In the Article Blame Game: The Uptick Rule Debate, both arguments of effect of the removal of the uptick rule in July 2007 on market volatility are presented. After extensive research and a pilot test in 2005, the Securities and Exchange Commission determined that the “uptick” rule was not necessary in preventing short selling. The uptick rule was initially implemented after the 1929 stock market crash. Its purpose was to hinder bearish traders, believing that a stock was overpriced, from short selling, consequently contributing to falling prices by flooding the market with shares. Under the uptick rule, shares could only be sold after the price had increased.
In July 2007 the SEC revoked the uptick rule, deeming that the rule was “hindering trading without protecting prices”. Many believe that this has contributed to the increased volatility of the market. Now stocks can be shorted even as prices fall. According to the article, some experts feel that the elimination of the rule has made it easier for bearish traders to short sell. The Volatility Index indicates that stock-price volatility has remained 70% higher after the rule was changed than before. The volatility of the market has caused investors to want higher returns, which leads to higher cost of capital for companies.
Others argue that the market’s problems are not due to the removal of the uptick rule, but rather, to much greater problems such as the debt crisis. One researcher notes that there have always been ways around the uptick rule, allowing traders to short sell, including simply breaking the rule and paying a small fine.
I agree with the head of one firm, who points out that the correlation between the market’s volatility and the removal of the uptick rule does not necessarily equal causation. There are too many contributing factors that the impact that the removal of the uptick rule cannot be isolated as a determining cause.
Blame Game: The ‘Uptick’ Rule Debate
Gregory Zuckerman
Wall Street Journal. April 1, 2008. pg. C.1
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2 comments:
Short selling has caused problems in the past, that is given. However, since the removeal of the uptick rule the SEC is not inplamenting a new short selling rules. Naked short selling was a Wall Street maneuver when a stock is shorted a stock without borrowing the shares immediately first. Traditional short selling requires borrowing the shares before selling them.
Naked shorts can usually push a stock's price lower than a traditional short can and can allow for a greater potential profit. As of 12:01am thurday the 18 naked selling is now agaist the law.
But the fact remains that short selling alone has not caused the problem that are currently seen, these factors are too numerous to metion but there is not just one cause for the problems we are in.
In theory having the Uptick rule would help quell market volatility and keep stock prices a bit on the higher side. This will make it slightly easier for investors to make money on long positions and should provide increased market value for companies. Both are nice benefits.
Now I am a bit worried about investors not being able to make as much money from shorting stocks. It would seem to me that investors out there making informed decisions about which stocks they are shorting, will be shorting the stock before it beings to tumble and bandwagoners start hoping on. Thus I would imagine they will be able to get around this rule pretty easily.
So for me, I think this could definitely be a positive thing. It could help eliminate those rash investors who make the market sink to irrational points.
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