It's Only Fair -- Bring Back the Uptick Rule

It's time to get serious about making sure we have a level playing field between the longs and the shorts in this market. As I can attest as a former money manager, the uptick rule -- waiting for a buyer before you could slam down stock -- seemed to be fair for years. We know that you can sow panic easily simply by forcing sales down and scaring everyone who is thinking of buying. The founding fathers of the SEC knew this; they thoroughly investigated the crash of 1929 and came to the conclusion that something had to be done to make sure it never happened again. The result? A simple, clean rule was born: the uptick rule.

The uptick rule made it almost impossible to foment a panic, something that was clearly an imperative if the capital markets are going to work right, "work right" meaning that buyers have the right to expect that a company's stock can't be manipulated down (or up, and I am all in favor of investigating every gang-tackle up) and that companies that need money have a fair chance to raise equity capital.

The uptick rule accomplished that.

All during the 2000s, the uptick rule was eroded because of a slippery slope of decisions involving market-making exceptions and decimal trades, none of which dealt with the imperatives I mention above. As the rule was chiseled and chiseled to make it easier for traders to blow in and out of stock -- the real reason for all of the changes to increase volume and allow short-selling to be even with long-buying -- the SEC launched a study that concluded the uptick rule had no effect in preserving the two imperatives mentioned above. It did not matter one bit that the survey was taken in the midst of one of the great bull runs in history. It did not matter that the rule was the result of an exhaustive and rigorous study of the psychology of the crash. The SEC just cavalierly ended it.

When the SEC refused to prosecute rumor-mongering and also refused to enforce the naked short rule, it created an environment where it was quite easy to destroy both the bad -- Washington Mutual, Citigroup (C - commentary - Cramer's Take), Lehman, Bear, AIG (AIG - commentary - Cramer's Take), Fannie (FNM - commentary - Cramer's Take) and Freddie (FRE - commentary - Cramer's Take) -- but also the good -- Goldman Sachs (GS - commentary - Cramer's Take) and JPMorgan (JPM - commentary - Cramer's Take) (as we know from the stress tests) -- and come frighteningly close to wrecking the marginal -- Bank of America (BAC - commentary - Cramer's Take) and Wells Fargo (WFC - commentary - Cramer's Take). All traders know this. The data from the floor of the exchange is convincing. When coupled with the double and triple ETFs, most notably the ProShares UltraShort Financials (SKF - commentary - Cramer's Take), you could shoot bank fish in a barrel.

Right now we are having a respite. But it's time to restore the imperatives, and the best way to do it is to bring back the whole rule and nothing but the rule and enforce the laws involving naked shorting.

That's why I signed the petition by Eric Oberg.

That's why you should, too. The rationale there is much more effectively argued than in this missive, but I feel it is necessary to call attention to the issue and the petition, and I urge you to go to it and make a difference now as we send this to the SEC to make our voices known.

At the time of publication, Cramer was long Goldman Sachs, Wells Fargo and JPmorgan.

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Jim Cramer is co-founder and chairman of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Watch Cramer on "Mad Money" weeknights on CNBC. To order Cramer's newest book -- "Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)," click here. Click here to order "Mad Money: Watch TV, Get Rich," click here to order "Real Money: Sane Investing in an Insane World," click here to get "You Got Screwed!" and click here for Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he appreciates your feedback and invites you to send comments by clicking here.

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