WASHINGTON - Federal regulators yesterday made permanent an emergency rule aimed at reducing abusive short-selling of stocks, put in at the height of last fall's market turmoil.
The Securities and Exchange Commission said it took the action on the rule targeting "naked" short-selling, which was due to expire Friday.
Short-sellers bet against a stock, hoping it will decline and they can profit when it does. They operate by borrowing shares, generally from a brokerage firm, and then immediately selling them at the current price. Then they buy shares when the stock falls and return them to the lender - pocketing the difference in price.
"Naked" short-selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions sometime after the sale.
The new SEC rule requires brokers to promptly buy or borrow securities to deliver on a short sale.
At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices. SEC chair Mary Schapiro said last week that the SEC could decide on a final course of action in "the next several weeks or several months."
Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market's downturn starting last fall. Schapiro has said she is making the issue a priority.
Some securities-industry officials have maintained that the SEC's emergency order on "naked" short-selling brought unintended negative consequences, such as wilder price swings and turbulence in the market.
In addition to making the "naked" short-selling rule permanent, the SEC and its staff are working with major stock exchanges to make data on short-sale transactions and volumes publicly available through the exchanges' Web sites, the SEC announcement said. It will result in "a substantial increase" over the amount of information currently required, the agency said.