Newsflash: SEC Might Slowly Start to Enforce the Law

From MarketWatch:

“The Securities and Exchange Commission said Tuesday that it will try to limit so-called “naked” short selling of shares in Fannie Mae, Freddie Mac and big brokerage firms. The SEC will issue an emergency order stating that all short sales of shares in these companies will be subject to a “pre-borrow” requirement, said Christopher Cox, chairman of the SEC. This will last for 30 days, he said. The SEC is also planning more rule-making focused on short selling in the broader market, Cox said.”

Is this some sort of joke? Naked short selling is illegal, and for good reason. Short selling involves borrowing shares from holders who are willing to lend them out, selling them, and promising to repay the shares at some point in the future. So called “naked” short selling, or selling shares without actually borrowing them, is illegal because it can result in constant selling pressure due to the sale of more shares than are available for sale.

Now the SEC is saying that “naked” shorting will be illegal for 30 days for certain financial stocks. Seriously? So they are admitting that “naked” shorting is running rampant (a position that has been claimed for years) and they have not been enforcing the law? Add that to the list of reasons why this market could be taking it on the chin. First the SEC eliminated the “up-tick” rule, and now they are allowing “naked” shorting. Shameful…

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2 Thoughts on “Newsflash: SEC Might Slowly Start to Enforce the Law

  1. Anonymous on July 16, 2008 at 2:10 PM said:

    Hey Chad,

    Wow! I was also a little surprised at hearing about this. It seems like the action today on Wall Street may have been diretly related to this. I cannot believe the gains that financials had in 1 day. “Best 1 day gain in a decade”. Do you think this is related to the fact that traders had to cover their shorts because of this new rule? It sure caught a lot of people off guard.

  2. Chad Brand on July 16, 2008 at 2:30 PM said:

    I think the Wells Fargo earnings report had more to do with the financial short covering that took place today specifically, but if the SEC starts enforcing naked shorting it will certainly limit the ability of traders to knock down stocks in the future, which certainly will have an effect to some degree on the market.

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