May 20, 2010
Much debate has occurred as to whether the SEC should implement an uptick rule. Implementation of an uptick rule is specious for a number of reasons. First, it prevents rapid and efficient price discovery – hallmarks of a properly functioning market. Second, it allows long holders to sell ahead of short sellers – which begs the question of whether a regulatory body should be in the business of favoring certain market participants over others. Third, some of those favoring reinstatement of the uptick rule claim that nefarious short sellers can artificially depress the prices of stocks. The operative word here is artificially. Were the price not a true reflection of market sentiment inefficient security pricing would exist and opportunities for massive profits at the short sellers expense would present themselves. After all, who wouldnt like to purchase their favorite stock a few points lower? Fourth, short sellers provide liquidity to sellers of all kinds when a security has decreased in price. Were short sellers unable to efficiently establish a position, the downside volatility the uptick rule is intended to reduce could well be exacerbated by a dearth of buyers.
The silence of the uptick crowd when stocks are driven ever upward is notable. If their true concern was volatility, they should not object to the implementation of a symmetric downtick rule in which long buyers could only purchase stock on a downtick. By careful enforcement of both rules, one could ensure that liquidity is reduced for all market participants.