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Reinstating Short-Selling Uptick Rule by SEC Head a Good Start

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Overall, many regulatory measures still need to be revised by the SEC to catch up with the recent innovations in financing/investing methodologies in order to restore the public’s confidence in financial markets.  And in light of the market turmoil that the nation has been experiencing over the past two years, it had become very obvious that the SEC needed to reinstate the short-selling Uptick Rule due to the large multitude of stock shorting transactions that get processed on a per second basis.  The Uptick Rule, which forces short sellers to sell a stock above its latest traded price, got rescinded during the summer of 2007 for some strange reason, but it obviously needed to be reinstated in order to curtail the resulting phenomenon known as “piling on” by hedge-fund type investors shorting stocks (e.g., the recent Bear Stearns debacle is a good example of “piling on”). The SEC still needs to tightly regulate the practice known as naked  (or uncovered) short selling as soon as possible as well.  In any case, the mitigating of these major regulatory exposures by the SEC is mandatory due to the resulting havoc that has been wreaked upon our so called “efficient” markets due to the resulting lack of control on the part of certain market players (e.g., predatory hedge funds, etc). 

Note:  Recently the NYSE, Nasdaq & two smaller U.S. exchanges have proposed a modified uptick rule, joining the crowd calling for more restrictions on short-selling. This proposed rule would only allow shorting at a price above the best bid, going further than the old uptick rule that was rescinded in July, 2007. This proposed rule modification would apply only to stocks that dropped a certain percentage (e.g., 10%).  So this may also for the first time set “circuit breakers” on single stocks, which will briefly halt short sales trading on a stock if it falls drastically.

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Written by Larry Fry, CCP, MBA

June 11, 2009 at 6:05 am

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