NYSE Executives Suggest Broader Action To Curb 'Naked' Shorts
Wednesday October 1st, 2008 / 19h47
By Geoffrey Rogow Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- The top executives at NYSE Euronext (NYX) expect the ban on short-selling will be extended for a short period of time, but suggested a series of broader actions to prevent "naked" short-selling abuses. In discussing the short-selling ban, which is set to expire Thursday, Duncan Niederauer, chief executive of the transatlantic exchange operator, threw his support behind a possible re-implementation of the up-tick rule or possible individual stock circuit breakers that would halt trading on a stock should it move greater than a suggested 10% to 20%. The decades-old up-tick rule, which prevents a short sale unless the share price is higher than the last trade, was dropped last summer. "Having some kind of circuit breakers is better than lifting the ban and going back to where we were," said Niederauer during an early afternoon conference call that was also broadcast over the Internet Wednesday. The Securities and Exchange Commission on Sept. 19 instituted a 10-day ban on short-selling in the ordinary stock of 799 financial-sector companies. The order, which has since been expanded to cover the shares of almost 1,000 companies, is set to expire on Thursday. Short-selling has become a whipping boy for regulators and lawmakers throughout the recent leg of the credit crisis on concerns that short sellers were draining confidence out of the U.S. financial system. However, while an earlier short-selling ban on 19 financial firms was partly a factor in stock market gains in July, this time around markets have generally moved lower even with the ban. Both the Dow Jones Industrial Average and Standard & Poor's 500 are both lower since the ban was instituted. The SEC has the power to institute the ban for a total of 30 days and push it beyond an original Oct. 2 cut-off, though Niederauer said the SEC was fully aware the current ban was not a "long-term solution." And while the SEC was originally reticent to look at a possible reinstatement of the uptick rule, he said they have put that option back on the table. From the exchanges standpoint, Niederauer said the uptick rule might be the easiest solution as it would cover all stocks, instead of a select set of firms, and could be reinstated from a technological basis in a matter of days or weeks. Executives for the exchange also noted the SEC will continue to enforce the rules on brokers to ensure clients have appropriately borrowed stock. On top of a potential extension to the short-selling rule, companies are also continuing to be added, including recent additions like jeweler Zale Corp. (ZLC), car-dealer AutoNation Inc. (AN), and truck-and-equipment renter Ryder Systems Inc. (R). They join a motley crew that already includes such notable "financials" as International Business Machines Corp. (IBM), Medco Health Solutions Inc. (MHS), General Motors Corp. (GM) and Ford Motor Co. (F). Some of the companies protected have tenuous links to finance: for fiscal year 2008, the "All Other" part of Zale's business, which includes its insurance unit, accounted for less than 1% of its overall revenue. Shortly before the rule came into effect, the SEC furnished exchanges with a set of criteria for additions to the original list of 799 companies, namely that a company is or owns a bank, savings association, insurance company, or various other entities. With that, the SEC passed along the responsibility for additions to the exchanges. The Nasdaq selected 66 companies at its discretion; the NYSE called for applications from eligible companies. The NYSE and the Nasdaq, for their part, insist that all companies added to the list fit the "strict" criteria. One outcome to the short-selling ban has been the CBOE Volatility Index remaining above $40, with executives for the exchange attributing the volatility to a lack of liquidity in the marketplace. Lawrence Leibowitz, group executive vice president and head of U.S. markets and global technology for NYSE Euronext, noted the ban has kept traders that hedge positions regularly out of the marketplace entirely, while also forcing electronic exchanges to cancel some trades entirely on the erratic stock movements. NYSE executives said they welcome a return of short-sellers, though Niederauer said these trades must be "governed, managed and overseen properly." Earlier in the day, NYSE closed its acquisition of the American Stock Exchange, following SEC approval of the deal. In the agreement, NYSE will pay $260 million in common stock. Though Amex was generating $4 million to $5 million in losses as of the second quarter, Sandler O'Neill said management for NYSE expects the transaction will realize $100 million in synergies, with the exchange forecasting the deal will add to earnings by the end of 2009. Amex, one of seven options exchanges in the U.S., currently has a 6% share of options trading volumes. When combined with NYSE Arca, which has a 12.3% share, NYSE Euronext will become the third-largest options market after the International Securities Exchange and the Chicago Board Options Exchange. Speaking about the agreement, Leibowitz said the exchange can now work to reintroducing large block trades back into the market place. -By Geoffrey Rogow, Dow Jones Newswires; 201-938-5360; geoffrey.rogow@dowjones.com (Rob Curran and Serena Ng contributed to this report.) 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=cN9izTttzEYnp%2BVDiKDWSA%3D%3D. You can use this link on the day this article is published and the following day.
