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More pressure to end naked shorting across the board

August 8th, 2008 · No Comments

This time it comes from a group that is hardly surprising, but there is more..

First, the American Bankers Association (ABA)joins the advocates, hardly surprising:

  • The American Bankers Association, a trade group which represents banks of all sizes, said on Thursday that distort-and-short campaigns push stock values below what market and bank conditions warrant.
  • “Bank customers frequently – and incorrectly – equate significant drops in bank stock prices with safety of bank deposits,” Sarah Miller, an ABA senior vice president, said in a letter addressed to the SEC.

But the ABA has proof, it claims:

  • ABA said it reviewed failure-to-deliver data through March 31 for a small sampling of super regional and community banks and found that the volume has grown.
  • The industry group said the same data showed that a spike in fails-to-deliver was accompanied by significant stock drops that were not all attributable to market or bank-specific conditions.
  • “Based on what we are hearing from our members… we suspect that the volume of (fails-to-deliver) has only continued to grow, perhaps dramatically,” Miller said.

We hope:

  • The SEC has said it will consider crafting a rule to crackdown on abusive short selling across the broader market.

And we’re not alone:

  • Former Securities and Exchange Chairman Harvey Pitt said the SEC’s emergency order that went into effect on Monday would help in “restoring legitimacy” to short-selling activity but should go even further.
  • “It’s something that is very good of the SEC to have done,” he told Reuters in an interview. “They can’t do it across the board without going through formal rule making, but I do believe that they need to expedite that.”
  • “Any cut less than the whole is going to be perceived ultimately as arbitrary,” said Pitt, now head of financial consultant Kalorama Partners in Washington. “My own view is they couldn’t do all of the public companies in one fell swoop. They made what appears to me to be a reasonable cut, and hopefully they will expand it across the board just as quickly as they are able to do it.”

It’s not entirely straightforward though:

  • The Securities Industry and Financial Markets Association says a broad expansion of the rule would be burdensome.
  • “Expanding the requirement to pre-borrow for every one of the thousands and thousands of publicly traded companies would involve serious operational challenges, not to mention a likely impact on liquidity and market performance, all of which we are still quantifying,” said Ira Hammerman, SIFMA’s general counsel, in an e-mailed statement.
  • The SEC’s emergency rule has exempted market makers from the pre-borrow requirement so they can continue to facilitate trading in certain stocks. But market makers are still required to deliver securities by the settlement date.

Tags: IOC · The Markets