There is no doubt these are scary times for investors. With the credit markets threatening to seize up and our leaders making a trillion-dollar "guess" to fix the problem, it is no wonder Wall Street is in such a nauseating mess.
If there is a bright side to this situation, it is we will likely never have to face a similar dilemma again. Just as we learned from the Great Depression, the savings and loan blowup, and most recently, the collapse of the Internet bubble, we will learn from this ordeal. New regulations are already getting tossed around. Ultimately, some great advances will be made.
If you have been listening to any of the financial pundits during this fiasco, you will have undoubtedly heard somebody discussing the "uptick rule." It was a regulation created in 1939 – because of what we learned during the Depression – that only allowed a short sale to be executed if the previous trade was at a price higher than its preceding trade. In other words, demand had to be higher than supply.
The original intent of the uptick rule was to ensure traders betting against a stock could not gain enough momentum and create enough fear to artificially reduce a share price by drastic amounts. Without the rule, huge sums of money could be thrown into short positions, suddenly weighing down the stock and initiating large amounts of panic selling. It happened last week in huge proportions.
It was a very tough rule to enforce and was certainly not perfect, but it proved beneficial to the markets many times during its multi-decade lifetime. When the rule was eliminated in July of 2007, short sellers were given much more freedom and hedge funds with their billion-dollar portfolios were given incredible new power.
New intentions for
