SEC Ban on Naked Short Selling Now Permanent

posted by Nima

July 27, 2009 · Posted in Investing 

The AP writes:

Federal regulators are making permanent an emergency rule aimed at reducing abusive short-selling, put in at the height of last fall’s market turmoil.

The Securities and Exchange Commission announced Monday that it took the action on the rule targeting so-called “naked” short-selling, which was due to expire Friday.

Short-sellers bet against a stock. They generally borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender — pocketing the difference in price.

“Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

Peter Schiff said a little while ago that the ban on short selling will potentially send stocks much lower than if it was in place, due weaker bear market rallys which result from people covering their shorts. He may have a point.

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