We Don’t Need an Uptick Rule

This is a simple issue.

It used to be that you couldn’t short a stock unless there was an uptick. The idea was that this uptick rule would prevent short sellers from piling on a stock and driving the price down. Then the uptick rule was removed. It became permissable to borrow shares of stock and sell them whether or not the stock had ticked up or not. The result ? Nothing. Not a darn thing changed.

Good companies operated their companies well. They recognized that short sellers just created future demand for their stocks. If they pushed the price down to new lows, it just created an opportunity for investors to buy the company at cheaper prices. So be it. Good companies aren’t defined by their stock prices, they are defined by their operations.

On the flipside are poorly managed companies. Poorly managed companies always presume the current business environment will stay the way it is. The big investment banks thought they could always raise capital and deploy it at higher returns. Which is a great model to lever up to squeeze every possible nickel out. It makes it easier to get your bonus and makes shareholders who only pay attention to the stock price happy.

Except that leverage is risk. Always has been, always will be. When you dont manage your risk well, you pay the consequences.

The problem with the likes of Lehmans, Bear Stearns et al, wasn’t that their stock prices were pushed down, it was that they had become myopic and overly leveraged. They had not considered all possible negative scenarios. When they were forced to write down assets and couldnt get access to loans because no one trusted their balance sheets, they were without capital. When they were without capital, they were SOL. Deleveraging brought their entire business models crashing down along with their stock prices. Lehman disappeared, the rest got government bailouts or were pushed to be bought out.

If they had not over leveraged, the price of their stock would not have mattered. If they had managed their risks properly, their stock price would not have mattered. The uptick rule had nothing to do with their failures. Management did. To blame it on the uptick rule is ridiculous. Companies that hadn’t overlevered and stuck by their lending and business principles got along just fine. Their stock prices did just fine as well. It really as simple as that.

Does anyone really think that even if there was an uptick rule and stock prices were not as volatile and even possibly higher, that anyone would have given Lehman’s capital in a private raise with all the uncertainty about their balance sheet ?

Put another way, if the uptick rule drove down prices, it should have been EASIER for the financial companies to raise money. Smart investors would have recognized the strength of their balance sheets and gladly jumped at the chance to invest money at prices depressed by those nasty short sellers capitalizing on the lack of an uptick rule.

That’s not what happened. What happened is exactly what should have happened. Good companies did well. Poorly run companies didn’t. Those in the middle got lucky and bailed out. The uptick had zero impact.

Thats not to say short sellers didn’t pick on the financial companies. Of course they did. They did so because they were poorly managed. They were right

When you hear someone talk about bringing back the uptick rule as a solution. Laugh. Then tell them “Larry Bird is not waking through that door”.

33 thoughts on “We Don’t Need an Uptick Rule

  1. MC
    The Uptick rule is to prevent manipulation by parties who do not own the stock.
    The BS that there should be a Downtick Rule is ridiculous. There is NO uptick rule for selling shares that you own!!! There should be no downtick rule for those who wish to own the shares either. Price discovery comes from buyers and sellers of the actual stock, not from added float of borrowed shares!
    If you wish to bet that shares you do not own are over valued, then an uptick rule will not prevent you from getting short, just stops the Bear Raids.
    The idea that Shorts and Longs are somehow equal is twisted. Only Buyers and Sellers of a companies actual shares are equal….that is how true price discovery occurs.(and the true efficient market)…Borrowing Shares (hopefully) and then selling those shares is a dilutive cancer on the true value (new shares being created out of thin air). This only serves to weaken the capital structure of a company, solely for the benefit of the short seller. I would propose short selling should only be allowed in hedge situations only…but that is asking alot from the pro-manipulation hedge crowd.
    JKS

    Comment by Keith -

  2. The problem is that when the Fed will leverage its newly acquired 1Tril into greenbacks they might be using it for short selling. 20Tril used for shorting the market that we have now – duck and cover.

