Return of the Uptick Rule?

by: Kirk Shinkle

Barney Frank says he's "hopeful the uptick rule will be restored within a month" and that the SEC's Mary Schapiro is on board. The uptick rule basically stopped shorts from betting against a stock as it falls by requiring a move up in price before a short trade. It was removed in July 2007, and the argument goes that it opened up Wall Street to nefarious shorting during the 2008 crisis.

From Reuters:

The head of the U.S. House Financial Services Committee said on Tuesday the Securities and Exchange Commission would soon reimpose the so-called "uptick" rule, which forces short sellers to sell at a price higher than the previous trade.

"I've spoken to Chair (Mary) Schapiro of the SEC. I am hopeful the uptick rule will be restored within a month," Rep. Barney Frank told reporters. "Mary is moving towards the uptick rule, which some people think is very important, some people think it's not important, nobody thinks it does any harm. I think that will go back (into effect)."

This is one of those good news/bad news situations. A few initial reactions to the news seem to be a) the stock market rallied today because the wings of short sellers are being clipped which b) implies short sellers are big culprits of the current market malaise, rather than the actual dismal state of all those heavily shorted names in (for example) the financial sector. This seems, at best, overblown. When we're still discussing whether or not the banking system is even solvent, pinning blame on short sellers is like blaming a plane crash on gravity. It's an important factor, sure, but it's not the most important one. Whether the rule even works is up for debate among regulators, according to Bloomberg.

Basically, it's good for most investors and bad for free-marketers. Whether it makes a big difference or not, the rule does do harm in that it keeps the market from operating at peak efficiently (though there's no denying stocks did just fine for decades under its yoke). The rule's real role now is as a confidence-building gesture to get investors back into stocks.

For example, CNBC's Jim Goldman sees Apple's (NASDAQ:AAPL) rally as a sign of the overhang put in place by aggressive (and illegal) shorting. He argues that it's about time for a rule change given the ease with which market manipulation can take place:

Fact is, rules and laws simply have not kept up with the Wall Street of the 21st Century. Day-traders equipped with massive computing power backed by enormous wealth at major firms, or individuals with a penchant for rumor-mongering on internet message boards that connect with blogs, who connect with mainstream media and can therefore manipulate stock in a way never possible before, means individual investors playing by the rules simply don't have a chance when it comes to legitimate investing. We live in a world where investors and news consumers simply don't know whom to believe anymore.

The thing is, reinstating the uptick rule won't stop this sort of manipulation. It'll just make it slightly more difficult for those engaging in market manipulation to get things rolling. Rules that date back to teh 1930's don't normally alter the influence of modern technology. They won't here either.

Still, markets are up today, and short covering is getting the credit. Whatever works...