The 'Uptick Rule' (A.K.A The Dangers of Dog Piles)

On July 6, 2007, our pals at the SEC stopped sitting on their hands long enough to repeal a rule that was introduced in the Securities Exchange Act of 1934. The "uptick" rule or Rule 10a-1 required a short sale could only take place at a price higher than the previous trade. Basically, when a stock was getting hammered by people who actually owned the stock, you couldn’t short it until someone bought it (thus creating an uptick).

From Urbandictionary.com:

Dog Pile

A group of people jumping on one person and creating a tower of people while crushing the people on bottom.

If some one falls over everyone nearby jumps on him/her thus creating a dog pile.

Boys will be boys. Good, clean fun, as long as you’re not the guy on the bottom. Grown-ups tend to flip out when they see one. "Someone’s gonna get killed," etc., etc. Sure dog piles are dangerous, but they provide excitement when kids are bored, and very rarely are they fatal.

The uptick was created to protect investors. It stopped traders from profiting by shorting stocks that they had no interest in, driving prices even lower for the remaining shareholders (dog piling). It always seemed like a really, really good rule to me. But it’s gone now. Dog piling has been sanctioned by the Keystone Cops (some restrictions may apply). They ran a "pilot" program for a little while it seemed o.k, so they decided to roll with it. Yeah, and mortgage backed securities worked in theory….

Proof I’m not just making this up (large pdf warning).

Anyway, the way I understand it, you can’t just pick a stock and crush it for no good reason, but if the stocks "trips" (misses earnings, guides lower) dog piling is allowed. What a godsend this must be for the trading desk at Goldman!

Fun fact: United States Treasury Secretary Hank Paulson was CEO of Goldman Sachs, and one of only two people in the present administration authorized to comment on the Dollar!

You can dog pile, too!

Check out the Earnings calendar to find out exactly when a small cap stock in a weak sector is about to report earnings (small caps crush faster). Short the stock just before earnings are announced (just as long as there is no way anyone could construe that you might have had inside information). Close your position when the volume drops off. Cha-ching.

Dog piling for Dummies

Maybe you don’t want to sit at your computer all day, or margin stuff just isn’t for you. Consider the Proshares Ultrashort Russell 2000 ETF (TWM). This ETF is up over 15% YTD is loaded with potential victims of dog piling. The Proshares Ultrashort QQQ (QID) is up about 35% YTD.

Side Effects

Side effects may include nausea, volatility, rapid market decline and total economic collapse (1929). Only your conscience can determine if dog piling is right for you.

Who can you thank?

For further information, contact: James A. Brigagliano, Associate Director, Josephine J. Tao, Assistant Director, Lillian Hagen, Special Counsel, Victoria L. Crane, Special Counsel, Office of Trading Practices and Processing, Division of Market Regulation, at [phone], at the Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-6628

Fun Fact: China leads the U.S. 1-0 in executing corrupt government officials in the 21st century!

Whether or not you agree with this rule change, you need to be aware of it, because I think the kids are getting bored………

Comments

[Michael B.Krause]

Well written piece of sarcasm.

Love it.

[floatyerboat]

Republicans hold the record for longest jail sentence given to a representitive. Reason: because they always operate to enrich
the wealthy. I know its such a cliche by now, thats why it still works.
The credit crisis is indeed being piled onto by the apparently deliberate
hands-off treatment by the SEC of returning the uptick rule they eliminated. There is a critical mass of proponents for keeping this elephant from leaving the room and I'll wager they're mostly republicans. Politics is never ...just politics. We wouldn't need big governent if people could be trusted not to stack the deck for their constituencies ...apparantly we need even bigger government ...its a shame.

[forest]

Why should we allow unfettered optimism to drive up valuations on the long side and not allow shorting to correct such? It's a market, we don't need the big brother SEC creating controls. Besides, we had the crash of 1987 when the uptick rule was in place (it obviously didn't help much).

And you're an idiot if you think Goldman's trading desk (which one by the way? they have many) would be engaging in momo tactics like the one you suggest. The type of trading they do is much more hedged and much more complex.

