Kenneth Cole Productions Inc. and Timberline Resources Corp. were among the first stocks to have short selling restricted today under a regulation aimed at preventing bearish bets from snowballing.
Shorting Kenneth Cole Productions was curbed after the maker of footwear and handbags plunged more than 10 percent following quarterly earnings that missed analyst estimates. The regulation, known as the alternative uptick rule, was triggered by Timberline Resources after the mineral exploration company slid on a plan to sell 5.3 million shares at 95 cents apiece.
By forcing speculators who want to bet on declines to wait, regulators are seeking to keep the market from being overwhelmed with sell orders that may feed on each other. When the 10 percent threshold is triggered, traders can only execute short sales at a price above the market’s best bid. The curb lasts through the following day.
“This new rule will have very limited impact,” said Jeff Middleswart, director of research at Behind the Numbers, which advises investors on short selling. “It will just cause stocks to fall over several days as opposed to one. Shorting is still a major part of the market despite claims that it hurts markets when it actually keeps them going.”
Short sellers sell borrowed stock in the hope of buying the securities later at a lower price and returning them to the lender. Other stocks with moves that triggered the restrictions were Bank of Granite Corp., Adeona Pharmaceuticals Inc., Alanco Technologies Inc., Waccamaw Bankshares Inc., DJSP Enterprises Inc., Ohio Valley Banc Corp. and Xueda Education Group.
So-called Rule 201, which was opposed by the SEC’s two Republican commissioners, was postponed from its scheduled November 2010 implementation to allow extra time for securities firms and stock brokers to revise their trading systems. The SEC estimated last year that implementation will cost the financial industry about $1 billion, or an average of $70,000 to $90,000 per firm. Ongoing costs will also be about $1 billion a year, or $120,000 per firm, the SEC estimated.
Short selling was blamed by lawmakers, former Morgan Stanley Chief Executive Officer John Mack and investors for pushing the U.S. economy toward the brink of collapse by driving down bank stocks during the financial crisis. Under pressure from politicians, the SEC temporarily banned bearish bets against almost 1,000 financial stocks in September 2008.