SEC Mulling Short-Sale Exemptions For Market Makers
Wednesday July 16th, 2008 / 23h32
By Tennille Tracy Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- The Securities and Exchange Commission is considering a plan to exempt market-makers in the options and equities markets from a new rule that attempts to slow down short-selling in financial companies. By putting the kibosh on so-called naked short-selling in companies like Fannie Mae (FNM) and Freddie Mac (FRE), the SEC would complicate life for market-makers who take the opposite side of orders to trade stocks and options. Early Wednesday, one day after the SEC issued the new order for 19 financial companies, representatives from the seven U.S. options exchanges contacted SEC officials to convey their concerns and raise the possibility of an exemption. The SEC is now considering such a move, an agency spokesman said, although no decision had been yet been made. The SEC's order stirred immediate panic in the options market. Market-makers often short-sell companies' stock in order to hedge positions they take in options contracts. If they sell put contracts, for example, they turn around and sell stock in the same company. "My book makes a market in nearly every name on (the SEC's) list," said Andy Schwarz, founder of AGS Specialist Partners. "This affects our book in a big way." The SEC already prohibits naked short selling - shorting stock without ever borrowing it - but it does allow broker/dealers to sell stock short as long as they reasonably believe they can locate the needed shares and deliver them on time. Beginning Monday, short sellers will need to make formal arrangements to borrow the shares before selling them. For options market-makers, the new rule would make the trading process more costly and challenging. "There will be less liquidity in the options market," said Paul Foster, a strategist with TheFlyOnTheWall.com. "The cost of the transaction will go up for the customer and the ease of use will decrease." The situation will get particularly dicey if the SEC does not grant an exemption and, as contemplated, expands the prohibition to cover companies whose shares are less liquid, Schwarz said. In that case, borrowing shares could become more costly and complicated, making it difficult to facilitate options trades. "If market-makers can't hedge themselves," Schwarz said, "they will be unable to sell puts and buy calls." -By Tennille Tracy, Dow Jones Newswires; 201-938-2345; tennille.tracy@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=tbcz0xXX1Jauzo6mglEnJg%3D%3D. You can use this link on the day this article is published and the following day.
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