Robert Weinstein's  Instablog

On Aug 17, 2009 the SEC released on their website that they were looking for comments on a proposal to reinstate an “uptick rule” for the non “insiders”.

Basically a license to print money for Goldman Sachs and other market makers. While there has been a lot of talk about the “evils” of short sellers (I am not talking about naked shorting which is another subject ) there is NO talk of stopping short selling, only talk of changing the playing field so that retail and smaller traders will have to wait in line AFTER the big players on Wall St. get to do what they want first.

This is perhaps the most important point of this debate is that all of the proposals including the one the SEC has pushed into the front is a ban ONLY on YOU. Not the market makers, specialists, or option market makers.

So the whole idea that this is a ban on short selling is ludicrous at best and will most surely hurt (retail) day traders both long and shorts in favor of market makers.

With this so called “ban” in place the next time you want to short a stock you WILL get in line after the market makers get their fill first.

You don’t short stocks and only trade to the long side? Well sorry but don’t expect much of a change one way or the other. You should have no opinion that this ban will aid your trading in any way. If you do you have most likely based it on zero public evidence (I would welcome someone to show some evidence that a ban would be good for anyone OTHER than market makers)

Some say that Bear Sterns and Lehman Brothers went down due to “bear raids” but I would argue that they went down because they went broke (and I lost money with being long LEH so I remember that one well but I sure as hell don’t blame shorts for either my loss or that LEH went BK)

I think its a very scary thing to turn the clock back and allow for more manipulation by the big money on Wall St and suggest that we let the SEC know that we want to keep the playing field as level as we been able to so far get it. Don’t turn yourself into a second class citizen with stocks. Ask the futures traders if having shorts is a bad thing. After all every single futures contract has a long and a short.

In its current form its not IF there are exceptions its right there in the proposal.

sec.gov/rules/proposed/2009/34-60509.pdf

I would point everyone to read Section B page 9 where the exceptions begin (I actually suggest people read the whole thing so you can be informed directly)

“In the Proposal, the proposed modified uptick rule and the proposed uptick rule included types of short sales that would not be subject to the requirements of the proposed rules.28 For example, the proposed modified uptick rule would require that a trading center’s policies and procedures be reasonably designed to permit the execution or display of a short sale order marked “short exempt” without regard to whether the order would otherwise be impermissible.29 The proposed uptick rule included a number of exceptions to its price test restrictions on short sales that, for the most part, paralleled the provisions in the proposed modified uptick rule relating to short sale orders that could be marked “short exempt.””

Here is some of the excptions on page 9 and 10.

Whether requiring a policies and procedures approach, or a prohibition approach, the alternative uptick rule could also include “short exempt” provisions or exceptions for: (i) a seller’s delay in delivery as set forth in Section III.A.2.b of the Proposal;32 (ii) odd lots,

Page 10

as set forth in Section III.A.2.c. of the Proposal;33 (iii) domestic arbitrage, as set forth in Section
III.A.2.d. of the Proposal;34 (iv) international arbitrage, as set forth in Section III.A.2.e. of the Proposal;35 (v) over-allotments and lay-off sales, as set forth in Section III.A.2.f. of the Proposal;36 (vi) transactions on a VWAP basis, as set forth in Section III. A.2.h. of the Proposal;37 and (vii) riskless principal transactions as set forth in Section III.A.2.g. of the Proposal.38

The last line of in Section B page 10 sums it up pretty well that this restriction is to be placed on YOU and ME and NOT on Wall street market makers, Specialists, Option market makers and basically in a nutshell the Wall st insiders. Every one else can take a second class seat and wait in line

“We ask for comment on the scope of any such exception and the conditions that should be imposed to ensure that it is used only for bona fide market making.” (SEC words not mine as can be seen on the SEC website)

From my view I see this as Wall St paying off politicians(primarily congressional) and they are not paying back by putting pressure on the SEC to allow them to step in front of the “outsiders”. Its no secret that the SEC is under pressure to “do something” and proposal everyone wins. The MMs get to make more money, the politicians get more political contributions, the SEC gets to crack down on what “everyone knows” causes the market to go down and the average trader, well I guess they get screwed as potential profits that they could be making are now reserved for a select group.

On a different note I almost never short on what would not be an uptick as I fade price when shorting. So some could argue that I would not be harmed much (if at all ) by this proposal with the way that I currently trade. Why why do I care?? Because tomorrow I may find a profitable setup that does include it. Because tomorrow I may want to BUY a stock and be able to buy it at the true lowest price possible to lower my risk.

Why anyone would voluntarily allow their trading to be viewed as second class is beyond me. I find it insulting when someone proposes that the market is served by “bona fide market making” when a MM shorts a stock at will and the average trader can not.

There will be winners and losers with this and I think we can mostly agree on how we are going to fair against Goldman Sachs and the other big MMs when they get to stand first in line every time.

Disclosure: No position in GS or any related stock to the article