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SEC Intensifies Efforts To Rein In Short Selling

Wall Street Readies For Longer Limits; Are Curbs Working?

(See Corrections and Amplifications item below.)





In a short sale, a trader sells borrowed stock in a bet the price will decline and the stock can be profitably repurchased at a lower price. The new rules require specific arrangements to borrow shares in short sales rather than the existing rules, which allow a looser assurance the shares can be located.

The rules appear to have had their intended effect of halting the slide in shares of financial companies such as Fannie Mae,Freddie Mac and Lehman Brothers Holdings Inc. Combined with falling oil prices and encouraging earnings reports from some banks, shares in some of these names have doubled.

Some hedge-fund officials until Friday said privately they considered an extension of the short-selling curbs unlikely. However, calls with regulators on Friday afternoon left a different impression, giving the matter added urgency going into the weekend, they added.

By 11:59 p.m. EDT Tuesday, the SEC will need to decide whether to extend its emergency order or let it expire. The SEC said it could extend the order for 30 days. But the law allowing the order limits such action to 10 business days.

It's not clear the SEC commissioners will agree that an extension is warranted. Paul Atkins, a Republican commissioner, has asked the agency's economists to determine whether the order had an effect on the targeted stocks, a person familiar with the matter says. If it hasn't, Mr. Atkins might argue against an extension, this person said.

Two groups of investors appear to be most vulnerable to an extension and broadening of the rules, smaller firms where the added costs and capital requirements would be onerous and fast-trading funds that use computer programs to make thousands of trades a day.

So far, major Wall Street firms have been complying with the order manually, making phone calls to line up so-called pre-borrow arrangements for the 19 stocks. Expanding the rule to all stocks "would require an extensive delay" so the process could be automated, one brokerage executive said.

Executives at the big Wall Street firms that handle trading for hedge funds and others have also been involved in discussions about how to adapt their computer systems to handle the rules.

The expansion could require increased capital to finance the borrowed shares during the three days before trades settle, as well as make short selling more cumbersome and labor-intensive. It is expected that the industry will push back forcefully on any attempt to expand rules.


Write to Randall Smith at

Corrections and Amplifications:

The SEC can extend its temporary limits on short-selling for as many as 30 calendar days. This article incorrectly said the law allowing the emergency order limits an extension to 10 business days.

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