The new SEC Short Selling rule will kick into effect when a stock has fallen 10% or more in one day. Studies have shown that putting restrictions on short selling actually causes more volatility, but I don’t think politicians worry about that as much as they need to look like they’re doing something.
From The Economist: (bold is mine)
Despite being a compromise, the new rule is controversial within the SEC. Two of the five commissioners voted against it. One of the dissenters, Kathleen Casey, complained that the move was guided “less by empirical analysis and more by public relations” and that “we should resist the urge to act merely to say we have acted.”
Some will see this as a reference to the huge political pressure the commission has faced to crack down on short-sellers, while others will see it as a dig at Mary Schapiro, the commission’s newish chairman. Ms Schapiro has spent her first year in the job trying to rush through a bunch of new initiatives to counter criticism that the SEC lacks spine.
The NYT’s Floyd Norris reported Mary Schapiro as saying “the rule would force short-sellers to stand in the back of the line, unable to sell shares until all actual owners who wanted to sell had been able to do so.”
Now that has to be the most stupid thing she could have said. Why the preferential treatment? That takes the spirit of competition right out of the market. Short selling is as American as buying long. Furthermore, short selling is more of a trade than an investment.
This rule, as it’s written, only strengthens and substantiates the institutional, long-only mindset that must have been lobbied for by the mutual fund industry. This is not a good thing.
Even if the SEC had evidence that there was manipulative short selling (they already have handled naked shorting) and long-only investors invest for the long-term, why would it be necessary to annul short selling on an intraday basis?