The US Securities and Exchange Commission (SEC) is seeking public comment on whether it should impose price or so-called circuit-breaker restrictions on short-selling US equities.
The commission said it is re-evaluating the use of short-selling restrictions because of “extreme market conditions and the resulting deterioration of investor confidence”.
The SEC’s decision to consult on new short-selling rules follows calls from several market participants for increased controls on short-selling. In March, for example, the US’s three biggest exchange groups – NYSE Euronext, Nasdaq OMX and BATS Exchange – wrote to SEC chairman Mary Schapiro proposing that a revised version of the uptick rule that was repealed in 2007 be used in conjunction with a circuit breaker that would take effect if a particular stock’s value dropped sharply. Uptick rules only permit short sales when stock prices are stable or rising.
Accordingly, the SEC is proposing two short-selling restrictions; one that would apply on a permanent, market-wide basis, and one that would only apply to a particular security in case of a severe decline in its value.
For the market-wide restriction, the SEC has proposed a modified uptick rule, as suggested by the exchanges, which would be based on the national best bid, or a reinstatement of the old uptick rule, which is based on the last sale price or tick.
For the temporary security-specific restriction, the SEC proposes a circuit breaker that, in the event of a severe drop in a particular security’s value, would either ban short-selling in the security for the remainder of the day, impose the national best bid uptick rule for the security for the remainder or the day, or impose the last sale price uptick rule on the security for the rest of the day.
Some have welcomed the SEC’s proposals. Nasdaq OMX issued a statement yesterday in support of the SEC’s “thoughtful and deliberative process in examining proposed rules to place limits on short-selling”.
“We are pleased with the way discussions progressed today and that the SEC has incorporated the modified uptick rule suggestions proposed by NASDAQ and other markets,” said Chris Concannon, executive vice president, Nasdaq OMX Transaction Services, in the statement. “We are also gratified the SEC will take a quantitative approach and seek to measure the impact of any proposed changes using current and past economic studies.”
However, the proposals are unlikely to find favour with all market participants. Last week, alternative equities trading platform Direct Edge criticised its rivals’ call for a modified uptick rule and circuit-breaker, arguing that such restrictions would limit liquidity and even increase selling pressure in a falling market.