SEC poised to introduce short selling restrictions in US markets

The US Securities and Exchange Commission (SEC) will today vote to introduce restrictions on short selling, in a bid to assuage fears that the practice was responsible for some of the major banking collapses seen during the financial crisis.

According to various reports in the US media, a majority vote among the SEC’s five commissioners – who are meeting today – will see a restriction put in place on stocks which fall by 10%. When this threshold is met, only short sells at prices above the market’s best bid will be allowed.

The rule that is expected to be introduced will be similar to the uptick rule, which had been in place for nearly 70 years before being repealed by the SEC in June 2007.

Short selling was condemned during the financial crisis, with many arguing that the practice severely reduced companies’ values and added to market turmoil. Regulators around the world introduced temporary restrictions on short selling, with some markets still enforcing these rules.

Additionally, many firms actively lobbied the SEC to ban the practice and the regulator held roundtable discussions at the end of 2009 on both short selling and securities lending. Today’s vote is being seen as the fruition of those talks and the SEC’s own deliberations.

However, many within the securities lending industry, from beneficial owners to hedge funds, have countered that short selling helps market liquidity and aids price discovery. Some studies have also shown that short sellers – who number far less than long investors – do not have the same impact as ordinary investors simply selling their shares when they feel they will lose value.

But one leading figure at a major US lending firm, who did not wish to be named, said that the restrictions “would not have a tremendous effect” on the securities lending industry.

He added: “I think it could have more impact on the cash execution side and perhaps on the derivatives and options markets. We had the uptick rule in place several years ago and if you think about it, the SEC was pretty thoughtful - they spent a couple of years reviewing it and looking at this very carefully, so this is being driven by some other influences besides a need for it.”