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By Matthew Quinn
The Securities and Exchange Commission on Wednesday adopted a new rule that imposes restrictions on short selling only when a stock triggers a circuit breaker by experiencing a price decline of at least 10 percent in one day. At that point, short selling would be permitted if the price of the security is above the current national best bid.
The regulator said in a press release that the so-called "alternative" uptick rule "is intended to promote market stability and preserve investor confidence."
The original uptick rule was put in place in the 1930s and removed in 2007. Under it, an investor could not short a stock unless the price of that stock in its most recent trade was higher than the price in the previous trade. The SEC determined that modern trading strategies rendered the rule ineffective.
The new rule passed by a 3-2 vote despite many protestations from the finance industry, especially hedge funds.
"We received thousands of public comments expressing every viewpoint imaginable," SEC spokesman John Nester told Bloomberg before the vote.
Goldman Sachs and hedge funds Citadel Investment Group and D.E. Shaw & Co. lobbied against a limit, the news service noted.
Short selling can serve useful market purposes, including providing market liquidity and pricing efficiency, the SEC said in its statement.
"However, it also may be used improperly to drive down the price of a security or to accelerate a declining market in a security."
Many have argued short sellers played a strong hand in the demise of Bear Stearns and Lehman Brothers.
The new rule is meant to prevent short selling from further driving down the price of a stock that has dropped more than 10 percent in one day.
"It will enable long sellers to stand in the front of the line and sell their shares before any short sellers once the circuit breaker is triggered," the SEC said.
Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.
The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.
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