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SEC Running in Circles

I guess the workers at the SEC are too busy looking at porn instead of thinking about ways to better market transparency and stability.  In the latest “solutions” to fix the problem, the SEC has issued a “number of subpoenaes” and has thought about placing even more circuit breakers into the market mechanisms.

Am I the only one who sees a mind numbingly simple solution to the problem?  To re-instate the “uptick” ruleThe rule was in effect from 1938 until July 6, 2007.  It just so happens that since the rule was lifted, we had the most volatile markets since the great depression and recently experienced a decline on one day which can only be compared to the crash of 1987 in which 6 or more stocks traded at zero dollar prices.

The uptick rule simply states that you can only short a stock at a price that is above the last traded price.  This does not stop shorting or stop stocks from moving down quickly, it merely stops people and institutions from pooling their capital and driving the stock down without limit and beyond fundamentals i.e. you cannot create a self-fulfilling death spiral such as the 5 minute crash on May 6th.  In addition, the uptick rule does not apply to futures, derivatives or market makers.

If we argue that the uptick rule truly has no effect, then why not reinstate it?  I cannot prove that markets would have been less volatile during the financial crisis and neither can you disprove it.

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3 Responses

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  1. jb says

    I wonder if the inverse ETFs will not work if the uptick rule is reinstated……

  2. SurlyTrader says

    That is actually a great point. Leveraged ETF’s on sectors, specifically the double or triple bears, would not work well at all with the uptick rule. They could still go through investment banks to place trades but the costs and timing would be prohibitive. I also do not believe the triple up or triple down funds are good for the average investor. The embedded fees and natural slippage make them terrible over longer periods of time and easily allow more people to lose money quicker within their actual retirement portfolios. Futures and options are still available so there is no reason you can’t play in that arena outside of your retirement funds.

Continuing the Discussion

  1. VIX Futures Move with S&P 500 | SurlyTrader linked to this post on December 19, 2011

    […] a research paper titled, “Evidence of market manipulation in the financial crisis”.  As I have complained in the past, the researchers attribute much market volatility to the repeal of the uptick rule and subsequent […]



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