Uptick rule to save share prices?
When stock prices fall during a bear market, what happens? Depending upon the severity of the dive and the overall state of the economy at the time, it’s fairly easy to predict. Typically, investors will go into a panic and rush to sell off as many shares as possible in the shortest period of time. If such behavior occurs on a wide scale – across the stock market – the economy is locked in a stranglehold and brought to the ground.
This is what Federal Reserve Chairman Ben S. Bernanke wants to avoid, and he’ll do it with an uptick rule.
Jesse Westbrook reports for Bloomberg that Bernanke said “there may be a benefit in resurrecting a rule that restricts short-selling stocks when share prices are falling amid the current bear market.”
“No longer relevant?” Please…
Bernanke told the House Financial Services Committee that the uptick rule could be of benefit to the nation right now. In essence, the uptick rule prevents investors from “betting against a stock until it sells at a higher price than the preceding trade.” Not seeing the need for it at the time, the U.S. Securities and Exchange Commission removed this rule in 2007. Interestingly, that’s the year most experts say that the current recession officially began…
The SEC originated the uptick rule in 1938 to prevent what’s happening now from occurring. Once E-trading became popular in recent years, the SEC decided that it was “no longer relevant.”
Everything beats 20/20 hindsight
According to Bloomberg, lawmakers like U.S. Representative Gary Ackerman should be happy with Bernanke’s decision. Perhaps rightly so, Ackerman made the logical connection between the absence of the rule and the recent assault upon financials. Evidence? Standard & Poor has fallen 50 percent since the Securities and Exchange Commission dropped the uptick rule. In a case of 20/20 hindsight, current SEC Chairman Mary Schapiro made the Epimethean pronouncement that she “may” bring the uptick rule back…
January 27, 2009
The Honorable Mary Schapiro
Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Dear Chairman Schapiro:
Congratulations on being sworn in as the 29th Chairman of the Securities and Exchange Commission (SEC). Your tenure begins amidst a crisis in our markets and exchanges and I, along with my colleagues, look forward to working with you to restore confidence and stability in our financial system.
One of the simplest but most important and effective initiatives that the SEC could undertake immediately to combat market volatility is the reinstatement of a so-called “uptick rule.” For more than 70 years, the “uptick rule” curbed short-selling runs until, short-sightedly, the Commission revoked it in 2007. The lack of a price test in our exchanges created an environment that provided short sellers with the ability to both exploit and accelerate the failures of a number of companies, including Bear Stearns and Lehman Brothers, the collapse of which had a devastating effect on confidence in the U.S. financial markets.
As you may know, I have been the leading advocate in Congress of the reinstitution of the uptick rule. I sponsored H.R. 6517, a bill that would have reinstated the price test, in the 110th Congress, and I recently reintroduced the legislation as H.R. 302 in the 111th Congress. I repeatedly pressed your predecessor, both during committee hearings and in private conversations, on the merits of reinstituting the uptick rule. Unfortunately, and to the detriment of our financial markets and exchanges, the SEC failed to act under the Bush administration.
While the Commission did not reinstate an uptick rule under the chairmanship of former Chairman Cox, he did express unequivocal support for reinstating a price test in our exchanges on his very last day in office. Of course, that was too late. While today is only your first day as Chairman of the SEC, I strongly urge you to make the reinstatement an uptick rule your first priority; it is that important.
I have attached former Chairman Cox’s letter of support, along with internal memos and SEC studies that he included with his letter, which provide unambiguous evidence that reintroducing a price test could drastically reduce market volatility and protect vulnerable stocks from being victimized by short-selling runs.
Members of Congress, financial industry executives such as Charles Schwab and NYSE Euronext Chief Executive Duncan Niederauer, and former SEC Chairman Christopher Cox all support the reinstatement of a price test to curb volatility in our exchanges. Although you have only just been sworn in as Chairman, I urge you to support the immediate reinstatement of the uptick rule, or some variation of the uptick rule, and to push for consideration of such measures by the Commission as soon as possible.
Sincerely,
GARY L. ACKERMAN
Member of Congress
This has to do with a point I have made to a lot of people – that complete deregulation is a wonderful idea, but it will never work in reality. The reason why is because there just isn’t the discipline on Wall Street to have an economy that will survive and grow on the long term, and that idea is usually chucked in favor of making a profit for the next year, if that. Bring back the uptick rule.