Nibbling at the Edges—Regulation of Short Selling: Policing Fails to Deliver and Restoration of an Uptick Rule

For several decades, most commentators' mantra on short selling has been promotion oj informational efficiency, which translated into minimal regulation. Individual investors, the U. S. Secunties & Exchange Commission ("SEC"), and other groups oj observers believe that escalating amounts oj short selling, including naked short selling, have been a substantial cause oj market volatility, investors' wholesale retreat jrom the stock markets, and severely declining market indexes and share puces, particularly in financial stocks. This Article reviews recent SEC proposals and enactments, including restoration oj an uptick or similar "sales pnce restriction" rule, or installation oj circuit breakers adding restnctions on short selling oj stock jollowing a precipitous price decline in the stock, and enactment ojjormerly temporary regulations requinng market participants (broker-dealers mostly) to close jails to deliver after three days rather than thirteen days. Open jails to deliver ojten are evidence oj naked short selling and stock pnce manipulation, which the SEC has battled since adoption oj Regulation SHO in 2004. The Article concludes that these are Main Street versus Wall Street issues. Damping down market volatility is more important to Main Street traders than is promotion ojhigh degrees oj informational ejficiency, while jor projessional traders, hedge junds, and high volume short sellers, informational ejficiency is more important. The SEC's objective is not to serve one goal rather than the other but to regulate so as to achieve a balance between the two policy objectives.