MARKET VIEW: SEC to consider restrictions on short-sellers

NEW YORK (Reuters) - U.S. securities regulators met to consider restrictions on short selling, an investing strategy that some lawmakers and corporate executives say exacerbated the financial crisis and drove down stock prices.

The Securities and Exchange Commission will consider reinstating the "uptick rule," which allowed short sales -- a bet that a stock's price will fall -- only when the last sale price was higher than the previous price.

SEC Chairman Mary Schapiro said the agency is starting a "thoughtful, deliberative process" on how to address short selling, and said the strategy undermines investor confidence.

Below are comments on this development from a range of leading investors, analysts and market experts:

JAMES CHANOS, COALITION OF PRIVATE INVESTMENT COS CHAIRMAN AND HEAD OF NEW YORK HEDGE FUND FIRM KYNIKOS ASSOCIATES

"Rebuilding investor confidence should be the primary objective of any new regulatory effort and it is not clear that today's proposals will meet that simple goal.

"Short selling is integral to improving the efficiency of markets and enhancing market quality through narrower spreads, deeper liquidity, less volatility and greater price discovery.

In recent years, short-sellers have publicly warned the marketplace about the dangers at AIG, Lehman Brothers, and Enron, as well as sounding the alarm over the credit ratings agencies, non-bank subprime lenders, and credit insurers.

"Proposals to inhibit short-selling have the effect of limiting this vital market-based antidote to corporate fraud and speculative bubbles, and must be carefully weighed against the clear harm that comes from ill-conceived government intervention in basic market functions."

BILL FLECKENSTEIN, WHO FOR 12 YEARS RAN A SHORT-ONLY HEDGE FUND AT SEATTLE-BASED FLECKENSTEIN CAPITAL

"The whole premise that the uptick rule created instability in the capital markets is 99.9 percent false ... What caused the financial crisis was the preceding real estate bubble, where anyone who could fog up a mirror could buy house of any size. When that bubble burst, that left in its wake debts at consumer level and bad loans at the financial system level."

"People who didn't see that coming -- and you know who they are because they started off by saying, 'Oh, it's just subprime' or 'It's contained' -- those same people now say it was the uptick rule."

"It was not the uptick rule abolishment that caused all this. It was bad management throughout the financial system, reckless behavior an the part of individuals and the lack of regulators doing their jobs that what brought us all this."

"So changing the uptick rule won't change much of anything, because that wasn't why we had this problem."

ANDREW FISHMAN, PRESIDENT OF PROPRIETARY TRADING AND FUND-OF-FUNDS FIRM SCHONFELD GROUP, WHICH MANAGES $750 MILLION

"The market has functioned perfectly fine except for a very brief window of time under an unbelievably unusual set of circumstances, and we shouldn't create rules that are going to burden the market 99 percent of the time for the one percent event."

"I hope it's a rule that applies in a very narrow circumstance, when that stock or the market really needs a break ... I like the notion that rules don't apply unless some unusual event occurs."

MIKE LONG, PRINCIPAL OF SHORT ALERT IN CHARLOTTE, NORTH CAROLINA, WHICH GENERATES RESEARCH ON SHORT-SELLING IDEAS.

"I think the SEC or the exchanges should first disclose exactly who was doing all the short selling that has been blamed for all this.

"There was no big increase in short interest and, certainly in the financial companies, the short interest was actually below average compared with the rest of the market."

"The 30 percent or so decline in short interest since July suggest that shorts have been net buyers rather than sellers. I really think (the SEC) ought to be a little more transparent what's motivating all of this."

"I don't think most of the shortsellers really care too much about the uptick rule one way or the other."

ERIC NEWMAN, CO-PORTFOLIO MANAGER OF TFS CAPITAL, WEST CHESTER, PA

"They (proposed rules) all presuppose that these 'bear raids' are driving companies out of business, that removing the uptick rule was somehow responsible for the bear market."

