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To summarize and analyze guidance provided by the US Securities and Exchange Commission (“SEC”) on what constitutes “bona-fide market making” for purposes of Regulation SHO’s exception to the locate requirement.

Explains SEC guidance on this subject, focusing on statements by the SEC and its staff related to Regulation SHO and SEC enforcement matters, including a recent SEC administrative proceeding providing concrete examples of activity that does not constitute bona-fide market making.

While there is still a lot of room for additional SEC guidance on what constitutes bona-fide market making, the SEC has provided some details on the specific type of trading that would not fall within the Regulation SHO exceptions applying to bona-fide market making activities. However, there is still a large gap between the type of activity that most likely falls within the exception and the concrete examples analyzed by the SEC.

Practical guidance from experienced securities lawyers that consolidates SEC guidance on the bona-fide market making exception.

This paper aims to provide a detailed description of the four releases issued by the US Securities and Exchange Commission (the “SEC”) on October 14 and 15, 2008 in connection with the three SEC emergency orders that were adopted on September 17 and 18, 2008, relating to the regulation of short selling.

The paper presents a general overview of: Interim Final Temporary Rule 204‐T; Interim Final Temporary Rule 10a‐3T; the Amendments to Regulation SHO; and the Final Rule 10b‐21, each regulating short selling; and highlights each rule's new requirements, the exceptions to those requirements, and the material differences between the new rules and the rules as they were originally adopted.

The Interim Temporary Rules, the Amendments to Regulation SHO and the Final Rule 10b‐21 are important because: Interim Final Temporary Rule 204‐T imposes a penalty on any “participant” of a “registered clearing agency”, as defined below, and any associated broker‐dealer for having a fail‐to‐deliver position at a registered clearing agency in any equity security; Interim Final Temporary Rule 10a‐3T requires certain institutional investment managers to file a new form with the SEC on the last business day of every calendar week subsequent to the manager effecting a short sale; the Amendments to Regulation SHO eliminate the “options market maker exception” from Regulation SHO's close‐out requirement; and Final Rule 10b‐21 prohibits any person from intentionally deceiving a broker‐dealer, or a buyer as to the intention or ability of that person to deliver shares on the settlement date. Each of these actions creates new day‐to‐day compliance responsibility for market participants generally and for US‐registered broker‐dealers in particular.

The paper provides expert guidance on recent SEC releases by experienced securities lawyers.

Over the past few years, regulators, issuers, investors, and other market participants have expressed increasing concerns regarding the real or perceived effects of short selling. For example, thinly‐capitalized issuers whose shares trade on the over‐the‐counter market often blame short sellers for declines in the prices of their stocks. Recently, these issuers’ ire has focused on so‐called “naked short sellers,” i.e. short sellers who do not locate or borrow shares before selling. Likewise, other market participants have expressed apprehension about conduct involving short sales that may be viewed as disruptive or manipulative. The Securities and Exchange Commission (SEC) and the self‐regulatory organizations (SROs) have addressed these concerns both by promulgating new regulations governing short sales and by pursing enforcement actions. This article summarizes the new short sales rules contained in Regulation SHO and the amendments to Regulation M, and discusses recent enforcement actions pertaining to short sales.

This paper aims to explain the SEC's new Rule 201 and amended Rule 200(g), which are designed to improve the regulations that address harmful shortselling practices.

The paper summarizes Rule 201, discusses the reasoning behind the “alternative uptick rule”, defines “covered securities” to which Rule 201 applies, explains why the commission chose the national best bid as the basis of the execution of short sales during the circuit breaker period, discusses the SEC's policies and procedures approach, explains conditions under which a broker‐dealer submitting a short‐sale order after the circuit breaker is triggered submitting a short sale order after the circuit breaker is triggered may mark the order “short exempt,” explains the reason an exception for market making activities is not included in the rule, and discusses the implementation period and the need for broker‐dealers to develop new policies and procedures.

Broker‐dealers and other market centers will need to dedicate significant compliance and systems resources to develop the policies and procedures and systems enhancements necessary to comply with the rule.

The paper provides practical guidance from experienced securities lawyers.

The purpose of this paper is to summarize and provide excerpts from a two‐day roundtable on securities lending and short selling hosted by the Securities and Exchange Commission (SEC) on September 29‐30, 2009.

The paper provides summaries and participants' comments from two days of SEC commissioner's questions and panel discussions. Day one – securities lending: Panel 1 – overview of securities lending; Panel 2 – securities lending and investor protection concerns; Panel 3 – improving securities lending for the benefit of investors; Panel 4: the future of securities lending and potential regulatory solutions. Day two – short selling: Panel 1 – controls on “naked” short selling; Panel 2: making short sale disclosure more meaningful.

Many pension and mutual funds view securities lending as an investment activity. Securities lenders see cash collateral as an important risk. FINRA and the SEC have considered the need for increased transparency and the possible benefits of a central counterparty for securities lending. The securities lending market is highly regulated, including through requirements imposed by Regulation T, 15c3‐3, 15c3‐1, Regulation SHO, and ERISA guidelines. The SEC has considered “hard locate” and “pre‐borrow” requirements for short sales, which some market participants believe would be uneconomical. An estimated 50 percent of fails are from ETFs. The SEC has considered enhanced disclosure requirements for short sales, both anonymous and public, their possible effects on fraud prevention and market efficiency, and any harm they could do to market makers.

