The SEC amended to Rules 200(g) and 201 of Regulation SHO (on shorting) that will restrict short selling shares when a company’s shares drop more than 10% in a day (new release here). The regulation of shorting dates to 1934, when many restrictions were implemented in a significantly misguided attempt to prop up share prices. This regulation does not look good, although it is quite limited in scope. It means that short sellers have to wait for those with shares in hand to sell before selling. A good sign that the rule is bad is the defense given in the press release: “to preserve investor confidence. . . ” If it actually had a large effect I would be worried – if I am buying a stock that has declined I would worry that a lot of people have really bad news and have sold out of the stock and that the price does not reflect fully their bad news because they are unable to short the stock until its price seems reasonable to them. Thus, I may pay a price to buy that many people might know is overinflated but are not able to make profits and make the price far. But what will the rule actually do? Well, I expect not much. People wanting to speculate on the decline of a stock can still take positions in the futures market and make their money and get their views out there. As long as enough people are paying attention and the market is liquid enough, the actions in the future market should lead to downward price pressure in the stock.
All that said, I understand the motivation for the rule. It is my view that today almost all firms are basically banks, funding long term projects with short term commercial paper (instead of deposits). This exposes them to the risk of a run. And a decline in share price may lead to a run. Which might justify the decline in share price and make speculators very wealthy. But the solution seems to me either 1) allow this to happen, equity holders will get burned and then run the firm with less maturity mismatch or buy some sort of run insurance or 2) provide a lender of last resort for corporations, the way the Fed does for banks.