WASHINGTON — The head of the Securities and Exchange Commission said Tuesday she is making the issue of new rules restricting short-selling a priority as the agency heard from an array of interests about ways to limit trades that bet against a stock.
Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market's downturn.
"There are people very concerned about this," Jeffrey Brown, Charles Schwab Corp.'s chief lobbyist said at a public "round-table" meeting organized by the SEC. The brokerage firm has been barraged with appeals from customers for it to seek a remedy, he said.
Short-selling involves borrowing a company's shares, selling them, then buying them back when the stock falls and returning them to the lender. The short seller pockets the difference.
Investor confidence has been shaken as the market has plunged and new constraints against abusive trading are needed, say proponents of restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price.
They say the absence of the so-called uptick rule since mid-2007 fanned market volatility, prompting bands of hedge funds and other investors to target weak companies with an avalanche of short-selling.
But others said new restrictions could eliminate the benefits of short-selling _ bringing capital into the markets and accurate stock prices to the surface _ and actually hurt investor confidence.
"Nobody likes being stung by a bee," said William O'Brien, the chief executive of Direct Edge, a stock trading platform. "But you don't kill all the bees and then wonder why all the flowers have died."
The SEC faces a daunting task in striking a balance between stemming market abuses to bolster investors' confidence and stifling the legitimate benefits of short-selling.
SEC Chairman Mary Schapiro and the other four SEC commissioners voted unanimously last month to put forward five alternative short-selling plans. They could settle on one and formally approve it sometime after the 60-day public comment period that began in early April.
Schapiro said Tuesday she has made it a priority "to evaluate the issue of short-selling regulation, and ensure that any future policies in this area are the result of a deliberate and thoughtful process."
Among issues raised were the cost for Wall Street firms of switching over trading systems if new restrictions are put in and whether trading business could migrate to foreign markets to escape new constraints in the U.S.
Dan Mathisson, the head of electronic trading at Credit Suisse, said it would take about six months for brokerage firms to refit their trading systems for an uptick rule.
Another approach floated by the SEC would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more. That option would be less dramatic, since it would affect only specific stocks rather than the market as a whole. Officials of Fidelity Investments, investment bank Credit Suisse and others made the case for that option, called a "circuit breaker" for stock prices.
There isn't clear evidence that restoration of the uptick rule would have dampened the market tumult of last fall, they said.
But John Kozak, chief financial officer of Newark, Ohio-based Park National Bank Corp., urged reinstatement of the uptick rule in some form _ the position espoused by the American Bankers Association.
Kozak said it was "ridiculous" to suggest that the uptick rule wouldn't have an impact. It "absolutely can influence our price substantially," he said.
Still, Schapiro has noted there is no "specific empirical evidence" that the absence of the uptick rule enflamed market volatility over the past 18 months.
Many financial and some other company stocks were targeted by short sellers in mid-2008. The SEC put the stocks of 870 U.S. companies, mostly financial institutions, under an unprecedented ban against all short-selling for several weeks last fall until Congress enacted the $700 billion financial bailout plan.
The SEC has advanced three possible variations for the circuit breaker proposal: Banning short-selling outright for the rest of the trading session in a stock that declines 10 percent or more, or restricting short-selling of the stock for the rest of the session based on its previous sale price or highest bid.
The fifth alternative, known as an upbid rule, would allow short sellers to come in only at a price above the highest current bid for the stock.