Sunday, July 20, 2008

The SEC naked solution and the impact on markets


New limits on naked short selling have changed the rules of the US stock market. Should there be naked short selling in the market? No. The issue why Christopher Cox and the SEC waited so long for some action and why should it be limited to a set of 19 financial institutions? If the practice is bad, then why not have it applied to everyone. What makes banks so special that they would receive this treatment? There will be a price to be paid for this government action regardless of what is believed to be a good policy in the short-run.

Selective enforcement or changes in the rules calls into question the fairness of the market. Face a bear market especially in financial stocks and the SEC will change the rules for short selling. These 19 financial institutions are all suffering loses and could go down further based on the strength of the credit decline, yet there are other firms including banks which are in similar trouble. How did the list of 19 get created? (I would hate to be the 20th institution which did not make the cut.)

These new rules will go into effect on Monday but the impact has already been felt with some bank stocks going up over 20% in one day after the announcement of the change by the SEC. The new rule combined with so good earnings number shave stemmed the bank stock decline, but this certainly will not save many banks. Short sellers which just have to borrow the stock first; however, in the world market is clear that the SEC will change the came when it sees fit.

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