[HarMegiddo]

i have heard arguments on both sides of the "uptick rule" change last summer. the both have good points.
but what's funny to me is, if you look at a S&P chart. it does seem that a rush of volatility did hit the market soon after the rule change....hm

[Dawson Lodge]

Man, let me tell ya, market surveillance and documentation if a stock was sold on an uptick, unchanged, or a downtick, seems like an insane
task (maybe the SEC is packed with quants, I don't know) and in any event, the purpose of the market
being price discovery, it is illogical to dictate a bias
either bullish or bearish. Bull raids and bear raids are
always a possibility, if you're not able to play, it's better to stay out. Luckily for the bears, gross ineptitude in the area of risk management is the norm,
and innocence on the part of passive money (your pension fund) is also the norm, so if the idea that
values can actually decline is unfathomable, too bad.
What is more interesting to me, is the timing of this
"regulatory" shift. It just says to me that the guys at the top (who own the SEC), wanted to be ready for a great bear market. I always follow the smart money.

[mark mchugh]

Thanks for the comments everyone. I was hoping we could all get a chuckle out of potentially perilous situation.

Now for you Forest,
When you have no buyers, you have no market and when you have no market, prices are imaginary. Anyone with thumbs should understand that. Through the second half I kept hearing that the CMO market was seized (no buyers). Yet Goldman was able to turn $4B in shorts on securities everybody (probably even you) knew were pretty much worthless. So how did they get the prices for the short sales in a "market" with no buyers? This rule change allowed them to make them up. Maybe next quarter they'll short Bo Jackson rookie cards at $400 a pop. Even if the shorts were legit, they still profited from shorting the crap that they sold $100B of to others (how's that for momo tactics?). You can hail them as Super-geniuses, but to me they're sleazy pigs.

But none of that was really the point. I was trying to let people know that Pandora's box has been opened, and seeing that none of the big firms seem too upset leads me to believe they plan to use what's inside.

[gaucho]

I just wish they the SEC would stop the bogus naked shorted shares for entering the market. They are in denial of the problem and then go and create the SHO list. But, they never tell you how many shares are naked shorted. Don't want the peons to know how much theft is really happening.
If you can pring an unlimited number of shares and are never forced to pay them back why would you stop your money machine. Look at a company called DNDN. It has been estimated that over 100 million naked shares exist in addition to the 36 million legitimate shorted share on an outstanding 86 million shares.

[A.S.D.]

A while back I commented on GS shadowy activities, and that there should and will be restrictions placed on "professional&quo... shorts. The MBIA complaint is just the start. They may not be the perfect advocates for creating new rules, but more credible players will join in. SEC as it stands today is the wolf in shepherd's clothing. We need visibility in financial markets. When is the retail investor going to get a fair hand in this game?

[floatyerboat]

Thing is, if you've ever read forums filled with short contributions their mentality towards investing has little to do with merits or not of a business, they just want to trap suckers. That cynicism reveals the their sociopathic intents. These characters more often than not resort to racial slurs, vulgarity and fear -- alls fair in love and war is not what Investing is about. I often think, this must be an eighteen year old with some extra money or the behavior of one.

[User 152666]

Dude,
Market Makers have ALWAYS been able to short without an uptick. This just levels the field for the little guy and it's aboout time. This was just another unfair advantage for the big money.

[shyguy]

Eliminating the uptick rule for shorting honestly isn't that big an issue, the real big issue is naked shorting. Regulation SHO lacks teeth basically it reads if you do is for 13 days we're gonna make it so you can't, plus all the naked short shares that existed prior to Regulation SHO aren't in any way affected. So in effect you have the SEC giving these hedge fund managers 2 and half trading weeks to proceed in the tactic of "strategic non-delivery", which is a tactic they shouldn't be allowed to employ in the first place mind you. Then there's also the fact that the SEC is only able to assess civil penalties and can't proceed with criminal charges. With this the deck is absolutely stacked against the retail investors, let's face for how many of us is strategic non-delivery an option? In closing the SEC needs to given some teeth then perchance these shenanigans can be halted.