Naked Short-Selling Ban Extended Through August 12 -- But That's It

Federal regulators on Tuesday extended through mid-August a temporary order banning a certain kind of short-selling of the stocks of mortgage finance companies Fannie Mae, Freddie Mac and 17 large investment banks.

The Securities and Exchange Commission said the ban on so-called "naked" short selling will be in effect until 11:59 p.m. EDT on Aug. 12 and will not be extended.

Short sellers make a bet that a stock's price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.

"Naked" short selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale. The SEC order requires short sellers to actually borrow shares before selling them.

SEC Chairman Christopher Cox said the order was also helping prevent potential "distort and short" manipulation of stocks, which occurs when rumors and misinformation are used to drive down the price of a stock that has been sold short.

"In addition to continuing the existing order against naked short selling, the commission will continue exploring other remedies for the broader marketplace to further protect investors from 'distort and short' artists," Cox said in a statement.

The SEC said that extending the restrictions on short selling will allow regulators more time to collect and analyze data on the order's impact and effectiveness.

After ban runs out, regulators will move to draw up formal rules to provide additional protections against abusive naked short selling in the broader market, while allowing legitimate short selling, the SEC said.

Advocates for smaller banks and investment firms have been urging the SEC to expand the ban on naked short selling to cover additional financial companies.

Analysts and government regulators blamed aggressive short selling for exacerbating the recent plunge in Fannie Mae and Freddie Mac's stock, as well as that of big investment house Lehman Brothers Holdings Inc.

The SEC initially announced the emergency order on July 15 after a perilous slide in shares of Fannie and Freddie, the government-sponsored companies that together hold or guarantee more than $5 trillion in home mortgages _ nearly half the U.S. total.

The regulators' move followed a 13 percent drop in the price of Fannie shares and a 22 percent plunge in Freddie's on July 10, when a news report said the government had begun contingency planning in the event the companies failed. The next day, Freddie shares plummeted 33 percent at one point and Fannie stock lost 29 percent of its value.

Comments

[mrcontinental]

Welcome to capitalism comrade; although it looks a lot like communism. Soon the state will own everything.

[Rule Of Law]

Naked shorting is nothing more than illegal price manipulation, and is how the Big companies control and eliminate their competition. Those who engage in it should be put in prison.

[GerryS]

The SEC needs to ban (outlaw) naked short selling period. Not just for the "protected" companies, ban this option for every traded stock and bond FOREVER. This is the only way average Joe (Joey) America will have his or her stock prices and mutual fund prices protected from rape and pillage by the giant hedge funds out there that are owned by the 1/10 th of 1 % of the richest families in America. The erosion of the middle class has to stop now, and this is one of the keys to that start-

[research]

Short selling in general is a dangerous conflict of interest for investors.

It is not good for our economy to have people who will make millions or billions if certain companies fail.

Now with the internet, it's relatively easy to drum up rumors about a company.

We should eliminate short selling.

If you don't think a companies going to do well, sell your stock and don't buy anymore of it.

[iambusto]

elimination of short selling itself would be a bad idea. just reinstate the uptick rule and ban naked short selling.

short sellers play a very important role in the capital markets too. if there was no shorting, the whole concept of "efficient markets" would be in jeopardy. we dont want the stocks to always have an upside bias do we.

[research]

as I said, just don't buy the stock you would have shorted.

[WIpatriot]

Understand what NAKED shorting is....

[funkalicious]

Naked Short selling is legal in any share since when? Wow when they changed the uptick rule and you can short stocks on the down side and keep banging the shares down who knew. We could sell naked shorts? never borrow or hold shares I guess that is how you can destroy a company and rob shares.
Wow and I thought your name had to be Joe Kennedy to get away with that in America.

I am placing some naked shorts on Freddie and Fanny starting the 13th of August who else is with me?
We can form a pool and all get stinking rich!!!! If we get rich enough maybe we can get an appointment to Treasury secretary or I can buy my kid a congressional seat in Rhode Island!! Bully!!

[Stephen]

Why allow any short-selling, naked or otherwise? The whole concept is dishonest.

[iambusto]

short selling in itself is not dishonest. you are putting your money where your mouth is.

Naked short selling is dishonest. same block of shares can be shorted by different people (theoretically) because there is no mechanism there.

what should happen is that if you short a stock, you must actually borrow the shares (as opposed to the broker just marking that block of shares as borrowed, which doesnt prevent someone else using the same block for shorting).

[pros54]

When they borrow the stocks do they pay interest on it and at what rate do they pay the interest? It is dishonest to sell what you do not own even if it is borrowed. If they want to short sell they should buy it and own it and then sell it what3ver way they want. I wont mind selling somebody's million dollar home for pennies so long as it was not mine to start with.

[livewire19]

Naked short selling is already illegal. The SEC decided to selectively enforce it on 19 stocks. The law should be enforced on all stocks to prevent the short attacks that target individual stocks and artificially (and temporarily) drive down their price.

[Chewelahboy]

YES - Thank you for pointing that out.

[ReasonIsMyReligion]

Naked shorts. Oxymoron?

[TXfemmom]

The whole system needs to be overhauled and some really intense oversight and penalties need to be built into the system.

[outnow]

Bernanke is an expert on the Great Depression. He has many theories about what went wrong and caused the crash of 1929. Now he has to deal in real time with a crash and a depression.

Bin Laden knew that the economy in the US was vulnerable. He wanted the Muslim countries to receive more from selling their oil, according to his statements. Bin Laden helped Bush get his second term. That sealed the fate of the sole superpower. Our country cannot fight two or three wars and survive a major depression. Even stagflation is too much for us now.

These men are all kicking the can down the road knowing that our gooses are cooked. The international banking system has so many derivatives and complex financial instruments that depend on the working class paying their bills on time while their jobs are being outsourced. It looks like a big Ponzi scheme with computers. This house of cards will fall.

[darthdarcy]

Ridiculous...

These guys are the most irresponsible fiscal managers ever...

We are allowing our economy to be cannibalized...

We need Regulations..!

[JustObserving]

Naked short selling has always been illegal. It's like printing fake stock certificates. Smaller companies like Overstock and Taser were on naked short lists for years but the SEC ignored their concerns.

Now the shoe is on the other foot and investment banks are being naked shorted and the SEC steps in to protect them.

It's a corrupt system meant to work for the benefit of the financial companies on Wall Street.

Removing the uptick rule in July 2007 also helped the financial companies who engage in program trading which works to the disadvantage of smaller investors.

Anyone who does not know that the rules are written for the benefit of the power players on Wall Street, will find out the hard way.

[CFAmick]

Agree 100%. I wrote a letter to my Congressman about a year and a half ago to try to get him to look into this. No response.

[dadw5boys]

NOTHING IS ILLEGAL WHEN YOU GET RID OF REGULATIONS!!!!!!!!

I can't believbe people missed that little part about the deregulation movement!!!

[1sanevoice]

chavez, you are off base here

naked shorting is the province of hedge funds, not regular joes

[davidrusso]

Incorrect. You can short on margin via an etrade account.

[JGxHitzert]

Not if you can't borrow the shares. Small investors can't naked short stocks period.

[ErnestineBass]

WTF? If I tried to pull this kinda stunt with my neighbor's brand new riding lawn mower, I'd end up with a split lip and a shiner. What a con.

[mrcontinental]

You know that I wouldn't allow the cad to lay a hand on you EB. We'll simply explain to him that's the way it's done on Wall Street and leave it at that.

[Chavez08]

"Free Market" peddlers don't like rules until the poor guy has a chance of making money in elitist market system.