Kudos to the SEC for its move yesterday to tighten the rules governing short selling. Starting today, short sellers will have to actually deliver their borrowed shares at settlement; plus, options market makers will no longer enjoy an exemption from the delivery requirement. Also, short sellers can no longer deceive their brokers about their intention or ability to deliver shares.
That’s all good. The moves should help restrain the abusive short selling practices lately rampant in the stock market. But as the law firm of Wachtell, Lipton, Rosen & Katz argues in a memo to clients, the moves aren’t enough: “the measures adopted by the SEC fall far short of the type of bold measures needed to constrain the abusive short-selling and rumor mongering taking place.”
I agree. The lawyers at Wachtell also argue (and I agree with this, too) that if the SEC is really serious about restraining the abusive, irrational short-selling lunacy going on, it should take additional steps forthwith:
As we have previously said, the SEC should immediately re-impose, under its emergency powers, the “Uptick Rule.” In addition, the SEC must now consider other very strong measures such as using its emergency powers to place limitations on short sales for a period of time to restore a fair and orderly market. Also, it is essential for the SEC to scrutinize short sellers and their related transactions, including options and credit default swaps to determine whether these strategies are contributing to the severe dislocations taking place in the marketplace. [Emphasis added]
And the sooner, the better. The stock market worked just fine over the 70 or so years of the Uptick Rule’s existence; reinstating it shouldn’t place an unreasonable burden on stock investors now, therefore. And it’s imperative, too, that the SEC look into how short-sellers might be manipulating the CDS market to manufacture uncertainty around the stocks they are short.
The CDS market is relatively new, and has turned out to be a wonderful playground for speculators looking to manipulate the equity markets. The SEC needs to get up to speed on the abuses going on, and develop some regulatory tools to fight them.
And it should do so sooner than later. The freezeup of the financial markets has been painful enough as it is. The SEC isn’t doing anybody any favors by allowing abusive and illegal practices to continue right under its nose.