Tuesday, July 15, 2008

SEC Move On Naked Shorts

The U.S. Securities and Exchange Commission will take emergency action today to limit the ability of traders to bet on a decline in the shares of Freddie Mac, Fannie Mae and brokerages, the agency's chairman said.

Christopher Cox told the Senate Banking Committee that the SEC will issue an order today imposing a ``preborrower requirement'' on short sales in the mortgage-financing companies and Wall Street firms. The requirement would prohibit the practice known as naked short selling, in which traders avoid the financial burden of borrowing shares when betting they'll fall.

Crickey..... That's pretty hardcore. I guess it was coming, and I have to say that the practice of being naked (actually not borrowing the shares to sell) is not a great high point in the rules of the markets. It is incredible to think though that provisioons are being forced on the markets for particular companies, and it looks like this will be address.

``In addition to this emergency order, we will undertake a rulemaking to address the same issues across the entire market,'' Cox said in his remarks to the committee.

The SEC is investigating areas of the market where shorting may have had a big affect. Bear Stearns and Lahmans come to mind which clearly were shorted in big style.

Freddie Mac, was down 34% until this statement which helped it get half the loss back.

``I don't think the government should ban short-selling in anything as long as it's fully disclosed, as long as there's no manipulation,'' MFS Investment Management Chairman Robert Pozen said in an interview with Bloomberg News yesterday. ``Don't we want the market to work here?''

In traditional short selling, traders borrow stock through a broker and hope to profit by selling shares high and later buying them back at lower prices to repay the loan.

The issue here, with naked shorting is not that it is illegal, its not, but has there been manipulation which is illegal.

You can be sure the SEC will be slapping someone soon and it appears that this is just the start of an assault on shorters....

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