Cramer has sensationalized it like only he can with unsubstantiated assumptions and extrapolations. Click here for Cramer’s take.
Herb Greenberg has “de-Cramerized” it as only he can with actual facts. Click here for Herb’s take.
Here’s my Uptick Uptake - I don’t care which argument is right or wrong. I deal with the rules that are in place right now.
There are many market forces and identifying one or the other as a primary cause of total market movement is very simplistic and dangerously ignorant. The idea that the uptick rule would have prevented us from declining a whopping 15% off the record high is absurd. I tend to place more emphasis for the selloff on the credit crisis, declining corporate profitability and the general contraction in the economy. Those seem to be pretty fair reasons for a market decline if you ask me.
But rather than just messing around debating specific reasons why bulls are having the wealth they feel entitled to “stolen” from them, why don’t we just skip past all that and prevent anyone from selling a stock for any reason? Of course I am kidding, but that would certainly accomplish the record highs the bulls want back. Why stop at reinstating the uptick rule to supposedly end the market’s problems? Why not just ban short selling altogether? That’s been debated before and has actually happened in some places. How did that work out?
Just look at Malaysia, which banned all shorting for over eight years after the 1997 Asian crisis and blamed it as a primary cause of the Malaysian market decline of 52%. So when they reinstituted shorting in March 2006, you might wonder how the Malaysian market capitalization could have risen from $193 billion to about $350 billion at its recent peak.
As I wrote in October, bulls complain about something when they don’t get their way. Never mind that the uptick rule was removed in July and the market reached record highs a few months later. Oh and nevermind that the uptick rule was in place for over 70 years and did not prevent periods of increasing volatility or market declines or October 1987 or more recently, the 7% decline over a few weeks last February and March.
The reality is that the market has a tremendously bullish bias caused by human nature and the brainwashing that over the long-term stocks always go up. By “human nature” I mean that most people are hopelessly optimistic. I am often accused of being overly negative so what do I know about human nature!?! Does it matter that my negativity has been correct or that HEDGEfolios has performed as well after the uptick rule change as it did before the change?
Regardless, there are many bullish forces that are much stronger than making it easy for a shortseller to put on a position.
Paramount among these is that the vast majority of all volume comes from long-only investors. Even at record levels of short interest, according to Bespoke, shares short on the S&P 500 only represent 5.4% of the total float. The power of short sellers is greatly exaggerated, even in a bear market and especially during a bull market.
Since the uptick rule went away last July, how many rallies were started by rumors that scared the shorts? How many rallies were started by the Fed screwing the shorts? How many rallies were started without short covering rallies? Seems to me that the ease of shorting has a pretty severe downside and is a convenient target to spike the market higher. Throw in the cheerleader media and it is pretty absurd to hear complaints that shorts have an unfair advantage in any way, and certainly not because they don’t have to wait a few trades for an uptick.
It reminds me of the argument about keeping South Africa’s double-amputee sprinter, Oscar Pistorius, from competing in the Olympics with the “disadvantaged” athletes who have to suffer with perfectly healthy (but apparently inferior) human legs. Somehow, I think Oscar would prefer to give it a shot without the prosthetics.
Shorting is extremely difficult in any market, and I don’t advocate it for anyone except for real experts - with or without an uptick rule.
This argument about the uptick rule or any other “unfair” advantage for shorts will disappear once we have a real rally.
This article has 23 comments:
A perfect example is CALM yesterday. It's earnings have grown at tremendous rates and it reported a tripling of income last quarter from the previous year. Analysts expected 2.00 per share yet they delivered 2.4 per share. The based on this quarter projected for the next 3 quarter its PE ratio is 3!!!! This company is 87% shorted and is on the naked shorting SHO list. I watched yesterday as the shorts dumped an estimated 1.5-2 million shares on the market. With the high short rate those were most likely naked shorts i.e. FRAUDULENT SHARES. Every trade they sold into the ask time and time again to the tune of 3 million shares pummeling the stock down 13% on a great news.
SHORTING is a legal market tactic but what’s happening is market manipulation on a grand scale. The uptick rule was put in place to prevent this manipulation. The naked shorting rules are in place and are not being effective are not being enforced. The SEC is a useless lapdog for the hedge funds and they refuse to take any action against big money.
These tactics are destroying investor confidence and small company’s ability to raise capital. As foreign investors begin to realize that listing their companies on US exchanges subjects them to this abuse they will take their companies elsewhere. As will the foreign investors and their money. The USs capital markets will become second tier and replace with uncorrupted overseas markets.
