The emergency rule that banned the naked short selling of 17 big-name financial stocks has come and gone, and a lot of people are wondering if the rule will be revived at some point--permanently. There are few issues that rile up passions in some corners of the small cap universe quite like naked shorting. (The state of South Dakota will vote in November about whether the practice should be banned).  

It's true that the rule caused a lot of commotion initially at several levels. A recent study by SunGard, as reported by Financial News Online, found that borrowings of the 17 shares more than doubled just before the rule took effect, reflecting uncertainty. Most of these borrowed shares were returned quickly, suggesting to some that there wasn't really a lot of naked shorting going on. Borrowing costs soared, however, rising from an average 56 basis points to 266 points. The Managed Funds Association, an advocacy group for hedge funds, said firms saw an increase of more than 200 percent in operational costs associated with short trades of protected stocks. If the rule is made permanent, what can we expect? Well, given that people have had a trial run of sorts, there may not be the same emotional response, but there will be pressing IT worries. Some firms likely would have to tweak their systems, as we've noted, to make sure they stay out of compliance hot water.

To address new shorting issues, a bevy of start-ups have cropped up. RegSHO.com, for example, provides a web-based, real-time stock lending service that helps firms comply with SEC rules governing both naked and regular short sales. The website matches traders with stocks available to be borrowed, and offers data on the short-sell market. It also offers compliance advice from, none other than Harvey Pitt. Other start-ups include ShortSqueeze.com, Stock-Borrow.com, ICAP and Quadriserv. One might argue that such new services ought to be subsumed within brokerage and liquidity service providers somehow. We'll see how all this plays out. The SEC will likely propose new short-selling rules within a few weeks. - Jim