May 8, 2009
I urge the SEC to reinstate an Uptick Rule for short selling. The Uptick Rule implemented in the 1930s worked well for almost 70 years, and a 1963 SEC special study confirmed the Uptick Rule as effective and fair.
The Regulation SHO pilot study of 2007 also validated the uptick rule, specifically by showing short sellers were liquidity providers with a tick test, but could become liquidity takers without such a test.
So-called naked shorting should be banned, and the ban should be enforced. Naked short selling creates theoretically UNLIMITED SUPPLY of stock out of thin air, curtails capital formation, and dilutes the rights of existing shareholders. Naked short selling simply must be eliminated.
Levered exchange-traded funds violate margin rules and should be banned. At the very least, short exchange-traded funds should be subject to a reinstated Uptick Rule. These levered short funds have been shown to not be viable hedging instruments, and serve only as speculative intra-day trading vehicles. Without an Uptick Rule in place, they remove liquidity from the capital markets, rather than adding to it.
I do not accept with the argument that reinstatement of the Uptick Rule is too technologically complex. A number of professional software programmers have commented that such a rule could be implemented with only modest software revision requirements.