Any time the powers that be want to literally take the HFTs toy away and restore order and confidence to the market, all that needs to be done is to reinstall the uptick rule. Why this has not been done, with all the evidence pointing to the efficacy of the uptick rule is possibly worthy of a mystery novel. The stock market peaked in July of 2007. The uptick rule was eliminated in July of 2007. Muse on the timing of the uptick rule's elimination and why it was eliminated, just as the stock market was about to roll over into a major bear market circa July 2007.
When I was a floor trader, we in the pit never sensed any retail shorting of our stocks. because the retail trader does not sell short into strength. With an uptick rule in place, only during periods of stock price strength, can a trader be confident of executing a short sale. Professional options traders did the vast majority of short selling; buying inexpensive calls to hedge the shorted stock. That situation did set up because plenty of times as a stock rises in price the retail trader/investor sells calls to hedge the gains the stock just made. Pros buy those calls from the retail hedger and short the stock using the greeks (think: delta neutral trading) to mathematically create their new position. Muse on how that dynamic radically changed thanks to the elimination of the uptick rule!
Trying to short a stock that is rapidly declining is almost impossible to do. I know that is a fact because many times I tried to do such, failing in the attempts. When the market is in a serious selling mode only short sellers covering short stock positions do the majority of the buying volume as they lock in gains. However, today, there is no uptick rule to hamper short selling as everyone can play the shorting game like they were playing whack-a-mole. Muse on the genius of the first S.E.C. and how they knew after doing their forensic accounting that short selling did a tremendous amount of stock market damage during the Crash of 1929.
Not only has the elimination of the uptick rule empowered the HFT world, it has ironically encouraged the retail trader to sell short. Permabears in the financial and general media have enabled the business of short selling as hyperbolic headlines of doom and gloom sell far more advertisements than do anything positive about the economy or the value of stocks. Muse on how the retail trader who shorted stocks some 3,000 Dow points and one year ago has been taken for quite a nasty ride, due in part to the fact that no uptick rule was in place to make them think twice before taking those awful positions.
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