Bring Back the Uptick Rule

Kudos to the SEC for its move yesterday to tighten the rules governing short selling. Starting today, short sellers will have to actually deliver their borrowed shares at settlement; plus, options market makers will no longer enjoy an exemption from the delivery requirement. Also, short sellers can no longer deceive their brokers about their intention or ability to deliver shares.

That’s all good. The moves should help restrain the abusive short selling practices lately rampant in the stock market. But as the law firm of Wachtell, Lipton, Rosen & Katz argues in a memo to clients, the moves aren’t enough: “the measures adopted by the SEC fall far short of the type of bold measures needed to constrain the abusive short-selling and rumor mongering taking place.”  

I agree. The lawyers at Wachtell also argue (and I agree with this, too) that if the SEC is really serious about restraining the abusive, irrational short-selling lunacy going on, it should take additional steps forthwith:

As we have previously said, the SEC should immediately re-impose, under its emergency powers, the “Uptick Rule.” In addition, the SEC must now consider other very strong measures such as using its emergency powers to place limitations on short sales for a period of time to restore a fair and orderly market. Also, it is essential for the SEC to scrutinize short sellers and their related transactions, including options and credit default swaps to determine whether these strategies are contributing to the severe dislocations taking place in the marketplace. [Emphasis added]  

And the sooner, the better. The stock market worked just fine over the 70 or so years of the Uptick Rule’s existence; reinstating it shouldn’t place an unreasonable burden on stock investors now, therefore. And it’s imperative, too, that the SEC look into how short-sellers might be manipulating the CDS market to manufacture uncertainty around the stocks they are short.

The CDS market is relatively new, and has turned out to be a wonderful playground for speculators looking to manipulate the equity markets. The SEC needs to get up to speed on the abuses going on, and develop some regulatory tools to fight them.

And it should do so sooner than later. The freezeup of the financial markets has been painful enough as it is. The SEC isn’t doing anybody any favors by allowing abusive and illegal practices to continue right under its nose.

Comments

[1worldcurrency:]

With LEH trading down to 8, seeking alpha posted an unconfirmed, unsourced rumor that Goldman Sachs had offered to buy it for 11.
Why don't you write about that.

2008 Sep 18 02:15 PM

[jim123321:]

In addition to this, there needs to be a minimum 5 cent spread, pennies are horrible

2008 Sep 18 02:41 PM

[Mr.G:]

the overall fundamentals are extremely bearish that is why the market is collapsing not short selling , it will slow the hemorrage but it wont stop the bleeding - all of the warning signs have been here for months about this market falling at some point - its now and if something doesnt change fundamentally expect it to continue for a long time - and right now the only thing that would probably stop this is not allowing people to literally sell their falling stocks -now that would be unfair .

2008 Sep 18 02:54 PM

[alpha24seven:]

Bring back the uptick rule...

Yep that will do it. Everybody happy shiny again....

Lol...

2008 Sep 18 03:02 PM

[ValueInvestor:]

Wow, the ignorant comments are astounding. Don't you people realize that the naked shorting rule has nothing to do with shorting? Shorting in itself is very good for the markets. It's legal, keeps companies honest and puts the needed downward pressure on the stock when things are bad.

"Naked" shorting is illegal and always has been. Its all about the companies/brokerages that short stocks with no intention whatsoever of borrowing the stock in the first place. The brokerage firms have been doing this for years because they knew the SEC won't follow thru with prosecutions. They've been a toothless deterant in all of this.

Watch the bloomberg video on "Phantom Shares" and you just might understand what its about.

2008 Sep 18 03:12 PM

[cristian:]

Ludicrous, but.... let's not forget that the ignorance of the "sophisticated" corner office is what has gotten us here !

2008 Sep 18 03:28 PM

[schtoonkmeyer:]

making the shorts deliver shares at settlement is a plus. I have to. You have to. So should everyone. But I disagree about the uptick rule which was onerous. It tilts the field to the longs which creates bubbles. Unless you require a downtick rule for buying, which I cannot imagine happening.

2008 Sep 18 04:02 PM

[colson:]

So why don't we actually make it a round-turn exercise in futility and only permit buying on down-ticks. The only thing irrational are these types of limitations on short selling and the people who advocate for them.

