SEC nixes naked short selling
The NASDAQ market site.
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Bob Moon: Hey, here's a deal: I've got a box of cookies that I borrowed from my friend. I'd like to sell it to you for five bucks. I'm hoping that I can buy some more cookies tomorrow for four bucks, so when I give the box back to my friend, I'll have made a dollar. On Wall Street, that's the idea behind what they call short selling.
Now, if I sell that box of cookies to you before I even have the box in my hand, well, that makes me a naked short seller -- naked because I may not be able to deliver the goods, cover my end of the deal.
The Securities and Exchange Commission is worried that too much naked short selling can drive stock prices down faster than they would fall otherwise, so starting today, some naked short selling will be banned for next 30 days.
Ashley Milne-Tyte reports.
Ashley Milne-Tyte: The SEC wants to prevent the shares of 17 finance companies from being pushed down unnaturally fast. It's forbidding traders from doing any naked short selling in those stocks.
But the rule doesn't include market makers. They make the market liquid by bringing buyers and sellers together. Banning them could make the system grind to a halt.
Joe Grundfest teaches law and business at Stanford University.
Joe Grundfest: The general perception is that the kind of market making that the SEC is considering here generally has a neutral or a beneficial effect in the marketplace.
This temporary ban doesn't change the SEC's regulations much, says Steve Sachs of Rydex Investments. Still...
Steve Sachs: I think they needed to try to do something particularly given the issues of confidence that have clearly been plaguing this market.
He says it's up to those in the broker/dealer community to police this activity as well.
In New York, I'm Ashley Milne-Tyte for Marketplace.