April 9, 2009
The uptick rule can easily be circumvented, as is explained in my book Scientific Investment Analysis (5th edition published by SIA in 2008 by SIA).
The attached article (Shorting Down Value: The Toxic Effect of Insufficient Internal Liquidity” presented at the 2005 Southern Finance Association meeting and at the 2006 WHU Conference in Germany) indicate the usefulness of imposing some sort of restrictions on short sales. The proposal to restrict short sales after a large drop might do the trick, as a careful reading of the research should indicate). It would also help immensely if the SEC would crack down on illegal "naked" shorting that is rampant. After all, what good are any rules if the SEC doesn't plan to enforce them.
Sincerely,
Austin Murphy
P.S. I'm guessing that one of the reasons the SEC allows the illegal naked shorting (i.e., shorting without delivery of shares) is that the brokerage firms like that policy (they make a lot of money on customer short sales, and requiring the borrowing and delivery of shares imposes a little administrative cost on them that inhibits the profitable bankrupting of thousands of firms by their heavy shorting customers like hedge funds). One way around the uptick rule actually provides more revenue to the brokerage firms, so they probably would far prefer that to enforcement of the delivery requirements for shorted shares.
--
Professor of Finance (Oakland University, SBA, Rochester, MI)