Bring Back the Uptick Rule? from Sam Humbert

July 10, 2008 |

I personally believe that the Uptick Rule should be reinstated or large money pools will be created to drive stock prices down on selected companies.

Alex Forshaw replies:

Why do you find it ok that speculators drive prices up, but not down?

Sam Humbert counters:

I will show you an article, the subject of which was how CNBC was unknowingly complicit in the fall of Bear Stearns. You might find it informative.

Jason Goepfert says:

So one of the largest investment banks and securities traders in the nation was taken down because traders didn't have to wait for an uptick to sell short? It didn't have anything to do with the fact that they had bitten off way more than they could chew and should have been deleted as on ongoing concern? That seems a little fanciful to me.

There were hundreds of stocks that were taken off the uptick rule for a couple of years prior to July 2007, in a trial balloon run by the regs. They studied the trading patterns on those stocks extensively compared to those that were still subject to the rule, and found little difference in trading patterns. The rule was not lifted by whim.

With penny pricing, it doesn't take much to get an uptick in a stock. If a large fund(s) really wanted to take down a company, the uptick rule makes no difference. They would just buy a bunch of shares, get the stock on an uptick, then short the hell out of it again. Or buy puts, or any of the other derivatives they have available.

The stock would go to zero whether the rule was in place or not. See Enron et al.

Blaming the uptick rule is lazy.

Sam Humbert comes back again:

Marty Whitman of 3rd Ave Value Fund has issued a statement in effect also blaming the elimination of the Uptick Rule as one of the factors that the bear raid on Bear Stearns was successful.

I agree with Marty Whitman.

As to driving prices up versus driving them down, there is a difference. Quickly falling stock prices can cause a panic which could cause money withdrawals from some stocks such as brokerage and banking firms, which in turn can cause bankruptcies and job losses.

Dylan Distasio recalls:

The fact of the matter is that uptick rule was easily avoided prior to its elimination through the use of married puts aka "bullets." When I traded intraday (before the SEC essentially eliminated this use of them in 2003), we used to use them on a daily basis.

Gibbons Burke also disagrees with the uptick rule:

If all the artificial barriers [such as the uptick rule] are removed the knowledge that stocks are more susceptible to bear raids will temper the irrational exuberance that lofts stock prices far beyond their real value, which causes them to correct just as dramatically.

Wall Street is institutionally bullish, and it extends even to the press covering the street, so support for the uptick rule is understandable, if not reasonable and rational. For example, I know from personal experience that Dow Jones requires all employees to sign agreements when they're hired on to never ever sell short, or be effectively short with options. No one on the entire staff of the Wall Street Journal has any interest in or ability to benefit from stocks going down. It renders the Journal a tout.

Mr. Albert has the day trader's perspective:

1) the nasdaq 100 had no uptick rule for quite a while before the general repeal

2) S stocks on the Nasdaq, certainly the most subject to bear raids as they have much shakier financials and tend to be story stocks, never had an uptick rule since I began trading in 1996

3) none of the SHO pilot stocks was more volatile than the comparable non Pilot stocks (in need to find the acedemic reference but it is there). IMO the specialist system (not the uptick rule) was a stabilizing force in the markets so now we have more vol

James Lackey has seen it all before:

All you get from more rule making, margins, uptick or program rules etc is bigger gaps at opens and closes. Restrict intra day moves and the energy must be transferred somewhere else.

Steve Leslie updates:

Yesterday the SEC announced that they were selectively reinstating the uptick rule for Fannie Mae and Freddie Mac. Why just those two stocks? I have no idea what this accomplishes other than a symbolic gesture. Could you imagine commodities having a limit up or limit down rule for just corn or beans? Couldn't they just raise the margin requirements for borrowing stocks ? As usual governments are late to the party. Back in 1987 the Government began looking at computerized trading and the use of collars. Of course this was after Oct 19th debacle. Look at Hurricane Katrina and see the government in action during a crisis situation. And yet there are still those who try to tell the public that the government is the solution to its problems. The bankrupt LA Times had a front page article arguing for government intervention in the financial markets, especially subprime. Politicians' cliches include "we can't drill ourselves out of the oil crisis and it is the speculator who is the cause of the problem." They are the ones who need to be ratted out and summarily chastised and shot. And then they use trite phrases like "We need to send a message to these oil companies and the speculator that they are going to be reined in." And then they hold a hearing in front of cameras, ask mindless, rehearsed questions formulated by their aides and attempt to project themselves as informed. Yet they expose themselves as what they truly are. Robots, empty suits whose prime objective in life is to get re-elected and retain their cushy phoney baloney jobs. And Nero fiddled while Rome burned. I think I will go outside and get a breath of fresh air.

