April 22, 2009
As an independent trader of my own account since 2002, I have experienced first hand up and down markets, with and without the uptick rule. I buy stocks hundreds of times a month. I short sell stocks hundreds of times every month. I also buy back these stocks when the short sale must be covered. There are always two sides to every trade.
Stocks will fall when they are over valued with or without an uptick rule. Further restrictive legislation will never prevent people from selling their stock when it is perceived as overvalued. If an over valued stock plummets because of massive selling, who is to say that it wasn't manipulation on the buy side that put it up there in the first place? How else would the stock of a manufacturer of colored plastic shoes (CROX) be worth double what General Electric(GE) was?
If investors are blind to the laws of normalcy and believe stocks will rise forever, why should sellers and short sellers be blamed for the investors stupidity?
Active short sellers like myself, provide a valuable service by adding liquidity to the markets and provide a check and balance to the rampant manipulation on the upside.
My preference would be to leave the uptick rule unchanged and agree with the SEC since they had already studied this when cooler heads prevailed and decided to eliminate the rule.
However, of the proposals the SEC is considering I rate them in the following manner best to worst:
1.Security-Specific, Temporary Approach
Impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker uptick rule).
2.Impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker modified uptick rule).
3.Ban short selling in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker halt rule).
4. Market-Wide, Permanent Approach
Proposed Uptick Rule: A market-wide short sale price test based on the last sale price or tick (a proposed uptick rule).
5.Proposed Modified Uptick Rule: A market-wide short sale price test based on the national best bid (a proposed modified uptick rule).
Sincerely,
Scott Farnham