Below are links that describe naked shorting in the market:
This stock is on the SEC SHO list due to heavy naked Naked short selling. Naked shorting is where the seller of the shorted share is supposed to locate and borrow the share but fails to do so; hence the term 'naked' short. The broker sells the share into the market as if it were a legitimate share. This share is a counterfeit share just like counterfeit dollars. The shorted shares that were supposed to be delivered after three days are not delivered. These shares are called failed to delivered shares or FTDs for short.
A great tutorial of how this scam works can be found here:
www.businessjive.com/
Here is the SEC saying they are going to do something once again. They are useless of worst that useless since investors think they have some protection.
www.sec.gov/news/speec......
Could shorting hurt a stock in the very short term, sure, but in the long term markets are efficient. But if you extend that period the true value of the stock will come out. Do these cry babies who blame shorts think that it is short sellers who have knocked Bear down to $10 from $170?
The problem these complainers have is that they think that market should always go up. Well dummies, we are in a recession and credit crunch caused by thieves on Wall Street. Stop looking to blame declines on stocks on anything you can and ignore the real problems. If you look hard enough you will always find an excuse for why your stock went down instead of just comming to grips with the fact that the stock you bought sucks and the management probably lied to you about many things.
Furthermore, Just leave the market. Now. It seems you are ENTIRELY committed to the notion that the markets are fixed. Leave now or you will be judged the fool. Why would anyone that "knows the rules" and knows with 100% accuracy they are incapable of winning -- stay and try and win?
I don't disagree with the notion that short sellers aren't to blame for the overall moves in the market but they do certainly create more volatility. On a relative basis, it is simply ignorant to say that the removal of the uptick rule doesn't help shorts by giving them more of an advantage.
ng
Bear Stearns 3,0%
Morgan Stanley 3,0%
Merril Lynch 3,1%
Lehman 3,3%
Goldman Sachs 4,5%
Citigroup 5,2%
JP Morgan 7,9%
Wells Fargo 8,3%
Bank of America 8,6%
Wachovia 10,2%
you will be long on this?
That is so much bull!
You hear it every other day on the upside and then every other day on the downside! Big moves result.
It is a matter of time to unwind the big clock spring that has overlooked so much for so long. We have not heard the big gong yet as commercial mortgages on our best real estate cannot be refinanced. Interest rates on junk bonds and commercial real estate are headed higher...big time. Do you know that as interest rates go higher, Capitalization Rates also go higher and Property Values which the inverse of the cap rates are very sensitive and are going lower...big time.
We have heard a lot about Bear and C etc and others having huge layoffs as well as thousands of bankers, mortgage brokers and paper shufflers in the housing business losing their jobs. Who is going to fill those empty offices? Just a matter of time till all this is will be felt. Translate that to a lot of consumers. The REITs will have to "mark to market" all those prime office buildings and shopping centers when it comes time to refinance the "interest only loans" who knows where the market will be?
Did the shorts cause this problem? I don't think so.
I am short the IYR, (the Dow Jones Real estate trust industry), playing the ultra short card with (SRS). Got hurt bad today, but not the least concerned. The bulls are having a good day and some shorts are folding, no doubt. But the reality of the situation is time... It takes a long time to hit bottom. Then after the bottom, a lot of rebuilding is required. If the most gross estimate of the bank debt comes to past at $1.2 trillion in losses by banks...Then just who is going to have the money to loan to borrowers seeking to buy that real estate? Not many will be positioned to take up the great buys that are coming. Shorts did not cause the problem, but I for one hope to make some money out of the crisis, and be in a position to buy some cheap commercial property. Is that so wrong?
Give me a break. For every buyer there is a seller. Our system is based on the individuals right to do either. So, don't blame shorts for the excesses of the big dumb banks! Think of it, 59% of commercial loans in first half of 2007 were interest only! The loans will have to be refinanced at some time and hopefully into long term debt. Anyone buying with interest only debt is a speculator and they are the ones who ran the prices up to unreasonable heights from which we all are now suffering. The pain is still in the future ... it will take a long time to rebuild from scratch the capitalization's of the leading banks lost to date, plus that which is yet to come. So when does it end? Certainly not this year...so why are so many in denial that we are already in a recession?
The rule was there to lessen effects of manipulation.
Jim Cramer is right on this issue. Naked short-selling should also be outlawed.
When are people going to realize that there are no bulls nor bears but just Mr. Market looking to fleece the sheep at any and all opportunities. If that thought makes you shiver, guess what that makes you.
Maybe they should create a bail out fund for John Q Public like they did for BSC? 'I invested in some bad investments and now don't have enough money. Can you spare a dime a trillion times?'
