August 22, 2009
I am strongly against reinstating the uptick rule on short selling. The 'reinstate the uptick rule' crowd did not put forth any convincing argument that would support their point. The only argument I hear is that 'we need the uptick rule to restore the credibility in the markets and stop the volatility'. This are more emotional than factual arguments.
My arguments against the uptick rule are the following:
1. The short sellers had nothing to do with the market collapse in 2008. The market plunge happened because of the abusive accounting practices of some financial firms not because of the short-selling. If the long investors thought that the economy was all right at the time and the market was punished unduly so why then they didn't step in and started to buy stocks at the bottom rock prices? Because they didn't see the value in stocks based on their forward looking earnings and dividend cuts. The market plunged not because of the excessive short-selling but because of the lack of the buyers. There is no such thing as the risk free investment when the markets always go only higher.
2. The rising volatility and falling prices present the opportunity for the short-term traders as well as for the long-term investors. For the investors with the long-term outlook the short-term market oscillation shouldn't matter. For them the best way to have a stable long-term portfolio is through diversification between different asset classes ( stocks, bonds, commodities),by using options and not by artificially regulating the stock fluctuations. Some commodity markets are known to be more volatile than the stock market but no one talks about introducing the uptick rule there.
3. Technically from the investors point of view short-selling and selling are identical. Short-selling may be used as hedging tool of a long portfolio of stocks as a substitute of their outright selling.
4. Some groups of professionals like market makers have to be exempt from the uptick rule since they use short stocks as a hedge of their long positions. The whole brunt of the uptick rule will fall again on the retail investors. They will be again the scapegoats of the failing system. How fair is that? If the rule can't be imposed on some group of traders then all participants of the market should be exempt. The markets should be democratic.
5. The markets should be symmetric for buyers and sellers. The short sellers are losing their shirts now by shorting this skyrocketing markets so why not establish a down tick rule as a matter of fairness.
6. There is no definite proof that the uptick rule will prevent the market collapse next time a black swan event occurs. The people will sell out of fear and no uptick rule will stop the market plunge.
SEC should resist all the political pressure in the matter of the uptick rule. SEC should not make it's decisions by timing them with the market fluctuations based on the black swan events similar to that happened last fall and do the right things that will have positive effects on the free markets in the long run.