April 16, 2009
I would recommend to the Commission Chairwoman and members that the uptick rule as applied on a market wide and permanent basis be readopted.
The uptick rule prior to 2007 worked fine after the Great Depression, and after its repeal we experienced the stock market meltdown in 2008-2009. I leave it to others to show the causal relationship between the two events.
The SEC was established as a result of the Great Depression to serve the interests of the investing public after many individual investors suffered staggering losses. Today, most trades are automated or through the black box by institutions. These institutional investors have experts and professionals in finance, accounting, tax and securities law, computer science and mathematics to look after their interests and likely find the SEC to be a hindrance.
On the other hand, individual investors do very little of the overall trading. Most individual investors don't have access to experts or computerized trading systems that can take advantage of small movements in the market, and have to have a longer term strategy to be successful.
The repeal of the uptick rule allowed automated trading systems to further upset the balance between the individual investor and the institutional investor and has allowed the institutionals to have an unfair advantage over individual investors because of the automation and expertization of their trading processes. Without the uptick rule, institutionals, especially hedge funds have driven stocks down relentlessly to the point that the individual investor has had to cry mercy in recent months. Many individual investors are reluctant to return to the market despite the recent upward reversal for fear of more losses and control of the markets by institutionals.
The uptick rule serves to balance the interests between long and short investors and tips the scale in favor of long investors. The reason why is because of the human perception of good and bad news. It is part of human nature that bad news is harder to shake off, even if its false than good news that is false. Companies have the legal obligation to deny rumors about their company, but usually only do so as to good news that is not true. It is harder for companies to deny bad news because the bad news is disguised to be vague enough that it is hard to refute. Therefore it is important that the uptick rule be re-instated to provide the overall balance needed between long and short sellers.
If the Commission chairwoman and members are concerned about protecting the individual investor, I would recommend it readopt the uptick rule on a market wide and permanent basis.