US Seeks New Short Sale Restrictions

From Bloomberg:

U.S. stock exchanges may seek to impose a temporary ban on short sales for individual stocks that plunge as regulators seek to rein in short-selling.

The New York Stock Exchange and Nasdaq Stock Market may file their proposal with the Securities and Exchange Commission as soon as today, said three people who have seen a draft of the rule. Under the plan, a stock that closes down more than 20 percent would be protected from short sellers for the following three days, the people said.

NYSE Euronext Chief Executive Officer Duncan Niederauer and Nasdaq CEO Robert Greifeld have met with SEC officials in the past month to discuss the proposal. A final rule might change as regulators weigh other alternatives. The so-called circuit breaker against betting a stock will decline would add to rules the SEC imposed since September to restrict speculators who may have exacerbated the plunge in stock prices.

“I can appreciate the regulators trying to support the markets,” said Ron Geffner, a former SEC lawyer who now represents hedge funds at the New York-based law firm Sadis & Goldberg LLP. “I am surprised after several iterations with little to no benefit that they continue to go back to the same dry well. It’s hard to play a game when the rules change week to week. This is just another reason for people to stay on the sidelines.”

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  1. Anonymous

    stopping the shorts forces more people to stay on the sidelines as they cannot hedge. These guy never learn! I never forget when I read how the dutch prohibited the short sales of tulips back in the days. We all know the results. Good luck! I am not buying anything for a long time until they stop changing the rules every week.

  2. Anonymous

    OK…clearly the regulators have no idea how the markets work. Or they are simply trying to create better exit points for themselves and insiders.

    Here’s my advice.

    Note to government officials of all stripes: shut the fuck up. The core problem is a lack of confidence. Virtually every public statement by these incompetents stokes more fear, primarily the fear that the people in charge have no idea what to do and are just randomly pulling levers.

    A three-day ban on announcing new “solutions” would be a far more effective measure at this point.

  3. gaius marius

    i think the market would be very wise to this a second time around — take every protected issue and sell the hell out of it in the second day of the ban. that was the lesson to be learned in the first attempt. would not be surprised to see the protected issues blip up and then run uncomfortably far down.

  4. doc holiday

    The way I look at this short selling stupidity is fairly simple, you have nasty companies, like Profunds and Rydex, that sell inverse funds which bet on the downside by going short, but the reason behind inversion is based on the reality of having fraction-like denominators and numerators and equal parts and divisions. There is up and there is down!

    As an example, Treasury bonds are bought by some people for the simple dividend yield potential and future cash flow streams — while some people hunt down the inverse and look for cheap bond unit pricing which allows them to gain future cash flow as the unit price goes up while the yield goes down. Then, those people have an opportunity to sell into panics, like now, when the price is going up and the yield is headed south.

    This happens in exchange and trade, i.e, people take opposite sides on deals, as in arms-length transactions. Granted in this type of a crash related to accounting fraud, there is not honesty and this is what drives valuation to a point of irrationality. In this mess, there is uncertainty as to how long The Titanic can remain afloat.

    See: On the night of 14 April 1912, during her maiden voyage, Titanic hit an iceberg, and sank two hours and forty minutes later, early on 15 April 1912. At the time of her launching in 1912, she was the largest passenger steamship in the world.

    >> The shorts didn't grant options for people like Fuld or The Friends Of Angelo, or Ken Lay and the fine folks @ Enron — or any of the long list of CEOs that have probably taken a few Trillion $$ in compensation.

    The shorts take a side of a bet that often says these bastards are crooks — yet now, these bastards have The SEC and Congress and Senate supporting option grants and future rewards for the crooks for just the upside, as they all deny any wrong doing. This synthetic structure to re-engineer simple fractions and arms-length transactions is criminal!

    On October 6, 2008, CEO Richard Fuld testified before Congress. Rep. Waxman pointed out that Fuld had made nearly $.5B since 2000, a salary incomprehensible to the average taxpayer, while Fuld was guiding Lehman to bankruptcy. Waxman said to Fuld, "My question is a simple one. Is this fair?" Fuld did not give a straight answer to the question, but only a meandering reply.

  5. wintermute

    The regulators are DUMB DUMB DUMB.
    Short-selling is integral to efficient markets, equally so mark-to-market and arbitrage. Any solvent, properly run company will have no fear of efficient market processes.

