Monday, May 4, 2009

Uptick Rule? Why Not Downtick Rule?

Talks about uptick rule are reaching hysteric proportions. Jim Cramer is the main proponent, but he is not the only one.

Explaining uptick rule for dummies: you can't sell stock short unless latest trade closed a little bit higher than trade before it.

Uptick rule was established in 1933, AFTER market bottom during Great Depression. If it's returned now, I'm going to agree with Mark Haines and Doug Kass: we had a global bottom on March 9, 2009. As usual, every Wall Street regulation is late and, as happens often, irrelevant.

Why Cramer wants uptick rule? He screamed many times that short sellers have been shorting bank stocks into oblivion. What banks, you ask me? Remember Washington Mutual, Bear Stearns, Nationwide? What about Citibank, which is technically insolvent? Why is it bad that stocks of these companies were shorted to almost zero? Short sellers just sped up inevitable.

There is another problem on Wall Street: obviously market manipulations are going on all the time. And that includes "naked" short selling, when someone sells short shares he doesn't have and has no intention of borrowing. Or various "pump and dump" schemes, when somebody buys (or sells short) the stocks and then spreads rumors about company inevitable quick rise (or fall). These schemes, and many more, are completely illegal. So why don't we see prosecutions? What about mad speculation on oil futures in January-July of the last year? What about pump and dump schemes in gold? What about future markets many of which exceed physical markets by orders of magnitude?

Bob Pisani was right: if you want an uptick rule for shorting, why not downtick rule for buying? Or someone would say that all buyers are just plain long term investors and there are no bull speculators? Unlike many, I think that honest speculation is what makes markets work, whether it's done on long or short side.

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