The uptick rule prevents traders from selling a stock short, unless it’s on a movement upward of the price (which shows that there are enough buyers for sellers). It was repealed in July 6, 2007, after an SEC study (begin in May 2, 2005) showed that it had no statistically significant correlation with greater volatility.
But that study itself, only 6 months in duration and limited to a period of relatively low volatility and up-trending prices, was probably flawed, say many critics. They blame the financial collapse of the banks in 2008, at least in part, to the repeal of the rule.
A later SEC study (from November 2008) now shows the repeal of the rule (a rule originally enacted in 1934 to prevent just the sort of cascading selling that destroyed the financial industry) did indeed have a huge effect on the volatility of trading in the markets.
As this piece. suggests, the repeal had a direct and sizable role in exacerbating the sudden bear raids on Bear Stearns and Lehman Brothers in 2008. The piece references a study by Birinyi Associates in April 2008 on volatility in the market after the repeal.
* The VIX (Volatility Index) went up at once from 13.25 to 23.55
*In the same period the absolute dollar value of the daily change in each stock in the S&P 500 increased from $1.02 to $1.77.
*July 6, 2007 shows an immediate and striking change in volume of stock purchases, from plus ticks to minus, indicating full-throttle shorting (mostly by hedge funds)
*Bear (with a float of 159,098,000 shares) traded down from $61.58 to $2.84 in 5 trading days (March 14 to March 20) on volume of 4.2 times its total float. Lehman went down from $16.20 to 15 cents in 5 days on almost 3 times its float.
Critics of the reinstatement of uptick (i.e., supporters of the repeal of uptick) claim that all it does is help politically connected firms. They say that institutional firms and market makers can and do short whenever they want. The uptick rule only prevents the general public from shorting.
OK. If that’s so, the answer is to fix things so that the market-makers play by the same rules as everyone else.
But, actually, I don’t agree with the critics. If you look at the context of what’s happened to the economy to get us to where we are today, you’ll see that each step followed the previous one systematically and purposefully, at least to appearances.
Look at the way things have moved:
First, there was the Kelo decision, allowing eminent domain seizure of property by the government from private owners on behalf of developers (2005). That signaled the end of the housing bubble.
Then there was the failure of the Bush administration to get social security privatized (which would have let the elites get more ordinary people’s savings into their hands).That meant there was no more money to be pumped into the party.
Then came the repeal of the uptick rule, signaling that everything was in place for a crisis to occur.
Now, take a look at the resume of the chief regulator at this time, SEC Chairman Christopher Cox.
Significant highlights of his career include the following:
* Senior White House Counsel 1986-88. Advised on the 1987 stock market crash.
*Authored the Private Securities Litigation Reform Act, which protects investors from fraudulent lawsuits
*Chairman of the Committee on Homeland Security
*Chairman of the Task Force on Capital Markets
*17 years in Congress, 10 in the Majority Leadership in the House of Reps.
*28th Chairman of the SEC from June 2, 2005 onward.
*Leadership role in integrating US and overseas regulation of the stock market
* Member of the Federal Housing Finance Oversight Board (2008), which advises the Director of the FHFA on the safety and soundness of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
*Member of the Financial Stability Oversight Board that oversees the $700 billion Troubled Assets Relief Program.