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.'"

more at http://online.wsj.com/article/BT-CO-20100211-712053.html

SEC delays decision on short-selling limits

Four months after releasing its proposal for restricting short-selling stocks, the Securities and Exchange Commission has yet to settle on an approach. The SEC has run into obstacles related to the effectiveness of the proposal as well as its cost. The agency is suggesting a different approach to the issue and has given the public 30 days to comment.

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http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090817/REG/908179984

Opposition to uptick rule might deter resurrection

While the Securities and Exchange Commission proposed resurrecting the uptick rule, traders, mutual funds and other market participants, including companies that blame short selling for their depressed share prices, expressed opposition to the move. "We know that the practice of short selling evokes strong opinions from both its supporters and detractors," SEC Chairwoman Mary Schapiro said. "I've made it a priority to evaluate the issue of short-selling regulation and ensure that any further policies in this area are the results of a deliberate and thoughtful process."

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http://www.bloomberg.com/apps/news?pid=20601208&sid=aPO.OOga5rN4&refer=finance

U.S. SEC to consider about 4 short sale proposals

The Securities and Exchange Commission is considering four proposals aimed at restricting short sales of stocks. The proposals include restoring the "uptick rule"; a "bid test" that would allow shorting at prices above the highest bid; and two "circuit breaker" rules, one of which would temporarily halt short sales when a stock has already fallen a certain percentage, and the other would trigger uptick or bid-test rules after a share price drops. The proposals will be discussed at a meeting Wednesday

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http://www.reuters.com/article/ousiv/idUSTRE53605A20090407

"Uptick rule" for short sellers might make a comeback

The Securities and Exchange Commission is considering restoring the "uptick rule," which requires short sellers to sell shares at a price above the most recent trading price of the stock. The commission "may conduct a public meeting as early as next month to consider whether to formally propose reinstatement of the uptick rule, or consider other measures related to short sales," said John Nester, spokesman for the SEC.

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http://www.businessweek.com/ap/financialnews/D96REJ6O0.htm

Uptick rule

The Uptick rule is a former financial regulations rule, relating to the trading of securities in the United States. The rule was eliminated by the SEC, effective July 6, 2007.

'Uptick' is the name generally given to Rule 10a-1, under the Securities Exchange Act of 1934, which states that short selling is only permitted following a trade where the traded price was higher than the previously traded price (uptick).

On the New York Stock Exchange a short sale may only be done on an uptick or a zero plus tick (which occurs when the price is the same price as the last trade, but higher than the previous different trade).

On the NASDAQ, shorting is only allowed on the bid side when the current inside bid is not lower than the previous inside bid (i.e. a downtick).

On the March 20, 2008 episode of Mad Money, Jim Cramer launched his campaign to reinstate the Uptick Rule. Citing the wild swings of the market since its elimination, Cramer pointed out that the SEC eliminated the rule during a bull market, when liquidity was not a problem. Cramer believes that, without the Uptick Rule in place, short sellers are devaluing perfectly solid stocks. As a former hedge fund manager, Cramer admitted to making millions short selling with the Uptick Rule in place. Without an impediment such as the Uptick Rule to slow down the pace of short sellers, Cramer believes it puts the market at risk for the very problems that lead to the Great Depression.