Bring back the "uptick" rule

Even though I’m a Conservative, it might sound some days that I’m a fan of regulation. But the Securities & Exchange Commission’s decision to do away with the uptick rule in early July was a mistake. This rule required firms that wanted to short a shock to do so only after the stock had “ticked” upwards. As in it traded higher than the prior trade. For reasons that are lost on me, this rule, which dated back to the 1929 crash, was repealed. Now, if you want to short a stock that has gone straight down, pushing it down further, the regulators are saying: go right ahead.

If you haven’t noticed, the last two months have been awfully volatile. Coinciding with the end of the uptick rule.

Here are some amazing figures, from the WSJ.

“Since 2003, there have been few big declines and few heavy one-way trading days — 10 in total from 2004 through 2006.

Since stocks peaked on July 19, there have been nine such days — six down and three up. Four down days came from July 24 through Aug. 14. Then there were three 90% up days in mid-to-late August, and two such down days, including a 90% down day on Friday.

That represents more such swings than in 1987, before and after the crash.”

There were 10 days in the space of three trading years (2004-2006) where the volume and prices were 90% up or 90% down. Since the uptick rule was buried in July, there have been nine such days in less than two months. The market is now — in aggregate — more volatile that it was before and after the 1987 crash. Except, there’s been no crash. Just wild swings.

The backdrop has certainly had something to do with the volatility, as the global credit market started to become unhinged in March of this year (see post “More subprime fallout at HSBC“, March 18-07). As an aside, that post contains a hilarious quote from the usually brilliant Don Coxe of Harris Investment Management:

“Greenspan called the last two recessions wrong, so therefore if he thinks the subprime market is going to hurt the economy or housing than it most certainly will NOT.”

Wrong, wrong, wrong was Don. And so is the SEC. Joe and Jill Retail can’t take much more of this.

MRM