The SEC has traditionally defended the view that protections against abusive short selling are important for issuer and investor confidence.
In an emergency action aimed at limiting the ability of traders short-selling in Fannie Mae (FNM) and Freddie Mac (FRE) stock, SEC Chairman Christopher Cox, at a Senate Banking Committee hearing – said the SEC would institute an emergency order requiring any traders to “pre-borrow” stock before shorting GSEs and Wall Street firms. The requirement would prohibit naked short selling, a form of speculation that allows traders to sell securities they do not own, effectively taking a negative position as they expect the value of the securities to decrease in the market.
Under current rules, a short-seller must locate shares to borrow, which are later replaced with stock bought at a lower price. The SEC said it will immediately begin considering new rules to extend new requirements to the rest of the market.
Some market observers have been concerned that traders were borrowing the same shares from the same lender over and over. Under the emergency order, traders will be required to borrow the stock and the lender would then take it out of the market and not allow other traders to use it to satisfy requirements that they’ve located stock.