Nibbling at the Edges - Regulation of Short Selling: Policing Failures to Deliver and Restoration of an Uptick Rule

Abstract

This posting is a second iteration of this article, which first appreared in February 2009 but has been revised substantially. In April 2009, the SEC promulgated for comment a 273 page release dealing with ideas and proposals for regulation of short selling of securities. The concepts explored include a modified uptick rule based upon the national best bid price (rather than a last sales price) and various types of circuit breakers which would be triggered by pecipitous price declines, which in turn could be caused by inordinate amounts of short selling. In July, the SEC permanently adopted a formerly temporary rule requiring that market particpants (broker-dealers) must close out all failures to deliver by the open of the fourth day following a sale, including a sjort sale, versus thirteen days under earlier rules. The new rule, unveiled in a 100 page release, is the latest chapter in an SEC jihad against naked short selling, which often is (good) circumstantial evidence of securities price manipulation. The revised article deletes discussion of regulation of stock borrowing programs, which have taken on added importance with the SEC's "get tough" approach to naked short sales and failures to deliver but must be the topic for a second, follow on article.

Keywords: securities, secruties regulation, short selling, short sales, broker-dealer, broker-dealer regulation

JEL Classification: A10, G18, K19, K22