(RTTNews) - The federal agency that oversees Wall Street said Wednesday that it has taken steps to protect against a practice known as “naked” short selling, which can be used to force a stock’s price lower than should otherwise be possible.

The Securities and Exchange Commission adopted three actions meant to tighten and clarify the requirements for people short selling securities, a strategy aimed at making money when a security declines in value.

Under normal circumstances, a short seller will borrow stock and sell it at a certain price, with the understanding that it will buy the security back to return to its owner. The trader hopes the security has lost value by the time it repurchases it, allowing him or her to pocket a profit in the exchange.

However, in the practice of naked short selling, the trader goes through the motions of short selling without actually borrowing the stock. This means the selling pressure on the stock can be greater than what might otherwise be possible, given the actual number of shares outstanding.

One action the SEC took was to require that short sellers and their broker-dealers deliver securities by the close of business on the settlement date, which is three days after the sale transaction date.

This rule, called a “hard T+3 close-out requirement,” has been adopted on an interim final basis, the SEC said. The SEC also stated that it will impose penalties for those failing to comply with the rule.

A second action announced by the SEC eliminated an exception to the close-out rule that applied to options market makers. As a result, options market makers will be treated in the same way as all other market participants, the SEC said.

The last action taken by the SEC creates a new rule clarifying that people who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver.

Many have blamed naked short selling for causing unnecessary problems for companies, even pushing them into or close to bankruptcy. This can happen as traders take advantage of vulnerable stocks, building profits for themselves but in the process shaking confidence in the company that issued the security.

Others have claimed that while naked short selling exists and can cause problems, leaders of failing companies often overstate the impact of the practice to shift blame from their own poor management.

One of the most outspoken opponents of naked short selling has been Patrick Byrne, the CEO of low-price online retailer Overstock.com. He has become famous for his anti-short selling rants, with at least one expert describing Byrne as being on a “jihad” against the practice.

Byrne’s battle against the practice has been largely futile, however, as many in the industry have charged him with overstating the problem.

In recent weeks, some have blamed short sellers in part for the problems that have struck the financial industry, as already unstable firms are pushed towards collapse by traders betting of further stock declines.

Whether this involves significant use of unfair practices like naked short selling, or a series of legitimate bets on the decline of an unsound stock is not clear. But in announcing the new rules on Wednesday, the SEC said specifically said that they would “apply to the securities of all public companies, including all companies in the financial sector.”

For comments and feedback: contact editorial@rttnews.com

Copyright(c) 2008 RealTimeTraders.com, Inc. All Rights Reserved

Posted in Categories: Economy, Releases, USA.

Subscribe by RSS Subscribe by Email