Bring Back The Uptick Rule!

The "Uptick Rule" or SEC rule 10a-1 is a securities trading rule used to regulate short selling in financial markets. With certain exceptions, the rule mandates that a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected, or at the last sale price if it is higher than the last different price. The rule was adopted by the SEC during the Great Depression in response to syndicated "Bear Raids" on individual securities.

The SEC eliminated the uptick rule on July 6, 2007. When the SEC concluded that the uptick rule modestly reduced liquidity and did not appear necessary to prevent manipulation. What in my opinion the SEC missed was that in market panics there are no buyers and stocks can be endlessly pushed down by programed selling. The chart above shows when the "UpTick Rule" was phased out. Since then stocks are down about 50% and volume on the S&P 500 ETF (SPY) has exploded.

Now given everything that has occurred since then, it's likely that stocks would still have declined. Also, I'm not against the process of short selling. But I doubt that we would have experienced some of the volatility or late day program trades that do nothing but relentlessly sell securities into a market where there are clearly no buyers. What is missing from this equation is that for every buyer there needs to be a seller and when there are lots of sellers the buyers run away. Nobody steps in front of these late day train wrecks which we have repeatedly chronicled with our charts. See our latest on this here: http://lumencapital.blogspot.com/2008/11/tsionna-at-dimming-of-day.html Better proof is to just look at the explosion late in the day when these sell programs kick in.

But let's find out. Why not have the SEC bring it back on a trial basis for six months and let's see what happens. After all the SEC got rid of the rule. They can surely bring it back.

*Long S&P related ETFs in various client accounts.