Uptick rule

It's more expensive with the ut rule in place for normal shorting (not bear raids which 99% of traders have no interest in) than without it. And at one point, they not only had the ut rule, they also took away bullets and conversions. Bullets and conversions make it easy to "bear raid" a stock with ut or no ut rule, but also helped honest traders that were simply shorting a stock with no evil intent or manipulation in mind. Getting rid of the ut rule is not what has caused the volatility and bear raids.

For those that trade algorithmically, it is a monster pain in the ass as well as expensive to buy these option contracts that get around the ut rule, and we have no interest in bear raids.

People are trying to cure the symptoms instead of the disease. The disease is not the ut rule. It is collusion by bears to raid a stock that should be frowned upon, assuming it is even true.

If people just want the market to go up with no risk of going down, why not just agree that all stocks go up 7% a year and get rid of trading altogether? Think how many orders of magnitude more money that would save investors as opposed to the few problems that not having the ut rule might cause?

nitro

 

Why do you only seem to be against "manipulation" to the downside?

And how can you prove that the object of a bear raid doesn't end up trading where it should be? It just got there faster than it would have without the uptick rule.

And finally, how can you prove that it's shorts hitting those bids and not panicked (ie. weak) longs?

 

I do watch the market all day. And, with all due respect, you are being naive.

What if these unnamed stocks you speak of were depending upon a financial institution for fianancing? And there are rumors that the financial institution will not have the liquidity to go through with the deal? Or that the institution scheduled to provide the financing may not even be around in 3 months?

Do you really expect such news to be handed to you, nice and neat and prompt?

The impact this subprime stuff could have on the non-financials is a major reason why the Fed is involved.

It. Is. A. Big. Fucking. Deal.

Regardless of where you are on the "free market /bail out" argument - Bailing these institutions is a big deal or letting
them fail is a big deal.

Either way, it is a big "macro" deal.


LEH raised money today or yesterday. If they really thought their business was as strong as last year's stock price indicated ($69/sh)- they would not have done that.

They would have instead *bought* their shares and waited to release the better than expected earnings. And then smiled as they watched the shorts suffer, bent over - with that "red ball" stuck in their mouths.

But all of the hoopla over the low price basically "outed" LEH - didn't it ?

With the low stock price they were forced to say, "you know what?... you're right. we need to make some adjustments to stay in business - or at least to get back to good health or the state of health indicated by last year's (or even last quarter's) stock price ... "

Would this had happened if the stock price only went down to an "orderly"$65/sh , instead of almost $30?

Nope. Probably not.

Would Cramer or Mario Gabelli be happy with LEH at $65/sh?

Probably, yes.

Would, however, $65/sh truly reflect the true health of LEH? No - not even close.

So all the aggressive (uptick or downtick) selling in the stock did was basically pose a challenge ... "LEH, prove that you are alright"

LEH's response? - "you know what? maybe we do need an extra $4b to be alright"

No one at Enron or Worldcom ever said - "Hey, investors, we have issues ..."

The BSC guy never said "HEY, CNBC !!! We have bad issues, man ..."

No one who knows that it is really bad ever tells the investors, that you care so much about, that it is really bad.

Not Skilling, not Lay, not Ebbers, not the BSC guy - none of them.


"The big deal if they put it back" is when a company's survivability is in question - one thing the ASTUTE investor has, in terms of honest info, are the hardcore challenges by the shorts to make a company prove that it is, in fact, alright - or is about to make changes to get better.

The same goes for "overpriced"

If I see a basic Honda Accord trading at $85,000 - why should I need "permission" to short it? Sure its a good car. At between $20K and $30K. Why should I have to wait for either another lemming wanting to pay $86K or a "too soon" short cover his position to initiate what is essentially a proper "price discovery" debate?

This price discovery doesn't need to be impaired so that guys like Jim Cramer and Mario Gabelli can be "liked" by the folks who butter their bread.

And, as a short, if you're wrong - like those short LEH as of 3/31 - you pay.

Shorting is not an ATM - even with struggling stocks like LEH.

One more thing - an "orderly market" does not mean an absence of large % moves to the downside. It means an attempt to provide "decent" liquidity throughout the trading range.

The term was associated with the specialists mkts. like the NYSE. With "hybrid" and etc. - not sure if that is really their objective anymore.

Anyway, I can't believe that these "dramtic moves" have made such an impact on you that you want the SEC to overturn its 7/07 decision - but you can't even remember the names of the stocks that were unduly "de-stabilized" and possibly manipulated by the absence of the uptick rule ...

And I'll leave it at that ...

