CBOE to Congress: stop trying to regulate markets

NEW YORK (Reuters) - The Chicago Board Options Exchange said on Tuesday that short selling was unfairly made a whipping boy of the financial crisis, and told lawmakers to get their hands out of the regulatory pot.

Under pressure from lawmakers and some investors, the Securities and Exchange Commission in February adopted new short sale restrictions that would be applied if a stock fell more than 10 percent in one day. Firms will be forced to comply with the new rule by November 10.

"This to me is one of the prime examples of Congress interfering with micro market mechanisms that had nothing to do with the crisis," said Chicago Board Options Exchange Chief Executive William Brodsky at the Reuters Global Exchanges and Trading Summit.

"The crisis was about other things and because the stock market went down and people complained to Congress, short sales became one of the whipping boys," he said.

Certain banking executives and lawmakers had lobbied the SEC ferociously in the fall of 2008 when global stock markets were plummeting and investor confidence in the financial markets was shattered.

The SEC responded more than a year later with a rule designed to curb only some short selling while not disrupting the smooth functioning of markets.

Under the SEC's rule, if a stock falls by more than 10 percent in a day, a curb would kick in only allowing short selling above the best bid for the stock.

The new rule was met with derision from short sellers and two of the SEC Commissioners, who said industry would be forced to spend billions of dollars on compliance when there was no data to support the need for the rule.

But proponents of the rule said a price tag could not be placed on investor confidence.

"If you go by the psychological, I would agree that there is some value to say to people 'well, we've done something,' but the data does not support it," said Brodsky.

"All the data shows that the drop in the stock was based on fundamentals and not anything else."

Equity and option market makers are not exempt from the SEC rules though the SEC suggested that the rule could be tweaked after the agency studied the impact on option markets.

Short sellers bet on a stock's decline. In a short sale, an investor borrows stock and sells it in the hope that its price will drop. When it does, the seller profits by buying back the stock at the lower price and returning the borrowed shares.