Short Sale Rule

Discussion in 'Trading' started by Eldredge, Feb 21, 2002.

  1. David nassar,

    You wrote in a another thread:
    "I feel Bullets should be illegal as well since both circumvent a useful longstanding rule of the NYSE (where the short sale rule originated as with most rules that still stand today in the market), the short selling rule..."

    Why do you think the uptick rule is good? I really don't see why the specialists should be the only ones allowed to sell on a down tick. We don't have to buy on a down-tick, why should we have to sell on an uptick?

    How do you guys do those good quotes from others posts - the ones that have bars and say "originally posted by"?
  2. Let me interject something here...the Specialist is forbidden from initiating a downtick or even an uptick, and can only participate in a trade, not initiate.

    Just kind of a FYI.....and we'll get SSF's soon, and they may be lifting the uptick rule (at least on the first 100 NYSE stocks) as a test case pretty soon..
  3. look in the lower right hand corner of your screen of all the posts. There is a quote button.

    Robert Tharp
  4. Don and Rtharp,

  5. you can see, I don't know how to do those quotes either.

    To answer you question, which Don Bright started to do and which he is also correct is that the Specialist can not initiate, but only participate. These come in the form of "go along orders"..."participation orders"...etc. The Specialist has to first honor his market to the floor brokers who represent the public and institutional markets. These floor brokers also rate the specialist in terms of his/her abilities so there is some poitics invilved as well. But the point is, I feel the short sell rule is good...but with decimals it has less impact versus the fractional system. It offers support to a weak market when things get really rough. We all suffer from a down spiral market because while prices would suffer first, volume would not be far behind and this would greatly damage the market. We as traders can flourish because there is a strong volume market and therefore interplay between bulls and bears. This is where opprotunity to trade is born. Without rules such as the short sell rule, the market would be unfairly traded by many and not truly reflect the supply/demand relationship that is the cornerstone of capitalism. So in short, it prevents an undue rapid downward spiral of selling when the markets need pause or at least rational review. A similar rule would be trading halts and curbs. So the Specialist really doesn't have unlimited discretion to sell on a down tick. He has advantages yes...but he also has to honor a two sided market and provide "liquidity of last resort" which means he/she must buy when sellers are in control and sell when buyers are. This produces an inherent risk for the Specialist and many would argue the rules help compensate the Specialst to accept this risk. Hope this helps!
  6. David Nassar,

    Thanks for the reply. I just don't really see it your way. I don't see why a downward spiral is any worse than an upward spiral. A solid company's stock will only go so low, and a weak company should go as low as it needs to. I bet there are a lot of people that wish Enron would have had a downward spiral from $20 instead of from where it was. And what about all the internet stocks - I think a "down tick" rule would have provided a lot more protection than the uptick rule. I see overvalued stocks as a much bigger threat to the market than undervalued stocks. Anyway, the shorts have to cover eventually. And what about QQQ and SPY?

    I enter half of my trades short, and I do them all naturally. I personally hope to see the uptick rule abolished. I do agree though, if "shorting against the box" is illegal, bullets should be too. I would just like to see them both be needless, because the downtick rule needs to be overturned.
  7. iiphos


    i find it fascinating that a trader supports the uptick rule. i would think as a trader you wouldn't want any sort of rules to get in your way of putting on a position. the futures markets (which is what i trade) seem to do just fine without the uptick rule.
  8. Just back from the Expo and thoroughly enjoyed it...much more dynamic than Anaheim. I'm a long time direct access trader, but I was particularly interested in the futures participation, as I feel it can offer an effective tool for balancing an equity based trading style on the short side. (without illegal or questionable tactics).

    The futures "ladders" that are now offered show the top five levels of each side of the market and give it sort of a Level II feel to see the depth of the market. So far, it seems to be effective in covering the short side of a market move using the eMini NASDAQ and S&P contracts, while depending on the equities for covering the long side.

    This gets me away from the "fray" with the downtick rule and having to use bullets or forward conversions to balance my trading. It's not perfect, but at least it's an option. When single stock futures arrive, I feel this might even be more effective.

    Any comments or suggestions?
  9. iiphos...

    I can certainly appreciate your perspective and I agree the rule is now outdated. My comments are directed to the benefit the rule had regarding the overall market, not the pros/cons to the individual trader. In terms of the market overall, I do believe it has helped the markets remain more stable in difficult times and that is the benefit to the trading community as a whole. The same can be said regarding trading halts. It simply adds pause to a heated downside market, and this is often necessary for the health of the stock market as an institution. The seventies marked a time when the markets reached such a point of difficulty, many felt the market itself was in jeopardy regarding the equities market. Volume was so low that exchanges themselves were threatened. My father was in the markets at that time and I remember the impact and perception he and other participants had at that time. So my comments regarding the rule relate only to the markets health, not the advantages/disadvantages to traders individually.

    The issue of the rule regarding the individual trader has a different meaning and personally has little impact on my style of trading (trends). One can get short many ways, and given the decimal system today, it simply has very little impact anymore, therefore I agree that it should be considered an outdated rule, but it did in fact add value to the markets as a whole over the years. I agree the rule has been difficult for many active traders, but I believe this is more a function of trading style versus the ability to get short the market. In 17 years of trading it has had marginal distraction to me. In the last four years, I have shorted the market approximately 60% of the time with minimal impact from the short-sale rule.
  10. iiphos


    David, do you think that decimalization has reduced the rule’s effectiveness in slowing down a market selling off? Is it easier to get short now than before decimalization?
    #10     Feb 21, 2002