This article was originally published Feb. 26
Market observers are divided as to whether the elimination of the uptick rule was to blame for the stock market's sharp decline, with one side arguing that short sellers drove share prices lower while the other claims those betting on a decline are the scapegoats.
The uptick rule, instituted by the Securities and Exchange Commission following the Great Depression, said that the short selling of stocks could be done only after the price ticked higher above the prior sale. The rule was designed as a guardrail that slowed down the short-selling process, preventing shorts from driving the price of a stock at a faster clip.
In a short sale, an investor borrows stock from a broker, sells it to other investors, and hopes to buy it back at a lower price later before returning it to the original lender. The difference in the transactions is kept as a profit.The SEC made the controversial decision to eliminate the uptick rule in June 2007 after its analysis showed it did little to prevent the manipulation of share prices. Of course, many market participants point to the move as the catalyst that helped short sellers thrive in 2008. Even Federal Reserve Chairman Ben Bernanke, testifying before Congress, said if the rule were still in place it "might have had some benefit" in preventing the market meltdown. Those in favor of the uptick rule say that its removal created an environment where shorts could accelerate the failures of a number of companies, especially financial names like Bear Stearns and Lehman Brothers and severe pressure on others, such as Citigroup (C), Goldman Sachs (GS) and Morgan Stanley (MS). "With the market that we currently have, the absence of the uptick rule leads to fairly consistent selling pressure as there's no impediment to shorting," said Thomas Sowanick, chief investment officer at Clearbrook Financial. "It's very evident in the financials." According to a short selling study conducted for the New York Stock Exchange in October 2008, 85% of the 438 CEOs, CFOs and investor relations executives surveyed favor a reinstitution of the uptick rule "as soon as practical, along with other options designed to place some constraints around short selling." Eighty-two percent think bringing back the rule would help instill confidence in the market.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV