June 10, 2009
I think short-selling is a price discovery mechanism that shouldn't be messed with. As many, and maybe more, investors can gang up and push a stock price higher as can raid a stock and push it lower,
The increase in volatility when the uptick rule was abolished was also present in foreign markets not affected by the rule. In other words, the increased volatility was purely coincidental.
There is no need for an uptick rule. After all, we don't have a downtick rule that prevents buying as stocks rise. What is missing is the ban or limit on naked short-selling. Even limiting naked short-selling to 50% of the outstanding stock would prevent the abuse of creating many times more shares than actually exist. Also needed is an equivalence rule that gets around the naked short limit.
While I appreciate that the current vogue is to call for the abolition of mark-to-market and the reinstitution of uptick, I'm on the other side of both of those issues. I think that the uptick rule encouraged its own share of nonsense whereby firms would uptick a small preceding order in the hopes of then hammering the short.
Moreover, I think it's healthy to allow market forces to react uninhibited by such artificiality. We have the ability to side car or to halt trading in any stock or market if such is required, and that may be preferable to essentially rigging the game with the prerequisite of an uptick.
I am not going to argue that the uptick rule would not have slowed the pace of the unwind and the panic. To the contrary, I will concede the point.
The larger question is whether the proper role of regulation is to interfere with such market forces. As a longtime trader, I much prefer a quick, dramatic reversal than one that inexorably unwinds over far too long. Most industry veterans will tell you that the several-hundred point market drop or the 20% intraday individual stock decline is far preferable to death by slices and inches over months.
Professional traders seek "capitulation" far more eagerly than a bear market that drones on in search of a bottom. I think that one good thing about the lack of the uptick rule is that it hastened the collapse of what we now see were many publicly traded financials that were riddled with fraud and corruption.