Uptick Rule petition

[scandal 951]

One of the analysts at the firm where I work has spent some time studying the short-side ETFs. Because they track an index and need to flatten at end of day, there's a flurry of predictable trading when they come into the market in the last minutes before the close on days with high volatility. They are trading in big enough volumes that this is creating noticeable price deformations, and the obvious reactions to them as traders anticipate them and trade ahead.

Regardless of whether uptick rule is good or bad for short selling in general, the short ETFs are definitely due for some regulation.

I for one do think that uptick should be reinstated.

http://www.thestreet.com/petition

We the undersigned believe in not just free markets, but fair markets. While the practice of short-selling equities can contribute to the market in terms of liquidity and price discovery, if left unchecked the practice can impede capital formation. We believe that a relatively simple check that was in place for nearly seventy years, the "Uptick Rule", helped serve the markets well in balancing various participants' interests. We therefore urge the SEC to reinstate such a price test rule, and specifically would urge a plus tick rule over other alternatives such as a "best bid" or "circuit breaker" test.

When the Uptick Rule was initially implemented in the late 1930's, there was an implicit acknowledgement that companies were not commodities. There was recognition that the capital markets served the broader purpose of capital formation; that companies create products, provide services, employ citizens and pay taxes and thus there was an interest to promote market integrity and protect interstate commerce.

In 1963, the SEC's Special Study reiterated the Uptick Rule as being a simple, but effective, mechanism for balancing the various competing interests: allowing for relatively unrestricted short sales in advancing markets, eliminating short selling as a tool for driving the market down by preventing short sales at successively lower prices, and preventing short sellers from accelerating a declining market by exhausting all available liquidity thus leaving long sellers to sell at successively lower prices.

Indeed in 2007, with their report on the Regulation SHO Pilot Study, the SEC's Office of Economic Analysis made the express point that in the context of a "Tick Test", short sellers were liquidity providers, but without such a price test they could readily become liquidity takers. An Uptick Rule validates short sellers as liquidity providers, thus should help remove stigma with the practice.

When considering the objectives of protecting investors and capital formation, it seems that the Tick Test seems to balance the interest of both the short seller and market integrity, and therefore ought to be reinstated.

Furthermore, the undersigned not only support the letter of the rule, but also the spirit and intent of the rule. A rule with myriad exemptions and carve-outs will not fulfill its purpose. Therefore, we urge the SEC to enforce not just the letter of the law, but also be mindful of the principle of the rule.

There has been considerable attention around the topic of the Uptick Rule because of a confluence of issues that, while independent, are inter-related around the practice of short selling.

One of the most obvious related areas of unease is the practice of naked short selling. This is a fraudulent practice that appears to have been laxly enforced in the past. Naked short selling is essentially the creation of shares out of "whole cloth", shares that never had to undergo SEC review, diluting the rights of existing shareholders, placing a price control on a stock and thereby inhibiting capital formation. No doubt, there is genuine concern from all market participants to put an end to this egregious practice; this is not an issue of "balancing interests", but instead an issue of enforcement, and we urge the SEC to continue to step up their efforts in this regard. Naked short selling simply can not be tolerated.

Another question that has arisen is the proliferation of levered "short side" sector based ETFs. These funds have mushroomed with the elimination of price tests, and have raised innumerable issues in the markets.

These ETFs were somehow approved by the Commission, despite seemingly obviating the margin rules set forth by the Federal Reserve. There is an entire body of evidence that shows a relaxation in margin constraints brings more noise to a market by drawing in uninformed traders. These funds have exacerbated volatility and created significant selling pressure during the downturn.

The great irony is that these products, due to their construct, do not even work for longer term holders, so in reality these are speculative instruments meant for intra-day trades, not for hedging or for investment. As intra-day speculative short selling vehicles unchecked by a plus tick test, they are sopping up available liquidity, rather than providing liquidity.

