Yesterday, as previously announced, the Securities and Exchange Commission held a roundtable discussion on recently proposed rules to re-regulate short selling. The roundtable consisted of 18 participants on three panels, plus the SEC’s five commissioners, and was moderated by the Deputy Director of the Commission’s Division of Trading and Markets.
During the course of the four-hour roundtable, the Commission heard from representatives of investment firms, broker-dealers, issuers, FINRA, national exchanges and academics. In her opening remarks, Chairman Schapiro reiterated that the evaluation of short selling is a high priority, and that any policy decisions must be based on a thoughtful and deliberative process.
The Commission’s five proposals involve variations on short-selling limitations that are either market-wide price or bid test rules or security-specific circuit breaker rules. The consensus among the representatives of the brokerage and investment firms was that a market-wide rule would serve little purpose in reducing volatility but very likely would reduce liquidity, while a security-specific rule would be difficult to implement. However, John Kozak, the CFO of Park National Bank, strongly disagreed with this assessment. Mr. Kozak argued that, at least in the case of thinly traded stocks, short selling can have a significant effect on share price and that a short selling rule based on the last sale price would be significant step toward increasing investor confidence. Several panelists commented that the market-side uptick rule abolished in 2007 was a relic of a time when trading was conducted face-to-face, as opposed to the current electronic trading systems, and that the creation of a security-specific rule would require a retooling of electronic trading systems that would take at least six months.
Aside from the proposed rules, nearly all of the panelists applauded the SEC’s actions last fall to address naked short selling. Dr. Robert Shapiro, Chairman of Sonecon, LLC, said that in addition to making the currently temporary restrictions on naked short selling permanent, the SEC should also address the persistent problem of fails to deliver.
While noting that public comment has been overwhelmingly in favor of reinstating some form of short selling restriction, Chairman Schapiro conceded that there is no specific empirical evidence that the absence of such restrictions contributed to the unprecedented market volatility this fall.