Grandfather-Klausel von der SEC abgeschafft !

Trading Rule Reprieve
Liz Moyer, 06.13.07, 4:56 PM ET

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Liz Moyer
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Wall Street got a reprieve from more restrictive trading rules Wednesday as the Securities and Exchange Commission voted to put off any decision on whether to take away certain exemptions for options market makers.

But the SEC did eliminate a controversial "grandfather" rule that many critics have said allowed rogue traders to manipulate certain stocks through naked short sales. It also eliminated the prohibition on selling short on a downward tick in price.

At a hearing Wednesday on proposed amendments to a 2004 regulation on short sales, SEC Chairman Christopher Cox said the tightened rules "are aimed squarely at abusive short selling and market manipulation and promoting fair, efficient and orderly markets."

The SEC has been considering amendments to its 2004 Regulation SHO to close loopholes that encourage manipulation, but the proposed amendments have not been without controversy.

More than 900 letters poured into the agency since July from a wide assortment of commentators, including broker/dealers, hedge fund managers, ordinary investors and state securities regulators. One vocal critic of the rules is Overstock.com (nasdaq: OSTK - news - people ) Chief Executive Patrick Byrne, who has been waging a self-described "crusade" to stamp out abuses on Wall Street.

"This is an encouraging development and the SEC is to be commended for taking this step," Byrne said in an e-mail Wednesday.

The grandfather exemption, repealed by a unanimous vote Wednesday though the date for implementation has yet to be set, made an exception to the 2004 Regulation SHO that hard-to-borrow securities sold short had to be delivered within 13 days of the settlement date. Reg SHO exempted trade failures that existed before the rule was implemented in January 2005, and it exempted failures that occured in a five-day window before a stock is added to threshold lists kept by the major stock exchanges.

Those exemptions are now eliminated though the close-out requirement was reset to 35 days from 13, giving short sellers more time to find shares to cover their open positions.

Cox has said Reg SHO helped reduce trade delivery failures, but hasn't been as effective as hoped, as evidenced by stocks that have languished on the threshold lists for months and years. (Overstock.com, for example, has been on Nasdaq's threshold list for over 500 days.)

These longstanding delivery failures are linked to the grandfather exemption for trades and by the options market maker exemption, which allows an options market maker to maintain an open short position to hedge his options position. High and persistent trade delivery failures can be a sign of deliberate naked short selling, "and that can be used as a tool to drive down a company's share price," Cox said.

The grandfather exemption was put in the 2004 regulation out of concerns that forcing the close out in hard-to-borrow stocks would lead to a short squeeze--a trading term to describe what happens to short sellers when a stock rises instead of the hoped-for decline, and the short seller has to cover by buying more expensive shares.

But the SEC commissioners acknowledged Wednesday that concerns about extra volatility and short-squeezes were overblown and that the benefits of eliminating the grandfather exemption outweighed the downside.

Also part of the changes proposed Wednesday was a plan to publish two-month delayed trade delivery failure data on individual stocks that appear on the threshold lists. That data comes from the Depositary Trust Co. The SEC is also going to increase the frequency of short-interest reporting to twice a month from once a month. That change is slated to go into effect by September.

But the matter of the exemption for options market makers is left open for now, something that is bound to cause consternation for those who wanted all the loopholes shut. The SEC will open a new comment period on amendments to market maker rules.

"We look forward to a comparable reform closing the market maker exemption loophole, which is currently an avenue of great abuse," said Overstock's Byrne. "There is a bank being robbed in two ways: some crooks snatch a teller's cash drawer and sprint out the front, some saunter in the back door and loot the vault. What the SEC did today was put bars up in the tellers' windows. I applaud that. But tomorrow there will be twice as many crooks going around back."