WASHINGTON — With Wall Street in crisis, the Securities and Exchange Commission is planning measures to rein in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and which some fear could be turned against other vulnerable companies.
During emergency meetings between federal officials and investment bank executives over the weekend, SEC Chairman Christopher Cox indicated to the bankers that the agency plans in a few days to impose new permanent protections against abusive “naked” short-selling, a person familiar with the matter said Monday.
Unlike the SEC’s temporary emergency ban this summer covering naked short-selling in 19 stocks, the new measures would apply to trading in the broader market. The person spoke on condition of anonymity because the SEC actions hadn’t been officially announced.
A critic of the agency said the action comes too late to stem a tide of short-selling attacks that have been felling huge companies.
Short sellers bet that a stock’s price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy the cheaper actual shares to cover the borrowed ones and then keep the difference.
In naked short-selling, sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale.
The SEC measures likely would include removing an exception for market makers in options on stocks from rules restricting naked short-selling, and a tightening of anti-fraud rules related to that activity, according to the person familiar with the matter.
Those two measures could be put in place administratively by quick approval of the SEC commissioners.
