April 28, 2009
I believe these are SIMPLE, SMART, and WORKABLE solutions that can cleanly solve some of the problems associated with shorting.
PLEASE DO NOT REINSTATE THE UPTICK RULE FOR SHORT SELLING EQUITIES. SUCH A RULE WORKS AGAINST AND UNDERMINES THE WHOLE IDEA AND PRACTICE OF SHORT SELING. I VIEW THIS RULE AS A FORM OF OVER REGULATION, AND TOTALLY NECESSARY. This is not where the focus of the SEC should be. DO NOT OVERCOMPLECATE THIS ISSUE, RATHER FOCUSE ON MORE IMPORTANT PROBLEMS.
If the SEC over reacts and attempts to OVER REGULATE the markets via the uptick rule, then that will most likely cause great ANGER and mistrust towards the SEC from investors.
THESE 2 IDEAS WILL TOTALLY PREVENT ANY STOCK PRICE FROM REACHING ZERO IN ANY 1 TRADING DAY DUE TO SHORT SELLING BY SETTING SMART LIMITATIONS. This is where your focus should be. Remember deep market declines are not frequent events.
1 - USE A STOCK LOCK/BOOT
The idea behind such a simple rule is to prevent shorting of a stock for that trading day, and the next trading day, if the trigger is tripped.
This rule would suspend/prevent short selling of any equity that loses 70% or more of its value in any 1 trading day. The 70% value threshold is the triggering point, and can be calculated using the stock's opening price for that trading day. Once the stock reaches a 70% decline, THIS WOULD AUTOMATICALLY TRIGGER A LOCK/BOOT that would be put on it to prevent further shorting. This means that NO broker, investor, or firm would be permitted to conduct shorting activities for that stock for the remainder of that day, and all of the following trading day. This includes all after hours trading as well.
For example, if a stock opens at $10, and falls to $3 during 1 trading day, then that stock would have a lock/boot put on it so no broker, firm, or investor could short that stock for the rest of that day, and the next trading day. However, investors could still buy it to go long. The lock/boot would only prevent short selling.
If an investor has captured the full 70% decline in 1 trading day, then that investor must automatically have their position closed out that day. This puts some limits on profiting on any 1 trading day using short selling.
2 - CREATE A PRICE FLOOR FOR SHORTING STOCKS
Another solution is to BAN/PREVENT shorting of all equities that have PRICES AT OR BELOW $1. This works in preventing further price declines from shorting. ANYONE WHO HOLDS THEIR SHORT POSITION ON A STOCK DOWN TO $1 WOULD AUTOMATICALLY HAVE THEIR POSITION CLOSED OUT BY THE BROKER. Again, this puts some limits on profiting on any 1 trading day using short selling.