The Securities and Exchange Commission (SEC) may restrain short selling when stocks are plummeting to avoid meltdowns in the market.
Next month, the agency may implement a requirement that when a stock falls 10 percent in a day, any short sales must be executed above the best existing bid in the market, Brian Hyndman, senior vice president of transaction services at Nasdaq OMX Group, told Bloomberg.
The SEC declined to comment.
The new regulation, known as an uptick rule, would make a short sale more expensive. That in turn could discourage traders from selling shares, protecting the market from a crash.
Short selling drew heated criticism in 2008 and 2009, with some experts complaining that short sales by stock speculators such as hedge funds exacerbated the market’s drop.
But traders and stock exchange officials, who benefit from short sales, say the idea wouldn’t prevent market plunges.
“There is no empirical data to support the introduction of a new rule,” Hyndman said.
“But this is the least intrusive of the proposals the SEC was considering.”
And Paul Adcock, head of trading at NYSE Arca, told Bloomberg that some kind of restriction is likely unavoidable.
Short sales weren’t much of an issue in recent months, falling dramatically as the stock market surged.
"Short sellers will be down in excess of 32 percent for 2009, which is the worst performance in the last 20 years," Harry Strunk, a principal at Treflie Capital Management, told The Wall Street Journal.
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