In the past, there was a "diversification exemption" for Rule 10a-1. While such an exemption may be understandable for a broad based ETF, it does not seem to make much sense with regards to these "short side" ETFs. If such an exemption was applied here with regards to the underlying hedging activity, then people would simply use these funds as a dodge for the Uptick Rule much as they are used as a dodge for the margin rules.

The proliferation of complex, algorithmic trading has also contributed to rapid-fire, unchecked short selling. There have been many comments about how embedded the code is in these program trades that would be impossible to reverse. This is a very specious argument. If the programmers can create code to trade thousands of stocks a second, they can surely accommodate a plus tick test.

To be appropriately comprehensive, the Commission will need to address these concerns, as well as many others including married put abuse and "dark pool" trading, in order to level the playing field for all participants. It is when too many exceptions are created, or rules are not enforced, that integrity and confidence suffer.

In conclusion, we the undersigned urge the Commission to promote market integrity and capital formation, and to help uphold free and fair markets. We support the re-implementation of the Uptick Rule in not only form, but in substance, as it best balances the interests of all market participants.

Jim Cramer

William Furber

Eric Oberg

Scott Rothbort

[Nagishkaw 510]

Totally off topic, for the OP: I forgot to include that the first one is always special.

[scandal 951]

Totally off topic, for the OP: I forgot to include that the first one is always special.

LOL

Meaning I've popped my cherry??

Was it as good for you as it was for me?

[mawilson 2,133]

One of the analysts at the firm where I work has spent some time studying the short-side ETFs. Because they track an index and need to flatten at end of day, there's a flurry of predictable trading when they come into the market in the last minutes before the close on days with high volatility. They are trading in big enough volumes that this is creating noticeable price deformations, and the obvious reactions to them as traders anticipate them and trade ahead.

Regardless of whether uptick rule is good or bad for short selling in general, the short ETFs are definitely due for some regulation.

I for one do think that uptick should be reinstated.

Well I for one am against the uptick rule.

I support unrestricted naked shorting of any stock.

Trying to crack down on short-sellers is silly. Short selling is an essential part of the price

discovery process.

The short-selling ban (on banks and other financial stocks) has been completely ineffective in

stopping declines of their share prices. One could also get around the shorting ban by trading

various derivative products (e.g. options or single-stock futures) which have no such restrictions.

While it's true that unmitigated short selling can exacerbate a declining market, it can equally

create an explosive rally if share prices start rising, forcing short sellers to close out their

positions rather quickly.

[Nagishkaw 510]

Totally off topic, for the OP: I forgot to include that the first one is always special.

LOL

Meaning I've popped my cherry??

Was it as good for you as it was for me?

[scandal 951]

One of the analysts at the firm where I work has spent some time studying the short-side ETFs. Because they track an index and need to flatten at end of day, there's a flurry of predictable trading when they come into the market in the last minutes before the close on days with high volatility. They are trading in big enough volumes that this is creating noticeable price deformations, and the obvious reactions to them as traders anticipate them and trade ahead.

Regardless of whether uptick rule is good or bad for short selling in general, the short ETFs are definitely due for some regulation.

I for one do think that uptick should be reinstated.

Well I for one am against the uptick rule.

I support unrestricted naked shorting of any stock.

Trying to crack down on short-sellers is silly. Short selling is an essential part of the price

discovery process.

The short-selling ban (on banks and other financial stocks) has been completely ineffective in

stopping declines of their share prices. One could also get around the shorting ban by trading

various derivative products (e.g. options or single-stock futures) which have no such restrictions.

While it's true that unmitigated short selling can exacerbate a declining market, it can equally

create an explosive rally if share prices start rising, forcing short sellers to close out their

positions rather quickly.

I entirely agree with you on the bold statement above: Short selling is an essential part of the price

discovery process. For that matter, the sponsors of the Petition I posted agree with it as well.

