FOXBusiness March, 13, 2009
The Securities and Exchange Commission announced Friday that it will consider in April proposing a new version of the “uptick rule” as step to help stabilize financial markets, but two confidential SEC studies obtained by FOX Business suggest any new rule may have a limited impact.
After the market crash of the Great Depression, the Securities and Exchange Commission created the uptick rule to prevent so-called short sellers from being the only investors to cause a stock price to decline. In a short sale, an investor borrows shares of a stock from a broker, sells the borrowed shares and pockets the proceeds, hoping to buy the shares back at a lower price before returning them to the lender. The difference — if any — is kept as a profit. Thus, a short sale is a bet that a stock will decline in price.
Under the uptick rule, a short sale could be executed only after a trade at aslightly higher price — 12.5 cents or 25 cents, for example.
Supporters of that requirement say it helps check stock manipulation, volatility and steep, rapid price declines — particularly as a result of so-called “bear raids” by short sellers who join together to drive down the stock of a vulnerable company, sometimes by spreading negative rumors about the firm.
But in 2007, the SEC repealed the rule. The agency argued it was outdated and ineffective at exchanges that had converted to decimal trading
(Now you have to ask yourself just who pumped and prodded the SEC into doing a “study” that eventually led to repealing the uptick rule? Seriously… Which group of lobbyists were in to see Chris Cox and the rest of his keystone cops? Jim Chanos? Richard Baker? Other hedge fund lackeys? Prime brokers? Or more likely all of the above)
… in which shares now trade in penny increments. As recently as October, the SEC said short selling played an “important role” in the market “for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk-management activities.”
(Or maybe the “important role” the SEC is describing is to protect the interests of a powerful group of hedge funds, brokers and Wall Street traders … the group that The Daily Show’s Jon Stewart so aptly described …
“People that believe that there are two markets: One that has been sold to us as long-term. Put your money in 401ks. Put your money in pensions and just leave it there. Don’t worry about it. It’s all doing fine. Then, there’s this other market; this real market that is occurring in the back room. Where giant piles of money are going in and out and people are trading them and it’s transactional and it’s fast. But it’s dangerous, it’s ethically dubious and it hurts that long-term market. So what it feels like to us—and I’m talking purely as a layman—it feels like we are capitalizing your adventure by our pension and our hard earned money.
… Wall Street traders that are doing this for constant profit on a day-to-day for short-term profits. These guys were on a Sherman’s March financed by our 401ks and all the incentives of their companies were for short-term profit. And they burned the f—ing house down with our money and walked away rich as hell.”
Note: More than 50% of the trades done today are via “quant funds” using algorithmic trading programs that can blitz thousands of trades across the screen in the blink of an eye … sort of like a giant rigged slot machine.)
But with markets dropping sharply in the last year, many investors, along with some lawmakers, have called on the SEC to reinstate the rule in some form — charging, among other things, that its absence has revived “bear raids” on certain stocks, particularly financial stocks, driving down their share prices, possibly below levels warranted by a company’s fundamental operations.
(Gee, do ya think there are such things as contrived “bear raids”? I’m sure any prospective profiteers would think twice about doing something morally corrupt and often illegal. After all, the SEC might come after them. Ooohh! I’m scared of the SEC … They found Madoff didn’t they? Oh that’s right, he confessed)
“I’ve been in this market for more than 50 years now. I’ve never seen stocks that go up and down — but mainly down — like they have” recently, said Sen. Ted Kaufman, (D-Del.). “The bank stocks selling at the rates they’re selling — you’ve got to believe part of this is bear raids.”
The SEC said it will formally consider whether to propose a “short sale price test” at an opening meeting on April 8. In a price test, a stock would have to rise a bit in price — three cents or five cents a share, for example — before an investor could sell it short.
In her Senate confirmation hearings in January, SEC Chairman Mary Schapiro pledged to review the rule. But in one confidential SEC study written in December by the SEC’s Office of Economic Analysis
(Guess they borrowed a few quant geeks from Chanos’ hedge fund to help with the SEC study?)
researchers using simulations found that a price test would be more effective “during periods with little volatility…counter to the intent of such a rule.”
A second, related SEC study suggested that restrictions on short selling might not have a major impact in preventing significant declines in a stock.
(More brilliant work by the “borrowed” math geniuses)
That study examined the impact of short selling without any restrictions for periods of “extreme” returns — big moves up or down — for a stock. In “extreme” declines, the report suggested that short sales are too small a portion of total sales of a stock during a decline to factor heavily in its drop.
“Our results are inconsistent with the notion that, on a regular basis, episodes of extreme negative returns are the result of short selling activity,” said the report, which examined actual short selling for 13 days in September 2008. It noted that “the average price aggressiveness of sellers who own the stock is higher than what is observed for short sellers.” Translation: stockholders dumping a stock appeared to be a bigger reason for a price decline than short selling.
(Look … an arsonist needs an accelerant to ensure the building will engulf in flames … short sellers spread gasoline and light the match… yet the primary fuel for the blaze comes from the “scared out of their wits” longs … I blame the arsonist and his accelerant (no uptick required) for the gutted building … NOT the longs who capitulated … morons!)
