SEC Chairman: 'We shouldn't be banning short selling' even as coronavirus drives big market swings

• "We shouldn't be banning short selling," Jay Clayton, chairman of the Securities and Exchange Commission said in a Monday interview with CNBC.
• A number of countries including the UK, Spain, Italy, and South Korea have recently imposed rules that limit short selling as the coronavirus pandemic has sent global markets reeling.
• During the 2008 financial crisis, the SEC curbed short selling of a group of struggling mortgage and financial companies.
• Still, short selling is needed to facilitate "ordinary market trading," Clayton said. He added that the SEC has rules in place to limit the risk of short selling creating undue downward pressure on falling stocks.
• Read more on Business Insider.

The highest-ranking regulator on Wall Street said that he doesn't think the US should do away with short selling, or betting against the stock market, even amid recent volatility brought on by the coronavirus pandemic.

"We shouldn't be banning short selling," Jay Clayton, chairman of the Securities and Exchange Commission, said in a Monday interview with CNBC. "You need to be able to be on the short side of the market in order to facilitate ordinary market trading."

Markets have been roiled in recent weeks as the coronavirus pandemic spooks investors. In light of the increased volatility, a number of other countries including the UK, Spain, Italy, and South Korea have recently imposed rules that limit short selling amid the coronavirus pandemic.

Short-sellers bet against the market by borrowing assets such as stocks and selling them, profiting when the price decreases and they can sell it back to the lender. Some critics of short selling argue that it can weigh on equity prices, especially in times of increased volatility.

Read more: Stocks are trading like they did early in the financial crisis - and it's proof to one Wall Street equity chief that the coronavirus crash will worsen

The SEC did impose some limitations on short selling for about a month during the 2008 financial crisis. It moved to curb shorting struggling mortgage stocks as well as those of major financial firms including Goldman Sachs, Lehman Brothers, and Morgan Stanley, The Wall Street Journal reported.

Clayton also responded to previous comments from billionaire investor Leon Cooperman, who said that the SEC should have an uptick rule to slow things down amid coronavirus-induced market volatility.

"We did put in place an alternative uptick rule," Clayton said. "It's a rule I believe more closely matches the electronic trading environment of today."

The new rule bans short selling for two days on a stock that's dropped more than 10% from the previous day's close, Clayton said. The rule has better dampened the type of short-selling activity that puts undue pressure on stock prices moving downward than the old uptick rule, Clayton said, adding that it works in combination with market-wide circuit breakers in place.

And get the latest coronavirus analysis and research from Business Insider Intelligence on how COVID-19 is impacting businesses.