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This is the final part of a three-part series on why the "plus-tick" rule should be reinstated. This rule, also known as the uptick rule, requires that any person selling a stock short must do so only at the price which is the higher of the last two discrete transactions.
Part I looked at how the rule serves a vital function in the market by addressing imbalances.
Part II, we discussed certain obscure but significant risks built into certain market practices such as basket trading and the use of leverage, and we examined some of the unintended consequences of having eliminated the rule to the detriment of the original purpose of capital markets.
Today, in Part III, we will describe how the rule has been strengthened and weakened at different times over the past two decades, show how the market acted during those times, and describe the process whereby the rule was eliminated in July of 2007.
The existence of the plus-tick rule presents a classic conundrum: the tradeoff between short-term hoarding and long-term benefits.
The rule impedes a certain type of transactions, but not others. In a competitive, commission-based world, not being able to access those prohibited transactions would be frustrating enough, but as we discussed in Part II, the development of index ETFs has added a way to access revenue that's not typically associated with transactions but rather with asset levels.
The ETF sponsors' only mandate is to match the price level prevailing when their investors' capital is committed. Even if their capital -- or levered capital promised on it -- is so great that they end up moving the market, they fulfill their promise by getting the money invested, regardless of price. How frustrating, then, to have a rule that impedes their ability to make transactions happen, and so to generate more fees.