May 12, 2009
I think the SEC made a huge mistake in removing the uptick rule on short selling. This rule was to protect individually investors from being taking advantage of by professional traders, who seek to create panic situation, thereby forcing individuals to sell the stock. The study that was done to determine if the uptick rule should be removed was done during a bull market. The study should have included a bear market period to see what effect it would have on the markets. If the uptick rule was not removed, I believe the stock market correction in 2008 would not be as severe. The argument that short sellers should have the same advantages as long sellers is totally incorrect. Individual investors cannot short sell a stock to push prices down like a professional trader can. So when the uptick rule was removed, it only helped the professional traders looking to take advantage of individual investors. When someone tries to push a stock price up by buying lots of a companys stock, the price usually goes up. If the price keeps going up, anyone that holds the stock usually doesn't panic or his forced to sell if they have the stock margined. In fact the individual investor are happy to see the price go up. If the price goes down to what it started at, again no one that held the stock before is forced to sell the stock and none of the original investors are hurt except the speculator that tried to push the stock up. On the other hand, if a short seller sells the stock to try to push the stock price down without having to worry about the uptick rule, individual stockholders have a tendency to panic when the stock price starts to fall. This is especially true if the individual invest has margined the stock. When individuals see the price of the stock fall for no apparent reason, they tend to sell the stock. That leads to falling stock prices, which cause more panic and more selling. This panic is exactly what the professional short sellers want. The more selling, the lower the stock price and more the more money short seller makes. If investor owned the stock and it was margined and if the stock price falls enough, it forces these stockholders sell even if they dont want to, which leads to lower stock prices and more selling. Only professionals can short enough stock to drive prices down. Individual investors do not have the ability to short stock enough to make a difference. Why should we have a rule that only professional can take advantage of and cause individuals to sell at the most inopportune time? . No one is saying that you cant short a stock. All the SEC needs to do to create more level playing field for the individual investor is to reinstate the uptick rule so professional traders can't short a stock with impunity.