May 5, 2009
Not enforcing the naked short selling rule is more problematic than the up-tick rule. Non-enforcement creates the opportunity to create greater downside pressure than the actual market cap of the stock. The upside pressure is limited by the number of shares in the market. Non-enforcement of naked shorting creates potentially unlimited downside pressure. Combine that with rumor mongering via internet and blogs and no regulations preventing the issuance of CDS coverage greater than the market cap of the stock and you have the present circumstances that inordinately balances pressure to the downside. When the multitrillions on the sidelines gets redeployed in stocks the shorts will have their guns reloaded. Any up-tick rule in combination with enforcement of the coverage requirements may limit downside pressure to the number of shares in the market creating parity with upside limitations.