Securities and Exchange Commission
has been flooded with comment letters on proposed changes to the so-called uptick rule, with many individual investors taking the time to register their vote on the subject of abusive short selling.
The SEC has received more than 300 comment letters from a range of sources, including individual investors, stock exchanges, academics, brokerage firms, auditors and accountants, many of whom excoriated the agency for eliminating the uptick rule in the first place.
On April 8, the five
to open a 60-day comment period on five different proposals related to short selling. The commenting period is slated to end June 19, after which the SEC will weigh all responses.
While the comment period is still open, the SEC is moving quickly. On Tuesday, the agency convened a roundtable discussion on short sale practices. The discussion will seek to address whether short sale price tests or short sale circuit breakers are necessary or effective, as well as a comparison of bid tests, tick tests and circuit breakers.
Tuesday's panels include speakers from Invesco, Fidelity Investments, FINRA, Direct Edge, Nasdaq OMX Group, and several corporations like
"This roundtable will help ensure that any policy decisions going forward in the area of short selling regulation are the product of a highly deliberate review process," said SEC Chairman Mary Schapiro in a statement.
The uptick rule, instituted by the SEC in 1938 following the Great Depression, said that the short selling of stocks could be done only after the share price "ticked" higher above the prior sale. The rule was meant to slow down the short selling process, preventing short sellers from driving the price of a stock lower at a faster clip.
The SEC ended the uptick rule in June 2007 after its analysis showed it did little to prevent the manipulation of shares prices. At the time, the agency received only 27 comment letters, many written by brokerage firms, self-regulatory organizations and associations like the International Association of Small Broker-Dealers and Advisors, the Securities Traders Association, the Managed Funds Association, and the Securities Industry and Financial Markets Association.
When the SEC originally announced the changes to the uptick rule, the agency said that "most commenters supported the Commission's proposals," although some did express "concerns regarding particular provisions."
For instance, one supporter of the SEC's 2007 proposal to eliminate the tick test said in a comment letter that "short selling enhances market liquidity and contributes to stock pricing efficiency, and thus is an important part of our securities markets, and that the existing restrictions on the execution prices of short sales."
Of course, some market participants point to the SEC's decision as the catalyst that helped short sellers thrive in 2008. The argument is that the lack of a rule that required share prices to tick higher before more short sellers could pile in created an environment where shorts accelerated the failures of a number of financial companies, like
Other financial names, like
Bank of America
, saw share prices fall dramatically throughout 2008, with many attributing the moves lower to short sellers.
A majority of the 300 comment letters the SEC has received since April 8 make the case that some form of the uptick rule is needed for protection against abusive short sellers and "bear raids." By comparison, during the comment period in 2007 before the SEC did away with the uptick rule, the agency said only two people (both individual investors) commented on the need for price tests to prevent bear raids.
At the time, the SEC said many others, including individual traders and
, noted that sharp market declines, such as those induced by bear raids, are "highly unlikely to occur in today's markets which are characterized by much smaller spreads, higher liquidity, and greater transparency than when the rule was adopted almost 70 years ago."
Ultimately, the SEC will elect to adopt one of five proposals or ignore them all. Two of the five options would involve a market-wide institution of some form of the uptick rule. Three others would create a circuit breaker, which would take effect in under certain circumstances, such as a 10% drop in share prices.
The agency, though, is facing some fiery comments from investors who continue to show support for and against a reinstitution of the uptick rule or a similar trading mechanism. Here is a sampling of some of those.
"Since the uptick rule was abolished in the Summer of 2007, volatility has gone way up. This should be undisputable, by looking at the VIX index, or how often the Dow Jones Industrial Average moves up or down 100 points or more. I believe that unfettered short selling was a factor in the 2008 stock market crash. I am in favor of restoring the uptick rule exactly as it was before the Summer of 2007."
-- Jeff Anderson, individual investor
"I plead with you to expeditiously reinstate the uptick rule, which served us well for about eighty years until July 6, 2007, when it was abolished. Doing so will level the playing field for large and small investors, eliminate some of the terrible volatility we have recently experienced, and help to stabilize our economy."
-- Ronald Edwards, daytrader
"We have now frightened away many of these investors who have traditionally formed the foundation of our capital markets. The uptick rule should come back. Naked short selling should be banned. Capital ratios should be increased. Credit default swaps should be regulated. The role of leveraged ETFs should be examined. Make the market safe again. We don't need more 'liquidity.'"
- Howard Ward, chief investment officer with GAMCO Investors
"Please do not reinstate the uptick rule or place new restrictions on short selling. Short selling is healthy for the markets since it provides another set of buyers/sellers to allow for an efficient marketplace. The recent downturn wasn't caused by short sellers, but was a case of mismanaged companies. Of all the 5 proposals THE MODIFIED UPTICK RULE WILL BE A DISASTER IT WILL DESTROY LIQUIDITY."
-- Rosemarie Montero, individual investor
"I believe very strongly that the uptick rule for all short sales should be immediately reinstituted. The financial industry has been needlessly harmed by reckless short selling which has directly lead to taxpayers needing to invest billions of dollars to recapitalize the banking industry."
-- Timothy Selchau, vice president of the California Bank Trust
"Please reinstate the uptick rule to help dampen the effect of speculators and their impact on the market."
-- David Mech, individual investor