May 6, 2009
As an academic and an active trader (day and longer term) I have the following comments on the short selling rules. I think the original intent of the short sell was to allow a trader to hedge their position against a sudden decline in the stock. When I first started trading you could only short your own shares, which made since, rather than take a gain you could sell your shares short to neutrilize price movements and then decide on the ultimate course of action after the market settled down. Next we had "borrowed shares" for short sells and then we went on to "naked shorts". The idea of "naked shorts" is just a bad idea in that no one should be able to short shares that do no exist. With the "borrowed shares" if the brokerage already loaned your shares out you suddenly could not short your own shares.
I am strongly in favor of the uptick rule to prevent professional traders (and hedge funds) from shorting my investments to a level that forces me out of a position and for the sake of 401k and 403b investor's. The retirement investors simply do not have the tools available to them to constitute a "fair market" environment that would prevent the massive transfer of wealth from private investor retirement portfolios to professional investors. It is obvious that the market will not function without the participation of retirement investors, an increasing number of which are attempting to manage their own portfolios. If these investors feel disenfranchised by the system they will ultimately not participate. Many of them have been so adversely effected in the last year that it may be years before they are willing to accept the risk to play again.
Even though I regularly participate in the day trading environment I am concerned about the concept of fairness in a market environment in which many individual investors are tring to manage their own funds. I think an agressive uptick rule would keep the market bias to the upside which is consistent with the tools that individual investors have at their disposal. In addition I might add that to participate in professionally managed hedge funds requires an initial investment in the millions. This obviously is not in the realm of the typical individual or retirement investor. I would strongly vote for making the market a relatively level feild in that all the tools of trading are realistically available to all participants in the market.
I fear that the stock market will become an exclusinve arena of experts if we do not agressively take action to make it a "fairer environment" for the individual investor.
Glenn A Metts, Ph.D. CPA