Why Not a Downtick Rule?

Talk about uptick rule is reaching hysteric proportions. Jim Cramer is the main proponent, but he is not the only one.

A short explanation of the rule: you can't sell a stock short unless the latest trade closed a little bit higher than trade before it.

The uptick rule was established in 1933, AFTER the market bottom during the Great Depression. If it's reinstated now, I'm going to agree with Mark Haines and Doug Kass: we had a global bottom on March 9, 2009. As usual, every Wall Street regulation is late and, as happens often, irrelevant.

Why does Cramer want uptick rule? He screamed many times that short sellers have been shorting bank stocks into oblivion. What banks, you ask me? Remember Washington Mutual, Bear Stearns, Nationwide? What about Citibank (C), which is technically insolvent? Why is it bad that the stocks of these companies were shorted to almost zero? Short sellers just sped up the inevitable.

There is another problem on Wall Street: market manipulations are going on all the time. And that includes "naked" short selling, when someone sells short shares he doesn't have and has no intention of borrowing. Or various "pump and dump" schemes, when somebody buys (or sells short) the stocks and then spreads rumors about the company which causes the inevitable quick rise (or fall). These schemes, and many more, are completely illegal. So why don't we see prosecutions? What about mad speculation on oil futures in January through July of the last year? What about pump and dump schemes in gold? What about futures markets many of which exceed physical markets by orders of magnitude?

Bob Pisani was right: if you want an uptick rule for shorting, why not a downtick rule for buying? Or someone would say that all buyers are just plain long term investors and there are no bull speculators? Unlike many, I think that honest speculation is what makes markets work, whether it's done on the long or the short side.

Comments

[Roger Knights:]

Here's a rule that I think would (or should) appease those who want to rein in short-selling, but that would also be non-destructive: Increase the transaction tax on short sales.

May 06 08:51 AM

[Larrysyr:]

I'm with you, Alex, on enforcing existing regulations to curb market manipulation. Honest short-selling is as useful in price discovery as any other market tool.

May 06 10:50 AM

[Old Trader:]

Roger,

How would that translate if one is shorting against the box?

May 06 10:49 PM

[Baboon:]

Why can't the short-seller do anything about beating this market down? The market keeps surging. Those short-sellers must be really good market timers? Maybe the problem is not the abusive short-selling but the abusive accounting, Mr. Cramer? The company the can be shorted into oblivion is taking a reckless risk by going public.

May 07 01:10 AM

[Baboon:]

Why not ban the selling of stocks all together? The market will just go up. The long will get themselves a risk free investment. The dream of investment come true.
Technically there is no difference between selling and short-selling. The portfolio of 15 long stocks can be hedged either by selling them all together or short-selling S&P etf instead.

May 07 01:15 AM