The U.S. Securities and Exchange Commission will limit the ability of traders to bet on a drop in shares of brokerage firms, Freddie Mac...

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The U.S. Securities and Exchange Commission will limit the ability of traders to bet on a drop in shares of brokerage firms, Freddie Mac and Fannie Mae as part of a crackdown on stock manipulation, the agency’s chairman said.

Christopher Cox told the Senate Banking Committee on Tuesday that the agency will require traders to hold shares of the two mortgage buyers and the brokerages before they execute a short sale.

The order, to be in effect for as long as 30 days, will bar the practice called “naked” short selling, in which traders avoid the financial cost of borrowing shares when betting they’ll fall.

“Since it’s impossible to police false rumors, the next best option for protecting fragile financial institutions is to halt short selling for a time being,” said David Trone, analyst at Fox-Pitt. “The SEC’s action is at least a partial measure.”

Short sellers borrow shares of stock and sell them. If the price drops, they purchase actual shares to cover the borrowed ones. Short sellers are betting prices will drop on a stock so they can turn a profit.

“Naked” short selling is when sellers do not even borrow the shares before selling them, and then look to cover positions immediately after the sale. The new SEC rule would require short sellers to actually borrow shares before selling them.

The SEC is investigating whether trading abuses contributed to the collapse of Bear Stearns in March and the 80 percent drop in the market value of larger rival Lehman Brothers Holdings this year.

Fannie Mae and Freddie Mac have each lost about 80 percent of their value amid speculation the mortgage-market crisis may push the firms into insolvency.

Hedge-fund manager William Ackman, who oversees $6 billion at Pershing Square Capital Management, is among those betting shares of Fannie Mae and Freddie Mac will fall. There’s no indication he is engaging in naked short selling.

Short sellers are spreading rumors about Lehman in an attempt to depress the stock, says Richard Bove, bank analyst at Ladenburg Thalmann.

“As with Bear Stearns, Lehman has been targeted by the fear-trade,” Fox-Pitt’s Trone in a report yesterday. Lehman should go private to avoid attacks by short sellers, he said.

Information from The Associated Press is included in this report