SEC Revisits Uptick Rules

The SEC is sheepishly back-peddling on the so-called uptick rule. Controversially, this rule was axed in 2007 after 70 years on the books. Unfortunately, the axing of this rule to mitigate short selling was also the cue for the worst bear market since the Depression. The uptick rule has nothing to do with disastrous corporate earnings, so I suspect this is another straw man held up as a scapegoat. However, red faces all around the SEC.

But is the uptick rule such a good idea? Just to muddy the whole argument the SEC has put up five different proposals for a 60-day consultation period. Whatever the outcome, any rule that tips the balance of supply and demand in one direction is not part of a free and fair market. If the idea is to increase stability and decrease volatility then perhaps having both an uptick and downtick rule would make sense. But looks like we're heading back to the days when pumping up stocks for no good reason is a great idea! The nightmare scenario for US stock markets is that they start to resemble their Japanese counterparts.

There are other ways to short stocks, such as using options. The real problem is from naked short selling, where someone sells a stock they don't actually own, as this effectively increases the apparent number of shares being traded. The SEC has proved itself completely useless at being a financial watchdog. Until wholesale changes are made, expect nothing more.

SEC Considers New Uptick and Short-Selling Rules

The Securities and Exchange Commission plans to consider whether to reinstate the controversial "uptick" rule or consider other short-selling regulations at a meeting on April 8, the agency announced Friday. (Marketwatch)

The uptick rule, which was removed from the markets in July 2007, allowed short sales only if a preceding trade boosted a company's stock price.

For anybody who believes in free markets - or at least in fair markets - this is yet another illustration of how rules distort behaviour. If this new uptick rule passes then we will be back to a new bubble scenario. For fairness there should be an uptick and downtick rule. This would allow for more orderly moves in either direction. The rule is stated in terms of price movements rather than volumes so it is feasible if the price is moving downwards to do small up trades followed by large down trades. Fairly simple but obviously too fair for the SEC.

As the news item also mentions other short-selling measures this will be a political move rather than a purely technical one.