August 14, 2009
I know you have floated a number of proposals on the uptick rule, but why not keep it simple and just bring back the old rule. Stopping short selling when a stock is already down 10% would help limit damage for a day but they would just be back the next day.
By allowing naked short selling, hedge funds or whoever, sit on the offer and break the buyers and then take the stock down on their own selling and the selling of others who had bought the stock. (I call it the avalanche effect). The stock cracks far more than it should and if there is enough fear, buyers totally disappear and the stock cracks like an egg.
I know that you have had academic studies suggesting that the percentage of short selling had a small effect on prices but this is garbage. It doesn't take a lot of stock when you have broken the buyers and sell into the sell off yourself furthering the panic.
By instituting the uptick rule all the time it would force short sellers to use alternative methods such as buying puts and getting long stock so they could sell the stock down.
This is better because market makers will short stock against the puts and when the buyers of the puts sell them the market makers buy in stock helping to support prices.
Or the buyers of puts buy in the stock, either way this better supports the stock and makes it harder for the short sellers to wreak havoc.
Reinstate the old rule it works better than any other proposal you are thinking about passing.