No one should shed any tears for the brokers who have been caught short after their failed attempt to break the peg during last Friday's mammoth stock market battle. Some are now bleating about government interference and even drawing wild comparisons with events in Malaysia. But the reality is far simpler. Those who short-sold shares they did not possess, in many cases, broke the law and fully deserve to be prosecuted. The huge turnover generated by the battle with speculators has exposed loopholes in the regulatory system that urgently need to be closed. The $1.36 billion in unsettled trades left for clearing authorities to resolve shows the stock exchange has not been doing nearly enough to stamp out such naked short-selling. Nor is there much of a deterrent at present. Only nine people were prosecuted for illegal short-sales last year and the fines imposed probably amounted to a day's pay for most of them. So the Government is right to pressure the stock exchange to crackdown and take a stricter approach towards enforcing existing laws. But it is quite another matter to change the rules in the middle of the game. The lax enforcement of settlement rules, which allowed speculators more time to cut their losses this week, must certainly be tightened before the next such battle. But it was wrong for Monetary Authority Chief Executive Joseph Yam Chi-kwong to insist that the normal grace period be scrapped without warning, and the clearing authorities were right to refuse. Worse still is the idea that the Government should take over the power to make rules governing the stock and futures markets. While recent events have exposed inadequacies the stock exchange must now address, Hong Kong's best interests still lie in self-regulation. The administration's role should be limited to making the laws that provide the overall framework in which share trading operates. Within those confines, it should be for the exchanges to make their own rules. A delicate balance has to be struck between legislating to stamp out market manipulation and allowing the industry to continue governing itself.