SEC chair: We shouldn't ban short selling — it's needed for properly functioning market

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SEC Chairman Jay Clayton said Monday that the practice of short selling — effectively betting that a stock will drop — is needed to “facilitate ordinary market trading.”

“We shouldn’t be banning short selling,” Clayton told CNBC’s “Squawk Box.”

However, he said the Securities and Exchange Commission did replace the old uptick rule with a new measure to help mitigate the volatility that short selling can bring to an already agitated market like the one that investors have been dealing with for weeks now because of the coronavirus crisis.

Many major investors, including billionaire Leon Cooperman earlier this month, are calling on the SEC to reinstate the uptick rule, which was implemented 1938 but was eliminated in 2007 as electronic trading began to take over Wall Street.

Essentially, the old uptick rule only allowed investors to short a stock or a security on an uptick, which is defined by a price increase relative to its previous trade.

“We did put in place, and not a lot of people know this, an alternative uptick rule [in 2010.] And it’s a rule that I believe more closely matches the electronic trading environment of today,” Clayton said.

The SEC chairman said the current rule kicks in when a “stock drops 10% from the previous day’s close for two days,” preventing short selling the bid. He offered a hypothetical situation to explain further: “If a bid/offer spread is $49 to $50, you can’t sell short on $49.”

“We need market integrity,” Clayton said. “But we believe we’re taking care of it with this alternative uptick rule.”

Trades on the flip-side of Cooperman’s argument would argue that getting rid of the uptick and other archaic rules have allowed electronic trading to flourish, bringing liquidity to the market and lower trading costs for investors.

Cooperman, in looking to slow things back down, represents the school of thought that high-frequency computerized trading has led to outsized swings in the market and it has also put individual investors at a speed disadvantage.

Upcoming earnings season ‘anything but typical’ for companies and investors

In addition to addressing short-selling, Clayton also talked about the coronavirus-difficulties of the upcoming earnings season for companies and investors.

“We’re going to have an earnings season that’s anything but typical,” the SEC chairman told CNBC on Monday.

Investors used to clear earnings estimates in the form of analyst forecasts may have to get by with less information as many companies have pulled their guidance due to the uncertainty of the outbreak on business.

Clayton said the SEC is going to give companies to some flexibility. “We said to the extent that you are unable to get reviewed financial statements together because the auditors can’t get to your locations to do physical inventory or to the extent you have other problems, we’re going to give you more time.”

However, he said, “In order for us to give you that more time, you’re going to have to explain as much as you can to your investors at this time including why you need more time.”

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