"Data out there shows that shorts don't seem to be hurting this market in a major way, and yet everyone seems to assume that short sellers are evil and out to ruin the market."

"It's grandstanding, it's public policy by pitchfork to some extent."

"I don't want to call these dire -- it's not going to put anyone (shorts) out of business."

"The one that is more reasonable is the exchanges' circuit breaker proposal. It stays out of the way 99 percent of the time, but could give the market confidence."

"Without a doubt some version of the uptick rule will be coming back."

JAMES MCGLYNN, PORTFOLIO MANAGER, CALVERT GROUP, SOUTHLAKE, TEXAS:

"I can't believe they ever got rid of it, and I want to know why they got rid of it. It shows something seriously wrong with the regulation. Stocks won't go straight down, it will reduce some volatility on the downside and take away a tool of the short-sellers."

Regulators should next target credit default swaps "to make people have some basis in ownership of the debt before they can trade them," to curb speculation, he said.

ELLIOT SPAR, MARKET STRATEGIST, STIFEL NICOLAUS & CO

"I don't like that thing about the 10 percent collar. It's like changing the rules all the time...

"People did not want to be in a position where they can't get out. That's going to be the same thing, once a stock goes down 5 to 7 percent it's going to bring on the sellers again.

"I don't like to be a cynic, but this falls under the category of the government closing the door after the horse left the barn. Every financial has been accelerated and crushed on the downside. It certainly got there a lot faster without an uptick rule. Most of the damage there has been done. So if they can come back with a rule that people can live with, the next time that we go down, it will slow things down.

"I wish them luck. The bottom line is whatever they do, it will be better than what we have now."

JACK ABLIN, CHIEF INVESTMENT OFFICER, HARRIS PRIVATE BANK, CHICAGO

"This is probably good for the overall market. It's great for retail investors, bad for institutional investors.

"My worry is in effort to help stimulate stock prices we could actually lose some liquidity as market makers don't have the flexibility to hedge their positions readily.

"Overall it's a net positive for the short-term, longer-term we will need to reexamine because of the liquidity.

"The stock market can respond very quickly to changes in information and sometimes that's to the down side. Reinstating the uptick rule may impair our ability to respond.

BRADLEY GOLDING, MANAGING DIRECTOR AT CHRISTOFFERSON, ROBB & CO IN NEW YORK

"I think there's a big difference between people who have abused the system by selling shares with no intent of delivering, and people who have done their best to live within the rules and were trying to conduct the system and make money for their investors.

"In the end, I think the uptick rule is a placebo for politicians who don't understand the deeper issues and want to say they've done something without sorting out the underlying problems of corporate malfeasance and poor management."

HEDGE FUND MANAGER DOUG KASS, WHO HEADS SEABREEZE PARTNERS MANAGEMENT:

"My general view is that short selling is a legitimate technique for price discovery, provides liquidity and is used for hedging. The SEC must be aware of unintended consequences and vilification of short sellers - especially by financial company managements is stupid.

"The problem is that the managements of the banks and brokers screwed themselves up, short sellers did not. Short sellers just made people notice how many bank managements lied like ministers of finance on the eve of devaluation."

ERIC KUBY, CHIEF INVESTMENT OFFICER AT NORTH STAR INVESTMENT MANAGEMENT CORP, CHICAGO

"I think there's two issues. One is they (the proposals) have been pretty widely discussed ahead of time.

"Second is there does seem to be in the market conflicting opinions as to whether it's a good thing or a bad thing for the market to restore some semblance of the uptick rule.

"I don't think it's likely going to be a market mover in the short run.

"I actually believe that it is a positive because I think the absence of some semblance of the uptick rule does provide the ability for speculators to step on the neck of stocks and it creates an element of risk that, if taken out of the market, would be a positive."

(Reporting by Joe Giannone, Jonathan Spicer, Ryan Vlastelica, Ed Krudy, Leah Schnurr, Herb Lash, Phil Wahba, Al Yoon and Jen Ablan; compiled by Edward Tobin and Joe Giannone)