But the findings found certain price tests effective in slowing and reducing short sales in some circumstances. In computer simulations of stock trades, one of the studies found:
- A price test would be “more restrictive” for lower priced stocks and more active stocks.
- A price test “would be less restrictive on short-sale orders during periods of large positive returns and large negative returns, though the restrictions are greater in rapidly declining markets compared to rapidly advancing markets.”
Researchers also found that “even moderate changes in bid increments can have a big impact” on limiting short sales. Short selling was “deeply constrained” in simulations of actively traded stocks even with a small uptick, such as three cents, because such stocks were traded in narrow spreads between buyer’s bids and seller’s asking prices.
For example, for actively traded lower priced stocks, an uptick requirement of three cents a share to execute a short sale would force short sellers to place orders at three cents a share above the last trade “99% of the time…resulting in lower execution rates and longer time to execution.” In periods of “moderate” volatility, less than 20% of the short-sale orders were executed in the SEC simulation.
The research also suggests that bigger upticks — such as five cents or 10 cents a share — could be more effective at curbing short selling. In the simulation with a penny increment, investors would be able to execute about 60% of their short-sale orders.
“These statistics suggest that, for practical purposes, high bid increments, such as five or 10 cents, might be equivalent to a ban on short selling in some stocks, especially during periods when prices are not changing rapidly,” the study said. Other studies — government and private — on the impact of the uptick rule have been conflicting.
(You guys could have saved yourselves a whole lot of time, trouble and money … just exhume Joe Kennedy and he can explain the whole game … Enough with the studies already … Implement a new rule! Just fix it!)
Rep. Brad Sherman (D-Calif.) is one of 27 members of the House Financial Services Committee to sign a letter to the SEC Wednesday urging the agency to approve a new version of the rule. He said he had not reviewed research on the issue and deferred to the SEC on it.
But he said, “You’ve got to ask the question, ‘Why not restore the uptick rule?’…It may be effective in some circumstances. We have a strong national interest in stabilizing the markets, particularly for financial institution stocks, and this is something that the government can do at no cost to the taxpayers and no increase in the national debt.”
Sen. Kaufman believes a new rule would help “keep volatility down,” prevent “bear raids” on vulnerable stocks by “predators” and help restore investor confidence in the markets.
”We can come up with an uptick rule,” he said. “I’m not arguing about whether it’s a tenth of a cent or whether it’s a quarter or whatever else it is. I’m just saying we can put the software in, in a new digital market. It’s just the will to do it and the decision to do it.”
An SEC spokesman called each study “a preliminary analysis based on data available at the time” and said it “won’t necessarily be the final view” on the issue. The studies were ordered by former SEC Chairman Christopher Cox, after the agency temporarily banned short selling in 19 financial stocks for about a month last summer. Cox was trying – but failed — to convince his fellow commissioners to approve a new version of the uptick rule.
(You’ve got to be kidding me?!!! As Rome was going up in flames there were actually SEC Commissioners voting against restoration of an uptick rule? Were they shorting financials in their own accounts? Which A—hole Commissioners voted no? … I want names!)
“Despite the difficulty in finding common ground among the commissioners and the exchanges on this important issue, there is unanimity of opinion among the commission and the SEC’s professional staff that the stated aim of the rule — to discourage manipulative conduct — remains an important regulatory objective,” Cox said in the letter to a member of Congress who supported reinstating the uptick rule.
(That’s nice “spin” Cox. Sorta sounds like this; “We have great sympathy that your house burned down, but according to the terms of your policy, we have to deny your claim … Luck to ya”)
Douglas Kass, general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP, sells stocks short as part of his investment strategy. He called the uptick rule “antiquated,” but said that so-called “quantitative funds,” which use computer formulas to trade, benefited from the absence of the rule.
“They short stocks that are relatively weak and exaggerate their moves by pressing them on the short side, serving to force long holders that lack conviction to sell — so it tends to make a bad market miserable!” Kass said in an email.
He said he would “most definitely” welcome a price test — of a penny a share, which he would “not really” affect his trading strategies. “Mandating a specific five or 10 cents increase in stocks to qualify as uptick wouldn’t be agreed to by anyone, in my view,” he said.
(Well Doug, “the enemy of my enemy is my friend” … so today you are my friend … but it’s a tenuous alliance as you can “talk your book” with the best of ‘em. And right now it looks like you’ve gone net long. Good on you! But come on Doug, we can do much better than a miserly penny uptick. How about we use a tiered uptick starting with a penny for under $10 per share stocks and then move up from there? [See example above])
The securities industry is taking a “wait and see” approach on a reinstatement of an uptick rule by the SEC. But Travis Larson, a spokesman for the industry’s principal trade group, the Securities Industry and Financial Markets Association, said implementing the rule now — across multiple exchanges around the world, in digital time and trading — could require stock exchanges to make large investments in new technology and software, a “massive expense” that could be passed on to investors.
(Hey Travis, installing an airbag in a car costs a few bucks too … but I can now buy 100 shares each of BAC, C, GM, F, LEH, BS for less than the cost of a new airbag install! … You catch my drift?)
“Today, finding that uptick and matching that uptick becomes a technological implementation nightmare,” he said.