    As for the short squeeze that is supposed to save the market: C dropping from 55 to below a buck was not a problem. But it seemed to be a problem when it was nearing four on Friday the previous week, when my ticker said “trading suspended”. LOL

    Comment by Schnulli -

  3. Yes, good point – if the uptick rule is inconsequential why was it removed in the first place? And it was removed in a still somewhat bullish market where you can’t see much difference due to upticks being all over the place…

    Comment by Schnulli -

  4. DEAR MARK CUBAN:

    After all these discussions the UPTICK RULE seems to have significance. Looks like the UPTICK RULE is NOT just a “simple issue”. By now you should be smart enough to understand that. When the UPTICK RULE gets reinstated you will see the “Efficient Market” Theory start to materialize. Until then there is nothing efficient about the market, unless your a day trader performing naked short-selling throughout this lackluster regulatory period. Noticed how the stock market just decided to go up last week after the news emerged of reinstating the UPTICK RULE? Maybe a lot of the short-sellers are running scared or just getting caught in a “short-squeeze”.

    U.S. SEC to meet April 8 to weigh uptick revival
    http://news.yahoo.com/s/nm/20090313/bs_nm/us_financial_sec

    US SEC to meet April 8 to weigh uptick revival
    http://www.forbes.com/feeds/reuters/2009/03/13/2009-03-13T224239Z_01_N13545158_RTRIDST_0_FINANCIAL-SEC-UPDATE-2.html

    Adam Mesh: Short Squeeze Will Save Stocks
    http://moneynews.newsmax.com/streettalk/adam_mesh_squeeze/2009/03/05/188765.html

    Comment by George -

  5. Part of the problem with the theories of efficient markets is that they simply do not take emotion into account (as most with most theories, that is considered “soft” and not relevant). The uptick rule existed for one very good, and very valid reason: FEAR is often much more powerful than GREED.

    We have a lot of things wrong with today’s markets. A very big thing wrong is that there are entirely TOO many weapons of fear available for short sellers, compared to weapons of greed which can be used by the long side (pumping, etc).

    Currently, false rumors fed to the press, combined with the ability to short sell without any uptick rule (and thus push the price down) AND the ability for some to short sell without validly borrowing a stock (naked shorting) allow short sellers to throw panic and fear into the market concerning one or more companies. The net result is the destruction of said companies’ ability to raise capital, and in some cases operate their business at all.

    YES, I agree that short sellers target companies which may have a history of being poorly run…or which may have legitimate problems in their operations. BUT, the problem with allowing short sellers to completely obliterate the capitalization of said companies completely eliminates the ability of said company or companies to get BETTER. By allowing short sellers to engage in these practices we encourage the DESTRUCTION of every company which has a misstep, rather than a paddling which acts as a measure to promote better management and recovery.

    And yes, its entirely possible to destroy a company this way, using FEAR. Short sell a stock without an uptick rule and engage in either naked shorting (or in the case of a fairly liquid stock, this may not even be necessary) and you can cause a deep enough fall of the price in such a short time that fear will cause investors to dump the stock before investigating further. Nobody wants to lose everything…so that fear will drive a smaller loss on what may amount to be either a rumor, or even a legitimate problem…but one that might be recovered from. The resulting downward spiral can absolutely destroy a company’s capitalization and ability to operate.

    So…yes, I believe shorting is a legitimate practice. But I also believe short selling without checks and bounds can decimate companies that might have issues, but don’t deserve a death sentence.

    And, there are cases of companies (though I believe fewer cases) that have NOT been having legitimate problems, yet were attacked by short sellers. Yes, speculating short sellers have the right to sell short anything they want…however, when they have the tools to generate rampant fear, they can cause serious damage to companies that may not even be experiencing operating issues. Self-fulfilling prophecies in the making…with the prophecies being written by the short seller.

