SEC adopts rules against naked short-selling
By MARCY GORDON, AP Business Writer Wed Sep 17, 9:31 PM ET
WASHINGTON – Federal regulators on Wednesday took measures aimed at reining in aggressive forms of short-selling that were blamed in part for the demise of http://news.yahoo.com/s/ap/20080918/ap_on_bi_ge/sec_short_sellingand which some feared could be used against other vulnerable companies in a turbulent market.
Short selling is a form of speculation that allows a trader to sell securities that he does not own, effectively taking a “negative position“. They do this when they expect the value of the securities to decrease in the market, allowing them to sell securities at today’s price and then buy the securities back when they decrease in value. With a large enough move in the price, the trader can purchase the securities, “covering” their position, for less money than they received for selling them earlier. http://en.wikipedia.org/wiki/Naked_short_selling
Short sellers bet that a stock’s price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference. http://news.yahoo.com/s/ap/20080918/ap_on_bi_ge/sec_short_selling
Naked short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale. http://news.yahoo.com/s/ap/20080918/ap_on_bi_ge/sec_short_selling
In a further move, http://news.yahoo.com/s/ap/20080918/ap_on_bi_ge/sec_short_sellingsaid he planned to ask his four fellow commissioners to consider on an emergency basis a new rule that would require hedge funds and other large-scale investors to disclose their short positions — the stocks they have borrowed and sold but not yet replaced.
The rule would be designed to ensure transparency in short-selling in general, beyond the practice of naked short-selling, Cox said in a statement issued Wednesday night. http://news.yahoo.com/s/ap/20080918/ap_on_bi_ge/sec_short_sellingwith more than $100 million holdings in securities would be required to promptly begin public reporting of their daily short positions.
Certain Commenators believe that “short-selling” accelerated the demise of Merrill Lynch and Lehman Brothers and that it was also involved with the sudden drop in AIG stock values that led to the Government takeover. http://en.wikipedia.org/wiki/Naked_short_selling. The Primary reason for these Companies economic troubles was their ill-advised real-estate investments, however, “naked short sales” may have killed the already ailing Companies.