June 10, 2009
The Honorable Mary Shapiro
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Sub: The Uptick Rule
Copy to: Hon. Gary Ackerman, Hon. Edward E. Kaufman, Hon. Johnny Isakson
Dear Chairperson Shapiro:
In response to the release 2009-76 by the U.S. Securities and Exchange Commission dated April 8, 2009, here is the recommendation -
Reinstate the Uptick Rule exactly the way it was until June 2007. That means uptick test based on the last sale price for exchange-listed securities and Nasdaq bid test for Nasdaq stocks. Anything else is risky, untested and detrimental to millions of Americans who invest mostly long.
Reasons in support of reinstating the original uptick rule, and reasons for discarding circuit breaker proposal:
1. SEC's pilot study for removal of uptick rule was flawed. You concluded incorrectly that there was no statistical difference in stock price changes between uptick-rule group and no-uptick-rule group. Actually, no-uptick-rule group had about 2 percent lower returns in a 6-month period. Dr. Dion Harmon and Dr. Yaneer Bar-Yam of New England Complex Systems Institute performed a detailed analysis and showed that the results were indeed statistically significant.
The data showed clearly that removing uptick rule adversely affected stock prices. One of the Commissioners in the April 8, 2009 meeting asked for empirical evidence. This is strong empirical evidence in support of reinstating the price test promptly. The rule should not have been removed in the first place.
2. You admit that the pilot study was done only on the one-third of the largest stocks. (SEC Release 2009-76) Then, why did you remove the price test on ALL stocks in July 2007? Small and midsize securities (typically market capitalization below $5 billion) are less liquid, have larger bid-ask spreads and are subject to more predatory short selling in the absence of the uptick rule. There was no basis for removing the price test on them. SEC ignored the warning by American Stock Exchange.
3. The Securities and Exchange Commission was established with the sole purpose of protecting investors. Yet, in recent years, the Commission has put more emphasis on less important matters. One commissioner, in the April 8, 2009 meeting called for cost-benefit analysis. If an SEC rule is detrimental to millions of ordinary investors, it does not matter how costly it may be for exchanges and trading companies to implement it. The removal of the uptick rule has already cost several hundred billion dollars in reduced portfolios to millions of Americans, who have life savings in stocks and mutual funds (mostly long). Millions of ordinary investors are not allowed to even short stocks in their retirement accounts. By the mandate given to you by U.S. Congress, you are required to take care of investors first. Everything else is secondary.
4. Problems with Circuit Breakers – There are plenty. First of all, any loss, 5%, 10% or even 0.1% due to abusive shorting is unacceptable. If you get 5% loss everyday, at the end of week you lose close to 25%. The whole concept is ludicrous.
When the U.S. Department of Transportation implemented strict airport security measures post 9/11, did they say, we will kick in 100% checking if more than 5% of travelers are seen violating the rules? NO. You need to have a system that is always on, 100% preventive. You have to be proactive, not reactive.
5. The idea of circuit breakers is completely untested. On one hand, an SEC Commissioner says, she wants to see empirical evidence. And yet the Commission allows a completely untested, unproven proposal to float. It is not worth the unseen risks.
6. One more critical problem with circuit breakers. Millions of working Americans have money in various stocks. They are not traders they are not sitting there monitoring stock markets six hours a day. How is average Joe supposed to know that the stock he owns now has circuit breaker triggered? He will be at a distinct disadvantage versus a trader when rules of trading change at any time based on price levels. That is totally unacceptable. This alone should dump the idea of circuit breakers. Once again, please remember that your first and foremost duty is to act in the interest of millions of investors.
Frankly, it is immature of major exchanges like NYSE and Nasdaq to even propose any type of circuit breaker. It shows how far removed they are from needs of ordinary investors.
7. Are Exchanges acting in the interest of its member firms? No. A poll by NYSE revealed that 85% of member firms want the original uptick rule reinstated.
NYSE chief commented last year that reinstating the original rule would be easy and quick. Yet, months later NYSE along with Nasdaq and BATS came out with a proposal of circuit breakers, which as explained above, is severely inadequate and unacceptable. NYSE and Nasdaq need to listen to their member firms.
8. The original uptick rule needs to be applied also to ETFs, which are a collection of stocks.
9. The shallow argument of decimalization - Original uptick rule worked very well for six years, from 2001 to 2007, with stock prices decimalized, i.e. stock prices in penny increments. And it will work fine in future. The argument that it does not work with decimalization is hollow. For even the most active stocks (like Dow Jones components) there is always a last sale price determined every second. Use that for price test for trades the next second or two. It is only a matter of revising trading programs. Those exchanges or trading companies that do not modify computer programs to meet the price tests should be barred from operations.
Before concluding, on behalf of millions of ordinary investors, I wish to express sincere thanks to members of Congress, both democrats and republicans, who are acting relentlessly to correct the situation and guide SEC to the reinstate the uptick rule. I want to particularly thank Hon. Gary Ackerman, Hon. Edward E. Kaufman, and Hon. Johnny Isakson. I also thank Hon. Jon Tester, Hon. Saxby B. Chambliss, Hon. Carl M. Levin, Hon. Arlen Specter, Hon. Kit Bond, Hon. Maria Cantwell, Hon. Carolyn McCarthy, Hon. Anthony Weiner, Hon. Carolyn Maloney, Hon. Michael Thompson, Hon. Nita Lowey, Hon. Michael Capuano, Hon. Ed Perlmutter and Hon. John McCain. I am hopeful that Congress will act decisively and quickly to reinstate the original rule and protect millions of investors in case SEC fails to act within 30 days after June 19, 2009.
In conclusion, please bring back the original uptick rule immediately.