Eric Newman - TFS Capital, LLC

Did the Elimination of the Uptick Rule Contribute To Recent Market Declines?

Well, let's look at some data. Between July 15th and November 14th, short shares outstanding fell by more than 5 BILLION shares on the NYSE, and by more than 3.5 billion on the Nasdaq.

But during that time, the S&P 500 fell 27.5%, and volatility (as measured by the VIX) more than doubled, increasing by 132%. How exactly did short sellers BUYING back 8.5 billion shares of stock cause the market to collapse and volatility to rise? The answer is that they didn't.

The uptick rule only affects stocks. But we have seen dramatic increases in volatility of oil prices, bonds, and just about every other asset class. How can anyone believe that the higher volatility of stocks was caused by the repeal of the uptick rule, when volatility is higher everywhere?

Because stocks fall, short sellers are to blame? Between September 19th and September 26th, Washington Mutual fell by 96%. Is it those manipulative short sellers again? Well, no-- short selling was banned in hundreds of financial companies during this time, including Washington Mutual.

Let's be clear: Short sellers are not driving price. In fact, the data shows that short sellers serve to regulate price-- they are part of the few who are buying when stocks go down, and selling when stocks are going up.

Stocks go down because they are overvalued. There was too much leverage, and too many companies didn’t bother preparing for anything besides the best of times. Let's stop blaming the short sellers already.