Amid widespread panic in equity markets, the Securities and Exchange Commission (SEC)adopted restrictive measures to combat coordinated short selling by speculative pools of capital by instituting an “up-tick” rule. That was in 1938. Fast forward 72 years, and many of the same measures are being applied, modified, and re-applied to today’s equity markets.

On 24th February the SEC adopted an “alternative up-tick” rule which is expected to go into effect later this year. This rule is designed to trigger a circuit breaker if a stock price declines by more than 10% intra-day. After such a trigger, short-sellers would only be able to short additional shares at a price above the current national best bid. Effectively, this ruling will allow investors holding long positions to sell ahead of potential new short-sellers. The primary goal of the SEC’s legislation is to promote market stability during periods of uncertainty, hence the circuit breaker feature of the proposal.

The US is not alone in taking actions to impede short-selling. Similar reform is not only being contemplated but is being actively introduced in Europe. German Finance Minister Wolfgang Schaeuble and Chancellor Angela Merkel have recently laid out plans for a comprehensive regulatory overhaul which includes proposals to eliminate naked short selling and speculative trading of government bonds. While the country’s financial regulator BaFin has already issued some guidance on the proposals, the full scope of the order remains unclear at this early stage.



Measures are also being considered in Asian markets. In March, the Securities and Futures Commission (SFC), Hong Kong’s financial regulator, also came out with new legislation with regards to short selling. The SFC will seek to require weekly reporting of short positions if certain ownership tests are met. As proposed, this initiative would only apply to roughly 100 Hong Kong listed companies, but the proposal has particularly important ramifications. Martin Wheatley, the chief executive of the SFC, also chairs the taskforce on short-selling at the International Organization of Securities Commissions, which represents more than 100 global regulatory bodies. A very similar initiative was brought to light by the Paris-based Committee of European Securities Regulators (CESR). The CESR has recommended a Pan-European disclosure of short positions in a similar fashion to those in Hong Kong. Clearly, this policy has the potential to act as a global precedent.