Restrictions extended on naked shorters

30 July 2008

The limit for shortsellers imposed by the Securities and Exchange Commission (SEC) on investors in Fannie Mae and Freddie Mac is to be extended.

Naked short sales in the government-sponsored lenders' stock are now limited until August 12th, as the regulator plans further measures against investors who deliberately manipulate prices.

Recent high-profile victims of the shorters include Bear Stearns, which almost collapsed in March, and IndyMac Bancorp.

The specific type of short selling put under restriction sees investors betting on price drops of a particular stock without actually holding any shares in the company.

Traditional short selling works by borrowing these shares, selling them and then buying them again if the bet succeeds and the price drops.

Naked shorters, however, can affect the price of a stock by issuing sell orders despite not owning any shares - therefore, they can create falsely negative market sentiment.

SEC chairman Christopher Cox said: "The commission will continue exploring other remedies for the broader marketplace to further protect investors from 'distort and short' artists."

Collectively, Fannie and Freddie hold over $2.5 trillion in mortgage debt.

Share prices in the two lenders have fluctuated recently, with many on Wall Street suspecting that they have been targeted in concerted attacks from shorters.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development