SEC's Cox: 'Naked' Short Ban to Restore Confidence
The SEC issued its emergency ruling against "naked" short-selling to build investor confidence in market information, SEC Chairman Christopher Cox told CNBC.
"What we are particularly concerned about is the potential for there to be maliciously manufactured, false information that feeds into a run, which is futhered by not legal short selling, but illegal naked short selling," Cox said.
In a regular short sale, investors sell stock they've borrowed, hoping to return the shares later at a lower price and pocket the difference. In "naked" short selling, the investor simply "sells" the stock without ever borrowing any shares.
Cox said "naked" short-selling isn't illegal, contrary to what some market experts say, so the SEC imposed an emergency rule that prohibts naked selling in the stocks of 19 major financial institutions.
Although there are "operational reasons" why the SEC can't eliminate this procedure throughout the entire market, it hopes to put an end to as much of it as possible, Cox said.
It's important to understand that the SEC is only trying to eliminate illegal naked short-selling and not regular short-selling, Cox added.
"We need the shorts in our market in order to balance so we don't have bubbbles and so on," he said. "There's got ot be a yin and a yang to this."
The SEC already has ample enforcement in place and will not need to increase its budget for regulation of the new rule, Cox said.
The emergency measure will take effect Monday, July 21 and last for at least 30 days. During this time the SEC will evaluate whether they want to extend the ruling.
The full list of securities effected by the order is: BNP Paribas Securities, Bank of America , Barclays, Citigroup , Credit Suisse , Daiwa Securities Group, Deutsche Bank , Allianz, Goldman Sachs , Royal Bank ADS, HSBC Holdings, JPMorgan Chase , Lehman Brothers , Merrill Lynch , Mizuho Financial Group , Morgan Stanley , UBS , Freddie Mac and Fannie Mae .
— Reuters contributed to this report