Schwab doesn't like shorting

Discussion in 'Wall St. News' started by Neodude, Dec 9, 2008.

  1. Neodude


    I've just lost all respect for Schwab. He is either losing money because the retail crowd is afraid to buy stocks or he is trying to look sympathetic. Where was he when stocks were being "manipulated" upward? Why didn't he propose a downtick rule?



    Restore the Uptick Rule, Restore Confidence.
    Short sales of stocks are fine given one tried and tested regulation.

    The last time the stock market suffered from extreme volatility and risk of market manipulation as severe as we are experiencing today, our grandparents' generation stepped up to the plate and instituted the uptick rule. That was 1938. For nearly 70 years average investors benefited immensely from that one simple stabilizing act.

    Unfortunately, in a shortsighted move, the Securities and Exchange Commission (SEC) eliminated the rule in July 2007, just as we were about to need it most. Investors have now been whipsawed by what appears to be manipulative trading, what we used to call "bear raids," which drive stock prices down without warning and at breakneck speed. Average investors feel the deck is stacked against them and are losing confidence in the markets.

    For the sake of our children and grandchildren, and to avoid a needless future repeat of a bad situation, it is time to restore the uptick rule.

    The uptick rule may seem far from a kitchen-table issue, but it is critically important to ordinary investors. With more than half of all U.S. households invested in the stock market, either directly or through a retirement plan, it matters a great deal. The average 401(k) retirement account has lost 20%-30% of its value over the last 18 months -- more than $2 trillion in retirement savings has been wiped out. Behind those numbers are real people who planned and saved, and who are suddenly facing an uncertain retirement and the prospect of working longer.

    In the wake of the Great Depression, the uptick rule was established to eliminate manipulation and boost investor confidence. The rule said that short sales could be made only after the price of a stock had moved up (an "uptick") over the prior sale. This slowed the short selling process making it more expensive and limiting the ability of short sellers to manipulate stocks lower by piling on, driving the share price quickly down and quickly profiting from the downdraft they created. In July 2007, however, the SEC repealed the uptick rule after a brief study. Manipulative short sellers couldn't believe their luck.

    The SEC's study took place during a period of low volatility and overall rising stock prices in 2005 through part of 2007 and didn't anticipate the kind of market we are experiencing today. We live in an environment now where 200 point drops or more in the Dow Jones Industrial Average are increasingly common, where a stock losing 20%, 30% or even more of its value in a single day barely warrants a second glance at the ticker. Ironically, it was just this sort of volatility that inspired the regulators of the 1930s to implement the uptick rule in the first place. Without this vital control mechanism, short sellers have been having a field day, betting heavily on lower prices and triggering panicked investors to sell even more.

    Don't get me wrong. Legitimate short selling where a trader has borrowed shares for future delivery and believes those shares will lose value over time plays an important and stabilizing role in our markets. It provides a check on overexuberant prices on the upside, and provides natural buyers on the downside. The uptick rule, however, prevents short selling from turning into manipulative activity. Reinstating it will help smooth out the markets and reduce the speed of price drops. It will limit the ability of a small number of professional investors to trigger fast dramatic price drops that create panic among investors.
    The SEC has an opportunity to make a real difference in helping to control future market stability and restore confidence in the fairness of our capital markets. But the SEC has been strangely silent as the crisis has worsened. It did step in earlier this fall to implement short stock borrowing restrictions and a temporary ban on short selling, first on 19 stocks in the financial services sector, and later in a broader swath of 900 stocks across several sectors. But these steps were a temporary half-measure and didn't fix the problem for the long term.

    Clearly, the SEC will need to work on some of the mechanics of reinstating the uptick rule. Regulators should act quickly to establish a framework and solicit public comment, then reinstate the rule and remain flexible and willing to fine tune it if necessary.

    Ordinary investors' expectations for investing are reasonable. They want a fair playing field. They want to be successful. They want to provide for their families, support their children's education, have a comfortable retirement, and maybe even leave a little bit for future generations. But they can't succeed when the markets are gripped by fear and manipulated by those who want to profit from that fear, at the expense of everyone else.

