Looks like the SEC has dealt NITE a major blow!!
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NEW YORK (MarketWatch) -- The battle raging around the short-sale rule approved Wednesday by a 3-2 vote before the Securities and Exchange Commission is more than a clash about where to set the limits for the shorts, it's about the purpose of investing.
After more than a year of debate, commissioners approved curbing short sales of a stock after it falls 10% in one day. In spirit, it resurrects the old uptick rule, a Depression-era law that only allowed investors to take short positions on stocks that rose, or ticked higher. The law was removed in 2007. See Market Pulse on SEC ruling.
Mary Schapiro
"It is a rule that is designed to preserve investor confidence and promote market efficiency," said SEC Chairman Mary Schapiro, who backed the proposal.
In reality, the rule is a compromise. On one side are issuers and traditional long-term investors who believe in a company's prospects. On the other side are short-term traders interested in making fortunes on the trade and the sentiment.
Short-selling is a traders' game. It's the purview of hedge funds and market professionals. Selling a stock is one thing. Shorting a stock in hopes for reaping a profit on the back of the long-term investors -- short positions must borrow stock from investors not looking to sell -- is quite another. Shorts create a self-fulfilling prophecy of downward pressure on a stock as they pile into a position.
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This isn't to say short-selling doesn't have its purposes. Many run-of-the-mill investors use short sales as a hedge. They limit losses for themselves and their clients. Short selling is here to stay.
Setting an artificial limit at 10% might give some comfort to the SEC, but the buy-and-hold crowd shouldn't feel much comfort. Ten percent is a pretty long way to fall. By the time a stock slides that much, the damage is already done.
It's been fashionable of late to dismiss Depression-era reforms like the uptick rule as antiquated. The world is more complicated these days, we're told. Back then, they believed in naive notions about investing: buy when you like a stock, sell when you don't.
That simple idea spurred a six-decade run of market confidence. Today, we've got compromise.
-- David Weidner
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