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Opinion: We Need the Plus-Tick Rule, Part I

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The plus-tick rule should be reinstated. Short-selling, where regulated by the existence of such rules, is a valuable component of well-developed capital markets. It adds liquidity by adding offer-side depth and encourages critical thinking by allowing for a way to profit by being bearish.

Short-selling without a plus-tick rule, however, not only takes liquidity out of the market by diminishing bid-side depth, it actually promotes behavioral factors which tend to diminish critical thought.

The rule addresses fundamental investment return asymmetries caused by permanent emotional and structural biases in the market. Contrary to arguments made in support of its elimination, its continued existence is more critically important today than it was a generation ago. Technological advancements which have in many ways been very good for the market have also made return asymmetries even more lopsided.

Further, these technological advancements have significantly weakened protections against other destabilizing factors that diminish market integrity, such as inaccurate or improper information dissemination and the use of excessive leverage. The plus-tick rule is an indirect but very effective antidote for these as well.

The capital markets exist so that growing enterprises may access capital, pay for the privilege of getting it and allow investors to account for their own liquidity needs without necessarily limiting those of the enterprises accessing the capital. The current system, which is continually evolving, is the best yet discovered which harnesses the power of the profit motive in a positive way while restraining some of its destructive extremes. The evolution of the capital markets is a dialectic, a never-ending process of trial-and-error which careens between "not enough" and "too much" while passing "just right" and spending most of the time in that middle area.

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