Tweet 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.
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In any event, this rule that had been in force since the stock market crash in the '29 was revoked by Christopher Cox in 2007 for reasons that only he can explain.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!