    Short-sell bans, witch-hunts for speculators and arbitrageurs, mark-to-fantasy will all prolong the credit crisis for years longer than needed to clear the system.

  6. doc holiday

    CME Group, the world's largest and most diverse derivatives exchange, and Citadel Investment Group, L.L.C., a leading alternative investment and technology firm, today announced they have executed a non-binding term sheet to launch a joint venture company within 30 days, which will be the first electronic trading platform that is fully integrated with a central counterparty clearing facility for Credit Default Swaps (CDS). CME Clearing, the world's largest derivatives clearing house, will be the central counterparty for this solution.

    >> Anyone know who owns CME Group.. trick question!

  7. Anonymous

    October 10, 2008

    A day of infamy:

    To think that US short selling is the cause of the down stock market response to a global financial market panic is the ultimate act of insanity. As far as I’m concerned short sellers buying back in today is the only thing that has kept the US markets from tanking below the opening -700. This is also the capper on the question of “what kind of idiots” are running the show. Now we know.

    Sorry Yves my patience has run thin.

    Earl L. Crockett
    Santa Cruz, CA

  8. Anonymous

    Shorts will piously proclaim the services they perform for the market as they perpetrate bear runs on stocks.

    Uptick was there for a reason, kids, and 3 years from now, when they do a postmortem on this period of turmoil, it will be widely accepted that anyone who took the shorts word as to how the market worked was a fool.

  9. River

    Earl Crockett you are right on. The ‘regulators’ need a scape goat and the shorts are it. What is really the largest driver in the market of the past week? How about the same pig men that caused the train wreck now issuing margin calls?

    ‘The selling has reached historic proportions. There literally is a “run on the market,” as investors worldwide are dumping stocks.

    ‘It seems that the major catalyst for this selling is the fact that the newest large banks primarily J. P. Morgan, Goldman Sachs, and possibly Morgan Stanley as well — have issued massive margin calls to hedge funds and other professional traders who use these banks as prime brokers.

    These calls were not issued because of market losses, but more because the banks arbitrarily decided that they wanted their customers to use less leverage. Margin rates as low as 15% for broker dealers were raised to 35%; hedge funds who had been used to operating on high leverage were told that they had to bring accounts up to a much larger percentage of equity.

    In this illiquid environment, where all manor of exotic securities literally have no bids, the only place to raise the cash to meet margin calls was to sell stock. That is what really set this market over the edge — as the first notice of these calls were issued on October 2nd and 3rd.

    There was something of a grace period to meet the calls, but funds realized they weren’t going to be able to meet them other than by selling stock. There are rumors that the most massive of the calls are due Monday (October 13th). If so, this market could continue to decline through then.’

    The pig men are not done. They will not be happy till there is but one giant pig left standing. So now we know why GS and the other ‘favorites’ were allowed to become commercial banks. Meanwhile, Paulson stands on the sidelines while his buddies gorge themselves. Otherwise, where is the direct capital injections? If capital injections had been made to these large new banks they would have no excuse to increase margin requirements. Hat tip to Jesse and, as always, a big thank you to Yves.

  10. Anonymous

    What is ailing the markets is that there is no confidence in Treasury Secretary Paulson and his other Goldman Sachs’ buddies to fairly implement the $700 billion dollar financial rescue package. Paulson held a press conference Thursday to cover his butt by declaring that he couldn’t guarantee that his efforts would do any good. That is because he knows his only goal is to protect his pals, the crooks on Wall Street, and if collateral benefits to the economy occur it will be a miracle. Lets not waste good money on bad people, choose someone new to manage the bailout, someone Americans can trust. Paulson must go.

  11. Anonymous

    short sellers are the only ones who are buying (covering) when the markets tank as it is well know to everyone here. they are creating liquidity and some traction in a falling market. this short mongering is insane: if they manipulate the stocks by rumors they should be punished just like the people who try to manipulate the market to go up. Oops, I guess a lot of the establishment is included in that pack!

  12. Caleb Mardini

    “It’s hard to play a game when the rules change week to week. This is just another reason for people to stay on the sidelines.”


    They’ve got to stop manipulating the markets! Prudent investors get screwed with all of this propping up. This is moral hazard on an entirely different level.

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