Comments

5 Comments so far

Joe Davis on July 10, 2008 11:35 pm
While I am NOT inclined to dismiss the uptick rule as a factor, I think there is another culprit here that is not as well discussed.

Options. Yep, plain vanilla options. Specifically PUT options. PUTS , many of which are FAR out of the money are being bought in large numbers before and while these stocks are tanking. This forces the options market makers to HEDGE the PUTS they just sold by shorting. And as the stocks get pounded lower, they have to short more to stay delta neutral.

The same clowns that are spreading suspect rumors are well aware of this dynamic. So the uptick rule would not be a hedge against this.

That said, a market maker could more easily control the descent of a stock when the rule was in effect. I believe this was particularly true on the NYSE.
Rob on July 11, 2008 8:18 am
The first problem is the fact that you watch CNBC. The second problem is that you actually believe the uptick rule has something to do with the collapse of Bear Stears? Is the uptick rule going to cause the nationalization of the GSE’s and the collapse of Lehman too? Jeez.
Cody Tafel on July 11, 2008 11:32 am
I’m going to have to agree 100% with Jason Goepfert on this one…blaming the uptick rule is lazy. If a large operator wants to make a stock go down all they have to do is sit on the offer with size, and as has been said the derivatives market is probably the much bigger dynamic than an uptick rule.

I also find it very interesting that there was no uproar when the uptick rule was actually removed. Only AFTER a 20% decline has put us in bear market territory have people really started to voice their opinion against removal of the rule.

The market is constantly changing. Just look at what else has happened this year and it’s not hard to see the government is doing their best to change the game. They would be far better off doing less and letting the market be a market IMO.
Joe Hughes on July 12, 2008 12:08 pm
When I sat on desks, or on the floor as a trader, no one paid attention to the uptick rule, it was in place for "Retail" only, and enforced only if a broker was dumb enough to mark it as a short sale, and they only did if they were shorting against the box at years end for tax reasons. If an institutional account came in to buy XYZ from me, and I was flat or short, I would have to sell them something, downtick, uptick or sideways… didn't matter, was never a concern. Same for options market makers, they use a synthetic to sell stock or however, many just don't care because it about staying delta neutral, or it is for most anyway. Yes there is no doubt some cooperation out there, but I'm sure it is the exception rather than the rule. Many stocks that are junk get sold down because they are just that – junk. Same as they were when the got got up to ridiculous numbers, but no one said anything then. World Com, ZBEST, I can go on and on. The Bear maybe one of those cases where folks are acting in concert. But also remember, the BEAR was on the cutting edge of MBS packaging and risky involvement in that industry way back to it's inception when they employed all those Southwestern Bond Daddies, (Names omitted to protect the guilty). Not that I am one to revel in it's fall, but there are many old timers out there secretly smiling at the BEAR's demise and if you asked them to explain it they would most likely utilize the word Karma.
David Whitesel on July 13, 2008 7:36 am
To: Nihontochicken who wrote (10682) 7/12/2008 10:47:17 AM
From: smh 6 Recommendations Read Replies (1) of 10706

Slider,

Please respond to this disturbing rant.

Bud Burrell
July 12, 2008

Special interview:
The Greatest Crime in History (edit; aka… Too Corrupt to Remedy)

http://www.financialsense.com/fsn/main.html

I believe there are many on this thread who would like to hear your big picture opinion.

SMH

P.S… I lurk here to be enlightened, not to be told what to think.

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