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Commentary

SEC gets tough on naked short sales, finally

The SEC has said – short sellers, get your shares ready.

Short sellers and their broker dealers are now required to deliver securities by the close of business on the settlement date, which is three days after the sale, or they will face penalties.

Broker-dealers failing to comply will be prohibited from further short sales in the same security unless the shares are pre-borrowed. That prohibition on the broker-dealer’s activity will also apply to all short sales for any customer.

This is good. First it will remove any stupid short sellers who can’t borrow shares. Second, it will raise the cost of borrowing, which should trickle down to lenders – making it lucrative to lend shares.

Lastly speculative over-shorting – i.e. short positions greater than free float – will likely be curtailed. Finally, some sensible regulation. I couldn’t care less if the short sellers are screaming right now – they have to short in an appropriately regulated way. Can’t find the shares, can’t short them, boo-hoo and all that.

Indian rules have futures which are regulated with respect to market limits – even that is sensible. The U.S. has had too little regulation for years in practically every department; now that they’ve seen the light on shorting, will they see it in compulsarily exchange traded derivatives?