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.

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