Quote from osx:
I know there is a popular belief out there that eliminating the uptick rule will create a symmetric marketplace. That is *not* true!
Imagine:
Something horrible happens to a stock or even to the whole market and everyone long starts selling. Everyone who is not long starts selling (short) too. What are they selling?
Supposedly they are selling borrowed stock, but that is *not* true! They are selling "located" stock. Location means that if there are 10,000 shares only to be borrowed anywhere in the world then an infinite number of shares can be shorted intraday-- but only 10,000 shares at a time. So, all but 10,000 shares worth of those short sales are not sales of borrowed stock but rather sales of "vapor stock". The "vapor stock" does not cause any accounting problems if all of those short sales are covered the same day, but the stock price sure does take a whack! (Those short positions that are carried are obviously forced to cover if the stock cannot actually be borrowed, essentially making them day trades as well.)
As long as intraday "vapor stock" is possible then eliminating the uptick rule is a bad idea.
The solution would be to create a situation in which two things hold true, making elimination of the uptick rule feasible:
a) short positions can only be created when an actual loan of stock has been "locked in" -- eliminate "location"
b) stock that is loaned out must be returned before ownership can be transferred
Now when something horrible happens to a stock, the long sellers start selling. However, they cannot sell until they have recalled any loaned out stock per (b) above, forcing those short sellers to cover. Presumably the new owner of the stock will also sell long if the market continues to plummet, again recalling the stock if it has been loaned out in the interim, forcing yet another short seller to cover. Finally, no short seller would be able to create a position unless there is actual free stock that is not changing ownership.
Practically speaking, and without an uptick rule, short sellers as a group would not be able to hold a combined position larger than the combined position of stock held by people willing to wait it out with a long position. THAT is a symmetric marketplace.
Of course this requires something that does not currently exist: a real-time stock loan marketplace. Incidentally, individual investors would loan stock under this model-- not large clearing firms (etc). An individual would then earn the return on the loan and the individual would decide when to recall the stock (presumably to sell it). Short sellers would lock in a loan before selling short and be forced to cover if the stock holder decides to recall. One could envision contracts where higher interest rates are paid to borrow stock in exchange for a guarantee that it will not be recalled for a certain period of time.
