Measures to Combat Improper Short Selling of Stocks

Investor concern about speculators using improper short sales to lower prices was eased on Monday by the SEC’s announcement of preventative measures. Wall Street executives have claimed that speculators using these tactics contributed to last year’s collapse of several major financial companies. Legislators have been pressuring the SEC to take action to combat the practice. While not placing restrictions on short selling, the new SEC measures do require more thorough disclosure. The SEC is looking at additional action to curb short sales, like making it harder for speculators to accumulate stocks when they are already declining.

One of the actions taken Monday by the SEC requires the disclosure of more information by speculators involved in short sales. Several Wall Street self-regulatory companies will release info on their websites reporting the number of short sales in stocks on a given day. Also, the sites will report times and amounts of each short sale within a particular company’s stock. That info will be published with one month delay. The new measures will take place in the next few weeks.

Another measure will attempt to weed out what the SEC calls “abusive” short selling. In an ordinary short sale, a trader borrows shares from investors and sells them. If the stock’s value falls, the trader buys back the shares for a profit. Then the shares are returned. The amount of shares that can be short sold is limited by the amount the trader can borrow. In an “abusive” short sale, the trader sells more shares than he is able to borrow, thus driving the stock’s value down.

A temporary requirement to limit abusive short sales had been in place since the fall; now it will be made permanent. The SEC also announced plans to increase reporting of “fails to deliver” on its website, essentially telling investors when a brokerage fails to find or identify shares to borrow. This can occur for various legitimate causes like technical problems, or can be an indicator of improper short selling practices.

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