“Emergency” Short-Selling Rules Set To Expire On Wednesday

The special rules designed to curb "abusive naked short selling" in 19 prominent financial stocks are set to expire on Wednesday, and no one’s quite sure what will happen if the SEC doesn’t extend the special rule designed to prevent shares of bad companies from going down.

Dylan Wetherill, founder of ShortSqueeze.com told CNBC that "If the SEC removes the rule, it will give the short sellers the edge in the market they are looking for."

What a load of bull. By eliminating the special "pre-borrow" requirement, the end of the "emergency" rule" would eliminate one layer of bureaucracy that makes short selling a really tough business. There are still a bunch more. Think about it: short-sellers have to borrow shares and pay a fee/interest for doing so, they can be bought-in at any time and, no matter how long the hold their short position, their gains are taxed at the higher short-term rate. There’s a reason that Jim Chanos’ Kynikos Associates is one of the only major short-only funds out there. Short-selling is far from the easy business that the fear-mongering demagogues want you to think it is.

Saying that removing the rule will give shorts "the edge in the market" is like saying that letting Little Leaguers have an extra at-bat in their game against the New York Yankees gives them an edge. Short-sellers are already disadvantage enough.

Then there’s question for long-term oriented investors: are rules that make short-selling difficult even wanted? If companies like Lehman Bros. and Fannie Mae have such great long-term prospects and are being unfairly battered by shorts, then the manipulation presents a buying opportunity! Interestingly though, very few executives complaining about manipulation at their companies are using it as an opportunity to acquire shares with their own money.

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Zac Bissonnette