July 25, 2008
In reading the prior comments I see a lot of confusion regarding what this rule does with respect to naked short selling.
Naked short selling could be stopped with current rules should the SEC ever decide to actually enforce them. There are blatant examples of "failure to deliver" that should be strongly enforced by the SEC. Yet they do not. An obvious example is OSTK.
On the other hand, the securites affected by this new rule were for the most part not on the Reg SHO list prior to the rally, meaning there was no need to break the law and engage in naked shorting. And they are still shortable 4 days after it has taken effect. The only difference is that a fee must be paid (to the very brokers protected by this rule no less) to short them.
I provide liquidity in these names both long and short and the fees involved may make it cost prohibitive to do so in the future. Less liquidity is never a good thing unless you are a market maker exempted from this rule who has just seen his competition removed. Since this rule affects all short sellers, not just naked short sellers, it is simply an impediment to liquid markets.
The implementation of this rule has coincided with a powerful rally in the names on this list. This only proves that the rule affects all short sellers, not naked short sellers. And because it affects all short sellers, I have to conclude that this rule is more about propping up markets than actually going after naked short sellers. I fear this will be a temporary effect.
Undoubtedly there are less shares outstanding short in these names after the rule took effect than before. I don't view this as a good thing. Short sellers are natural buyers in the marketplace. With the implementation of this rule any further selling will take place into a vacuum of less natural buyers than if it weren't in place.
To the people commenting in support of this rule I say, "be careful what you wish for". This rule is not constructed in a way to actually do anything about naked short selling, just short selling in general.