May 14, 2009
As a long-only equity porfolio manager, I have witnessed from afar many abuses and fraudulent acts directed at our heart of our financial system. And one would think given my long-only investment bias, that supporting an "uptick"-type rule on short sellers would be a logical consideration for my support.
That would be the furthest thing from the truth. In fact, I think that re-instituting the Uptick Rule (in whatever form) is a waste in time and effort that diverts valuable resources in favor of other efforts that are in dire need of new regulation and enforcement (i.e., OTC derivative transactions, market manipulation in propietary and agency accounts, catching the next massive Ponzi scheme, etc.).
You also cannot repeal a rule whenever it is most "convenient" for a particular group, or groups at a particular point in time-- and expect to be taken seriously by the same investors you are given the responsibility to "protect". Why it took so long to repeal a rule after being around since the Depression years-- and bringing it back after a 3 year hiatus-- is stunning. And not in a good way, as it places in doubt the trust and confidence investors have in their regulatory instituions and those that arbitrarily make those rules.
Look-- volatility has increased since the repeal of the Uptick Rule. There's little doubt about that. But what gets overlooked by most of the investing public is that volatility works both ways-- on both the upside and the downside. As such, market manipulation works both ways as well.
Case in point, let's take the conditions of the latest market rally. As a buy side/long-only investor, I was a little more than purplexed to see equities that had little reason to rally were going up in value way more than what logic (and fundamentals) would dictate.
Was short selling-- and the resulting "squeeze" that followed-- responsible for some of these sizable short term gains? There's little doubt some of it was. But when you look closer and you see large volumes being traded well above a volume weighted average prices (VWAP), you realize that market makers (and their agents) are capable of abusing quotes and distorting valuations on the ASK-- as well as the bid.
Before I really get off on a tangent, perhaps the most logical and fair approach to reduce market volatility is to approach the potential solution in a symmetric way-- rather than trying to apply an asymmetic solution to a clearly symmetric problem.
I suggest you might consider both an "Uptick Rule" AND a "Downtick Rule"-- as a primary way of controlling volatility in more symmetric and holistic fashion. Perhaps both rules can be applied via thresholds based on "extreme" price and volume activity. But such rules, if implemented, need to be applied: (a) universally among all market participants and (b) symmtrically to control potentially manipulative actions on both the long side AND the short side.
Proposals that fail to address both sides of the equation as such will likely leave unintended consequences for the markets,for public policy-- and most importantly-- for investors. Let's face it-- more and more of the investors you are trying to protect (especially the retail investor) are getting more involved on both the short and long side of transations these days. Both sides need equal protection-- if the goal is to truly limit volatility.
I understand and respect the good intentions behind these proposed amendments. But I respectfully think they are arbitrary, not uniform, and are being introduced at precicely the wrong time-- a time where investor trust in its institutions is most vulnerable.