The Securities and Exchange Commission, once its temporary ban on shorting nearly 1,000 securities expires sometime in the next few weeks, is likely to propose the nation’s market centers build circuit breakers into their trading platforms to halt short sales temporarily if deemed necessary.
A circuit breaker proposal is considered more likely to emerge from the regulator than the reinstatement of the uptick rule that many want. “What we think is a little more likely is a circuit breaker by stock,” Duncan Niederauer, NYSE Euronext’s chief executive, told issuers and the media in a webcast this week. The exchange has been in constant communication with the SEC regarding short sale rules, Niederauer said.
Niederauer is championing the reinstatement of the uptick rule, but believes that “having some kind of circuit breaker is better than just lifting the ban and going back to the way we were.”
Nasdaq, on the other hand, is championing a circuit breaker proposal. Nasdaq OMX Group chief executive Bob Greifeld told representatives from Nasdaq-listed companies this week that a circuit breaker was more pragmatic while an uptick rule was akin to a “blunt instrument.” The exchange is submitting a proposal to the SEC calling for a circuit breaker, Greifeld said.
Any rule would have to be workable across all market centers, sources say, including dark pools, and will likely encompass all stocks, not just financials.
That the exchanges will play a role in implementing any new short sale rule is a switch. The SEC’s Regulation SHO deliberately bars exchanges and self-regulatory organizations from implementing a short sale rule of their own. During the deliberations leading up to Reg SHO, the NYSE lobbied to be able to implement an emergency rule, but was turned down.
A circuit breaker rule would kick in if a stock fell by a certain amount. Short sales in the security would be halted until the market center decided otherwise. The ban could last for the rest of the day or be intraday. The latter would take longer to implement, Niederauer said.
Both the NYSE and Nasdaq currently operate circuit breakers that involve halting all trading for some time period if the broader market drops precipitously. If the Dow Jones Industrial Average drops more than 1,100 points, then Nasdaq, for example, will halt trading for a certain amount of time depending on the time of day.
While the NYSE and many issuers are calling for a return of some sort of price test such as the uptick rule, others consider it unlikely. The SEC took four years to deliberate the fate of the uptick rule, conducting or sponsoring several studies into its effectiveness. “I don’t think they will, Mike Perlis, a former SEC enforcement attorney currently in private practice at Stroock & Stroock & Lavan in Century City, Calif., says of the likelihood the SEC would bring back the old rule. “It would make them look foolish.”
Perlis and many others in the trading community are opposed to any ban on short sales including a circuit breaker. “It’s not a good idea,” he said. “Abuse should be policed, but artificial rules are not the answer.”
The SEC’s latest emergency order banning short sales of financial stocks will expire on the third business day after enactment of any bailout legislation, but in any case no later than Oct. 17, 2008.
