SEC Reins in Short Sellers with New Restrictions

Published: Wednesday, 24 Feb 2010 | 11:54 AM ET

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U.S. securities regulators adopted a new rule to restrict short selling more than a year after the financial crisis provoked cries to rein in investors who bet on a stock's decline.

Oliver Quilla for CNBC.com

The Securities and Exchange Commission voted 3-2 on Wednesday to approve a rule designed to put the brakes on a stock that is falling precipitously.

The new rule attempts to bridge the divide between those who argued a market wide curb was needed to protect stocks from short sellers and others who said that restrictions would hurt market liquidity.

"The commission was cognizant of the benefits that short selling can provide to the markets," SEC Chairman Mary Schapiro said at a public agency meeting.

However, Schapiro said the SEC was also concerned that excessive downward pressure, accompanied by fear of unconstrained short selling can destabilize markets and undermine investor confidence.

Under the SEC's rule, if a stock fell by more than 10 percent in a day, a curb would kick in only allowing short selling above the national best bid. That restriction would last for the day the stock dropped and the day after.

Short-sellers bet on a stock's decline. In a short-sale, an investor borrows stock and sells it in the hope that its price will drop.

When it does, the seller profits by buying back the stock at the lower price and returning the borrowed shares.

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