Well, we all knew that new regulations were coming on short selling. Last week, the SEC put forward five potential methods to control short selling and asked for public comments. One of the proposals, of course, is the traditional uptick rule, which allows short sales if the last sale lifted a stock price by at least a penny. The rule had been in effect for 70 years until it was abolished as part of Reg NMS in 2007. Some would like to reinstate it now. 

But that strikes me as an emotional response to the financial crisis and the beating financial companies took. My sense is that the traditional short sale has no real chance. Indeed, the SEC favors a modified uptick rule that would allow short sales if a buyer bid at least a penny more than the stock price. The original uptick rule required an actual sale. The SEC favors this bid-test approach in part because it would be a lot more feasible than the old uptick rule. A bid will be easier to determine than the last sale price, given the tremendous volumes these days. The old rule sounds like a latency nightmare. I would think the industry would agree, which makes some sort of bid-test more likely. 

The three exchanges have also thrown their weight behind the modified uptick rule, which also raises the likelihood it will win the day. 

The other three proposals are much more intriguing. They all involve circuit breakers that would limit the short selling if a stock dropped 10 percent. One proposal would ban short selling for the day outright in specific stocks. Another would reinstate the old uptick rule for the rest of the day. And still another would initiate a bid-test rule that would allow short sales at prices above the highest bid. My bet would again be on the modified rule combined with a circuit breaker. 

It's all quite arcane, but this much is obvious: There will be costs. Recall that Reg SHO, a previous attempt at regulating short selling, resulted in lots of unforeseen costs. Of course Reg NMS was a money sinkhole. Even the measure passed in the heat of financial stock swoon--the temporary ban and such required some system tweaks. - Jim