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Short-selling rules may not have helped

Bob Moon Jul 29, 2008
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Short-selling rules may not have helped

Bob Moon Jul 29, 2008
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TEXT OF STORY

Stacey Vanek-Smith: The government’s getting pretty involved in the markets these days. There’s Congress’ multibillion-dollar mortgage-bailout bill. And last week, regulators put temporary restrictions on so-called short selling. The rules were supposed to prevent the stocks of certain financial companies, like banks, from going into a free-fall. Those are set to expire at midnight tonight, though they could be extended. So, did they help? Marketplace’s Bob Moon takes a look.


Bob Moon: “Short sellers” borrow stock and then sell it. Then, if the price falls before they have to return it, they can pocket the difference. It’s called “naked” short-selling when just the promise that shares will be borrowed is enough to carry out a trade.

Since last week, short-selling of 19 major financial stocks can’t happen until traders prove the borrowed shares they’re selling are essentially “in hand.” SEC Chairman Christopher Cox argued that should help keep abusive short selling from driving down prices. But it hasn’t stopped some shares from sinking steadily ever since.

John Standerfer: And if you look at the stock price of Fannie Mae and Freddie Mac over the last three days, they’re down, what, 30 percent?

John Standerfer is with the research firm S3 Matching Technologies. He says the extra paperwork is costly and time-consuming for smaller traders, but not the big guys.

Standerfer: This rule has created a lot of problems for retail investors. The larger players, you know, are much less encumbered by it.

Otherwise, he says the rule has little effect. Before it was imposed, short-selling trades he tracked involving those particular stocks totaled just 1 percent.

I’m Bob Moon for Marketplace.

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