SEC Short-Sale Rule Expiring

Short trading in 19 major U.S. financial stocks will revert to rules governing other shares on August 13, according to a Reuters report. The experiment made by the Securities and Exchange Commission against abusive short selling was recently extended and will not be renewed.

Market data company S3 Matching Technologies says short sales dropped after the emergency rule took effect, according to Reuters. However, despite the drop, there has been little consensus as to how the market will react on August 13.

"My guess is that while this curtailed naked short selling in the short run, I suspect people found clever and sophisticated ways to work around it through derivatives," said John Welborn, an economist with investment firm The Haverford Group who studies short selling, in an interview with Reuters.

Critics also believe that if the SEC removes the rule, it will allow short sellers to have the edge in the market they are looking for, according to Reuters. The SEC rule initially went into effect July 21 and short sellers have been required to pre-borrow stock in mortgage finance giants Freddie Mac and Fannie Mae as well as 17 other financial firms such as Goldman Sachs, before executing a short trade.