Market participants debate uptick rule as SEC nears ruling

Mary Schapiro, chairman of the Securities and Exchange Commission, said the agency is close to finalizing short-selling rules. Market participants continue to debate the uptick rule, which prohibits investors from selling a stock short until after it has increased. The SEC is also considering whether to require short-sellers to publicly disclose stocks they are shorting.

The uptick rule has been a contentious issue for the market. Those who are in favor of it partly blame the stock slide in late 2008 on the 2007 removal of the short-selling restriction, saying the removal helped exacerbate the stock losses, especially as high-speed, electronic trading was on the rise.

"The shorts were just killing these stocks," said Robert Pavlik, chief market strategist at Banyan Partners. If the uptick rule had still been in place, he said "it wouldn't have stopped or prevented people from shorting stocks, but what it would have done is in the advent of computer trading, it would have just brought it down to more of a manageable level where it would have made people slow down, take a look at the situation and assess it from a little bit better of a standpoint."

Opponents, meanwhile, see the uptick rule as an interference in the stock market that shouldn't be there. They note that short sellers provide liquidity and help prevent stocks from going too far to the upside. They also say that in late 2008, as stocks fell below where the short sellers were betting they'd go, many short sellers would cover their positions, with that covering helping buoy the stocks from sliding even more.

The uptick rule represents "an artificial barrier to the free market," said Rich Gates, founder and portfolio manager at TFS Capital. "It's as logical to us as a downtick rule where you can only buy a stock after it depreciated. If anything, we would be more in favor with a downtick rule," he said, noting that such a restriction might have helped prevent the formation of the dot-com bubble as well as the credit bubble.

As for the short-position disclosures, the consensus is that while disclosures on a quarterly basis along the lines of those made for long positions might make sense, positions shouldn't be disclosed on an immediate or daily schedule.

"There's a concern about predatory trading," said Julian Pittam, managing director of DataExplorers, which tracks short-selling activity. "If large hedge funds are reporting short selling information on a one-day delay ... that becomes a self-fulfilling prophecy. If people see all these hedge funds are shorting [certain stocks], then they'll think 'perhaps I should do it too.'"

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