The paper provides a discussion by regulators and industry experts on the most important current regulatory issues related to securities lending and short selling.

This article assesses the state‐of‐the‐art on the subject of international market selection based on a comprehensive review and synthesis of the literature. It provides an inventory, taxonomy and brief review of the normative quantitative models that have been proposed in the literature, and compares them to current business practices in selecting foreign markets. This comparison reveals a theory‐practice gap that is discussed in the context of the methodological and conceptual weaknesses of the models. Suggestions for future research are made.

The purpose of this paper is to explain the SEC's final rule, issued on July 27, 2009, making the “close‐out” requirement in Interim Temporary Final Rule 204T permanent and eliminating the short sale and position reporting requirements in Form SH.

The paper explains certain limited modifications to the Temporary Rule, including Rule 204(a)(1), which permits borrowing of securities to close out a fail to deliver position; Rule 204(a)(2), which defines an extended‐settlement provision for fail to deliver positions resulting from the sale of an equity security a person is “deemed to own”; Rule 204(b), which eliminates an exception for market makers; Rule 204(e), which permits a broker‐dealer to borrow a security for an early close‐out to claim a “pre‐fail credit”; and Rule 204(f), which explicitly prohibits “sham close‐out” practices. It explains the SEC's decision to eliminate the weekly requirement for certain managers to file weekly short sale and short position information on Form SH and instead to work with self‐regulatory organizations (SROs) to make short sale volume and transaction data available on their web sites.

The paper finds that the SEC intends to host a public roundtable in September 30, 2009 to discuss securities lending, pre‐borrowing and possible additional short sale disclosures.

The paper provides practical guidance from experienced securities lawyers.

On January 3, 2005, Regulation SHO was implemented by the Securities and Exchange Commission, with the express purpose of updating short sale regulation by seeking to limit an abusive short selling practice known as naked short selling. The purpose of this paper is to examine the efficacy and impact of Regulation SHO in achieving this goal of reducing naked shorting.

Time series analysis using fixed effects regression, Fama‐French‐Carhart model, various parametric and non‐parametric tests. The paper tests a number of hypotheses regarding the effectiveness of Regulation SHO in controlling naked shorts/fails‐to‐deliver in the American stock markets.

Utilizing several models, the authors find strong evidence in the first 30 to 60 days after being identified by Regulation SHO as having excessive naked short positions, those securities on average experienced further significant negative abnormal returns, indicating the regulation was at best ineffective. This result is robust for a number of parametric and non‐parametric tests. Models also show a security identified by Regulation SHO as having an excessive short position may actually suggest a profitable trading strategy of continuing to short those stocks. The regulation was largely ineffective/insignificant in reducing naked shorting. In addition, results revealed that a profitable investment could be made by shorting stocks as they were identified by Regulation SHO as already having excessive outstanding failure positions.

This is the first paper, to the authors' knowledge, that considers whether SHO was effective and offers intuition as to reasons why it was not.

The purpose of this paper is to empirically examine whether corporate insiders extract information from activity of outsiders, specifically the short sellers.

Using portfolio approach and Fama-MacBeth regressions, this study examines the relation between short interest and subsequent insider trading activities.

The following results are reported. First, there is a strong inverse relation between short selling and subsequent insider trading, which is partially due to common private information and same target firm characteristics. Second, insiders extract information from shorts. This information extraction effect is more pronounced for firms whose insiders have stronger incentives to extract shorts information (insider purchases, higher short sale constraints, and better information environments). Third, during the September 2008 shorting ban, the information extraction affect disappeared among the large banned firms, whose shorting activities were distorted.

The findings contradict the of-cited accusations corporate executives hold against short sellers. Instead, corporate insiders appear to trade in the same direction as suggested by shorting activities.

Among the vocal critics of short sellers are corporate insiders, who allege that short sellers beat down their stock prices. Many corporations even engage in stock repurchases to show confidence that the stock will perform well going forward despite the short sellers’ actions. This paper’s analysis on their personal portfolios suggests the other way around.

By focusing on how corporate insider trading is related to shorts information, this paper sheds new light on whether corporate decisions convey the true information the corporate insiders possess.

The purpose of this paper is to investigate short‐selling around private investment in public equity (PIPE) issuances, for evidence of manipulative short‐selling by hedge funds.

The authors use the Regulation SHO short‐selling data in combination with information about hedge fund participation in traditional stock PIPE offerings from Sagient Research, and share price and trading volume data from the Center for Research in Security Prices (CRSP) to examine the relations among hedge fund participation, short‐selling levels and stock returns surrounding such offerings.

It is found that significantly less pre‐deal short‐selling occurs when hedge funds are included in the PIPE investor group, and adjusted returns for firms with hedge funds as investors are positive in the pre‐deal period and negative in the post‐deal period. Both of these findings are opposite of the patterns expected given manipulative short‐selling by hedge funds. Pre‐deal and post‐deal adjusted returns and PIPE discount are unrelated to pre‐deal short‐selling by hedge funds, findings inconsistent with manipulative short‐selling by these investors. The evidence suggests that most hedge funds that invest in traditional stock PIPEs do not engage in manipulative short‐selling around these deals.

This paper is the first, to the authors' knowledge, to examine hedge fund participation and daily short‐selling around traditional stock PIPE issuances. Previous studies focus on structured PIPE deals, which do not represent the majority of the PIPE market at present. The daily short selling data used in this study allow for detailed investigation of market behavior not afforded by monthly short interest data used in previous studies.