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.

RELATED: Christopher Cox’s Shorts.

Christopher Cox told the Senate Banking Committee the agency will require traders to hold shares of the two mortgage buyers and the brokerages before they execute a short sale. The emergency order, to be in effect for 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.

Mr. Cox said the SEC will draft rules “to address these same issues across the entire market.”

A hedge-fund manager who oversees $6 billion at Pershing Square Capital Management, William Ackman, is among those betting shares of Fannie Mae and Freddie Mac will fall. There’s no indication he is engaging in naked short selling, in which traders never borrow shares from their broker or deliver the stock to buyers.

The SEC is reluctant to curb short sales “because it would require a major retooling of the plumbing of Wall Street,” a finance professor at Georgetown University studying short sales, James Angel, said. “It’s only when the big Wall Street firms are threatened that the SEC does something about it.”

The SEC is investigating whether trading abuses contributed to the collapse of Bear Stearns Cos. in March and the 80% drop in the market value of larger rival Lehman Brothers Holdings Inc. this year. Fannie Mae and Freddie Mac have each lost about 80% of their value amid speculation the mortgage-market crisis may push the firms into insolvency.

Short sellers, who borrow shares betting that they’ll decline, are spreading rumors about Lehman in an organized attempt to depress the stock, according to a bank analyst at Ladenburg Thalmann & Co. in Lutz, Fla., Richard Bove.

“As with Bear Stearns, Lehman has been targeted by the fear trade,” an analyst from Fox-Pitt Kelton Cochran Caronia Waller, David Trone, said in a report Monday. Lehman should go private so it can avoid the attacks by short-sellers, he said.

Freddie Mac, down as much as 34% yesterday before Cox’s comments, fell $1.85, or 26%, to $5.26 in New York Stock Exchange composite trading. Fannie Mae tumbled 27%.

An SEC spokesman, John Nester, said the emergency order will “require any person effecting a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on settlement date.”

The SEC’s proposal will raise the cost of short-selling a stock, a co-founder of Quadriserv Inc., a New York brokerage that specializes in securities lending, Gregory DePetris, said. “There will be greater demand for shares,” he said. “It will make the process a little less easy.”

In traditional short selling, traders borrow stock through a broker and hope to profit by selling shares at a higher price and later buying them back at lower prices to repay the loan.

Naked short selling isn’t necessarily illegal, unless authorities can prove fraud, such as a scheme to manipulate stock prices.

“Short-sellers in general help price discovery and make the market more efficient,” a fund manager at Mellon Capital Management, which oversees about $200 billion, Warren Chiang, said. “But naked shorting isn’t fair.”

Senator Schumer questioned whether the SEC should restore the so-called uptick rule, which barred traders from short-selling stocks when prices are falling. The rule, scrapped in June 2007, was implemented after the Great Depression to prevent raids on companies.

While the regulator is considering “some other kind of price test” to regulate short selling, it has no plans to reinstitute the uptick rule, Mr. Cox said. “It was just very clear that that rule no longer mattered,” he said.