May 27, 2009
May 27, 2009
Re: Reinstatement of the Up tick Rule
U.S. Securities and Exchange Commission
Dear Sir or Madam,
There is a big difference in the nuances of short selling and reading about it in a book.
As someone with over 25 years of trading experience, here is a simple example of short selling today vs. short selling under the up-tick rule.
Today: Imagine yourself at a computer screen, filling in some boxes. Sell short 50,000 shares market click. Sell short 50,000 shares, market, click. Sell short, 50,000 shares, market, click. In about a minutes time, I can sell short 300,000 shares. Now take that figure times 390 minutes, times perhaps hundreds of participants doing pretty much the same thing. The result: massive downward pressure, triggering stop loss orders, causing panic, and resulting in stock prices manipulated down 80-90% in a matter of days.
In the past: Sell short 50,000 shares, market, click. Now I need an up tick. Say point, but now, the buy/sell orders must match. So if the buy is for only 200 shares, Ive only sold short 200 shares, not 50,000 shares at that up tick price. Now, if the stock drops a point and the next up tick buy is for 2,000 shares, Ive only shorted another 2,000 shares. And most people under these rules, would not place a market order, because, the order could be filled substantially lower than the seller originally hoped for. Thus, the amount of selling pressure is greatly reduced. The difference is a gargantuan advantage to a short seller under the new rules. These rules were established about 70 years ago, after the Great Crash of 1929, to prevent this very thing from happening.
Academic models tested in times of market stability which resulted in the uptick repeal has cost this country and shareholders $billions of dollars. And as is often the case, the model works until it doesnt. Remember Long Term Capital? They had two Nobel Laureates as founding partners, only to implode when their model no longer worked. We need Street Smart solutions, not an academic model. Even Mark Hanes from CNBC knows this rule needs to be reinstated.
This has been a checks and balances used to safeguard our markets for decades. Had this rule not been repealed, Im confident we would not be in this mess today. Sure, the problems would have surfaced, but at least we could have worked through them at a reasonable pace. Not being forced into a panic decision, once a stock price falls 90% in two to three days and having little, if any options. This is so fundamental and so obvious it is almost beyond my comprehension why a revision of this rule was not considered first and before other recommendations were instituted. If a foreign government were attacking our financial system this way, we would consider this type of attack, an act of war. We must counter this assault the way our Forefathers had in the past. Reinstate the Rule
Jeffrey A. Jaeger, CFP
Sr. VP/Financial Consultant
Accredited Wealth Manager