April 22, 2009
While short selling may be an essential component of equity and commodity markets, much of the short selling that occurs now does little to counter excessive appreciation. Short selling is now a primary speculative instrument that allows sophisticated traders using high-powered computer trading schemes to substantively hit stocks regardless of fundamentals.
The SEC, by ignoring its fundamental enforcement and oversight mandate, has allowed short sellers to flaunt the rules and large equity traders to further leverage their impact on the market at the expense of retail investors. There is now a serious crisis of confidence in our markets with more people questioning if equity investing is a reliable and fair avenue for wealth creation/preservation. The SEC is directly responsible for this due to its failure to enforce current rules regarding short selling and its failure to advocate for new laws or promulgate new rules that better ensure short selling abuses cannot occur.
With regards to the proposed new short selling rules, investors, as opposed to perhaps traders, would be better served by adoption of BOTH the market-wide proposal that requires short sales to occur at better than the previous bid and a "circuit breaker" mechanism during extreme decreases. In fact, the SEC would once again be bending to the will of hedge funds and large trading houses if it proposes a "compromise" by adopting only one of the measures under consideration. If such rules make short selling more costly, so be it.
Finally, the SEC must require more transparency of short selling activity with real-time or near real-time reporting of equity short interest and require 3-day settlement of short sales with clear verification of borrowed shares. Short interest data coming out every two weeks is of little real value. The lack of FTD enforcement and loose settlement rules allow for more questionable trading practices that only increase market volatility and undermine investor confidence. It's well past time for the SEC to once again start regulating the markets as mandated by law and to re-establish them as responsible investing platforms and not the playground for speculators and manipulators.