Reinstate the uptick rule
It’s a great environment for the bears these days, made worse by the unilateral disarmament in market regulation over the last decade. One can argue about the merits of the repeal of Glass Steagall, for example, but it would seem the sort of important change which should be made in the beginning of an administration (where it can be tracked within the continuity of an administration), not its dying days, as happened in the Clinton presidency. The continued existence of Glass Steagall could arguably have prevented some of the worst excesses of the last few years.
And of course these days the markets have other problems as well, including some rather bold bear raids on highly leveraged companies like banks and investment houses. The WSJ reports on the recent raid on Lehman:
executives at Lehman Brothers, whose shares fell nearly 17% Friday alone, were working on a plan to put the firm on more solid footing and stop the free-fall in the company’s stock…Officials at Lehman and other firms have expressed to the SEC their concerns about false market rumors. Many top Wall Street executives have complained privately about the apparent lack of action, saying traders knowingly spreading false rumors were in part responsible for the unraveling of Bear Stearns Cos., which was sold to J.P. Morgan Chase & Co. in March for a fire-sale price…
Market-manipulation cases are difficult to prove. Traders live and die by information and are constantly talking to one another. It is illegal, however, to knowingly spread false information with the intention of profiting from its dissemination; for example, by shorting a stock and saying the company is in danger of collapse. The problem is tracking down the original source of a rumor and proving that traders knew the information was false when they told others.
From the oil market to the equity market, the wise guys are exploiting every profit possibility with, it seems, greater ferocity than ever these days. Perhaps it is because the regulatory bodies seem so feckless and the targets so juicy. The bear raids on HBOS and Merrill Lynch seemed so easy and profitable. And so does this one at Lehman (right in the wake of the Chuck Schumer and Indymac affair).
The relevant example of regulatory unilateral disarmament in the case of bear raids was the termination of the uptick rule in short-selling stock by the SEC precisely one year ago. The uptick rule made it a little harder to conduct the bear raids of which we’ve seen so many in recent days, by only allowing the shorting of a stock after a trade that represented an “uptick” in share price. Why dismiss such an unobtrusive, and common sense regulation?
We note with amusement that the SEC did a “computer simluation” of trading and observed that the uptick rule had no impact. As the SEC reported: “OEA examined the Pilot data for any indication that there is an association between extreme price movements and price test restrictions. OEA, however, did not find any such association. We also note that although we are removing current price test restrictions, today’s markets are characterized by high levels of transparency and regulatory surveillance.” You’ve just got to love the smug self-congratulation in that second sentence.
(So the SEC removed a common sense rule because a computer model said it was okay to do so. Question: is that computer model as good as the ones that three years ago gave AAA ratings to catastrophic tranches of subprime debt?)
The success of the sequential bear raids on otherwise solvent financial institutions (see the nuttiness in National City today) leads us to the conclusion that the uptick rule should be reinstated, and promptly.
July 15th, 2008 at 9:30 pm
My opinion, which iirc I’ve stated here before, is that buyers and sellers should be treated evenhandedly. I don’t see why allowing naked shorting is evenhanded; my concerns with the SEC’s move today are primarily with the timing and the limited scope. However, I disfavor the uptick rule; if it is reimposed, it should be balanced with a downtick rule on margin purchases.
IMO the first paragraph of the Journal’s “Operation Stocks Go Up Always” is gallows-humorous; see also the link to portfolio.com:
“When people are hurting, the government has got to move.”
Hey, fatcats are people too.
July 29th, 2008 at 8:38 pm
Your an idiot. The short sellers have nothing to do with this mess. It wasnt short sellers Buying CDO’s Like they were goverment bonds when in fact they were the paper of second and third lien mortgages. Bear stearns and Lehman were the worse. The uptick rule and short sellers are not to blame, so get your story strait. People are just made that the shorts are right and that the people that ran these banks were the ones making the mistake. Stop Grasping for straws. ITs a Joke!!!!!!
September 28th, 2008 at 7:24 am
The Up Tick Rule is important,
By not having the Uptick rule, shorts can sell at the bid, keep hitting it down, punching through stop losses, with market makers not realling supporting the stock anymore, the shorts will force margin calls, etc.
If you made shorts sell at the Ask, or into the buyers order, you can’t force margin calls etc.
Go to http://www.bring-back-up-tick-rule.com
January 20th, 2009 at 8:14 am
Proponents of reinstating the uptick rule are unable to come up with a single piece of evidence that short sellers are impacting the market.
So let’s look at some actual data. Between July 15th and November 14th, short shares outstanding fell by more than 5 BILLION shares on the NYSE, and by more than 3.5 billion on the Nasdaq.
But during that time, the S&P 500 fell 27.5%, and volatility (as measured by the VIX) more than doubled, increasing by 132%. How exactly did short sellers BUYING back 8.5 billion shares of stock cause the market to collapse and volatility to rise? The answer is that they didn’t.
The uptick rule only affects stocks. But we have seen dramatic increases in volatility of oil prices, bonds, and just about every other asset class. How can anyone believe that the higher volatility of stocks was caused by the repeal of the uptick rule, when volatility is higher everywhere?
Between September 19th and September 26th, Washington Mutual fell by 96%. Is it those manipulative short sellers again? Well, no– short selling was banned in hundreds of financial companies during this time, including Washington Mutual. Let’s be clear: Short sellers are not driving price. In fact, the data shows that short sellers serve to regulate price– they are part of the few who are buying when stocks go down, and selling when stocks are going up.
Stocks go down because they are overvalued. There was too much leverage, and too many companies didn’t bother preparing for anything besides the best of times. Let’s stop blaming the short sellers already.