The Cox Rule: Weighing Down Shorts With Red Tape

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Late last night the Securities and Exchange Commission finally got around to releasing the new, emergency short-selling rule Chris Cox announced in the middle of the trading day yesterday. Cox's announcement has been largely criticized because it initially left traders guessing about what the SEC was actually doing.
Now we know what the new rule is. Basically, it could be called the Paperwork Production Act of 2008. It requires short sellers to have not just located the stocks they want to borrow in order to short, but to actually borrow. From our read, 100% delivery of the stocks at settlement is required. The rule doesn't, of course, cover every share of every public company. It offers this special protection to just 19 financial firms.
The move seems aimed at increasing the marginal cost of shorting stocks. It throws red-tape transaction cost and creates enforcement risk for short selling. Increasing the cost of short-selling should have the effect of making shorting some stocks, particularly stocks that have already dropped precipitously, less attractive as an investment strategy.
To the extent the rule is effective, the move seems certain to obscure the signaling effects of pricing for the financial firms. To the extent that investors understand that pricing no longer reflects market processes, the move could ironically create more uncertainty about the health of these firms.
SEC Enhances Investor Protections Against Naked Short Selling [SEC Press Release]

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