    It may be too late for the restoration of the uptick rule to have much impact on where we are today. But there is no reason to wait and we need the protection in place for the future. It is time to restore it. It's what our grandparents did for us in 1938, and it worked for nearly 70 years. With that kind of track record, we should tip our hats to the regulators of yesteryear and acknowledge that they had it right all along.

    Mr. Schwab is the founder and chairman of the financial services firm that bears his name.
  2. He's 100% right. I have never seen so many stocks lose sometimes 50+% of their value in a matter of minutes with not even one green bar on a 3-min chart.

    I've been shorting long before the uptick rule was repealed and never had a problem with this rule. Just because someone supports the rule doesn't mean they are against shorting.
  3. nitro


    The reinstatement of uptick rule feels so wrong to me. People think they are getting something for nothing, but there is no free lunch in markets. For example, if the UT rule is reisntanted, option markets will automatically compensate for the rule by shifting option values. "Insurance" will likely become more expensive. Offers will go wide in stocks. I can't imagine all the ramifications.

    The UT rule if reinstated will not apply to MMs. That means that the balance of power is once again shifted away from the small trader/investor. The democratization of markets will go backwards. It is like saying I want to turn back the clock to the dark ages.

    But the most blatant objection towards the UT rules it that people are focusing on the symptoms and not the disease. Imo, all the reinstatement of UT rule does is allow the creation of a _stock_market_ pyramid scheme easier. It will create a bubble of it's own, this time without any outside help.

    People don't realize that the stock market didn't implode because of some lack of an UT rule. It imploded because lack of rules in the rest of the market, Wall Street and Main Street. The phony profits created in the real estate and credit markets were instatiably invested in the stock market, which in turn fueled greedy fund managers to encourage more phony real estate money be sent their way so they can slice and dice it, creating more fees for themselves. This in turn fuled more real estate to be built, which in turn fueled more phony RE demand in the form of cheap credit standards, from the very people enticing the real estate bubble, Wall Street. It is worth saying again, this fuels greed uncontrolled because this greed created a positive feedback loop between the stock market and real estate/credit markets. This postive feedback fueled both asset classes demise because it was based on a false premise: real estate prices can't go down. When that phony money dried up, and the value of RE went down, it was a game of VERY fast musical chairs ni all asset classes. There is no regulation that controls greed.

    Make rules that don't allow people to get "no doc loans" or other similar time bombs. Make a rule that says that 401K fund managers be held to some standard. Make rules that say 30:1 leverage is not allowed. Make rules that you can't sell $100 worth of insurance with $3 of funds backing it. Concentrate on the real problems. Innovate and the market will come back on it's own.
  4. good call....the removal of the uptick rule made companies pump up their profits with insane amounts of debt and risk.
  5. Even better call, the removal of the uptick rule had nothing to do with so many stocks losing 50% of their value on RUMORS in minutes.

    The key word there, RUMORS.

    Several stocks a day basically plummeting off a cliff on rumors?

    I can see that happening once in a while, but everyday on several stocks? with not ONE green bar?
  6. So what, if the company is solid and Cashflow is safe + dividend yields go up thanks to shortsellers you are being provided an opportunity to buy stuff cheap and dividend reinvest gets more shares.
  7. Dear imbeciles.

    We got along fine with the uptick rule for decades.

    Please, take your ridiculous objections to the Yahoo boards where they belong.

    Thanks in advance.

    PS The only ones benefiting from the no uptick rule are black box manipulators and rumor mongers. No one else.
  8. tradersboredom

    tradersboredom Guest

    i agree thinly traded stocks need uptick rule to protect against bear raids or abusive short selling.

    market makers will not support the market or put bids on if shorts can short that easy.
  9. tradersboredom

    tradersboredom Guest

    uptick rule just means you have to short or sell at the ask price. and in bear markets the ask is never sold. and very few buyers to short to or no buyers. the only buyer is the market maker.
  10. tradersboredom

    tradersboredom Guest

    the stock market has been deregulated since the mid 80's to 2000.

    unregulated market behaviour is what caused all this volatility.

    the stock market had no regulations until 1934. basically after 1934 the US financial markets were shut down or closed to unregistered brokers/traders. . and didnt' return business as usual until 1950 after world war 2

    #10     Dec 9, 2008