The SEC's emergency rule to curb short selling of 19 financial stocks, notably Fannie Mae and Freddie Mac, went into effect last week. Advanced Trading notes at least one executive who thinks that some brokerages will have a rough time adapting their systems to the new rule. They may end up simply eliminating short selling as an options in the 19 stocks that have been identified--at least until they've developed confidence in their systems.   

So for now anyway, the law may prove to be all too effective in limiting short selling.

Some background: This is not the first time the SEC has moved to curb "naked" short selling. Recall that Reg SHO took aim at the practice as well, but did not require short sellers to actually borrow the stock. All you needed was reasonable grounds to assume that you could borrow it by delivery day. (It's fair to say that rule was specified in a way that created uncertainty about how it might be satisfied.) A lax standard, to be sure. One result was that multiple short sellers could borrow using the same shares as collateral, so to speak. That only multiplied short volume. The new emergency rule for the 19 hard-hit financial stocks requires that short sellers actually borrow the stock. This certainly should curb the practice. No longer will multiple firms be able to claim the same shares. Shorting will pretty much have to decline for stocks with heavy short interest.  

Even if all brokerage back offices could immediately be setup to handle the new rule, the ability for the market as a whole to short specific issues would be reduced. The software changes may be an incentive to sit out all together. So the rule works on two levels--one by design, the other not.  

One consequence for the market will be ever more pressure on borrow fees. We've noted on FierceFinance that borrow fees have been soaring recently. Certainly they've emerged as profit centers for the top prime brokers. Institutions bent on shorting these 19 stocks will not only traverse a rough road in locating and borrowing shares, for which supply is effectively constricted. but they'll also have to pay more, raising the stakes on individual trades. - Jim