They're not advocating a ban on short selling completely, they're advocating a (modest) restriction on when shorts can trade. A restriction that was in place for 70 years, and didn't prevent shorting from adding to the liquidity pool. I think that's a reasonable restriction.

You are right the the outright ban since last Sept on financial stocks was ridiculous. My jaw dropped when it was announced, and I fail to see the purpose in that. Markets will come around to fair value eventually, and banning shorts has not "saved" the unrealistic valuations for those firms. NYSE:C 52wk high: 23.81. 52wk low: 0.97. Friday close: 3.48.

You are also right about the ability for shorts to create synthetic trades to simulate shorting. Any beginning options trader knows how to sell calls and buy puts to build a short position. The key difference is that this doesn't increase the float in the underlying. It won't affect dividend payouts or dilute shareholders, as would an outright naked (uncovered) shorting.

Referring back to the article:

One of the most obvious related areas of unease is the practice of naked short selling. This is a fraudulent practice that appears to have been laxly enforced in the past. Naked short selling is essentially the creation of shares out of "whole cloth", shares that never had to undergo SEC review, diluting the rights of existing shareholders, placing a price control on a stock and thereby inhibiting capital formation. No doubt, there is genuine concern from all market participants to put an end to this egregious practice; this is not an issue of "balancing interests", but instead an issue of enforcement, and we urge the SEC to continue to step up their efforts in this regard. Naked short selling simply can not be tolerated.

When you say that you support unrestricted naked shorting, do you mean simply unencumbered by the uptick rule (or other throttling mechanism), or are you actually in favor of allowing selling of shares that increase the float? The former is a reasonable position to take, in my view. The latter is unconscionable and should be banned.

[웃 910]

Totally off topic, for the OP: I forgot to include that the first one is always special.

LOL

Meaning I've popped my cherry??

Was it as good for you as it was for me?

I've had better

[scandal 951]

Totally off topic, for the OP: I forgot to include that the first one is always special.

LOL

Meaning I've popped my cherry??

Was it as good for you as it was for me?

I've had better

Better WHAT?

fwiw this was referring to something "Off topic" having nothing to do with the topic of this thread, as Nagishkaw mentioned. She "got" it. You don't.

[웃 910]

Totally off topic, for the OP: I forgot to include that the first one is always special.

LOL

Meaning I've popped my cherry??

Was it as good for you as it was for me?

I've had better

Better WHAT?

fwiw this was referring to something "Off topic" having nothing to do with the topic of this thread, as Nagishkaw mentioned. She "got" it. You don't.

You don't take jokes very well.

[scandal 951]

You don't take jokes very well.

Guess not. At least when they go zing! over my head.

Here's another take on uptick rule, perhaps more in line with mawilson's views against reinstating it. Though even if the old 1930s rule doesn't come back it looks like some kind of braking system is going to be put in place.

http://uk.reuters.com/article/companyNews/...E54458820090505

By Rachelle Younglai

WASHINGTON (Reuters) - Financial professionals, academic experts and the U.S. broker-dealer watchdog agree the Securities and Exchange Commission should not reinstate its old uptick rule to regulate short selling but disagreed on what other measures would be effective.

At a day-long meeting on Tuesday, the SEC examined a handful of proposals to restrict short selling after a year in which U.S. markets lost trillions of dollars amid the economic crisis.

Short sellers, who make bearish bets on stocks, have been blamed for contributing to the market decline. They contend that short selling helps the market operate efficiently.

The SEC is considering five proposals, including reinstating an updated version of the Depression-era uptick rule, which would only allow short sales when the last price was higher than the previous price.

None of the SEC proposals received overwhelming support at the public meeting on Tuesday. The only thing on which experts achieved some sort of consensus was their opposition to proposed legislation that would force the SEC to reinstate its old uptick rule. The rule was abolished in 2007 after the SEC concluded it was no longer effective in modern markets.