    Comment by Peter -

  6. There is a very strong case that could be made that the removal of the uptick rule caused several Trillion dollars in losses over the past months. The argument that removing the Uptick Rule had no effect is simply flawed. Read the SEC Pilot study at http://www.sec.gov/news/studies/2007/regshopilot020607.pdf and pay attention to page 69. This was a controlled study and it showed that there was a 2.38% drop in return for 6-months on stocks when the uptick rule was set aside. This translates into an annual drop of 4.76%. The annual return on NYSE stock investments averages 7%, so this indicates that the drop in profits is 68%. A fifth grader could predict a stock crash if investers only average 2.24% a year in returns.

    The SEC study predicts higher volatility. Look at page 71, and it becomes apparent that removing the uptick rule causes an increase in volatility of 16-25%. The SEC study was done in a stable market. In a down market, there is downward pressure on stocks with no compensating upward pressure. Again, take the existing stock market crash and figure that 25% of the size of the crash is due to no uptick rule. This is a no-brainer. How do you spell Trillions?

    Comment by Tom Arnold -

  7. I agree but someone should tell Barney Frank. He is determined to bring it back into play.

    http://bit.ly/nFFiX

    Comment by econ365 -

  8. All I know is that with the uptick rule in place the market went from 800 to 13500 in the last 20 years. Since removing the uptick the market has gone from 13500 down to 6500 in 6 months. If the uptick was of no consequence, why remove it? Why try to fix something that is not broken? I wonder how many of the officials who were in favor of removing the uptick rule are shorting stocks and laughing all the way to the bank.

    Comment by Jake -

  9. I think Patrick Byrne’s complaints about his company’s stock being shorted had more to to with the legality of selling something you don’t own. He believed people would put in lots of sell orders, but then withdraw them before being required to pass the stock to a buyer. This created the impression of many more sellers than buyers, driving down the price when in actually no transaction was taking place. I believe volatility is not a good thing for the market, and people making money holding a stock for a few hours should be seen as gamblers, not investors.

    Comment by Pete -

  10. Barney Frank states: “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,” said Frank who is Chairman of the House Financial Services Committee. “I think that will go back (into effect).”

    Uptick Rule on Shorting Stocks Expected to Be Restored
    http://www.cnbc.com/id/29616614

    Comment by George -

  11. Nick G. spot-on mate.

    Comment by Beltway Greg -

  12. Mark,
    You are Brilliant guy. Sorry about the spelling, not wearing my readers.
    Nick

    Comment by Nick G -

  13. Mark,
    You are a brillant guy. Lets keep this simple. Granny is not selling BAC at $5.00 per share, she owns at $20 for years and if anything, her broker is telling her to buy more at $5.00. She buys another 200 shares. Enter hedge fund with millions backing them. In the past (with the uptick rule in place) they short 200,000 more shares at $5.01, they think it is going to $3.00 Great. Now (with the no more rule) they dump 100,000 shares on the market at $4.70 and another 100,000 shares at $4.50 (when BAC is trading at $5.00). Grammy cannot keep up with this (she is out of money) and the shorts drive the price to its current close of $3.65. How can you possibly say that this selling is done by an investor in BAC? How can you possibly say that this is good for the IRA and long term investors in this country? How can you say that the ability of a fund (with limitless dollars backing it) that is shorting a stock under the price it is trading at is fair to anyone. Give me a few million and there are several stocks that I own for clients that I could drive into the ground by shorting them at a price under the current market. Please come clean and teach me something that I am missing. I have read most of the posts here, please only respond to the fact that a well capitalized fund can continue to pound a stock lower by selling well below the current market, bringing the market to whatever price they want. And don’t say there should be buyers to keep the price up, you know how much money these guys are playing with, and grammy does not have that much.
    Thanks
    Nick

    Comment by Nick G -

  14. Interesting post. I do believe the largest reason why these companies failed is due to poor management but these shorting techniques used by hedge funds and other rich individuals is just not right.

