Page last updated at 22:46 GMT, Monday, 27 July 2009 23:46 UK

US rules on abusive short selling

Wall Street, New York
The SEC says the emergency rule has helped to stop abusive short selling

US stock market regulators have made permanent a rule aimed at reducing abusive short-selling.

The emergency rule on "naked short-selling" was introduced at the height of last year's market turmoil, and was due to expire on Friday.

Short-sellers usually borrow shares, sell them, then buy them back when the stock falls and return them to the lender keeping the difference in price.

"Naked" short selling is when sellers do not even borrow the shares.

The US the Securities Exchange Commission (SEC) acknowledges that short selling can help limit market bubbles in individual shares.

But it has been concerned that the practice can also be used to manipulate the market.

'Abuse' reduced

The rule now made permanent includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

The SEC says this has helped to reduce what it calls "abusive, naked short-selling", by more than 50% in an eight-month test period.

US politicians have put pressure on the SEC to curb trading moves they believe worsened the market downturn.

However, some analysts in the securities industry warn that the new regulation on naked short-selling could have negative consequences, such as wilder price swings and market turbulence.

In a related move, the SEC says it is working on new approaches to reining in rushes of short-selling that can cause dramatic plunges in stock prices.

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