2008 Sep 18 04:13 PM

[colson:]

whoops, sorry for pretty much saying the same thing schtoonkmeye. I guess I should type and post faster :)

2008 Sep 18 04:14 PM

[ChuckChange:]

I agree with ValueInvestor. To put the blame on short sellers ridiculous. If these financial (and other) companies are so great, then why doesn’t someone step in and by them? The SWF's and Buffett’s of the world are sitting on piles of cash, and I think if they saw value they would have or will step in. I think the truly astute investors out there vastly outnumber any group of S sellers, at least in terms of fire power anyways. So lets ask ourselves a basic question: What is more likely, a group of short sellers are to blame for the collapse of Bear Stearns, Fannie/Freddie, Lehman, AIG, and probably a few more (not to mention Northern Rock and HBOS in the UK) OR the following business either had flawed models to begin with and or became way too over levered for various reasons. Ill let you decide.
Finally, you and the law firm agree "that if the SEC is really serious about restraining the abusive, irrational short-selling lunacy going on, it should take the following steps"
My only question here is, why dont you, your law firm, regulators and everybody else complain when abusive and so called "irrational" buying was taking place just months before, during the tech bubble or during any other period of so called irrational exuberance that you might choose.
I by no means believe that there aren’t questionable practices that go on in short selling, long buying, CDS markets etc., but I do believe placing any blame on the current issues at hand on short sellers is either ignorant or an effort to divert your attention from the real problem.

2008 Sep 18 04:43 PM

[glassbox:]

Valueinvestor and TTvalue, I agree that there is technically nothing wrong with short selling. Its only ok as long shareholders implicit know that their shares are being lent out. Short selling is a derivative - and we've seen how unregulated derivative activity have taken down markets and companies. Take the case of Harbinger the hedge fund manager - they did not know their shares are being lent out and frankly their response so far has been very disappointing. As a subscriber to their fund, I've been very disappointed by their careless attitude to the whole debacle of them 'not knowing that their shares have been lent out'. I am half suspecting that there is something in the whole trustee/custodian/fund manager system that deliberately don't want to make this issue a debate.

2008 Sep 18 08:55 PM

[Jolly_Rancher:]

Short sales should be banned. Period. The reason is that the purpose of the capital markets is to raise money for investment in projects that create economic value, i.e. products that people will buy. The purpose of the capital markets is NOT to provide a playground for investors (whether long or short) to manipulate with computers. Especially short sales should be banned. There is no common economic reason for it's existence. I am not arguing for bubbles. I am saying the games need to stop and people need to go back to work.

2008 Sep 18 11:12 PM

[1worldcurrency:]

Yes we should pass a rule that no one can sell at a loss. Then stocks would always go up, like real estate. We taxpayers have to bail these banks out so they can start losing (oops) gambling (oops) lending (that's it) again.

2008 Sep 19 01:17 AM

[1worldcurrency:]

Well Tom old boy you may be right after all. These bank stocks are a bargain. They may return someday to profitability, a trillion or two of bailout later. Watch out for triple digit inflation though. Hank's bazooka and Ben's helicopter are loaded up with almighty dollars.

2008 Sep 19 01:25 AM

[CLH:]

The incredible ability to do nothing right is is how the gov. works. The shorts over shot and have been creamed. We dont need the gov to tell us what to do. The market works. Shorts are part of the market. Leave them alone!!

2008 Sep 19 09:46 AM

[ResourceWise:]

CLH, the market works?! Surely you're kidding?!!! The market is a stacked deck, a loaded dice, a mugs game and needs a thorough review so that the theft of shareholder value is made harder.

2008 Sep 19 03:48 PM

[Joe H.:]

All the messages from short sellers are self serving.

2008 Sep 19 05:58 PM

[williambanzai7:]

How The Grinch Almost Killed Wall Street
(How the Grinch Stole Christmas revised by
William Banzai7)
williambanzai7.blogspo.../

