'Naked' Short Selling Gets a Close Eye

This is the VOA Special English ECONOMICS REPORT.

The Securities and Exchange Commission in the United States recently moved to protect nineteen major financial stocks. The agency gave an emergency order to restrict what is known as "naked" short selling of those stocks. This is a form of stock trading that is being blamed for sharp drops in the price of some financial stocks.

Short selling is a way to make money when a stock price falls. It involves borrowing shares of stock and then selling them in the hope that the stock will lose value. Later, the shares are purchased back and the loan is settled.

If the stock has lost value, the selling price will be greater than the purchase price. The difference is profit for the investor. If the stock price rises, the investor loses money.

Short selling is considered a necessary part of an efficiently operating market.

With naked short selling, however, trading takes place with shares that have not yet been borrowed -- and may never be. Naked shorting lets traders short sell large amounts of stock that may not be available to borrow in the market. Sometimes, lenders of securities tell several short sellers that they can borrow the same shares.

The chairman of the Securities and Exchange Commission, Christopher Cox, says naked short selling is not out of control. But he says the order was needed as a preventative step to help bring confidence back in financial markets. He says the goal is to stop naked shorting that is done abusively to drive down a stock price.

He said Thursday that the agency wants to extend what he called operational protections throughout the market.

The emergency order went into effect on Monday. The ending date is this coming Tuesday but it could be extended into August.

The American Bankers Association has urged the commission to extend the restrictions to all publicly traded banks. It says protecting only a few big banks will cause short sellers to target smaller ones.

The July fifteenth order covers seventeen international banks as well as the nation's two largest housing finance companies. Fannie Mae and Freddie Mac have lately been the main support for the troubled housing market. But their share prices have fallen sharply this year.

A housing rescue bill on its way to becoming law includes a plan that would let the Treasury invest in Fannie and Freddie if needed. The plan also includes a new regulatory agency with stronger controls over those two companies.

And that's the VOA Special English ECONOMICS REPORT, written by Mario Ritter. I'm Steve Ember.