NASD Delays New Short Selling Rule to April 1,
By Carol S. Remond, Of Dow Jones Newswires
NEW YORK (Dow Jones)--The National Association of Securities Dealers said Wednesday that it has delayed the implementation of a new stricter rule governing short selling to April 1.
The NASD surprised most market participants last month when it announced that it expanded its affirmative determination rule to cover broker and dealers which are not NASD members, such as foreign brokerage firms and specialists.
The affirmative determination rule stipulates that brokers and dealers engaged in a short sale transaction must make sure that shares can be delivered by settlement time, three days later.
The new rule was scheduled to take effect Feb. 20. The NASD said in a notice to members Wednesday that it delayed its implementation to provide members with additional time to "make technological changes to their systems to comply with the new requirement."
Some members "needed time to reprogram their systems in order to create this interim step before accepting orders," said Steve Luparello, executive vice president of Market Regulation at NASD.
Under the current affirmative determination rule, non-NASD members do not have to represent to the NASD broker through which they conduct a short sale order that they are able to deliver the stock by settlement date.
A short seller typically borrows stock from a broker to sell it into the market, betting that the share price will fall so that he can buy the stock back at a lower price and pocket the difference.
The amended NASD affirmative determination rule will particularly affect short sales conducted through foreign brokers, most specifically Canadian brokers which have often been used by investors to sell short the stock of small U.S. companies trading on the Over-the-counter Bulletin Board or OTCBB.
Because it's often impossible to borrow the shares of companies trading on the OTCBB, investors and hedge funds looking to take negative bets on these often- overvalued development-stage companies have traditionally been trading through Canada where it's not required to borrow stock before selling it short. The practice is known as naked shorting.
The new NASD rule doesn't cover Canadian brokers, since most are not members of the association, instead it makes it the responsibility of U.S. brokers trading with non-members to make sure that their counterparts will be able to settle a transaction before completing a short sale.
Market makers engaged in bone fide market making activities will continue to be exempt from affirmative determination.
While some investors argue that short sellers provide a needed service to the markets, others have called for the complete abolition of short selling because of the undue pressure its puts on the shares of companies.
Although separate from it, the amended NASD rule fits tightly within a new short selling rule, known as Regulation SHO, currently under review by the SEC staff.
As it stands, the new SEC short selling rules will make it easier to short large-cap stocks since they would do away with the "uptick" rule, which bans short selling on a stock when the price is falling. But it when it comes to the small-cap markets, where it's often impossible to borrow stock, the impact of SHO will be the opposite, making it harder to short sale stock.
The new SEC rule sets a predetermined level of so-called clearing fails - cases in which a broker or investor cannot deliver stock within two days after settlement - which will trigger a 90-day blackout whereby the customer will not be allowed to short sell that security. That 90-day exemption would affect trading of U.S. securities in and outside the U.S.
-By Carol S. Remond, Dow Jones Newswires; 201 938 2074
News 
Market Data 
Discover 
