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Sunday, April 12, 2009

My Take on the Uptick Rule Reinstate it at Least for the Short-Term

The uptick rule was put in place in 1938 after being passed in the Securities Exchange Act of 1934. On July 6 of 2007 the rule was suspended, just months before the stock market decline started. I am not attributing all of the decline to the elimination of the uptick rule, but it certainly made it much easier for losses to accelerate, especially on those days where we were down 400 and ended the day down 700+... Reinstating the uptick rule is a good idea in my opinion as it will allow the markets to become more stable. Without the uptick rule in place, anyone with enough buying power could essentially drive a stock to nothing, and it should not be that easy! Reinstating the uptick rule would stop these bear raids from occurring. Think about it this way... Lets say a stock is up .05 to $20.05. If someone shorted a stock and the last trade price was $20.05 but the current bid is $20 and the short seller filled all of bid size at $20, and decided to short some more, but the next highest bid is $19.95 and then filled all of those, the security would then be down .05. What if the seller continued shorting the stock on and on? The price would get hammered and it would most likely send signals to others to sell the stock, AKA creating a self-fulfilling prophecy. This is extremely dangerous for any security and if this rule is not reinstated soon we could see many more equities driven to very low levels. I think this rule should be reinstated at least until things stabilize. Putting short bans in place have not helped the market, they've only created delays. When the ban is up things go back the way they were, if not worse than before. I honestly think reinstating the rule will benefit the markets greatly. The sooner we can get it in place the better. As of now there seems to be a hurdle, because they are trying to decide which rule to use from a list of 5 different versions. Hopefully they can get a vote on which rule to use and reach an agreement to reinstate the uptick rule quickly!


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