SEC May Approve Restrictions on Short Sales When Stocks Plunge

Bloomberg reports:

Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.

The regulation would require the trades be executed above the best existing bid in the market when shares fall 10 percent in a day, said Brian Hyndman, the senior vice president in transaction services at Nasdaq OMX Group Inc. In a short sale, an investor borrows an asset and sells it, hoping to profit from a decrease by repurchasing it later at a lower price.

Forcing short sellers to wait for a stock to rise above the best price bid may prevent them from flooding the market with sell orders and causing losses to multiply. Some exchange officials say the restrictions known as uptick rules don’t work, citing studies that show they may be less effective during panics that drive prices down and volatility up.

“There is no empirical data to support the introduction of a new rule,” Hyndman said yesterday at a securities industry conference in Chicago. “But this is the least intrusive of the proposals the SEC was considering.”