SEC's new short selling rules 'are short-sighted'

3 March 2010

The Securities and Exchange Commission's (SEC) decision to bring in tougher regulation of short selling practices has been criticized by a professor of finance.

Under the new rules, which were approved last week, restrictions will be imposed on short selling when stock falls by more than ten per cent in the course of a day.

If that occurs, then short selling may only take place at a price above the best bid for that stock.

According to SEC estimates, around four per cent of the market is affected by drops of ten per cent or more on an average day.

But the move has been attacked as "short-sighted" by Professor Larry Harris from the USC Marshall School of Business.

He told the Financial Times: "The majority of such sales reflect hedging and … if a stock price does not reflect fundamental value, retail investors will most likely end up paying more than they should for it."

Announcing the introduction of the rule last week, a statement from SEC said the intention of the new legislation is to help market stability by preserving investor confidence.

By Claire Archer

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