UltraShorts and the Fall of the Uptick Rule

Since the fourth quarter of 2007, ProShares has expanded its product range to include Ultra/Short/UltraShort funds based on Treasury indices, currencies, commodities, various MSCI indices in EAFE, Japan and emerging markets, the telecom sector and the FTSE/XINHUA China 25 index. As the market leader in short and levered ETFs, ProShares had grown from under $6 billion of assets under management (AUM) in June 2007 to over 20 billion AUM by June 2008 -- ProShares had gone from zero to 20 billion in just two years. Today, ProShares has roughly 28 billion in AUM, so make that going from zero to nearly $30 billion in less than three years.

In December 2006, when ProShares was just six months old, the SEC proposed amendments to Regulation SHO to remove the price test of Rule 10a-1 (the "uptick rule"), and formally enacted the removal of the price test effective July 2007. The SEC also prohibited any self-regulatory organization (SRO) from instituting its own price-test rules. (Question: Why would they do that? If an SRO entity finds it in its best interest to be more conservative, shouldn't it be allowed to do so? I find that strange ... but I digress.)

(Don't miss "Uptick Rule: Meaningful or Meaningless?")



The SEC had established a one-year pilot program, approved in 2004, launched in May 2005 and subsequently extended until August 2007 (an end date later rendered moot by the recommendation in December 2006 to remove the price test, a decision which was enacted in July 2007), which allowed one-third of the stocks in the Russell 3000 to be free of the uptick rule as a test case. A study was conducted by the SEC's Office of Economic Analysis in February 2007, detailing the observations of the pilot program.

There has been criticism that the SEC's analysis and the pilot program were conducted over too short a time period and warranted further study. Note that from the launch date of the pilot program (May 2, 2005) until the date of this SEC paper (Feb. 12, 2007) the S&P 500 rose from roughly 1,160 to 1,450 generally unimpeded, with two modest pullbacks (both times establishing higher lows) over that period.

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