Short Selling

The Securities and Exchange Commission on Wednesday proposed rules to loosen some restrictions on short selling, the first time in 27 years that the agency has considered changing rules on trading practices that make money when stocks fall. Under the proposal, the SEC would conduct a two-year experiment for about 300 widely traded companies, eliminating rules that bar short selling when a stock's price is falling.

Bearish traders who were closing out their bets over the last month may have helped provide support for the stock market in that period. Nasdaq said Tuesday that short interest -- the number of shares borrowed and sold, usually in a bet on lower prices -- declined nearly 6% from July 15 to Aug. 15, to 4.404 billion shares.

Bearish traders have been boosting their bets that Nasdaq-listed stocks are heading lower. The Nasdaq market said Tuesday that short interest -- the number of shares borrowed, sold and not yet replaced -- rose 5% between mid-May and mid-June to a record high. The total number of shorted Nasdaq shares was 4.604 billion as of June 13, compared with 4.386 billion on May 15. The previous record was 4.456 billion as of mid-April.

Activity by bearish investors expecting a further drop in stock prices rose to another record high in the last month, according to data released Wednesday by the New York Stock Exchange. So-called short interest increased to 6.27 billion shares Nov. 15 from 6.08 billion on Oct. 15. Stocks with high-profile problems, such as airlines and beleaguered Enron Corp. (ticker symbol: ENE), were among the stocks that were targeted by short sellers.

Many travel-related and financial-services stocks that had been heavily "shorted" before the Sept. 11 terrorist attacks continued to be hammered by short sellers after the attacks, new data show. The increase in short selling means those traders expect the stocks' already-depressed prices to decline further. The latest jump in short sales of certain stocks could complicate the government's probe of possible insider trading by terrorists ahead of the attacks.

Some of the market's biggest bears stayed in their dens through Monday's stock plunge, as Wall Street's "short" sellers found their investment strategies conveniently coincided with patriotic virtue. Amid a grass-roots movement encouraging people to buy stocks as a vote of confidence in the U.S. market after last week's terrorist attacks, short sellers--who bet stocks will fall in price--say they largely remained on the sidelines as the market dived.

European stock market regulators are investigating whether the masterminds of last week's terrorist attacks attempted to profit by short-selling the stocks of insurance companies in the days leading up to the attacks, according to the regulators and sources at European insurance firms. Regulators in Germany, England, France, Italy and Switzerland are all studying unusual patterns of stock trading, sources said.

More signs that the bearish tone on Wall Street is deepening: * Short interest--the volume of shares borrowed and sold, usually in anticipation of lower prices--rose 2.2% to a record 5.91 billion shares on the New York Stock Exchange as of Aug. 15 from a month earlier, the New York Stock Exchange said Tuesday. * Total margin credit outstanding from NYSE-member brokerages dipped in July to the lowest level since March 1999, the Big Board also reported.

The Nasdaq Stock Market said Tuesday that short interest--a bet that share prices will fall--rose to a record as of mid-June, as bearish traders again looked for technology stocks to pull back. Nasdaq said the number of shares borrowed and sold totaled 3.82 billion as of June 15, up 3% from the mid-May total. A short sale is when an investor borrows a stock and sells it with the intention of buying it back at a lower price.