    Comment by Cep Telefonu -

  15. Dear Mark:

    We all know that the “Efficent Market” is just a theory. I am not sure if you or I can prove or invalidate this “Efficient Market Theory”. Any theory can be proven to work, supposing all of those things acually can happen. But how can you know? That’s how come it’s a theory. At the end of the day it looks like the benefits of the UPTICK RULE are greater than the “short” disadvantages. I am agreeing with FRB Chairman Ben Bernanke on this one.

    “To the victor goes the spoils”

    Bernanke: Uptick rule might have been useful during crisis
    http://www.marketwatch.com/news/story/Bernanke-Uptick-rule-might-have/story.aspx?guid=%7B78BCD860%2DC835%2D4E71%2D821E%2D8FB62D7C7964%7D&dist=hpmp

    Efficient Market Theory
    http://www.investorwords.com/1672/Efficient_Market_Theory.html

    Bernanke Says There May Be Benefit to Uptick Rule
    http://www.bloomberg.com/apps/news?pid=20601087&sid=a5.dyHLeI8a0&refer=home

    Comment by George -

  16. Hello Mr. Cuban,

    You are a great salesman and have been successful in several business transactions. I agree with you on some of your viewpoints. However I do not believe you have as much credibility as these business people with regards to your opinion on the UPTICK RULE. Maybe you’ll do some more research and formulate a better hypothesis? The actions taken by the SEC to eliminate the UPTICK RULE is the equivalent of: “Eliminating all the traffic lights in Manhattan, which would create complete chaos.”

    THE TRUTH IS OUT THERE!

    Restore the Uptick Rule, Restore Confidence By CHARLES R. SCHWAB

    http://online.wsj.com/article/SB122878208553589809.html

    Muriel Siebert Has a Few Things to Share With Regulators

    http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210004122

    Ken Langone: I think the uptick rule should be brought back…

    http://www.cnbc.com/id/29301520

    “I think the uptick rule should be brought back immediately,” says Langone. “This notion that short sellers created the problem is nonsense.” In fact, Langone adds, “I think the uptick rule worked.” And in case you didn’t get his point the first few times, Langone reiterates, “Bring back the uptick rule, leave it that way and let it happen.”

    From MC> So what you are saying is that the stock market is not efficient. That buyers wont come in when they think assets are undervalued ? That its ok for there to be no “downtick rule “? That there shouldnt be an inhibitor to prevent stocks from just shooting skyward to bubble levels ? You cant have it both ways. Either the market is efficient and works, or the same “protections” should be on both sides

    Comment by George -

  17. Hello Mark,

    I am not sure if you were drunk or just exhaused when you wrote this commentary. Especially this part: “If they pushed the price down to new lows, it just created an opportunity for investors to buy the company at cheaper prices. So be it. Good companies aren’t defined by their stock prices, they are defined by their operations.” You’re thinking and rationalization for this statement and scenario is completely flawed. As for a study on the impact of the elimination rule, thoroughly read this study link below. You should ask yourself these questions: “Why didn’t the SEC conduct a post-study after eliminating the UPTICK RULE?” Don’t you think a post-study warranted, considering the fact that short-selling king & first SEC commissioner Joseph Kennedy implemented the UPTICK RULE in 1938, to prevent further BEAR RAIDS? The fact is that the SEC conducted their “UPTICK removal study” during a BULL MARKET. It does not take a genius to tell you that we will not realize the same results in a BEAR MARKET. I guess the SEC was too busy catching Madoff? The SEC is supposed to “protect investors”. As everyone has witnessed the SEC actions are reactive opposed to proactive. Shouldn’t the SEC be proactive to “protect investors” instead of taking actions after billions in investments were lost due to fraud?

