June 23, 2009
There are those who would urge "caution" in reinstating the uptick rule, and imply that such an act may be rushed due to political pressures. It is important to recall that for over sixty years, the uptick rule was an integral part of the structure of the US market system, and only in the past couple of years was it repealed. The onus of proof falls not on those who claim that the uptick rule is a reasonable component of a healthy market, but on those who claim that it is not only irrelevant to the system, but damaging to it.
The study performed by the SEC in making the decision to repeal the uptick rule was a six month comparison of pilot stocks with the uptick rule eliminated, with other stocks which did not. Only the first six months of the one year pilot period were used in the report. The results from that study, which has been cited as proof that unregulated shortselling does not damage companies, fell far short from being conclusive enough to justify a radical change in market regulation. In fact, the study demonstrated that deregulated pilot stocks performed worse over the course of the study, by an economically significant amount. The justification for repealing the rule was that the difference between the two categories of stocks was not statistically significant--it fell just below the 95th percentile. With an economically but not statistically significant result, the only conclusion one can scientifically justify is that the study performed was insufficient to give conclusive results. It certainly does not justify the decision to repeal the uptick rule. So as the SEC is spending several months deliberating on the right course of action, consider that the default state of the system includes the uptick rule. If a borderline study lasting six months was considered as reason to remove an economic regulation that had been established for the better part of the century, then a reinstatement of that rule is not a rushed decision due to political pressures, but a restoration of the basic foundation of the economy, on which we should indeed build more structures to suit the modern situation.