The Securities and Exchange Commission may approve a rule next month that aims to keep short sellers from accelerating stock sell-offs, said Brian Hyndman, the senior vice president in transaction services at Nasdaq OMX Group Inc.
The regulation would take effect when shares fall 10 percent in a day and require bearish trades be executed above the best existing bid in the market, Hyndman said. In a short sale, an investor borrows an asset and sells it, hoping to profit from a decline by repurchasing it later at a lower price.
Forcing short sellers to wait for a stock to rise above the best bid price may prevent them from flooding the market with sell orders and causing declines to multiply. A study by two SEC economists in December 2008 suggested the so-called uptick rules are less effective when needed most, during panics that drive prices down and volatility up.
“There is no empirical data to support the introduction of a new rule,” Hyndman said today at a securities industry conference in Chicago. “But this is the least intrusive of the proposals the SEC was considering.”
SEC spokesman John Nester declined to comment.
Hyndman expects the SEC to adopt a so-called alternative uptick rule that includes the 10 percent trigger, changing regulations that were eliminated from U.S. markets in 2007. The commission asked the public last April to comment on strategies to cushion the impact of short selling following criticism hedge funds and other speculators used trading tactics to deepen market declines that began in 2008.
