Yesterday the SEC announced a pair of rules on short selling. Here’s the surprise: they’re not bad!
The first is a rather straight forward disclosure rule. It will require Wall Street’s self-regulatory institutions to publish data about how many short sales occur in a company’s stock each day. There will also be a more comprehensive, monthly report that will include the time and size of individual daily short-sale transactions with a one month delay. (We can’t figure out exactly what the point of the delayed report is. If you know, drop a comment below.)
The other rule will cement the locate rules that have been in place for several months. These require brokerages to locate shares to can be borrowed before allowing short sales. The point is to make “naked” short selling with the intent to manipulate a stock downward more difficult. Again, most short sellers don’t anticipate that this is much of an obstacle to the way they do business.
The only note of caution we would raise here has to do with harrassment and litigation risk. These rules add “red tape” to short selling, making it more difficult than it would be otherwise. This will be to the advantage to institutional short-sellers, such as hedge funds, but discourage smaller investors by making it more costly. You’ll note that hedge funds did not fight hard against these rules.
But ‘red tape” isn’t just a hassle. It creates litigation risk. Basically, the new rules create new ways for traders to run afoul of the law and new ways for regulators to harrass traders. Most of those targeted for enforcement will likely be hedge funds. But since hedge funds have been one of the sources of strength in our troubled markets over the last two years, it is hard to understand why we’d want to increase their costs of doing business in this way.
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