The no-short-selling list created by the Securities and Exchange Commission continues to change, as do the rules themselves. On Monday Diamond Hill Investment Group pulled itself off the list. Yesterday JMP Securities also exempted itself. Today Greenlight Capital Re, Ltd., a reinsurance holding company whose Chairman is David Einhorn, the most prominent critic of Lehman Brothers, yanked itself from the list.

Why would a firm remove itself from the list? Len Goldberg, the CEO of Greenlight Capital, told us it wasn't a tough decision.

"It's prety simple really. We believe our shareholders are better off by having the market determine our stock price," Goldberg said. He added that the company hadn't suffered since coming off the list. "In the extreme short-term, we certainly haven't suffered. Today we're up 2%."

But even as these firms have come off the list, the number of companies protected the shorting restrictions continues to grow. A great number of financial firms and banks have applied to be on the list, as have IBM General Electric, General Motors and the Ford Motor Company. The SEC delegated the responsibility for deciding which companies should be protected to the stock exchanges, and the exchanges are actively soliciting listed companies who might want to be protected from short sellers, Michael de la Merced of the New York Times reported. So far as many as 900 companies are on the list.



Meanwhile, the rules themselves keep changing. Originally, the SEC had declared that complete fatwa against short-selling the stocks on the list. As many market participants pointed out, this would have been a disaster. Market makers, arbitrageurs and long-short market neutral funds would have found themselves needing to scramble to undo positions that could no longer be hedged. Preferred shares and bonds would have faced a sell-off as investors discovered themselves unable to hedge their positions by shorting common stock of the issuers.



A few days later, the SEC changed its mind and announced it would permit short sales from genuine hedges. This two creates a strange situation in the market, where investors who diversify holdings between hedge funds, investing in both net long and net short funds, rather than hedging through a single fund taking a market neutral position, are disadvantaged.



The disclosure rules also shifted. At first, shorts were required to publicly disclose short positions on the Monday following the trade. Now the SEC has promised to not disclose these filings for two weeks. Interestingly, this could mean that the disclosures never become public, as the current “emergency rule” is scheduled to expire next week. It will probably be extended, of course. But we’ll only have a few weeks of disclosure before the 30-day extension expires and the SEC is required to enter the formal rule making process.



It’s hard not to think that this regulatory chaos must be contributing more uncertainty to the markets. Is Chris Cox even talking to market participants and other regulators? Or is he just tossing these rules off into the night after huddling with a few close advisers? Is there anyway we can draft Paul Atkins, the eminently sensible retired SEC commissioner, back into service?