Thursday, April 9, 2009

SEC continues path to end abusive short selling

To the delight of many whose company shares are “trading at a discount,” the Securities and Exchange Commission appears to be putting some genuine thought into reinstating the now defunct ‘uptick’ rule.

At her confirmation hearing in January, Schapiro told lawmakers the agency would look at the entire area of short- selling and whether to reinstitute the ‘uptick rule’ that forces short sellers to sell at a price higher than the previous trade. With that, federal securities began contemplating ways to place restrictions on traders who bet that stock prices will fall.

Then, just recently, at the April 8 meeting of the SEC, the agency’s five commissioners voted unanimously to open the alternatives to public debate. While no definitive plan has been set, it appears as though the motion is at least pushing forward.

Sen. Ted Kaufman, D-Del., said he was pleased the SEC has begun to move on the issue but will not be satisfied until a rule is put in place “that is meaningful, difficult to evade, and vigorously enforced.”

The uptick rule was adopted in 1938 after the SEC conducted an inquiry into the effects of concentrated short selling during the market break of 1937.

The SEC eliminated the uptick rule in July 2007 as part of a planned action set into motion in 2004 to study the effectiveness of the rule. The SEC officials and researchers concluded that the rule only modestly reduced liquidity and didn’t appear necessary to prevent manipulation.
Wild swings in the market are now being attributed to the fact that the uptick rule was eliminated.

“When the [uptick] rule changed you could see a marked change (60-90 days) in the volume of volatility in various sectors. Several hundred point swing days, as opposed to once or twice a year, were happening many times in a two- to three-month period. It exacerbates any market instability or nervousness and you’re able to push it even further,” warned TXCO Resources’ VP of capital markets and corporate secretary Bob Thomae back in September.

Another criticism is regarding the research results themselves. Critics say the SEC eliminated the rule during a bull market, when liquidity was not a problem. fast forward to 2009. Market manipulation speculation runs rampant and liquidity is a huge problem.

In March, House Financial Services Committee Chairman Barney Frank (D., Mass.) told reporters, “[SEC Chairman Schapiro] Mary is moving towards the uptick rule, which some people think is very important, some people think it’s not important, nobody thinks it does any harm. I think that will go back (into effect).”

If no one thinks it “does any harm,” why not reinstate it? What else do we have to lose?