SEC Outlines Five Options For Restricting Short-Selling

In her first major initiative, SEC Chairwoman Mary Schapiro today announced five potential ways to restrict short-selling, the practice of buying and selling stocks betting that prices will fall. Critics say rampant short-selling has contributed to recent stock-market plunges. One option put forward for public comment is restoring a Depression-era rule that prohibits short-sellers from making their trades until a stock goes at least one cent above its previous trading price, the Associated Press reported. That rule was lifted in 2007. The goal is to prevent selling sprees that feed upon themselves -- actions that battered the stocks of banks and other companies over the last year. Schapiro said the proposal, now open to public comment for 60 days, was the beginning of "a thoughtful, deliberative process to determine what is in the best interests of investors" before the SEC takes final action.

Short-selling is legal and widely used on Wall Street. But as the market has plunged, investors and lawmakers have pressed the SEC to issue new rules. They say the lifting of the rule in 2007 has fanned market volatility, prompting bands of hedge funds and other investors to target weak companies with an avalanche of short-selling. Another option for restricting the practice, besides reinstating the uptick rule, is a sort of "circuit breaker" for stock prices. That approach, in three variations, would force short sellers to sell shares above the going market rate when they execute a short trade -- it would only go into effect after a stock price has had a decline of 10 percent. The fifth option, known as an upbid rule, would allow short sellers to come in only at a price above the highest current bid for the stock.