Would Reinstating the Uptick Rule Make It a Fairer Game?

I mentioned Wednesday that our CEO, Duncan Niederauer, was speaking at the Museum of American Finance earlier this week, and Bloomberg picked up on his opposition to a stock-transaction tax. Yesterday, Traders magazine came out with another news nugget from the same remarks, with Duncan again calling for the "uptick rule" to be reinstated.

Perhaps I should have gone to that speech instead of rushing home to catch "THE REAL HOUSEWIVES CONFESS: A WATCH WHAT HAPPENS SPECIAL."

But I digress. Here's an excerpt from the Traders coverage:

Duncan Niederauer, CEO of NYSE Euronext, would like to see the Securities and Exchange Commission reinstate the uptick rule for short sales, even if it's mainly for the sake of bucking up "investor psychology."

Referring to the trading community, he said, "we've got to come out with a definitive statement" for investors. He noted that last fall exchanges were not able to agree on an approach to limiting rapid declines in stock prices, such as an uptick rule or a circuit breaker for individual stocks. But he also laid responsibility at the SEC's feet, calling on the Commission to decide how it wants to approach this issue. "No more rhetoric, no more maybes--just what are they going to do," he said. Niederauer spoke Tuesday evening at the Museum of American Finance on Wall Street. ...

... Many others, however, have argued that in the current fast-moving market in which prices skip around rapidly, these tests simply rein in liquidity and potentially distort the market. The SEC's Office of Economic Analysis and a handful of academic studies, which analyzed data from a pilot that ran from 2005 until 2007, found that the lack of price tests did not adversely impact market quality.

Niederauer acknowledges this. The SEC and other studies, he said, presented a "good case why we didn't need it anymore." But while "there's no economic benefit we got from having an uptick rule," he continued, "I'm not sure there was any economic disbenefit. If the question is, 'Would people think it's a fairer game if we had an uptick rule?' the answer is 'Yes.'"

Steve Wunsch, a market structure expert and former executive at ISE Stock Exchange, agrees that the uptick is worth another look. "An uptick rule may help stabilize the market and throw a little bit of extra process at those CDS [credit default swap] buyers and rumormongers trying to drive a firm's stock price to zero," he said. In Wunsch's view, short sellers appear to have had the upper hand in recent months. "Restoring the uptick might redress the imbalance," he said. "Even if the main benefit were only public relations, that's still not a reason to dismiss it." ...

Your thoughts, as always, are welcome. Particularly as I'm sitting here watching the S&P 500 sink farther below 700.

Comments

[Moon Kil Woong:]

The market is descending in an orderly fashion. As far as I can tell it is not being driven by a few shadow short sellers or some bear cabal of depressive maniacs.

Rather than focusing on how to artificially affect the market that have been proven to not work, people should be concentrating on how to make real fundamental changes in the market that insures our financial institutions can't make the blatantly dumb choices it appears they are constantly prone to making in the name of executive bonuses.

Mar 06 02:50 AM

[john s. gordon:]

yes restore the uptick rule, if only to prevent a repeat of the bear raids of 2008.
> jack

Mar 06 08:13 AM

[Sigmax:]

See S. Forbes in todays WSJ:
"Another horrific Bush policy that Mr. Obama has left untouched concerns short selling. In 1938, the SEC, created by FDR, enacted the so-called uptick rule, which held that investors could not short a stock unless it went up in price. In July 2007, the SEC, whose commissioners were handpicked by the White House, got rid of the rule. Market volatility exploded.

Compounding this lunacy was the SEC's inexplicable failure to enforce the rule against "naked" short selling. Before an investor can short a stock, he is supposed to borrow the shares and pay a broker or stockholder a fee. What sellers soon realized was that the SEC was turning a blind eye to naked short-selling, thus adding even more pressure to beleaguered bank equities. Short sellers quickly saw how mark-to-market made seemingly invincible companies vulnerable to destruction. They picked their targets and relentlessly sold financial stocks short.

If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling."

Mar 06 09:34 AM

[Berninvestor:]

Well written Sigmax. Everthing you're saying should be so obvious to those trying to solve our financial mess. Another thing that is contributing to this mass panic: Comments from Paul Krugman in op-ed columns continually using the term "zombie banks". Isn't that like pouring gasoline on the fire? Is anyone else bothered by these irresponsible, harmful in my opinion, remarks by of all things a winner of the Nobel Prize in Economics? To me Krugman sounds like a "zombie economist".

Mar 06 12:55 PM

[Chancer:]

I would like to see them outlaw short selling in stock markets to protect small investors.

I would like to limit short selling to commodity and currency markets which are already perceived as higher risk.

Shorts can wipe out a good company that small investors invest in.

I would also like to outlaw program trading to level the playing field.

Right now the market rules are just for the big players and hedge funds.

Of course, I doubt my opinion will get much support.

Mar 06 03:07 PM

[henarl:]

The argument that the uptick rule reins in liquidity and potentially distorts the market is only valid if you believe high volitility is a desireable function of a "normal" market. I guess it depends on whether you're a trader or an investor.

Mar 06 04:50 PM

[uplift:]

Look at what has happened since the removal of the uptic rule in july of 2007. The shorts started to gain momentum around November 2007 it's been straight down hill ever since. Long term investment money has been used to short the market and weaken the USA economy. The only good side I see that has happened was with the sudden cashing out to protect losses has exposed the crooks and pozi schemes, along with bad CEO's and their outrages bonuses they gave themselves while allowing the shorts to take place. I say Liquidate to prevent anymore losses until the uptic rule is reinstated and we return to vol of at least 8500 on the Dow

Mar 13 04:24 PM

[sf94127:]

The SEC does nothing and they know nothing. Mary Schapiro is just as big a disgrace as Cox.

May 12 09:30 PM