Upbeat On Uptick Rule's Reinstatement
Investing: As longtime advocates of the old uptick rule on short selling, we were heartened to learn of its possible reinstatement. Now let's hope it has the same effect on the market it seemed to have 81 years ago.
It was in March 1938 that the uptick rule — requiring that a short sale be made only at a price "higher than the last different price" — was first established.
Then, as now, the market was under pressure, having sold off 50% from its year-earlier high (which itself was 50% off the 1929 peak). And "bear raids," in which unchecked short sellers hammered stocks with impunity, were the order of the day.
With panic in the air, the uptick rule provided at least some relief, requiring short sellers to wait until a stock ticked up an eighth- or quarter-point before their trades could be executed.
The intent was to prevent them from accelerating the downward momentum from a security already reeling from a crisis-induced decline.
The rule remained in effect until its repeal by the Securities and Exchange Commission in April 2007. The SEC felt the rule was no longer needed in a period of relative market tranquility.
It was also felt that the change from fractional to decimal trading, where trades differed by pennies instead of eighths or fourths, rendered the rule impotent.
The timing could have been better. That was six months before a major top and the onset of the bear market that continues to this day. Then, as the financial system started melting down in 2008, market volatility and unbridled short selling returned.
We may never know, for example, if shorting played a role in the failure of Bear Stearns and Lehman Bros. But for some observers, it could have. Bear plunged from $61.58 to $2.84 in just five days on extremely heavy volume, and Lehman dived from $16.20 to 15 cents over a similar stretch.
It was amid this decline last Sept. 19, after Britain banned short selling in its financial stocks, that we called for the U.S. uptick rule to be reinstated. At the time, the Dow stood at 11,019. Five weeks later, on Oct. 16, with the Dow 2,441 points lower at 8578, we called for it again.
Now, with the Dow well under 7000, comes word from Rep. Barney Frank, chairman of the House Financial Services Committee, that the uptick rule may be reinstated in about a month.
Yes, it would have been nice if Congress and regulators could have moved 4,000 points ago. But better late than never. We hope the new system will be similar to the old one and require an uptick, or upward price increase, of at least 10 or 25 cents.
We also hope that the market's reaction is similar to that after the original rule was set. After undercutting 100 on March 31, 1938, the Dow industrial average shot up 50% in four months. Yesterday's 390-point rally, with the uptick-rule news getting at least some of the credit, looked like a pretty good start.