Cramer calls for the reinstatement of the uptick rule

BTW, it is important to understand what the entire pictures is.

Imagine that the market was literally a coin flip. This is known in statistics as a"fair" game. A fair game means that the expected value is zero, since repeated trials of a coin flip has the mean of zero. Therefore, the expected gain from anyone playing this game, whether investor or trader is zero. What is worse, if played for a long time, since you are taking risk, the odds of risk or ruin approaches 100%.

So no one in their right mind plays this game except for entertainment.

My contention is the following. If removing the ut rule turns the market completely into a fair game, investors eventually will not want to play this game. That means traders die as soon as that happens, since liquidity dries up.

It is important that the stock market have some asymmetric risk profile to the upside, however small. If you do a monthly regression of the SP500 from around 1950 to about 2007, the regression equation is

ln[P(t) - P(t-1)] = .0059 + 3.0.

That means that the SP on average rises about that percentage, .0059, on a monthly basis. Annualized this comes to ~ 7.1%. That is the "upward" bias that we all hear about. Note that number is with the ut rule in place for most of the entire timespan of the regression.

If short selling turns that value into zero, that is not a good thing and some rule will be instituted.

I offer this analysis only as a theoretical argument for the other side that are suggesting an ut rule change. While I do not even come close to believing that short selling will adversely affect that upward drift for value investors that "buy and hold", it is worth understanding that if investors don't make money, the game dies, for all of us.

nitro
 
Uptick rule more foot.

For those companies that are well managed and pay a dividend along with growth in dividend payout the trend should be a positive increase in the underlying stock price to support the relative dividend yield to i-rates.
 
The uptick rule will never, EVER return. Take it from someone who knows (me). This is b/c the effects of this rule were studied for years by comparing stocks that had the rule vs. stocks that didn't have the rule.

The results were that the stocks w/o the uptick rule rose by a larger % than the stocks that had the upitck rule. And this makes perfect economic sense as since shorting is only a small % of overall trading, the stocks that were easier to short (ie w/o the uptick rule) had more shorts and therefore more future buyers (b/c every short has to cover).

Cramer is just whistling in the graveyard. He knows it too.
 
Bob Rowshan


Registered: Aug 2007
Posts: 413


New Post 03-23-08 07:07 PM

The uptick rule will never, EVER return. This is b/c the effects of this rule were studied for years by comparing stocks that had the rule vs. stocks that didn't have the rule.

The results were that the stocks w/o the uptick rule rose by a larger % than the stocks that had the upitck rule. And this makes perfect economic sense as since shorting is only a small % of overall trading, the stocks that were easier to short (ie w/o the uptick rule) had more shorts and therefore more future buyers (b/c every short has to cover).

Cramer is just whistling in the graveyard. He knows it too.
More...

I agree with the study. In fact, shorting stocks will make them cheaper to the investors by the traders act of bringing them back to "fair value".

The point is that it is not so simple, and what I truly object to is Cramer's dismissal of the academic studies, when in fact it is the one thing that should be admissible in court if you only had one choice.

It is an asinine thing to say. Lots of academics have made fortunes trading for themselves or their employers, e.g., Emanuel Derman. And the list is huge. I forgive most of the morons on ET that continually say that, but Cramer is an educated man.

nitro
 
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