Blackman
Clearly, automation permits the manipulation of the markets on a small scale at least, and probably on a larger scale for those with deep pockets. Therefore, the uptick rule is useless, because programmed trades can simply sell big, buy back just enough to tick the price, and sell big again. The SEC and other government agencies are underfunded and simply not equipped -- and perhaps not inclined -- to enforce much of anything these days in the financial markets.
The only advantage of the uptick rule in this day and age is to serve as evidence of market manipulation. However, it appears to me that nothing is ever done about such manipulation, so why try to prevent it with a mechanism that can easily be circumvented? On the other hand, if enforcement were strict and relentless, then the story changes. If particular groups of sellers were seen playing the "sell big, buy tack a tick" game, they would be held accountable, discouraging others.
Anyone who believes that stocks are subject to a free and efficient market during their short term fluctuations is welcome to that opinion, which I do not share. The long term market may be somewhat efficient, but an inspection of real time daily charts will often show interesting anomalies, such as a huge block trade on one side in the mornining, resetting the price drastically in a desired direction, and then a similar trade later, which does not move the price as much in the opposite direction. I find the similarity in size of these offsetting transactions to be more than coincidence, although I could be wrong.
In my view, short sales should not be subject to delayed settlement. All short sales should be made only when the stock certificate is "in hand" in advance at the brokerage. There should be no "failures to deliver" permitted. This would limit the number of short sales to genuine shares from margin accounts, putting an immediate stop to "counterfeiting&q... of shares by naked shorts.
It is disingenuous, perhaps deceitful, to say that free markets should be left to their own devices. Naked shorts, my view, are not the result of free market operations. They are the result of loopholes, deceit and perhaps fraud. However, it is highly unlikely that any action will ever be taken to stop this practice, because both Wall Street and the government have higher priorities, or else are simply unconcerned. It's common these to talk about "bear raids" on stocks. Everybody knows what's going on, and only the victims care.
The villains of the piece are not only the short sellers. It is the brokers who do not have the shares, but want the commissions from the trades, who are very much to blame. Yet Wall Street will circle the wagons and protect its own, as so many professional groups do, rather than blow the whistle on miscreants who are their colleagues.
Clearly, automation permits the manipulation of the markets on a small scale at least, and probably on a larger scale for those with deep pockets. Therefore, the uptick rule is useless, because programmed trades can simply sell big, buy back just enough to tick the price, and sell big again. The SEC and other government agencies are underfunded and simply not equipped -- and perhaps not inclined -- to enforce much of anything these days in the financial markets.
The only advantage of the uptick rule in this day and age is to serve as evidence of market manipulation. However, it appears to me that nothing is ever done about such manipulation, so why try to prevent it with a mechanism that can easily be circumvented? On the other hand, if enforcement were strict and relentless, then the story changes. If particular groups of sellers were seen playing the "sell big, buy tack a tick" game, they would be held accountable, discouraging others.
Anyone who believes that stocks are subject to a free and efficient market during their short term fluctuations is welcome to that opinion, which I do not share. The long term market may be somewhat efficient, but an inspection of real time daily charts will often show interesting anomalies, such as a huge block trade on one side in the mornining, resetting the price drastically in a desired direction, and then a similar trade later, which does not move the price as much in the opposite direction. I find the similarity in size of these offsetting transactions to be more than coincidence, although I could be wrong.
In my view, short sales should not be subject to delayed settlement. All short sales should be made only when the stock certificate is "in hand" in advance at the brokerage. There should be no "failures to deliver" permitted. This would limit the number of short sales to genuine shares from margin accounts, putting an immediate stop to "counterfeiting&q... of shares by naked shorts.
It is disingenuous, perhaps deceitful, to say that free markets should be left to their own devices. Naked shorts, my view, are not the result of free market operations. They are the result of loopholes, deceit and perhaps fraud. However, it is highly unlikely that any action will ever be taken to stop this practice, because both Wall Street and the government have higher priorities, or else are simply unconcerned. It's common these to talk about "bear raids" on stocks. Everybody knows what's going on, and only the victims care.
The villains of the piece are not only the short sellers. It is the brokers who do not have the shares, but want the commissions from the trades, who are very much to blame. Yet Wall Street will circle the wagons and protect its own, as so many professional groups do, rather than blow the whistle on miscreants who are their colleagues.
Grow up.
However, the unknown extent of naked shorts used to manipulate low-float stocks is a little scary. The interesting and well-narrated presentation at businessjive.com (as mentioned above) is really worth a look if you want to understand terms like NTCC, BD, SHO, and the "death spiral convert".