The Securities and Exchange Commission approved a measure in a party-line 3-2 vote to limit short selling. However, the commission, including Chairman Mary Schapiro, does not say that there is any evidence that the practice is harmful to investors or that the SEC's restriction will help investors, according to The Wall Street Journal. "The self-fulfilling logic would seem to be that merely by regulating, the commission can claim to shore up investor confidence, thus justifying its decision to regulate," said Troy Paredes, one of the dissenting commissioners.
Short-sellers borrow stock and sell it with the expectation that it will fall in price. The shorts then buy back the shares at the lower price, pocket the difference and return the shares to the original owner. Sometimes, struggling companies blame short-sellers for driving down their share prices because that's easier than explaining what management has done to make investors flee the stock.
In fact, short-sellers make for a more efficient market by allowing all points of view to be expressed in a company's stock price. The SEC came to this conclusion several years ago when it abandoned the so-called uptick rule that had prevented a short-sale unless the last movement in the stock price had been up. The idea was that the rule would serve as a brake on market panics, preventing sharp declines in stock prices, while also preventing short-sellers from manipulating the market.
After years of study and a long pilot test, the SEC staff found no evidence that the uptick rule did any of these things. Studying the 2008 crisis, when the SEC enacted outright bans on short-selling many financial stocks, the SEC staff still hasn't found evidence that such limits benefit investors.
more at http://online.wsj.com/article/SB10001424052748704479404575087762656446670.html
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