Wednesday, April 8, 2009

Uptick Scmucktick

Our all knowing regulators are out to save the world from themselves again as the uptick rule gets a second look. It will take months to test them but in the spirit of speed and clarity there will be five, count em' five, different proposals for consideration.

Here are the proposals:

One approach the agency is considering would be to simply reinstate the uptick provision removed in 2007. The SEC is also asking the public to comment on four variations.
Another approach bears a resemblance to old uptick rule, but it would allow short sales only after a potential buyer bid at least a penny more than the company's stock price. This bid test is different than the original uptick rule because it would allow a short sale after a higher bid rather than a higher sale price. For technological and implementation reasons, the SEC staff indicated that it favored this approach over reinstating the old uptick regulation.
Three other proposals, known as "circuit breaker tests," would limit short selling for the duration of one trading day once certain triggers were met. One provision would ban short selling outright in a particular security if there were a 10% decline in its stock price, according to the agency. The ban would be in place for the remainder of the day.
The agency also proposed two other similar "circuit breaker" tests. One would reinstate the uptick rule for a particular security, for the duration of one trading day, if there is a 10% decline in its stock price. With another approach, a stock that experiences a 10% price decline would have a bid-test uptick rule that would only allow a short sale at a price that is above the highest available bid.

Jim Chanos who is primarily a short seller, but also has long exposure had this to say today:

"Rebuilding investor confidence should be the primary objective of any new regulatory effort and it is not clear that today's proposals will meet that simple goal. Skeptics, independent research and critical analysis must continue to play a vibrant role for our markets to grow sustainably and with integrity. Short selling is integral to improving the efficiency of markets and enhancing market quality through narrower spreads, deeper liquidity, less volatility, and greater price discovery. In recent years, short-sellers have publicly warned the marketplace about the dangers at AIG, Lehman Brothers, and Enron, as well as sounding the alarm over the credit ratings agencies, non-bank subprime lenders, and credit insurers. Proposals to inhibit short-selling have the effect of limiting this vital market-based antidote to corporate fraud and speculative bubbles, and must be carefully weighed against the clear harm that comes from ill-conceived government intervention in basic market functions."

Chanos was one of the first to uncover problems at Enron and AIG. Keep up the good work BIG GOV. My counter is a downtick rule where you can only buy stocks on a downtick.

A pox on all their houses.


Steve Patterson said...

I sounds good. Feel good. But probably won't matter.

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I am a former hedge fund manager, broker and capital markets dude who now trades for his own account. I love what I do. I will try to post some stocks and an occasional chart that looks attractive for entry.I will also try to point out the idiocy of conventional wisdom and the lack of value added by the mainstream financial media. These postings should not be viewed as recommendations.