Join Jim Cramer, Doug Kass, Helene Meisler and other RealMoney pros at TheStreet.com Investment Conference on "Best Ideas to Make Real Money." Save the date: Saturday, May 2! More details here.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. In 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.
Rules and ChoicesThere is no need to compare the arguments for grabbing income right now vs. acting in a way that pays income, and probably a lot more income, periodically over time. There are good, rational reasons to argue for each. Rather, we have to consider whether we want so many golden eggs right now that we are willing to run the risk that we'll kill the goose when we jam her full of amphetamines. There is a limit to the immediate capacity of almost everything. This is why even the freest of markets need regulations. We need to be free to make choices in the world of finance, and that means we need functioning and at least occasionally discriminate markets. No markets, no way to choose. Markets require capital, and capital requires a level playing field. The last 12 months have shown us what happens when capital decides it's not worth it to be in the markets. Money market levels are at all-time highs, as capital is pulled to the sidelines. The Securities and Exchange Commission eliminated the plus-tick rule because people and organizations with an interest in seeing it gone asked them to, and while there were others who disagreed, the SEC chose to get rid of it. Before doing so, the agency's Office of Economic Analysis studied the issue over a period of about 18 months, beginning in May 2005. (Interestingly, although the pilot period was extended until August 2007, the SEC did not wait until the pilot was complete before eliminating the rule.)
How the Change Went ThroughIt is not really fair to lay all of the blame at the door of those running the SEC, however. They did solicit opinions from all of us at the time. Although they might have stepped back and decided at any moment that the combination of faulty methodology and the possibility of bias in the motivations of those arguing the loudest for the rule's elimination made it a risk not worth taking, the blame also lies with traders, especially professionals. Many of us who did not comment might have thought how obtuse the whole notion was of doing away with the rule really, yet we did little to argue the point with the people who would ultimately make the decision. I know I did, and didn't.
Know What You Own:Other ProShares funds include the ProShares Ultra Real Estate ETF ( URE), the ProShares UltraShort Real Estate ETF ( SRS), the ProShares Ultra Financial ETF ( UYG), the ProShares UltraShort FTSE/Xinhua China 25 ( FXP), the ProShares UltraShort QQQ ( QID), the ProShares UltraShort Oil & Gas ( DUG) and the ProShares UltraShort Industrials ( SIJ).
How can you survive -- and even prosper -- in a rocky midyear market? Get the "best ideas to make real money" from Jim Cramer, Doug Kass, Helene Meisler and other RealMoney experts at our May 2 Investment Conference. Learn more here.