Stock Market - Uptick rule on shortselling?

[frenchie]

I don't know that much about the stock market, although I'm learning. I only just heard about the uptick rule on short-selling.

The SEC repealed the uptick rule in July of '07, at which point markets became much more volatile, and... well, you know:

http://tickersense.typepad.com/ticke...money_flow.jpg

...but then I read that the repeal of this rule had nothing to do with the implosion, it's just coincidence.

I understand why repealing the rule, didn't cause the crisis. But I have a hard time understanding how keeping the rule, would not have minimized the repercussions. The explanations I've read... it's over my head I suppose. Can anybody explain in plain language, how repealing the uptick rule did NOT remove an important safeguard against market implosion?

While we're at it, can anybody explain why it still hasn't been re-instated? Or why it shouldn't be reinstated?

[David Meiland]

You're ready to become a Boglehead. They will break it down for you.

www.bogleheads.org

[Dick Seibert]

I didn't understand it at the time, and Cramer railed against the suspension as being stupid, but academia determined that it wasn't doing any good and eliminating it would provide more liquidity to the market bringing the short money back in spades, short selling provides lots of commission money to brokerages. BTW, it was originally conceived by JFK's father.

The SEC eliminated the uptick rule on July 6, 2007. The elimination of the rule was preceded by a SEC order, placed on July 28, 2004, to create a one-year pilot temporarily suspending the uptick rule on select securities. The purpose of the suspension was so that the commission could study the effectiveness of the rule. The SEC's Office of Economic Analysis and academic researchers provided the SEC with analysis of the data obtained during a six-month period starting May 2, 2005. The consensus was against the uptick rule, with the commission concluding that the uptick rule "modestly reduce[d] liquidity and do[es] not appear necessary to prevent manipulation."

The rule was originally put in place to avoid the perpetration of a financial crime known as a bear raid. However, short sellers themselves viewed the rule as "largely symbolic" and having little actual effect on short selling.*

* http://en.wikipedia.org/wiki/Uptick_rule

[frenchie]

That's what I've heard, also - that there were dozens of ways to get around the rule, so getting rid of it made no difference. But that's a bit hard to swallow, looking at the volatility indexes:

http://www.marketwatch.com/charts/in...rand=967277169

http://chart.finance.yahoo.com/c/my/_/_vix

Middle of '07 sort of jumps out at you...

[tayriver]

Can anybody explain in plain language, how repealing the uptick rule did NOT remove an important safeguard against market implosion?

While we're at it, can anybody explain why it still hasn't been re-instated? Or why it shouldn't be reinstated?

Frenchie - I'm no expert either, and maybe I'm misinterpreting, but it seems partly like the premise for your question is that when the market moves down it's bad. Presumably also, the market moving up is always good? Do I have this right?

I would argue that the most important safeguard against market implosion is a reasonably priced market. Markets that are disconnected from their fundamentals (historic aggregate p/e ratio is a starting point for evaluating the stock market) make me nervous. This applies to the housing market as much as the stock market - you simply can't kick these markets into the stratosphere and have them not come down.

Part of what makes me nervous about the recent bailouts is that they're largely premised on these same assumptions. Politicians are immune to cognitive dissonance. So on one hand we need to 'keep American home values from eroding', and OTOH, 'Americans need affordable housing'. Is there a better path to affordable housing than allowing a correction in home prices?

Returning to the stock market, IMO, removing impediments to short selling can help us weed out stock market fraud (which now appears to have been endemic during the past decade+) and deter investor stupidity that seems to increasingly lead to bubbles. I think the implementation of short selling restrictions is further evidence of the massive ideological hypocrisy of bankers - the "free market when it suits us" mentality.

Check out Shiller's work on both home prices and the stock market index in the first 2 spreadsheets on this page.

And for a lighter read, check out Manuel Asensio's book, 'Sold Short'.

Oh, and Cramer is a moron who should just STFU. Watching his show is like watching a pet psychic on crack.

[stock-market]

Thank tayriver for such a great article .The info is really valuable

[Allan Edwards]

The market hit an 18 month high today. A year ago the averages were in the tank, I know a lot of people who bailed and lost tons of money. I'm glad I didn't, I've recovered (almost). If you had invested a year ago you would have a 60-70% return. The stock market rebound is one of the bright spots in the economy.

[philthegreek]

Yeah Allan, for those that have money to invest. For those that don't, it just means farther into the hole. All those making money right now are not making jobs, they are taking advantage of the lost overhead make their money.
Yeah, I also know I'm "oversimplifying" it. Doesn't make it less true though.

phil

[Allan Edwards]

Yeah Allan, for those that have money to invest. For those that don't, it just means farther into the hole. All those making money right now are not making jobs, they are taking advantage of the lost overhead make their money.
Yeah, I also know I'm "oversimplifying" it. Doesn't make it less true though.

phil

I know the job situation is bad, and it really doesn't look like it is going to improve that much for a while. During boom times, companies hire, sometimes in excess, and during recessions they cut jobs and actually become more efficient by doing more with less. If Exxon or GE or Microsoft or Bob the Contractor can get by with fewer employees, why wouldn't they.

But the stock market is forward looking, prices increase on an expectation of corporate profits and future earnings, and all I was pointing out was that that rising stock prices is one bright spot in our economy. Millions of people have their retirements hinging on stock prices, so hopefully those people feel a bit more flush and will start spending money. Consumer spending drives about 75% of our economy.

[swbuilder]

I did better in stocks last year then I did building homes which isn't saying alot I guess. It was a rough ride though. Really rough last March. I refused to look at my portfolio it was so decimated, but I kept averaging down. So far this strategy hasn't helped me much with building lots but hopefully eventually.

[Dick Seibert]

Randy:

I got out at 12,500 with the intention of buying back in at 12,500 if it appears that the recovery is real, everything I'm reading now indicates a further real estate downturn, a lot has to do with what Europe does with Greece, and what China does with the yuan. It will be interesting to see what congress does with Obamacare and how the market reacts, in Walnut Creek today I saw marchers carrying picket signs saying "No to Obamacare" and "The government is not the solution".

[swbuilder]

Dick:
I'm debating even making me IRA contribution right now for the 2009 tax year. Probably makes little difference since it is a long term hold but if this health care bill passes I think it will put more pressure on the markets. I heard someone say today, look for it to start falling off around May.