May 27, 2010
I do not know what is in the SEC's mind, what is holding them back in seeing what has happened in the last 10 plus years that has allowed the market situation that we now find ourselves in, but if I were them I would be looking at each action of the exchanges and each action regarding exchange regulation that has taken place in the past 10 years.
Just a few of the changes that have taken place that I feel are directly responsible as follows:
1) 1998 SEC rule allowing alternate trading systemsfollowing this rule change, the electronic trading world grew exponentially including HFTs, Co-Located computers near the exchanges, ETFs (exchange traded funds), a doubling or tripling of Hedge funds.
2) Removal of the uptick rule, whereby one could not short a stock until it ticked up from the previous sale. This alone in my opinion is one of the most important short selling restrictions that has to be put back in place to halt the erratic behavior of the marketsheres why The uptick rule was established in 1938 to prevent exactly what is happening today which is speculators ie: short sellers, pooling huge amounts of capital( hedge funds) for the sole purpose of driving down the price of a stock or groups of stocks to the point that the holders would become so scarred they would sell their holdings even though nothing with regard to the company had changed, it was a price action decision based on fear. Not coincidentally in my opinion, since the uptick rule was eliminated by implementation of Rule 201 Regulation SHO on July 6th, 2007 the markets have become extremely volatile and in-fact crashed in 2008yes I said it, they crashed
Now many will try to tell you that the crash was all caused by the sub-prime mortgage market but it was not. How could sub-prime mortgages crash a market when they only made up about 5% of all mortgages outstanding?
What crashed the markets wasyou guessed it, the hedge fund short sellers (that pooled capital by speculators they spoke about in 1938) jumped on those totally unknown derivertives by the general investing public which go by the names of CDOs and other so called structured products and shorted them with those huge pools of capital causing the wholesale selling due solely to fear by holders that ordinarily would have not sold just as spoken about by those in charge of the SEC in 1938.
Hello SECare you listening? Your predecessors understood the problem and DID something about it.
There have been many calls for these changes for two years now from persons with direct insight in the workings of the markets, yet nothing has been done:
Calls for reinstatement
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: Weve never seen volatility like this. Were 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 didnt need an uptick."11
On March 28, 2008 Jim Cramer of CNBC offered the opinion that the absence of the uptick rule harms the stock market today. He claimed that reintroducing the uptick rule would help stabilize the banking sector.12
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.13 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." 14
On July 16, 2008, Congressman Gary Ackerman (D-NY), Congresswoman Carolyn Maloney (D-NY) and Congressman Mike Capuano (D-MA) introduced H.R. 6517, "A bill to require the Securities and Exchange Commission to reinstate the uptick rule on short sales of securities."15
On September 18, 2008, presidential candidate and Senator John McCain (R-AZ) said that the SEC allowed short-selling to turn "our markets into a casino." McCain criticized the SEC and its Chairman for eliminating the uptick rule.16
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."17
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".18
On January 20, 2009, Ackerman received a letter from Chairman Cox written the day he left the SEC – in which Cox said he supports the reinstatement of an uptick rule. The letter reads, I have been interested in proposing an updated uptick rule. However, as you know, the SEC is a commission of five members. Throughout 2008 there was not a majority interested in reconsidering the 2007 decision to repeal the uptick rule, or in proposing some modernized variant of it. I sincerely hope that the commission, in the year ahead, continues to reassess this issue in light of the extraordinary market events of the last several months, with a view to implementing a modernized version of the uptick rule.21
On February 25, 2009, Chairman of the Federal Reserve, Ben Bernanke in testimony before the House Financial Services Committee stated he favored the SEC to examine the restoration of the uptick-rule.22
On March 10, 2009, the SEC and Congressman Barney Frank (D-MA), Chairman of the Financial Services Committee announced plans to restore the uptick rule. Frank said he was hopeful that it would be restored within a month.2324
A pretty impressive list of prominent people who know and understand the workings of the markets but yet NO action by Mary.
Now lets go to my 1st point above regarding the HFTs and co-located computer systems.
Why would anyone want to co-locate a computer as close as they could to an exchange?...
give up?, Answer-so their high frequency trading systems can get the quotes before the rest of the market participants and react accordingly by buying or selling at the privileged price and volume information they get to see first and with their split second trading systems that can make many trades a second. In my opinion Its a form of front running and front running is illegalsomeone please tell Mary.
You see this is the perfect storm for those who lobbied and got all the safe guards put on after the 1929-34 market crash taken off just so they could use those super duper computerized trading systems (money machines) to skim the cream off the market and when they smell fearful events going on in the world, they can pull back their bids, the markets alleged liquidity guarantee and then short the markets through those same HFTs and ETFs and all other new fangled products designed purely for trading in and out of the market skimming and whip sawing our pension and 401ks until we give them up out of fear.
Another problem I see that nobody has commented on is this: By letting computerized systems, running algorithems, essentially run the exchanges and trading of equities we have left ourselves open to our enemy's computer hackers and alike that may find a way to change one of those programs and make it do something that will cause a computer directed event to crash our markets, maybe at the same time one of their operatives are setting off a car bomb in front of the exchange....please don't say it could'nt happen.
A wise old friend once said to me and now I will say to you
Doing nothing is not an option.
Thinking about doing something is doing nothing, and doing nothing is not an option.
Doing something and failing is doing something.
Failing while doing something is honorable.
Remember, doing NOTHING is NOT an option.