Every Banker down on Wall Street Liked CDOS a lot...
But the Grinch,Who lived just north in Greenwich, Did NOT!
The Grinch hated those investment bankers for a whole list of reasons!
Now, that is why we are having this exciting fall season.
It could be his trader head was screwed on just right.
It could be, perhaps, that his white shoes were a little too tight.
But I think that the most likely reason of all,
May have been that his NAV was 12 sizes too small.
Whatever the reason, His smarts or his shoes,
He stood there last week, hating all Wall Street's Whose Whos,
Staring down at his trading P&L with a sour, Grinchy frown,
Detesting those warm lighted screens in Wall Street town.
For he knew every Captain down in Wall Street beneath,
Was busy now, trying to sail through the great Subprime reef.
"And they're firing their traders" he snarled with a sneer,
"In three months its Christmas! It's practically here!"
Then he growled, with his Grinch fingers nervously drumming,
"I MUST find some way to give those investment bankers a drubbing!"
For Tomorrow, he knew, all the Whose Who of Bankers,
Would wake bright and early. And rush to save all their bonus earnings!
And then! Oh, the noise! Oh, the Noise!
Noise! Noise! Noise!
That's one thing he hated! The NOISE!
NOISE! NOISE! NOISE!
Then the Whose Whos, young and old, would all fly Far East.
And they'd try to talk Korea and China into feasting on trading book yeast!
And they'd feast! And they'd FEAST!
FEAST! FEAST! FEAST!
They would feast on champagne and rare banker roast beast.
Which was something the Grinch couldn't stand in the least!
And THEN They'd do something He liked least of all!
Every Who down in Wall Street, the Bulls and the Bears,
Would stand close together, with opening bells ringing.
They'd stand hand-in-hand. And the Whos would start singing!
They'd sing! And they'd sing! And they'd SING!
SING! SING! SING!
And the more the Grinch thought of this Singing,
The more the Grinch thought, "I must stop this whole thing!"
"Why, for year after year I've put up with it now!"
"I MUST stop a Wall Street bailout from coming! But HOW?"
Then he got an idea! An awful idea!
THE GRINCH GOT A WONDERFUL, AWFUL IDEA!
"I know just what to do!" The Grinch laughed in his throat.
And he made a some quick calls to spread rumours of a giant toxic CDS boat.
And he chuckled, and clucked, "What a great short seller trick!"
"With this phone and this screen, I'll batter those Wall Streetwalkers selling asset backed tricks"

"PoohPooh to the Whose Whos!" he was grinchishly humming.
"They're finding out now that no Chinese White Knight is coming!"
"They're just waking up! I know just what they'll do!"
"Their mouths will hang open a minute or two,
Then the Whose Whos down in Wall Street will all cry BooHoo!"
"That's a noise," grinned the Grinch, "That I simply MUST hear!"
So he paused. And the Grinch put his hand to his ear.
And he did hear noises over the trading screen glow.
It started low. Then it started to grow.
But the sound wasn't sad! Why, this sound sounded merry!
It couldn't be so! But it WAS merry! VERY!
He stared down at Bloomberg and Reuters! The Grinch popped his eyes!
Then he shook! What he saw was a shocking surprise!
Every banker down in Wall Street, the Bulls and the Bears,
Was singing! Without any White Knight at all!
He HADN'T seen a Big Federal bailout coming! IT CAME!
Somehow or other, it came!
And the Grinch, stood puzzling and puzzling: "How could it be so?"
"It came with out tickers! It came without a tab!"
"It came as Federal largesse in boxes and bags!"
And he puzzled three hours, till his puzzler was sore.
Then the Grinch thought of something he hadn't before!
"Maybe a Bailout," he thought, "is not just for financial Whooers"
"Maybe Fed bailout...perhaps...me... a little bit more!"
And what happened then? Well...on Greenwich Main Street they say,
That the Grinch's taxes grew 12 sizes that day!
And the minute his wallet didn't feel quite so tight,
He whizzed with his Lexus through the South Bronx morning light,
And he met those Wall Street boys for a Smith & Wolensky feast!
And he, HE HIMSELF! The Grinch carved the beef!

2008 Sep 23 05:52 AM

[Investor Man:]

It is impartive that you up tick rule come back into play. This rule stops shorts from taking out bids, and creats a false sense of owners of a company are cashing out.

2008 Sep 28 09:08 AM

[handworn:]

I agree. The uptick rule must be reinstated. What's more, the practice of "automatic trading"-- using algorithms based on online news reports to buy or sell automatically without a human being's judgment being involved-- should be outlawed entirely. And the rule banning institutions from owning stocks under $5 should be suspended.

Why? Because if negative news reports come out and a prominent stock drops to within a certain range, short sellers can now short it down to below $5, which triggers a mandatory flood of selling by the institutions which can no longer own it. Which makes it drop even farther. Which causes a new round of negative headlines in the news. Call it a "reverse bubble."

2008 Nov 23 12:11 PM