June 16, 2009
I want to thank the SEC for revisiting this critical issue.
The catastrophic stock market conditions the uptick rule was designed and proven to prevent for 70 years onset instantaneously upon the rule's repeal. This simply cannot be coincidental.
A large bipartisan coalition of experts supports reinstatement of the rule. It strains credulity to suggest that President Clinton, Secretary Clinton, George Soros, Charles Schwab, Robert Pozen, Warren Buffett, Jim Cramer and numerous others do not understand the issue well enough to offer an authoritative opinion. Chairman Bernanke told Congress the rule "may have been helpful" during the current crisis. Former SEC Chairman Christopher Cox, the man who rescinded the rule, now supports its reinstatement.
85% of NYSE members supported reinstatement of the uptick rule in an October 2008 survey. 91% of the members surveyed by the National Investor Relations Institute-the largest association of public company investor relations professionals-in April 2009 supported reinstatement of the rule.
Professor Yaneer Bar-Yam has analyzed the SEC's 2005 study of the effects of the uptick rule, and found that the SEC's own study demonstrated conclusively that unprotected equities would suffer significantly reduced prices and the market as a whole would experience dramatically increased volatility.
Of the five proposals forwarded by the SEC, I feel the best is to simply return a modernized variant of the original uptick rule. It is obvious from Professor Bar-Yam's analysis that the rule promoted marketwide stability in addition to protecting individual equities from "bear raids." The uptick rule has stood the test of time, is familiar throughout the industry, and was in place when the market was at very high levels in the early summer of 2007 without any apparent administration problems for the NYSE or any significant damage to the hedge fund community.
As a second choice, I would support the modified "upbid" rule. I believe this would also promote marketwide stability, and is widely familiar from 11 years of use by the NASDAQ, again without apparent administration problems for the exchange or damage to legitimate short-sellers.
I believe any of the circuit-breaker proposals are worthwhile, would probably be effective, and are infinitely preferable to the status quo. The NYSE, NASDAQ, and BATS support the 10% circuit breaker backed by the modified upbid rule, so I believe this plan has some merit. Also, simply stopping a stock from trading after it has declined 10% would be a very cogent approach and would seem to be the easiest to administer and enforce. I cannot emphasize this strongly enough: any of these plans is preferable to doing nothing.
In that regard, it is worth noting the NYSE administers 10, 20, and 30% circuit-breakers for the Dow itself. If the Dow declines by 10% trading is stopped for a specified period of time in order to quell panic. Given that, it is hard to understand why, at a minimum, individual equities don't merit similar protection, and it is awfully difficult to see how adoption of equity specific circuit-breakers would be either harmful or somehow "unconstitutional" as some comments by the hedge fund industry have suggested.
Adoption of a price test or circuit-breaker is foundational to rebuilding orderly, stable equities markets that equally protect all investors. I have every confidence the SEC will take the appropriate action, and I thank you for reviewing my comments.