May 4, 2009
There is widespread belief, I believe backed by ample evidence, that the abolition of the uptick rule combined with the prevalence of naked shorts, contributed meaningfully to the autocatalytic destruction of capital in the forth quarter of 2008.
The change in the longstanding uptick requirement was presumably tested after 2005, but was in fact tested in 2008 – and its pretty clear that it failed the test.
I believe that reinstatement of the uptick rule – the un-watered down market wide proposed uptick rule - along with an enforced ban on naked short selling will support capital formation, in the sense at least that system design will not be biased in favor of potentially rapid capital destruction.
Equally important, there is widespread popular perception that these two factors contributed meaningfully to the collapse of the markets last fall. This has helped to drive many small investors from the stock market. Reinstatement of the uptick rule and enforcement of a ban on naked shorts will help to restore confidence by demonstrating to the investing public that the Government has moved to rebalance the playing field.