"The commission did the right thing in removing the old uptick rule because it was useless," said James Angel, a professor at Georgetown University.

Other proposals under SEC consideration include a bid test or modified version of the uptick rule, which would only allow shorting if the best available bid were higher than the last bid.

Three other possible measures would use a circuit breaker approach to trigger a temporary suspension of short selling in a particular stock, or temporary application of the uptick or bid rule in a security.

"I don't think the uptick or bid test is needed," said Richard Ketchum, chief executive of the Financial Industry Regulatory Authority, the broker-dealer industry watchdog. Ketchum, who recently replaced SEC's Schapiro as the head of FINRA, said a circuit breaker was a better approach.

Dan Mathisson, managing director at Credit Suisse, said a circuit breaker that would temporarily halt short selling in a particular stock would be the most effective.

"It gives management breathing space," he said.

Mathisson said the old uptick rule was completely ineffective given that stocks trade in much smaller increments than when the rule was first adopted after the 1929 market crash.

SEC Chairman Mary Schapiro has not indicated whether she supports the reinstatement of the uptick rule and said on Tuesday that the roundtable discussion will help in advancing the debate over short sale price tests and short sale circuit breakers.

[mawilson 2,133]

Mathisson said the old uptick rule was completely ineffective given that stocks trade in much smaller increments than when the rule was first adopted after the 1929 market crash.

That's exactly right. Not to mention that with the rise of electronic "black box" trading, it's

a lot harder for a "human" trader to catch an uptick.

Bottom line: the powers that be are making it very difficult to sell short. We used to have

"hard to borrow" lists of stocks, which now are being replaced with "easy to borrow" lists.

In other words, everything is hard to borrow by definition, unless the clearing firm (or whoever

lets you borrow stock) says otherwise...

[scandal 951]

Mathisson said the old uptick rule was completely ineffective given that stocks trade in much smaller increments than when the rule was first adopted after the 1929 market crash.

That's exactly right. Not to mention that with the rise of electronic "black box" trading, it's

a lot harder for a "human" trader to catch an uptick.

Regarding price increments -

The advent of decimalization has definitely increased the 'smoothness' of price changes and removed the old 'lumpiness' of trading on 1/8th and teenies.

I also would agree that spreads are tighter in liquid issues now than they were years ago, typically being penny spreads on big issues. Thought they can still be pretty wide on things like Pink sheets and many small caps that have small floats and aren't liquid. I'm not sure why these factors invalidate the uptick rule though. The purpose of uptick is to prevent a piling-on of shorts to the downside. That can happen in lumpy or smooth price increments.

Regarding program trading - most shorts, by and large, tend to be sophisticated traders who will set up their trades as a program trade, not a manual execution. Certainly the high frequency short traders that can lead to a catastrophic drop in a share price over brief seconds or minutes are all going to be program traders. It's not hard at all to program an algorithmic system to implement uptick or any other circuit breaking system. That's software even I could write, certainly not an excuse to avoid safeguards.

Are you opposed to any form of circuit breakers whatsoever? Or just to the classic uptick rule in particular?

[scandal 951]

Bottom line: the powers that be are making it very difficult to sell short. We used to have

"hard to borrow" lists of stocks, which now are being replaced with "easy to borrow" lists.

In other words, everything is hard to borrow by definition, unless the clearing firm (or whoever

lets you borrow stock) says otherwise...

My understanding is that listings move back and forth between hard-to-borrow and easy-to-borrow all the time.

I don't think there's a trend away from hard to borrow. It's really a function of short interest in the issue at any given time at a given broker.

On any given day, a stock that's hard to borrow at one firm may be easy at another. Making it possible to "play the field" e.g. between MLCO and GSCO - get a locate for 10,000 short at Merrill and do your short trade through Goldman.

I got a bit curious about this subject, and found this site - http://www.locatestock.com/ which appears to act as a centralized clearing house of locate lists. Nifty idea!