    Here is a study for you to analyze:

    Technical Report on SEC Uptick Repeal Pilot, November 18, 2008

    http://www.necsi.edu/research/UptickTechReport.pdf

    From MC> So you are saying we dont have efficient markets ? That when a price falls below its “fair value” investors wont come in and buy stock or the company insiders wont buy stock ? And if there is an uptick rule, you obviously feel that there should be a “downtick”rule as well. As we have found out multiple times, bubbles are as dangerous if not more so than major declines in the market. But you may not be smart enough to understand that

    Comment by George -

  18. We have seen dramatic increases in volatility of oil prices, bonds, and just about every other asset class.

    Comment by Kalp Sagligi -

  19. Interesting post. I do believe the largest reason why these companies failed is due to poor management but these shorting techniques used by hedge funds and other rich individuals is just not right.

    Comment by En Yeni -

  20. Mark-You are dead wrong on this issue.

    This is a complex issue and unless you are a professional trader, you won’t understand.

    Comment by Jim -

  21. A drop in short volume is exactly what you’d expect as the market drops. The extreme trading ranges this fall were caused by short covering. Oil price were effected by speculators who did not produce nor receive the actual underlying commodity.
    If indeed the rule is benign then bring it back. At least it will serve as a hedge against the rare “heavy sarcasm” few that would knowingly spread false rumors about a stock. It buys the truth a few more moments to get its shoes on.

    Comment by Beltway Greg -

  22. The volume of shares shorted declined as the market fell? That is exactly what you would expect.
    Stocks can become over extended to the up or down side. Look at SKF.
    And I’ll bet fewer investors were short Washington Mutual at the bottom than at the top.
    At the bottom the damage had been done. During some of these days we had tremendous upswings
    based no doubt on short covering. The violent price movements are caused by money looking for a home.
    Of course, the instability was introduced by macro- mismanagement. We are now in a Kenysian Depression.
    Which is ironically a bad time to be short.

    Comment by Beltway Greg -

  23. Mark,
    You are completely correct. Shorting stock is not for the faint of heart and believe that it requires people who are very specialized. Maybe a lot of people who don’t know what the consequences are in the market should just stay out of it.
    Steve
    http://www.stevenwevodau.biz

    Comment by Steven Wevodau -

  24. This comment is almost 100% accurate. Short sellers are not driving the prices in today’s markets. 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?

    Proponents of the uptick rule essentially claim that “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.

    Comment by Eric Newman - TFS Capital, LLC -

  25. Flippant, unsophisticated argument that isn’t supported by studies or data. Everyone with half a brain admits that the uptick-rule prevented abuse and naked short-selling is a crime. On the day this fall the “uptick-rule” was reinstated for financial stocks they rose by 10%. When it was dropped they fell by 10%. Case closed. Bring it back. Sadly, I’ll bet I benefited from the lack of it in the case of POT.

    Beltway Greg

    Comment by Beltway Greg -

  26. I am not sure anyone can argue that these companies weren’t overlevered and run poorly, BUT you are mixing everything up. Running a business is one thing. An uptick rule is unrelated and a different thing. Naked short selling is another beast entirely. When a person is trying to run a business that depends on confidence, borrowing to finance your business and counterparty risk you have to acknowledge that short selling without an uptick rule AND controls on Naked short selling can drive a company out of business.

    While I imagined your situation, imagine mine:
    You run a company. You are leveraged the same as every other company. Nobody is REALLY sure what they have on their books, but everyone thinks they have laid off this risk in various ways. You trade with many of these other banks as well as other parties on a daily basis. A few wealthy groups get together and see who is at the bottom of the “brand name hierarchy” in finance and short the shares of this company mercilously. No need to wait for a stock to go up, no need to borrow the shares. Just short the hell out of it until counterparties refuse to trade with them and they cannot raise capital by issuing shares or debt. There is no confidence. Then…short some more. There is no cost and nobody is watching. The company gets bought for $2/share or maybe goes bankrupt. No need to buy the shares back in that case. No short squeeze.

