Short sellers beware -- the regulators are coming

The SEC banned naked short selling from September 19, 2008 to October 2, 2008, four days after the Lehman bankruptcy on September 15, 2008.

Let's be clear about what is a "naked short sale." A naked short sale is where you simply sell the stock short without owning it. It is outright speculation of the worst kind.

After nearly 10 months of doing nothing about the short sellers, the SEC has finally set forth a few proposals. On Monday the SEC banned naked short selling. Now before a trader sells a security short, he or she must first borrow the security, usually from a brokerage house.

The SEC also wants to publish aggregate short sales on a daily basis and information about short sales of publicly traded companies on a monthly basis. These two proposals are still in the talking stage.

The other proposal being floated about is the so called up-tick rule on short selling. Until 2007, if you wanted to sell a stock short, you must do it on the next up tick. What does that mean? Let's say a stock is selling at $5.00 and you want to sell it short. You could only sell it short at the next price above $5.00, let's say $5.10. That would take some of the sting out of computer programs which have been selling short "at the market" after 2007.

So far, there has been much talk but very little action coming forth from the SEC. Where are all the convictions from the slew of abuses that occurred during our financial crisis?

Should the SEC ban short selling altogether?