"Short-selling," the legal but questionable tactic of betting against a stock in order to make a profit, is set to undergo strict rule changes from U.S. securities regulators.
Successful short-sellers borrow shares from a brokerage firm and then sells them, hoping that the price will go down so that when its time to pay the brokerage firm back, he can buy the same amount of shares at a lower price and realize a profit.
If Securities and Exchange Commission proposals are ratified, the current New York Stock Exchange "tick rule" will be eschewed out in favor of the "bid test," which would permit the short-seller to sell shares only at prices above the current amount people are willing to spend on those shares.
"We can expect the proposal for short-sale reform will be calendared for Commission consideration in the next few months," Annette Nazareth, head of the market regulation division at the SEC told Financial Times.
The problem of "naked" short selling, in which un-borrowed shares are illicitly sold and company share prices plummet, will also be taken care of if the SEC rules are passed.