    So your uptick argument is a rather neutered arguement.

    A better way to look at it is this: If the uptick rule is so inconsequential then WHY WAS IT REMOVED IN THE FIRST PLACE?

    Comment by bill ross -

  27. Now look at this,Harvey Pitt and Patrick Byrne’s Overstock.con continue along with SEC Chair Christopher ‘Naked Shorts’ Cox to lie to the American public about the term(where did it come from and when ?)’naked short selling”.Why did the unknown person who thought the term up not say ‘negative short selling’ for instance ?Was it because the term rteally really was dreamt up at the Las Vegas Cheetah Club that ‘Bob O’Brien’ listed as his address for NAANSS’,et.al.’s AND NFI
    websites ?
    As one interested in certain aspects of history and even science history I try to give background for historic events or discoveries.And yet Gary Weiss nor Patrick Byrne are willing to explain or document where this term came from and even less so James Dale Davidson Patrick Byrne Harvey Pitt or SEC Chair Chris ‘MoFo’ Cox who are the interbnet and securities industies greatest rumor of the term or unsubstantiated rumor.Why !?
    Mark you say and others confirm that hard to get shares for shorting are generally not free but that one has to pay to buy or rent them.Correct ? So is Chris Cox et.al. correct or not about ”naked shorting’ even occuring except in case of market makers who temporarly ‘naked’ or in my mind a better term ‘negative’ short ? And why has Chris Cox,if he has not located the market makers or the ‘Sith Lord’ that has wreaked such havoc upon Fannie Mae and Freddie Mac and done trillions of dollars in damage – at least prosecuted Patrick Byrne,James Dale Davidson,Gary Valinoti,David Patch,Richard Altomere,et.al. for making fraudulent claims about their illegal pump and dump activities erroneously being ‘naked shorts’?
    I had never heard of the term ‘naked shorting’ or ‘naked short selling’ until 2002 when James Dale Davidson,Brent Pierce,Grant Atkins et.al. as well as Endovasc and Genemax began spamming the term at first all over ragingbull.con.Chartles Schwab would not confirm or deny that they were ‘naked shorting’ Endovasc’ so I bought a ‘cert’ as Chris Cox’s neighbor in Alexandria,Virginia and the Virginia banker(fraudulently posing as a ‘biotech’ expert)David P Summers suggested.It was only later when I noted SEC filing showing how much dumping they had been doing thus they were lieing.
    Why has SEC NOT PROSECUTED ONE COMPANY FOR MAKING A FRAUDULENT NAKED SHORT CLAIM NOR INDENTIFIED AND PUNISHED ON MARKET MAKER FOR NOT COVERING SHORTS ?

    http://www.reuters.com/article/marketsNews/idUSN0926750020081209

    SEC urged to do more to curb naked short selling

    WASHINGTON, Dec 9 (Reuters) – U.S. securities regulators need to do more to crack down on abusive naked short selling — a type of trading blamed for contributing to the free-fall in financial stocks — former and current regulators said on Tuesday.

    Amid volatile market conditions, the Securities and Exchange Commission adopted a number of rules to rein in those who profit illegally from stock declines.

    Making bearish bets on stocks is a legitimate investment strategy but the SEC’s rules are designed to weed out abusive practices, such as investors’ failure to deliver stock by settlement date.

    Short sellers arrange to borrow shares they consider overvalued in hopes of repaying the loan for less and profiting from the difference. A naked short sale occurs when an investor sells stock that has not yet been borrowed, which can distort markets.

    Former SEC Chairman Harvey Pitt praised the SEC for taking constructive steps but said the agency has not done enough.

