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Corporate executives want tighter restrictions on short selling, says NYSE study

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A study commissioned by NYSE Euronext, operator of the New York Stock Exchange, has found support for tighter restrictions on short selling of stocks, going as far as an outright ban in ce

A study commissioned by NYSE Euronext, operator of the New York Stock Exchange, has found support for tighter restrictions on short selling of stocks, going as far as an outright ban in certain circumstances, among senior corporate managers in the US and abroad.

The survey, conducted by Opinion Research Corporation, found that senior management of public companies generally view the short selling of stock to be harmful during periods of market volatility and favour new rules and disclosure requirements to protect the interests of issuers and shareholders.

The survey was conducted following the expiry on October 8 of the Securities and Exchange Commission’s emergency order banning short selling of the stock of hundreds of financial companies and covered a total of 438 chief executives, chief financial officers and investor relations officials of companies listed on the NYSE and Nasdaq.

Overall, 75 per cent of respondents favour restrictions on short selling activity during periods of stock price volatility, 85 per cent recommend re-instituting the uptick rule as a means to instil market confidence, and 92 per cent believe investment managers should publicly disclose their short selling positions.

‘The corporate community is clearly concerned about short selling, particularly naked short selling, and want regulators and exchanges to apply more rules, such as a new tick-test or circuit breakers, and disclosure to protect companies and shareholders,’ says Jeff Resnick, president of the US group of Opinion Research Corporation.

‘Many respondents, noting the inconsistency of disclosure requirements for issuers compared with those for hedge funds and other businesses, say greater transparency in short selling is essential.’

Six in ten of all respondents believe that short selling is harmful to their company’s stock and shareholders, and an even larger proportion of chief executives. While companies of all sizes view short selling as harmful, the proportion is highest among companies with market capitalisations of less than USD750m. ‘For small cap companies with limited floats, the impact of short selling can have a dramatic intra-day impact on share prices,’ says one respondent.

Three-quarters of survey respondents believe short selling should be temporarily prohibited when a stock experiences a certain level of volatility. Of those favouring a temporary ban, 24 per cent say short selling should be stopped after market decline of less than 10 per cent, while 54 per cent say it should be halted after a decline of between 10 and 20 per cent.

A smaller proportion, 18 and 4 per cent respectively, believe that declines of between 20 and 30 per cent and greater than 30 per cent should trigger a temporary prohibition, while 84 per cent of chief executives favour a temporary ban on short selling under some circumstances.

There is widespread support for the reintroduction of the uptick rule governing short selling, with 85 per cent of all respondents and 89 per cent of those from the US respondents in favour of re-instituting it as soon as practical, along with other options that would to place some constraints around short selling. Eighty-two percent of US respondents saw a revival of the rule, which was repealed by the SEC on July 6, 2007, would boost market confidence.

‘Unbridled short selling can overwhelm markets, and the ‘plus’ tick worked for decades to control the ability of short sellers to overwhelm market sentiment,’ says one respondent. ‘It should be re-instituted but must include on-exchange trading as well as off-exchange and dark pools.’ Adds another: ‘Reinstatement of the uptick rule won’t eliminate the function of shorts in the marketplace, but will make them act more responsibly.’

There is overwhelming support for requiring investment managers to disclose their short selling activity publicly, a move the SEC backed away from when drawing up permanent disclosure rules this month, with 92 per cent of respondents in favour. Says one: ‘I support greater transparency within the investment community and am in support of full disclosure of both long and short positions.’

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