WASHINGTON (CN) – The Securities and Exchange Commission is permanently adopting rules it temporarily imposed on short sales of stocks during the financial meltdown in late 2008.
The rules limit the ability of short sellers of stock to make naked short sells where they fail to deliver the stocks they have shorted, by requiring that the seller borrow or buy the shares by the beginning of the settlement day following their fail-to-deliver trade.
Short selling is when a trader “borrows” securities from a current shareholder, agreeing to return them on demand. The seller delivers these shares to a buyer, who takes full ownership and likely does not know that he is participating in a short sale. When the trader wants to “unwind” the position, they buy back equivalent shares in the market and return them to the lender, pocketing the difference between the two sales. If a seller fails to deliver the stock to the buyer, usually because they did not borrow the stock in the first place, the price of the stock as the trader keeps “selling” shares they haven’t borrowed making the market appear to be flooded with sales of the stock.
By requiring traders to close their positions or face sanctions those trying to manipulate market prices will lose the time frame required to cause a large change in the price of stock.
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