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Uptick Rule: Meaningful or Meaningless?

Stocks in this article: GS MS C BAC

A Better Solution?

Rather than have the SEC focus on the uptick rule, Pento argues that a much more important move would be to focus better on enforcing violations of the naked short selling ban. By definition, naked short selling occurs when a short sale occurs, but the trader does not first borrow the shares and fails to deliver on the transaction.

Naked short selling is considered extremely harmful to certain stocks because it can keep share prices artificially depressed, allowing unscrupulous traders to take advantage of the stock. While certainly illegal according to SEC regulations, many investors believe naked short selling occurs often enough to be destructive and that the SEC does little to enforce the rules against the practice.

"It's important to me that hedge funds are not able to manipulate prices down and cause XYZ Corp. to raise capital at extremely low, distressed levels," said Pento. "Having said that, if that's being looked to as the panacea to cure what ails the market, it'll be extremely disappointed."

Instead, Pento calls naked shorting the "bane of the market" and that it needs to be strictly enforced by the SEC. "No one should really be able to sell a stock without borrowing it first," Pento said. "I can't believe you can do that. You can actually short more shares than are outstanding. It's a million times more important to enforce the rules. If they enforce that rule, you don't need the uptick rule at all."

Still, others maintain their support for either the reinstitution of the original uptick rule or the introduction of a modified version of the same rule. "At a minimum," Clearbrook Financial's Sowanick said, "you would cause short sellers to think about the fundamentals of why they're shorting something as opposed to the emotion of shorting something."

But for a handful investors, even ones as well known as billionaire investor and the owner of the Dallas Mavericks basketball team Mark Cuban, the idea of the uptick rule as a viable solution isn't realistic.

"If we need an uptick rule, we also need a downtick rule," Cuban wrote in an email. "Bubbles have been far more detrimental to the health of the economy than the stock market hitting new lows."

Reiterating a post he made in December to his "Blog Maverick" Web site, Cuban suggests that "when you hear someone talk about bringing back the uptick rule as a solution, laugh. Then tell them 'Larry Bird is not waking through that door.'"

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