SEC may Reinstate Uptick Rule

[MKTrader]

Many companies, particularly small and mid-cap ones, have been shorted below fair value and out of existence. There are way too many failures-to-deliver to explain--naked short selling is very real. In June, for example, there were more than 2 billion phantom shares floating around before the SEC enacted their emergency order. Bloomberg, among others, have exposed it, and none of the accused have ever come back with a cogent response.

As for the uptick rule, it will most have a psychological affect (hopefully). It's better than nothing, but the SEC really just needs to enforce its current rules and do a serious investigation of the Depository Trust and Clearing Corporation (DTCC).

Quote from bevo96:

You sir are a piker. Why would you advocate any constraints to your trading? The fact that you are a long homer is not a sufficient rationale for the up tick rule, its less efficient and it doesn't work. When I used to trade manually I could lean on bids with large size offered and you could make the stock drop without even having to transact. Everyone assumed it was an institutional short sale and bailed out of the way.

Anyways,this reinstatement is not as noble as you like to think. It is being pushed by the NYSE (Duncan Niederauer) for the benefit of the specialist firms and designated MM's (who will be exempted from the rule). The NASDAQ is hoping for a different solution.

On another note, suggesting that one can actually push a company below its TRUE fair value for any length of time is nonsense. Smart money is agnostic to the direction (long vs. short) of its position, it only looks for an edge against its perception of fair value. To suggest otherwise is uninformed. You dont see anyone "bear raiding" Exxon CDS's and "machine gunning" the bid do you? The company and others would come in and hammer the shorts if they moved the company to far below fair value.

I know basic market microstructure is lost on you, but it was worth a shot.

 

[sprstpd]

That's fine. Enforce the naked shorting rules that already exist. Just don't dick with making the playing field uneven when you cannot even prove that the uptick rule is the culprit. This whole campaign is a bunch of b.s.

 

[spyderman]

Quote from moonmist:

Uptick rule did not prevent the crash in 1987 ( Black Monday ) either.

The presence of the rule IN FACT helped precipitate the crash.

 

[Rod Shaft]

Quote from sprstpd:

That's fine. Enforce the naked shorting rules that already exist. Just don't dick with making the playing field uneven when you cannot even prove that the uptick rule is the culprit. This whole campaign is a bunch of b.s.

Agreed. Financial news media and politicians are just looking for a bogeyman. This will do nothing to help the markets. This has already been studied extensively. It won't even decrease the velocity of down moves. All it will do is decrease liquidity, which decreases value.

 

[Angrycat]

Quote from bevo96:

You sir are a piker. Why would you advocate any constraints to your trading? The fact that you are a long homer is not a sufficient rationale for the up tick rule, its less efficient and it doesn't work. When I used to trade manually I could lean on bids with large size offered and you could make the stock drop without even having to transact. Everyone assumed it was an institutional short sale and bailed out of the way.

Anyways,this reinstatement is not as noble as you like to think. It is being pushed by the NYSE (Duncan Niederauer) for the benefit of the specialist firms and designated MM's (who will be exempted from the rule). The NASDAQ is hoping for a different solution.

On another note, suggesting that one can actually push a company below its TRUE fair value for any length of time is nonsense. Smart money is agnostic to the direction (long vs. short) of its position, it only looks for an edge against its perception of fair value. To suggest otherwise is uninformed. You dont see anyone "bear raiding" Exxon CDS's and "machine gunning" the bid do you? The company and others would come in and hammer the shorts if they moved the company to far below fair value.

I know basic market microstructure is lost on you, but it was worth a shot.

BINGO! Well done.

 

[Angrycat]

Naked shorts are nothing more than futures on the stock. It is theoretically possible to manipulate the stock with endless naked short selling, but as the price falls below fair value, the bids pick up, so all the excess shares created are absorbed by an increasing demand as the price falls. That kind of manipulation requires almost limitless capital and an endless appetite for risk.

Yet again, MM's and Specialists are exempt from the no naked short selling rule and are advantaged over any retail guy who is trying to hedge his position by shorting a correlated stock because retail man has to locate. This means retail man must accept more risk in his portfolio and is only able to take advantage of one side of the market - when the price is below fair value.

The uptick rule won't restore "market psychology" either. Institutional traders understand that it doesn't have an impact on prices - except for medium to low liquidity stocks which have wider spreads and more volatile price moves with distortions like the uptick rule. Retail guys too ignorant to understand that they are simply paying higher transactions costs and getting abused by the uptick rule are the only ones who may nurture the dangerous fantasy that the uptick rule will stabilize the markets for them. Institutional volume dwarfs retail, so there will be no effect on sentiment.

 

[gnome]

Quote from spyderman:

The presence of the rule IN FACT helped precipitate the crash.

Did you see that argued somewhere? I hadn't thought about it specificially before, but I think you're RIGHT!!

 

[coolice]

The uptick rule should have never been applied. Naked shortselling policy must be enforced as much as possible. The uptick rule provided an unfair unnatural advantage for the market to move higher for many decades after 1930. By eliminating the uptick rule the market has to find the new equilibrium of short sand long positions even if it means a much lower level for the indexes and equities. Finally electronic trading alongside with the elimination of the uptick rule will make the market more efficient and fair than ever it has been before.

 

[ang_99]

Honestly, I don't see how they can do this logistically.

Penny spreads, 500 trades a second.

Its a stupid, pointless idea.

 

[bevo96]

MK,

I have to respectfully disagree here. I think the perception of fair value is different from actual fair value in these cases. If you have a company that is actually making a REAL NET profit then at some price money is willing to come in and buy that series of cash flows, taking the company private if need be. If a company is highly levered in a low margin business and the stock price triggers debt covenants, then I can see where there is a problem. This is the risk you take by employing leverage in a low margin space.

I am not saying that naked short selling, in excess of the outstanding should be tolerated at all. The SEC should focus their energies on enforcing borrows and deliveries instead of this Cramer driven "witch hunt" of the up-tick rule. We all know the real players will either be exempt or use other methods to circumvent the rule anyways. Why artifically influence the market mechanism to appease people who think short selling downticks is the reason their stocks are down, not the change in the present value of future cash flows.

Quote from MKTrader:

Many companies, particularly small and mid-cap ones, have been shorted below fair value and out of existence. There are way too many failures-to-deliver to explain--naked short selling is very real. In June, for example, there were more than 2 billion phantom shares floating around before the SEC enacted their emergency order. Bloomberg, among others, have exposed it, and none of the accused have ever come back with a cogent response.

As for the uptick rule, it will most have a psychological affect (hopefully). It's better than nothing, but the SEC really just needs to enforce its current rules and do a serious investigation of the Depository Trust and Clearing Corporation (DTCC).