Did the Elimination of the Uptick Rule Contribute To Recent Market Declines?

The Wall Street Journal's "Heard on the Street" column suggests today that abolition of the "uptick rule," established after the 1929 crash, may have contributed to the recent market declines.

The evidence of this is anecdotal, but I think this is a very real possibility. If so, then what we have here is yet another example of how the SEC's kowtowing to anti-naked-shorting nutcases has skewed its priorities and diverted the public's attention from real issues.

As I describe in Wall Street Versus America, elimination of the uptick rule was part of a package of regulations that included -- and was overshadowed by -- the ridiculous "Regulation SHO," which tackled the nonexistent "naked short-selling scandal."

Wall Street views Regulation SHO as a nuisance, not a threat to its livelihood. But the uptick rule was an obstacle to genuine (as opposed to phantom) short-selling.

So the Street was, I am sure, only too happy that Overstock CEO Patrick Byrne's lapdogs in the Utah congressional delegation railed away at Regulation SHO and the phantom menace of naked shorting -- while letting the uptick rule slip away.

And now the rest of us are paying the price.

Once again, the destructive force of the Baloney Brigade has been demonstrated.

Comments

[Sol Rosenberg:]

If naked short selling is non-existent, why are there so many stocks on the Reg SHO threshold lists?

And how exactly are the "rest of us" paying the price because of the elimination of the uptick rule? The uptick rule was completely arbitrary. Arbitrary rules that prevent legitimate transactions just make the market less efficient. Econ 101. Sorry if you were profiting from the less efficient market, but it's time to find a new strategy.

2007 Aug 14 05:24 PM

[patrickpt10:]

ok mr weiss for the sake of us nutcases as you so fondly name us. will you present your evidence in detail that you have concerning the naked short selling scandal?

your sec buddies are jumpning ship pequot investigation was horribly screwed up why did the sec cover up that mess? overstock is shinging a bright light on the books in wall street, i think mr mack needs to be talked with again by those in enforcement, what is his problem? what was he hiding? brookstreet belly up
american home belly up bear stearns hedge funds worthless (some not all) bnp paribas cant value their funds...why? they are gone...i suppose i could go on.

you sir are in denial. what is your part in all this? i think you are involved up to your neck in this naked short selling. i cant think of any other reason you would be so vehemently against this illegal practice.

you must be involved trying to cast doubt on what is already a proven fact. you did it not me.

2007 Aug 14 06:39 PM

[Doug Roberts:]

Futures traders don't have an uptick rule - they just trade. They have a tremendous effect on the markets. The uptick rule mattered when futures did not exist, but now the uptick rule is just an obsolete rule messing up efficient markets.

Anecdotal stories about volatile markets don't prove a valid association.

Doug

2007 Aug 14 08:12 PM

[Scott Rothbort:]

I could not agree more. Back in February I wrote about What Must De Done to Ensure Fair and Orderly Markets scottrothbort.blogspot... and today I also discussed the current problems that the SEC needs to address scottrothbort.blogspot... to fix the markets and the short sale on the down tick problem that they created

2007 Aug 15 12:50 AM

[CP / The na...:]

I have found the smoking gun that can be the October surprise for McCain. In June of 2007 the Republicans got rid of the old standing rule of the "UpTic Rule". According to Bob Brinker, if you want the smoking gun as to why the financial collapse happened here it is. They are called the Bear Raiders. A quote from 1920 from then President of Mechanics Bank E.C. Stokes in Trenton New Jersey:

" It is a perfect outrage to destroy values the way it is done on the stock market. A very small percentage of the actual holdings is ever traded in, but the innocent investor, who isn't selling loses the value of his stock if ever he wants to sell, because somebody in Wall Street sells it short. Barn burning is a virtuous occupation compared with this monstrous, mediaeval robbery of the so called bears." NY times 08/18/1920.

Same complaint was heard in 1908. According to Bob Brinker these bears have a business plan that occurs in hedge funds and under current rules have no rules thanks to the Republicans. The following is their business plan:

They invest in the "credit default swaps" that are the insurance instruments vis-a-vis AEG. This causes the cost of insuring the mortgage debts to rise substantially.

They short the common stock of the hedge fund that owns the mortgage debts.

They create nasty rumors in the rumor mill that influences regulators and ratings.

They contact the rating agencies and further their goals of panic. The rating agencies according to Bob Brinker do not know what they are doing anyway and simply respond to nonsense data. Where they initially had rated these toxic mortgages as AAA rating, they now severely down graded the stocks rating to junk bond status.

The result was Lehman Brother's bankruptcy, the selling of 2 of the 5 investment banks, the other two changed to banks holding companies at the same time. This is the dirty deeds of republicans using an ancient tactic to ingratiate their cronies (The foul short bear raiders) and I would not be a bit surprised the McCains name pops up in relation to that. We have zero investment banks left in this country. When French President Nicolas Sarkozy talks about the regulation needed, this Up tick rule is what he is talking about. We have the fox in the hen house with the Treasury head and his hand picked protege to head up the task force of the $700b fix. As far as I see this it is treason and the Republicans need to direly pay for this.

2008 Oct 19 06:07 PM

[Eric Newman...:]

Well, let's look at some 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?

Because stocks fall, short sellers are to blame? 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.

Jan 05 01:57 PM