George S. May Business Blog

Reinstate the uptick rule NOW!

Feb. 25 (Bloomberg) – “Federal Reserve Chairman Ben S. Bernanke (pictured left) said there may be a benefit in resurrecting a rule that restricts short-selling stocks when share prices are falling amid the current bear market.

“In the kind of environment we have seen more recently” the so-called uptick rule “might have had some benefit,” Bernanke said in testimony before the House Financial Services Committee today. The rule, scrapped by the U.S. Securities and Exchange Commission in 2007, barred investors from betting against a stock until it sells at a higher price than the preceding trade.

Bernanke’s comments may give credence to lawmakers such as U.S. Representative Gary Ackerman, a New York Democrat, who blamed the rule’s elimination for triggering attacks on financial stocks. The Standard & Poor’s index has tumbled 50 percent since the SEC dropped the uptick rule 16 months ago. New SEC Chairman Mary Schapiro said in January she may resurrect the provision.

The SEC approved the rule in 1938 to prevent bear raids on companies. The agency eliminated the regulation after studying its effect on share prices and determining it was no longer relevant in markets dominated by fast-paced electronic trading.”

I have to absolutely agree that reinstating the uptick rule is essential. But, don’t trust me, trust the experts:

“On August 27, 2007, the New York Times published an article on Muriel Siebert, former state banking superintendent of New York, “Wall Street veteran and financial sage”, and, in 1967, the first woman to become a member of the New York Stock Exchange. In this article she expressed severe concerns about market volatility:

“We’ve never seen volatility like this. We’re watching history being made.” Siebert pointed to the uptick rule, saying, “The S.E.C. took away the short-sale rule and when the markets were falling, institutional investors just pounded stocks because they didn’t need an uptick.” Volatility increased dramatically in bonds, commodities and virtually all asset classes, and the uptick rule only applies to equities, so it’s removal was arguably not related to the fall in the markets.

On the March 20, 2008 episode of Mad Money, Jim Cramer launched his campaign to reinstate the uptick rule. Citing the wild swings of the market since its elimination, Cramer said that the SEC eliminated the rule during a bull market, when liquidity was not a problem. Cramer believes that, without the uptick rule in place, short sellers are devaluing perfectly solid stocks. On the Friday 22, 2008 episode, Jim Cramer further underscored the true scale of the absence of the uptick rule, exclaiming that Obama must “reinstate [the uptick rule], a rule put in place to prevent a repeat of the great crash.”

On July 3, 2008 Wachtell, Lipton, Rosen & Katz, an adviser on mergers and acquisitions, said short-selling was at record levels and asked the SEC to take urgent action and reinstate the 70-year-old uptick rule. On November 20, 2008, they renewed their call stating “Decisive action cannot await … a new S.E.C. Chairman. … There is no tomorrow. The failure to reinstate the Uptick Rule is not acceptable.”

On July 16, 2008, Congressman Gary Ackerman, Congresswoman Carolyn Maloney and Congressman Mike Capuano introduced H.R. 6517, “A bill to require the Securities and Exchange Commission to reinstate the uptick rule on short sales of securities.”

On September 18, 2008, Republican presidential candidate and Senator John McCain said that the SEC allowed short-selling to turn “our markets into a casino.” Sen. McCain criticized the SEC and its Chairman for eliminating the uptick rule.

On October 6, 2008, Erik Sirri, director of the Securities and Exchange Commission’s Division of Trading and Markets, said that the SEC is considering bringing back the uptick rule, stating, “It’s something we have talked about and it may be something that we in fact do.”

On October 17, 2008, the New York Stock Exchange reported a survey with 85% of its members being in favor of reinstating the uptick rule with the dominant reason to “help instill market confidence”.

On November 18, 2008, the Wall Street Journal published an Op Ed by Robert Pozen and Yaneer Bar-Yam describing an analysis of the difference between regulated and unregulated stocks during the SEC pilot program. By using an analysis they claimed to be more comprehensive than the SEC’s original study, they showed that unregulated stocks have lower returns, with a difference that is both statistically and economically significant. They also reported that twice as many stocks had greater than 40% drops in corresponding 12 month periods before and after the repeal.” (source)

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