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SEC's New Restrictions Scapegoat Short Sellers


Note to the Securities and Exchange Commission: Stocks are supposed to be risky.

Do you own STEC (STEC)? If so, you're in pain.

However, you may be comforted to know that the Securities and Exchange Commission doesn't want other investors to experience what you're going through.

In a 3-2 vote, the SEC approved circuit breakers that kick in when a stock falls 10% in one day. At that point, a short sale can only be executed at a price above the best bid.

According to SEC Chairman Mary Shapiro,"excessive downward price pressure on individual securities, accompanied by the fear of unconstrained short selling, can destabilize our markets and undermine investor confidence in our markets."

Ms. Shapiro goes on to say that "it will prevent short selling, including potentially manipulative or abusive short selling, from further driving down the price of a security that has experienced a 10 percent price decline. Limiting the potential for abuse is an important goal of these rules."

But aren't stocks supposed to be risky?

Maybe I'm a dolt that just doesn't get it, but the SEC is trying to suck risk out of what is an inherently risky asset class by scapegoating short sellers, who comprise only a small portion of the investing population. And why? Because some of them may engage in "potentially manipulative or abusive short selling."

Furthermore, if the SEC is particularly concerned about "excessive downward price pressure on individual securities," it may want to look at the long-only institutions who are the biggest shareholders of basically every stock in the universe. If we want to protect investors from price declines, it's only sensible to put an equivalent circuit breaker on trades from large institutions. I don't know about you, but I think the sell button on Fidelity's trading desk can do more damage to a stock price than any dirty short seller.

But in the regulators' minds, stocks were made to go up, period. If they violate that new law of financial physics, there's always a culprit -- leveraged ETFs, the President sneezing, or the ultimate boogie man, the shorts. The long-only complex must be protected at all costs.

Look back at 2008 -- bureaucracies aren't all that good at influencing market prices. Restrictions placed on shorting financial stocks didn't stop companies with bad fundamentals from falling apart.

The SEC is also ignoring the fact that long investors already have access to protection from price declines. Every investor with a brokerage account can tap the options markets, where put options can readily be purchased for downside protection.

And oh yeah, they can sell to avoid the risk they incurred when invested in stocks in the first place.
No positions in stocks mentioned.
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