March 4 (Bloomberg) -- The revival of Securities and Exchange Commission rules aimed at curbing speculators who seek to drive down stocks may be hindered by a report from the agency’s own economists.

Daniel Aromi and Cecilia Caglio, economists at the SEC in Washington, said in a December report to former Chairman Christopher Cox that the so-called uptick rule was less effective when needed most, during panics that drive prices down and volatility up. Even with delays imposed by the curb, short sellers in a simulation executed trades 25 percent faster on average when stocks plunged than when prices were steady, according to the study.

“The uptick rule is not going to slow down the market that much,” said Michael Pagano, a finance professor at Villanova University in Villanova, Pennsylvania, who read the report. “The time when you’d want to see the uptick rule become more binding is exactly when you have high volatility, and particularly when you have large negative returns.”

Regulators are considering restrictions on speculators after the Standard & Poor’s 500 Index fell 53 percent in the 20 months since the uptick rule was eliminated. Mary Schapiro, who succeeded Cox, said in January during her confirmation hearings that examining the rule is “one of the things that I would be committed to doing very quickly.” Federal Reserve Chairman Ben S. Bernanke told Congress last week that the measure, removed after 69 years on the books, should be revisited.

‘Some Benefit’

“My sense is that it’s worth looking at, and I would say that to the new chairwoman if she asks me about it,” Bernanke told the House Financial Services Committee on Feb. 25. The rule “might have had some benefit,” he said.

In a short sale, traders borrow stock and sell it, hoping to profit by replacing the shares at a lower price. The uptick rule required bearish traders to wait for a price increase in the stock they wanted to short, and prevented so-called bear raids where successive short sales drive prices down.

Members of Congress, New York-based banks Citigroup Inc. and Morgan Stanley, and Charles Schwab Corp. in San Francisco have blamed abusive short selling for exacerbating losses last year. The S&P 500 gained 2.4 percent today, rebounding from a 12-year low of 696.33 yesterday.

Cox failed to convince a majority of SEC commissioners last year to reinstate the regulation or create a modified version that was easier for brokerages to implement. The agency eliminated the uptick rule after SEC and academic studies showed it didn’t work in markets dominated by electronic trading.

‘Psychologically Damaged’

NYSE Euronext Chief Executive Officer Duncan Niederauer said late yesterday that he supports bringing back the uptick rule.

“When markets are psychologically damaged like they are right now, I actually think it would go a long way to adding confidence,” he said at the Museum of American Finance in New York. “We at least owe the investing community an answer. No more rhetoric, no more maybes, just what are we going to do.”

The December SEC report examined the benefits of barring short sales unless they were done at prices at least 1 cent higher than the last trade. While more than 58 percent of short sales would be delayed or barred by such a requirement, the impact lessens in times of panics, according to the 28-page study. Short sellers would be able to execute as much as 57 percent more trades in certain stocks when the market slides, compared with times when prices are steady, the report shows.

Effective Ban

The SEC also considered raising the threshold to as much as 5 cents. For increments of 4 cents or more, the uptick rule would effectively ban short sales, a policy counter to the agency’s position. In October, the SEC said short selling plays an “important role” by increasing liquidity, helping traders hedge other assets and curbing speculation.

A separate SEC analysis concluded that in September, when the S&P 500 lost 9.1 percent, short sales were more common during rallies than declines.

“We found that a short-sale price test would be most restrictive during periods with little volatility,” Aromi and Caglio wrote in the report. “Our results are inconsistent with the notion that, on a regular basis, episodes of extreme negative returns are the result of short selling activity.”

John Nester, a spokesman for the SEC, said that while Schapiro plans to review the issue, there is no specific proposal under consideration. Aromi didn’t return a call seeking comment, and Caglio referred questions to Nester. Fed spokeswoman Michelle Smith didn’t respond to a request for comment.

Prudent Bear Fund

David Tice, who sold his short-selling fund to Pittsburgh- based Federated Investors Inc. last year, said he wouldn’t be hampered if the uptick rule were brought back. The $1.28 billion Federated Prudent Bear Fund has returned 17 percent in 2009 after gaining 27 percent in 2008.

“We functioned just fine when the uptick rule existed before and, in fact, we wouldn’t mind if the uptick rule was reinstated,” he told Bloomberg Television today.

Regulators from Washington to London last year cracked down on short selling. In the U.K., a Financial Services Authority prohibition on shorting 34 financial companies expired in January. The SEC eliminated a similar measure Oct. 9 after exchange data showed the prohibition fueled volatility and made it more costly to trade.

“What we have right now is a banking and credit crisis, and the equity markets were functioning quite well before they started tampering with short sales,” said Stephen J. Nelson, a lawyer in White Plains, New York, who represents brokerages and investment advisers. “There is a lot to do with financial service regulation, which is going to involve thousands of issues that are much more important than an uptick rule.”

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: March 4, 2009 16:38 EST