Thursday, February 26, 2009

Don't Sell The Uptick Rule Short!

Short Selling From A Former Trader

I was a proprietary equity trader for some time in the late 1980's, '90's and early 2000's. The uptick rule on New York Stock exchange traded stocks was in existence to prevent traders from pounding a stock lower because you could only sell the shares on a plus tick.

Ben Bernanke

In the late 1980's this rule was not in place on the NASDAQ stocks and traders, including SOES traders (small order execution system), could take a stock, particularly on news, and make quick money selling and buying lower. The speed with which the markets would change on the screen was blinding.

Pity the poor market maker that happened to be in the bathroom and was not adjusting his or her markets when it was being driven down. Imagine an $80 bid that was now a $77 bid for the rest of the market, but ABCD market maker was still at $80 being bombarded by SOES trades like in a game of asteroids, with those traders able to cover at the ask of $77. Talk about a slot machine stuck on jackpot.

In any event, this rule that had been in force since the stock market crash in the '29 was revoked by Christopher Cox in 2007 for reasons that only he can explain. In testimony today before the House Ben Bernanke clearly stated that he very much favored the reinstatement of this rule.

"WASHINGTON (MarketWatch) -- Federal Reserve board chairman Ben Bernanke seemed to give tacit support on Wednesday to restoration of federal rules that don't allow short-selling while a stock is declining. In a question-and-answer session with the House Financial Services committee, Bernanke said that the rule "may have had some benefit" during the current crisis. Mary Schapiro, the new chief of the Securities and Exchange Commission, told the New York Times this week that she's thinking about reinstating the rule. The SEC eliminated the rule in 2007. It had been in place since the market crash in 1929. It stated that short sale had to take place at a price higher than the price of the previous trade. Robert Brusca, chief economist at FAO Economics, said too many people on Wall Street were able to make profits from the pessimism in markets and restoration of the up-tick rule was needed."

The uptick rule is certainly not a panacea for all that ails the markets, but it is one step in the right direction!

5 comments :

  1. Along with the uptick rule they need to bring back mark to market as well.

    ReplyDelete
  2. If we enforced mark to market banks and istitutions that are functionally insolvent would actually become insolvent and destroy a system that is already under incredible levels of duress.

    ReplyDelete
  3. You sir have absolutely no idea how current microstructure works. $80 bid / $77 offered. That only existed in the criminal SelectNet/ 16 Seconds per execution SOES days when the MM's were the biggest criminals on the Street. Spear and Herzog used to camp out on the bid or offer and refuse to move or trade more than the minimum 100 shares every 16 seconds to prevent stocks from moving. Island and INCA would just trade across them, but only a limited few had access. OH YEAH, those were the good ole' days when stocks only went up, so no one cared how the "public" was getting screwed. The idea that traders or Funds "machine gun" bids and run stocks down is rediculous. With an uptick rule in place it will be much easier to "lean" on the bid with size and not even have to transact or risk capital by actually executing trades. Bear, Lehman were bankrupt, not the victim of a CDS/Short raid. The market is trading at a fair multiple relative to the precieved future cash flows of companies. To suggest that we are not in a deep recession and instead blame the current market valuation on short selling is simply not fact. Eliminating the short sale makes markets less efficient, and less liquid while having no material impact on one's ability to short a stock.

    ReplyDelete
  4. I can appreciate your passion Brandon, but nowhere did I suggest that the current economy is the result of losing the uptick rule.

    Having worked at a proprietary trading firm during the SOES years and watching traders that used it pound market makers, that is indeed how it worked. That is not to say that the market makers themselves did not also have a license to steal.

    I don't think that I equated yesterday to today, and specifically said that the uptick rule is certainly not a panacea, particularly as stocks trade with a .01 spread.

    ReplyDelete
  5. "Fooling around on the course, bad language, smoking grass, poor caddying. If you want to be replaced by golf carts, just keep it up."

    Welcome to 2009, we use ATMs not tellers, search engines not card catalogs and electronic matching engines not pants pissing specialists.

    ReplyDelete

;