Charles Schwab On The Uptick Rule.

Charles Schwab has an editorial in the Wall Street Journal today regarding the uptick rule. We've discussed this before ourselves most recently here: http://lumencapital.blogspot.com/2008/11/bring-back-uptick-rule.html

Here's an excerpt. You can read the whole thing at the link at the end.

Restore the Uptick Rule, Restore Confidence
Short sales of stocks are fine given one tried and tested regulation.

By CHARLES R. SCHWAB

"The last time the stock market suffered from extreme volatility and risk of market manipulation as severe as we are experiencing today, our grandparents' generation stepped up to the plate and instituted the uptick rule. That was 1938. For nearly 70 years average investors benefited immensely from that one simple stabilizing act.
Unfortunately, in a shortsighted move, the Securities and Exchange Commission (SEC) eliminated the rule in July 2007, just as we were about to need it most. Investors have now been whipsawed by what appears to be manipulative trading, what we used to call "bear raids," which drive stock prices down without warning and at breakneck speed. Average investors feel the deck is stacked against them and are losing confidence in the markets.....

......The uptick rule may seem far from a kitchen-table issue, but it is critically important to ordinary investors. With more than half of all U.S. households invested in the stock market, either directly or through a retirement plan, it matters a great deal. The average 401(k) retirement account has lost 20%-30% of its value over the last 18 months -- more than $2 trillion in retirement savings has been wiped out. Behind those numbers are real people who planned and saved, and who are suddenly facing an uncertain retirement and the prospect of working longer......

......In the wake of the Great Depression, the uptick rule was established to eliminate manipulation and boost investor confidence....... The rule said that short sales could be made only after the price of a stock had moved up (an "uptick") over the prior sale. This slowed the short selling process.....In July 2007, however, the SEC repealed the uptick rule after a brief study. Manipulative short sellers couldn't believe their luck......The SEC's study took place during a period of low volatility and overall rising stock prices in 2005 through part of 2007 and didn't anticipate the kind of market we are experiencing today. .....Without this vital control mechanism, short sellers have been having a field day, betting heavily on lower prices and triggering panicked investors to sell even more.

Don't get me wrong. Legitimate short selling where a trader has borrowed shares for future delivery and believes those shares will lose value over time plays an important and stabilizing role in our markets. It provides a check on overexuberant prices on the upside, and provides natural buyers on the downside. The uptick rule, however, prevents short selling from turning into manipulative activity. Reinstating it will help smooth out the markets and reduce the speed of price drops. It will limit the ability of a small number of professional investors to trigger fast dramatic price drops that create panic among investors......

.....The SEC has an opportunity to make a real difference in helping to control future market stability and restore confidence in the fairness of our capital markets. But the SEC has been strangely silent as the crisis has worsened.......Regulators should act quickly to establish a framework and solicit public comment, then reinstate the rule and remain flexible and willing to fine tune it if necessary.

Ordinary investors' expectations for investing are reasonable. They want a fair playing field. They want to be successful. They want to provide for their families, support their children's education, have a comfortable retirement, and maybe even leave a little bit for future generations. But they can't succeed when the markets are gripped by fear and manipulated by those who want to profit from that fear, at the expense of everyone else.
It may be too late for the restoration of the uptick rule to have much impact on where we are today. But there is no reason to wait and we need the protection in place for the future. It is time to restore it."

Mr. Schwab is the founder and chairman of the financial services firm that bears his name.

Here is the full editorial Link: http://online.wsj.com/article/SB122878208553589809.html