Patchie,
Dont assume that everyone on this board is a hack daytrader....some of us read it for amusement and post stupid comments occasionally just to solicit a response.
Its clear that everyone who understands how the current market microstructure works knows this is an irrelevant idea. Even the SEC committee understands this, I was on a call with the team CSFB sent to monitor the hearing yesterday afternoon. They made it pretty clear that the committee is only considering reimplementing the rule due to pressure from the Senators and Representatives in Washington that have ZERO understand of how the current market structure works. They just want to appease the retail public who have been convinced by idiots like Jim Cramer that the reason there portfolios are down 35% is because of "bear raids" and not shitty fundamentals.
The buy side fund managers you quote are COMPLETELY IRRELEVANT to market liquidity. These guys make their money from charging fees on funds invested with them...not from actually trading profitably. Of course they want the rule in place if it increases the probability that they will get more AUM and thus make more money.
Here is why the short sale rule will impact liquidity:
The High Frequency prop shops that make up approx 50% of the equity market daily volume (I work for one of them) estimate that their available opportunities will drop by 15-20% if an UPTICK or UPBID rule is put in place. How do I know this? Because, firms like mine are constantly monitoring and lobbying the situation. We can all easily estimate the impact on our volumes buy running the new rules thru a backtest. It is much less likely that a high frequency model will want to hit a bid on an uptick than a downtick. Its pretty simple to understand if you have ANY understanding of short term auto correlations or microstructure arbitrage.
Other long/short stat arb funds will not be able to effectively enter quant model driven pairs trades if the rule is in place. They estimate their volumes will drop by the same 15-20%. When you combine the loss in trading volumes across the quant shops (WE KNOW THIS BECAUSE WE CAN MODEL THE RULE SET ON CURRENT DATA) you are looking at a loss of 12-15% of the total market volume from an UPTICK or UPBID rule.
This means that when an institutional buy side firm puts a 20,000 share bid out that would normally be hit by a quant shop or group of quant shops arbing microstructure, now that order will take much longer to get filled and will have a greater risk of impacting the market higher, thus increasing their execution slippage and costing them return (NOT THAT THE BUY SIDE FIRMS REALLY CARE ABOUT MAKING MONEY).
It is also going to cost the ECNs and exchanges hundreds of millions of dollars to implement and test the new rule set. BATS doesn't even have legacy code for an upbid or uptick rule. Barney Frank and the other morons think you can just make the change and the next day the guys calling out to each other on the floor of the NYSE will just "know the rule and abide by it". The markets don't function that way anymore. The majority of the trades are executed electronically now. It is a VERY COSTLY policy in terms of technological implementation and market liquidity.
Also, in this microsecond world, how can INET, BATS or Arca be expected to know the actual tick state across all markets at any given microsecond? The network latency between matching engines is at least 1ms. Of course most people dont trade anywhere near the microsecond world, but 50% of the market volume lives and dies by it.
In reality bear raids dont really exisit. The velocity to "fair value" is just much faster than most of the old school guys are used to. You dont see guys jamming CDS's in XOM or any other financially healthy company and raiding the stock do you??? The company and other funds would appreciate the buying opportunity and squeeze them to oblivion.
If you are running a highly levered, low margin business with debt covenants tied to your stock price then you are just asking for trouble. If companies were run more responsibly we wouldn't have to create artificial mechanisms to protect them.
Why is it that a down tick rule should not also be implemented? Short squeezes create artificial bubbles that are equally detrimental to the capital markets.
I love how people want an asymmetrically "fair" rule.
Quote from patchie:
bevo, I am more amused by the morons who somehow think bringing it back will kill liquidity and move money out of the US capital system. I think I have heard that with every short sale reform that has come through since 2005. Never once happened but it was an amusing threat.
Since angrycat can't answer the question, why don't you. what is all the fear circulating in bringing back the rule. What got your panties in a wad over the SEC opening up for public comment? Didn't see you whining like this in 2006/2007 when they removed it.
