As markets await the Securities and Exchange Commission’s decision on whether to extend the emergency short-selling ban, NYSE Euronext is considering instituting “circuit breakers” to halt short-selling in a stock if the price of that stock declines dramatically.
In a webcast today, stock exchange CEO Duncan Niederauer told listed companies that the Big Board is considering an intraday ban on short-selling in stocks that see major declines. For example, if a stock took a hit of 10% or 20% in a single day, NYSE Euronext could step in to halt trading in the stock for the rest of the day, then ban short-selling in that stock for a few days.
Such a recommendation could take weeks to institute, Mr. Niederauer warned. An easier fix could be reinstating some form of the uptick rule, which forbids short-selling if a stock’s price is not above that on the preceding sale. The SEC eliminated the uptick rule last year.
The SEC’s ban on shorting financial stocks expires at midnight Thursday. Mr. Niederauer said it’s possible the SEC may extend the ban for at least a few more weeks, at which point the uptick rule could be rolled out. Following that, the exchange could institute the circuit-breaker idea.
Some difficulties remain. The SEC has a “bias against reinstating the uptick rule,” Mr. Niederauer said, because it would go against the work the agency had done in recent years to do away with that rule. “But it is back on the table,” he said, adding that the stock exchange and traders could tweak technological programs to handle the uptick rule “in a matter of days.”
In addition, it’s not clear whether the uptick rule helps streamline market discipline. An SEC pilot program a few years ago found the uptick rule did not prevent manipulation and in fact reduced liquidity. Some have said that study was conducted while the market was rallying, though, and might not reflect the uptick rule’s true effectiveness.
Other critics say the rule is outdated. During a conference call with listed companies last week, Rick Ketchum, CEO of NYSE’s regulatory arm, said the uptick rule would give investors confidence that short-selling alone isn’t moving the market down.
He also noted, however, that such rules “don’t work very well in the very fast, very electronic markets,” and that they could provide some false indicators for watchdogs looking for abusive short-selling.
While the particulars are still to be decided, it is clear that regulators will come up with some additional short-selling restrictions in the next few days. “Forget all the pomp and circumstance, our markets just need to work,” Mr. Niederauer said today.
Nicholas Rummell is a reporter for Financial Week, a sister publication of Pensions & Investments.