    “Naked shorting is a situation in which someone is gambling but they have no skin in the game. They are not required to make any effort to deliver the shares,” said Pitt, one of the panelists speaking at a “Coalition Against Market Manipulation” event in Washington…

    Jonathan Johnson, president of web retailer Overstock.com Inc (OSTK.O: Quote, Profile, Research, Stock Buzz), agreed and said the SEC should require investors to borrow the stock ahead of time to prevent manipulation between the trading day and delivery date. Overstock is known for its vigorous war against naked short selling and has brought lawsuits against major U.S. brokerages. (Reporting by Rachelle Younglai, editing by Matthew Lewis)

    © Thomson Reuters 2008 All rights reserved

    Comment by tryals -

  28. While it’s not hard to argue that some of the financial companies suffered from mismanagement, I think the absence of the uptick rule helped to create an environment where short sellers could create a sense of panic in the stocks of companies like Bear Sterns and Lehman. This panic caused conterparties and customers to pull accounts or stop doing business with these firms causing liquidity issues which not only affected the firms in question, but threatened the entire financial system with disruption.
    Fear always wins over greed and when people are worried about losing money they pull accounts first and ask questions later. Why give short sellers the power to wreck companies by creating panic. Look at charts of companies like Hartford Financial(HIG, SL Green Realty(SLG), or even a fertilizer company like Potash Corp.(POT) to see the volatility that shorting without an uptick rule can help create. Also, look at the giant last half hour moves in the markets in the last few months to see how powerful the effects of shorting without an uptick rule can be.
    Over time the stocks of poorly managed companies will suffer with or without the uptick rule, I think the average investor suffers at the hand of professional agressive short sellers with the absence of the uptick rule.

    Comment by duck38 -

  29. I strongly disagree with much of your argument but I’ll set that aside for the moment. I will mention that an analysis of the study conducted by the SEC has shown their conclusions were flawed and quite dangerous.

    I do want to address the following paragraph which I copied from your text:

    Put another way, if the uptick rule drove down prices, it should have been EASIER for the financial companies to raise money. Smart investors would have recognized the strength of their balance sheets and gladly jumped at the chance to invest money at prices depressed by those nasty short sellers capitalizing on the lack of an uptick rule.

    This paragraph is comical. You praise the reduced stock price as an entry point for “smart investors” while ignoring the interest of long term shareholders. Let’s say you own 100 shares of a company that has a total of 1000 shares outstanding. The “shorts” drive the price down and the company decides its an EASIER time to raise capital. They issue 1000 new shares at a reduced price. Your original investment of 100 shares (10% ownership position) is now reduced to 5%. How is that beneficial to you? Or the company?

    The stock price for a company DOES have a huge impact on how they conduct business. The recent “crash” in stock prices has stopped mergers, acquisitions and expansion. A stock price is “currency” to our public companies. At a reduced stock price our companies are handcuffed, unable to expand their businesses because of the dillution of issuing stock at “crash” prices.

    You present a compelling argument for “how shorts can benefit” in the current market environment. However, you make no point as to the benefits this provides the company or its existing shareholders. That underscores the need for an uptick rule, so that the playing field is level and efficient.

    One final point, I am not against short sellers. I’m against removing important safeguards that have served our markets for 70 years. Bottom line, your analysis is quite narrow in scope.

    Comment by stockguy -

  30. Pingback: Question: What will happen if the uptick rule is reinstated? - StockTickr Blog

  31. Great article. Most focus that I have seen you apply in some time. –ski

    Comment by consultski -

  32. Interesting post. I do believe the largest reason why these companies failed is due to poor management BUT these shorting techniques used by hedge funds and other rich individuals is just not right. You are putting stock in the market that would not normally be out there owned by someone else and they don’t even know it’s happening. Why do you think so many well managed companies are undervalued at the moment?

    I think the uptick rule is needed and naked shorting should be illegal. If funds want to short stock in my portfolio tell me about it and we can share some of the returns rightfully. Sure the uptick rule will not stop shorting but it will smooth out the curve and enable investors with less resources to react to the “rip down” effect that seems to be happening so often in this crazy market.

    Comment by nickgs -

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