WASHINGTON - Federal regulators imposed new curbs on the practice of short-selling yesterday, hoping to prevent spiraling sales sprees in a stock that can stoke market turmoil.
The Securities and Exchange Commission, divided along party lines, voted 3 to 2 at a public meeting to adopt new rules.
The rules put in a so-called circuit breaker for stock prices, restricting for the rest of a trading session and the next one any short-selling of a stock that has dropped 10 percent or more.
Short-sellers bet against a stock, in a practice that is legal and widely used on Wall Street. They borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender - pocketing the difference in price.
Investor confidence was shaken as the market plunged amid the financial crisis in the fall of 2008, and proponents of restoring restraints said they were needed to prevent abusive trading. But opponents said new restrictions could eliminate the benefits of short-selling - bringing capital into the markets and accurate stock prices to the surface - and actually hurt investor confidence.