I trade a Long/Short strategy intraday with the Long/Short Leverage ETFs such as UYG/SKF, URE/SRS. Does anyone know how a reinstatment of the uptick rule might impact the Leveraged Short ETFs???
How might Uptick reinstatement impact Short ETFs???
- Thread starter NERVESASTEEL
- Start date
Below is from an article on Seeking Alpha 6/15/07. We'll see what happens this time ...
http://seekingalpha.com/article/38439-sec-votes-down-short-selling-uptick-rule-unanimously
SEC Votes Down Short Selling 'Uptick Rule' Unanimously
The Securities and Exchange Commission [SEC] has eliminated the so-called âuptick rule,â which prevents short-sellers from selling stock in a down market. SEC commissioners voted 5-0 to eliminate the rule, which was established in 1938 as a way to prevent disorderly selling during market downturns. Under the rule, a short sale could only be executed on an âuptick,â i.e., when a share was trading up. The idea was to prevent stocks in free fall from being forced ever lower by short-sellers.
The SEC has considered eliminating the rule for years, and ran tests recently to see how individual stocks would trade if the rule was removed. It found that there was no substantial difference in performance so itâs eliminating the restriction.
The development is of interest to the ETF community because many ETFs were exempt from this rule to begin with. That exemption was one of the selling points for ETFs, and often highlighted as one of the reasons they were appealing to traders and hedge funds. In reality, those traders will likely continue to use ETFs for short purposes, as the funds have other advantages over individual stocks as well.
http://seekingalpha.com/article/38439-sec-votes-down-short-selling-uptick-rule-unanimously
SEC Votes Down Short Selling 'Uptick Rule' Unanimously
The Securities and Exchange Commission [SEC] has eliminated the so-called âuptick rule,â which prevents short-sellers from selling stock in a down market. SEC commissioners voted 5-0 to eliminate the rule, which was established in 1938 as a way to prevent disorderly selling during market downturns. Under the rule, a short sale could only be executed on an âuptick,â i.e., when a share was trading up. The idea was to prevent stocks in free fall from being forced ever lower by short-sellers.
The SEC has considered eliminating the rule for years, and ran tests recently to see how individual stocks would trade if the rule was removed. It found that there was no substantial difference in performance so itâs eliminating the restriction.
The development is of interest to the ETF community because many ETFs were exempt from this rule to begin with. That exemption was one of the selling points for ETFs, and often highlighted as one of the reasons they were appealing to traders and hedge funds. In reality, those traders will likely continue to use ETFs for short purposes, as the funds have other advantages over individual stocks as well.
If you are only buying the funds, even if they are bear funds, the uptick rule does not apply. If you are shorting an index fund, where the index is broadbased (i.e. 10 or more companies in the index), then the rule also does not apply.Quote from NERVESASTEEL:
I trade a Long/Short strategy intraday with the Long/Short Leverage ETFs such as UYG/SKF, URE/SRS. Does anyone know how a reinstatment of the uptick rule might impact the Leveraged Short ETFs???
Then why is Cramer ranting that this rule change is the end of the SKF and all the other ProShares UltraShort ETFs??? I'd hoped that because these instruments use financial derivatives, such as options, swaps, and index futures they would be unaffected.
Below is the response from ProShares. As I thought, the products like the SKF may NOT be effected due to their use of derivatives instead of equities for shorting.
EMAIL RESPONSE FROM PROSHARES:
Thank you for your email regarding ProShares.
Any new uptick rule would first have to be approved by the SEC, then proposed for public comment, then finalized. Accordingly, until any rule is finalized, the impact on the management of our funds canât be known.
It is important to note that we may get our short exposure, not from shorting stocks, but from financial instruments, including swap agreements. When a swap counterparty has entered into a swap agreement with us, the swap counterparty decides whether or not it needs to hedge its exposureâand engaging in short selling of a stock is only one of several ways they may accomplish this.
If you would like to further discuss our products, please call us at #1-866-776-5125 and one of our Registered Representatives will be happy to assist you.
Sincerely,
Maureen Goff
ProShares®
Shareholder Services
EMAIL RESPONSE FROM PROSHARES:
Thank you for your email regarding ProShares.
Any new uptick rule would first have to be approved by the SEC, then proposed for public comment, then finalized. Accordingly, until any rule is finalized, the impact on the management of our funds canât be known.
It is important to note that we may get our short exposure, not from shorting stocks, but from financial instruments, including swap agreements. When a swap counterparty has entered into a swap agreement with us, the swap counterparty decides whether or not it needs to hedge its exposureâand engaging in short selling of a stock is only one of several ways they may accomplish this.
If you would like to further discuss our products, please call us at #1-866-776-5125 and one of our Registered Representatives will be happy to assist you.
Sincerely,
Maureen Goff
ProShares®
Shareholder Services
I think even if the uptick rule is held for SKF, it would be extremely difficult to enforce. Especially SKF. The price jumps back and forth and never goes in an "orderly" fashion. Like this:
139.45
139.50
139.41
139.49
139.32
139.42
139.25
139.30
The trend is down, but every or every other price print the price can be above the last print. So how would they enforce the uptick rule on this one?
139.45
139.50
139.41
139.49
139.32
139.42
139.25
139.30
The trend is down, but every or every other price print the price can be above the last print. So how would they enforce the uptick rule on this one?
Quote from NERVESASTEEL:
I trade a Long/Short strategy intraday with the Long/Short Leverage ETFs such as UYG/SKF, URE/SRS. Does anyone know how a reinstatment of the uptick rule might impact the Leveraged Short ETFs???
An uptick rule is likely to impact every stock and derivative-of-stocks that you might use to go short.
Because shorting a stock will become more difficult, I think the clear result will be less profitablity on the downside, especially when trading short term.
While you can use futures, options, short ETFs....whatever...they are still all based on the movement of underlying, which is going to be dampened.
So traders like me, who have enjoyed the nice movements on the short side, are likely to get screwed.
I understand, but the important line from the ProShares responses is, "When a swap counterparty has entered into a swap agreement with us, the swap counterparty decides whether or not it needs to hedge its exposureâand engaging in short selling of a stock is only one of several ways they may accomplish this."
With each swap counterparty having many tools they might employ to either get around the rule or simulate a short with Puts etc., I think thereâs reason to be optimistic that these products will still perform ... although how well still remains to be seen.
You may be able to easily short an ETF...or go long and UltraShort ETF...but the issue is, what happens after you enter? As the ETFs are based on the underlying indexes, and the indexes are based on the underlying equity components, if short volatility is dampened with uptick rules then your ETF will be equally impacted. So you will feel it, especially if trading short term.