I'm going to write something here that probably flies in the face of what most people are thinking but here it is: Who the heck cares what most people think about the uptick rule? Seriously. Of course most investors are going to oppose anything that makes it easier for stock prices to fall but the role of the SEC is to maintain a fair and orderly stock market -- not to appease the short-term oriented desires of people who want to look at their portfolio statements and see black.

Continue reading Of course investors support the return of the uptick rule! Who cares?

Of course investors support the return of the uptick rule! Who cares? originally appeared on BloggingStocks on Wed, 10 Jun 2009 14:00:00 EST. Please see our terms for use of feeds.

Continue reading Uptick rule set for a comeback

Uptick rule set for a comeback originally appeared on BloggingStocks on Tue, 10 Mar 2009 16:40:00 EST. Please see our terms for use of feeds.

John Bogle: Bringing back the uptick rule won't solve anything originally appeared on BloggingStocks on Wed, 26 Nov 2008 10:45:00 EST. Please see our terms for use of feeds.

This post is part of a feature on companies and products that our bloggers think are in need of a makeover. See all 26.

In light of the short-selling ban, someone recently asked me for my opinion about short selling. Personally, I'm grudgingly accepting of the practice, but I believe that some serious changes need to be made. I believe that the practice of short selling should be made harder to engage in, more expensive to execute, limited in duration, and heavily scrutinized.

The uptick rule is fine, and it never should have been suspended, but I feel that it falls short of the mark. Bear raids can still be orchestrated in spite of uptick only buys. Purchasing on the uptick simply slows the process a little. A system must be developed by which the practice of bear raids is effectively terminated.

When I researched opinions and viewpoints on short selling, it became quite apparent that the writers I had encountered were not supporting short selling nearly as much as they were simply railing against a short-selling ban. Not one person actually made a case for why the practice is essential to market health. The closest I came to finding an eloquent argument in favor of short selling was an article by Paul R. LaMonica, editor at large, CNNMoney.com. Though Mr. LaMonica didn't really explain to me why I should be shorting stocks to benefit the markets, he did quote the SEC on 3.5 reasons why shorting might be beneficial.

Continue reading Makeover needed: Short selling stocks

Makeover needed: Short selling stocks originally appeared on BloggingStocks on Fri, 24 Oct 2008 10:05:00 EST. Please see our terms for use of feeds.

Continue reading Cramer on BloggingStocks: Shorts are not and should not be equal

Cramer on BloggingStocks: Shorts are not and should not be equal originally appeared on BloggingStocks on Tue, 22 Jul 2008 08:41:00 EST. Please see our terms for use of feeds.

The SEC recently eliminated the 'uptick rule', which was put in place after the Great Crash of 1929 in an effort to prevent bear raids. The rule mandated that stocks could only be shorted on an uptick -- the price of the short-sale had to be higher than the last price.

Some commentators, including Chuck Jaffe, are complaining that the end of the rule has allowed short-sellers to pile into stocks more easily than before. And maybe that's true. They complain that this has increased the volatility of the market, and maybe they're right.

But here's the problem: There's really no particularly intelligent justification for the rule. Short-sellers are already required to go through the cumbersome process of borrowing shares before they short. If we're really concerned about the uptick rule making it too easy to short and drive prices down, shouldn't we also implement a downtick rule? That way it would be harder for pumpers and promoters to drive up the prices of stocks.

Of course we shouldn't do that. That would be insane. But it's really not substantially less crazy than the uptick rule.

We have tons of regulations on short-sellers, and the fewer we have the better it is for America -- effective short-selling keeps things from getting out of hand like they did in the internet bubble. It also provides an incentive for investors to uncover fraud. The market has such a bullish bias, and it's great that people can also make money by looking for signs of trouble. That's what makes a market.

The elimination of the up-tick rule is not a loss for investors originally appeared on BloggingStocks on Thu, 30 Aug 2007 14:45:00 EST. Please see our terms for use of feeds.

The SEC has voted to end price restrictions on short-selling. Under the uptick rule which was instituted in 1938, shares could only be sold short on an uptick -- That is the price of the stock on the short-sale must be higher than the last trade. The SEC also said it would strengthen its "fight" against naked short selling.

This is a victory for investors: The much-maligned short sellers are the financial markets' first line of defense against fraud and ludicrous valuations. Rules making short-selling easier increase the incentives for market participants to police the markets themselves, and can prevent fraudulent or overvalued companies from running even higher.

The crackdown on naked short selling however, appears to be a concession designed to appease a very vocal group of conspiracy theorists. As long as shorts are eventually covered, there appears to be little harm in naked short selling. The requirement to borrow shares is cumbersome and unnecessary. I've discussed this issue with numerous anti-short selling people, and none have been able to provide an answer to this challenge:

Please provide the name of a legitimate, profitable business that has been harmed by naked short selling.

In spite of all the complaining and conspiracy theories, I've never seen a company take the action to deal with a poor valuation supposedly caused by short-selling: If Overstock (NASDAQ: OSTK) is so undervalued, why doesn't Patrick Byrne take it private? Why aren't suitors lining up to acquire it?

There are a number of mechanisms in the market to prevent stocks from receiving gross undervaluations: Private equity funds, strategic buyers, share buybacks, etc. By making life harder for short sellers, the SEC is weakening one of the only mechanisms in place to proactively stop fraud.

SEC ends uptick rule but vows crackdown on naked short selling originally appeared on BloggingStocks on Thu, 14 Jun 2007 15:18:00 EST. Please see our terms for use of feeds.