 

I think a lot of you are misconstruing what I'm trying to say. I realize that the uptick rule wouldn't have changed what happened to BSC and LEH. Even with the uptick in place, BSC still would have dropped from $65 to $30, it just would have taken another 30 minutes or so. Same thing with LEH. Like you said, these stocks plummeted for a specific reason. The uptick wasn't implemented to prevent that.

I also realize that volatile stocks, such as many commodities are now, are going to be subject to huge price moves. No surprise there. The stocks I'm looking at are the relatively thin stocks that typically have low volatility that are periodically getting bear raided. I don't have any specific examples off the top of my head because they're not stocks that I typically trade; I just pull them up and trade them when they light up one of my filters. I trade them the day of the bear raid, and then probably won't touch them again.

As for the whole downtick rule argument, here's my reasoning: The vast majority of market participants are long. So if a bear raid starts, this can cause massive panic selling resulting in a huge sell-off for no reason other than a hedge fund decided to push a stock down. If a "bull raid" (or a squeeze) takes place, then there are only a handful of people (most likely traders) that are getting crushed, and the follow through most likely isn't going to be as dramatic. The rules of the SEC are designed to protect the masses, not the day traders.

A lot of you have made really good points, many of which I don't necessarily disagree with. But in my opinion, the market was more "fair and orderly" with the uptick in place. True the market will never truly be fair and orderly, but that shouldn't prevent the SEC from trying to get it as close as possible. And sure it cost more to short when the uptick was in place, but that shouldn't play a role in the SEC's decision regarding the uptick.

 

Well, if your concerns are that thinly traded stocks can be easily manipulated, why not institute the UT rule for stocks that are not in the SP500, or that are not in some other major large index with massive institutional following? Or some other simple rule (like stocks that trade less than 1M shares a day) to protect stocks that may implode at any moment a priori?

What I am trying to say is, LEH and BSC are stocks that have tons of investment interest. I don't get it. If a stock is incorrectly bear raided, why not step up and buy it for a bounce? Your entire year is made on a week like what we saw in LEH.

You may say, well, bear raids cause panic selling. So what you are really saying is, investors invest based on the act of behaving like a lemming. If you see a bunch of sheep jumping off a cliff, you go ahead a follow them right off that cliff, and vice versa. Let me give you a hint, momentum is a double edged sword. In fact, most investors are now some hybrid investor/traders, as they should be given the low commission. This is what causes volatility, not bear raids.

Investors should be buying stocks that they are comfortable with. If you buy MRK, LLY, SGP etc, expect that once every few years you are going to get hammered. And these are massive stocks! What do you think is going to happen to a biotech that has a float of 50M shares and has one product? You need an uptick rule to protect you from that? If you buy PCLN expect that you may lose all your money, ut rule or no ut rule.

nitro

 

1. The "masses" ... ?

Coca Cola (KO) has a float of 2.2 BILLION shares. I think there are a good chunk of "the masses" there.

Since the repeal of the uptick rule - KO is UP approx. 15%, despite the market being down approx. 10%.

The shareholders were protected, first and foremost, by the mgt. of KO adding value to the company.

The "masses" ... ?

Wal Mart (WMT) has a float of 2.3 BILLION shares. I think there are a good chunk of "the masses" there.

Wal Mart was part of the NYSE short sell "pilot study."

Despite your disregard of the study, the study seems to have gotten it right. In a weak general market since the repeal of the uptick rule (7/6/07) - Wal Mart is UP approx. 15%.

"The masses" have been "protected" just fine.

2. "What about the masses represented by the 910 mln float in MER?"

For anyone asking this question I, again, would point you toward the implied vol for the stock. Once the subprime news came out, the stock spent a fair amount of time above an implied vol of 50. At least once each month since August.

An implied vol above 50 means you need to be up on all relevant news, do your homework and start asking some serious "what if" questions.

An implied vol above 75 means you really better have an extremely sound reason to be dealing with this stock - LONG or SHORT.

The implied vols for KO and WMT have not been above 35% in the last 52 weeks.

The "smart money masses" read these tea leaves and shipped out, happily selling to the "Oh, look - MER's RSI is at 10 - its SO OVERSOLD masses." Another dose of bad news and these masses now become the "Ahhhh, FUCK !!!" masses, liquidating aggressively as the stock carves out new lows and new assholes. You may have thought this was a "bear raid."

According to Yahoo, there are just under 40 million shorts in MER. Let's assume the info is old and double the number. 80 million shorts. That leaves 830 million longs with no short seller on the other side.

Who has more fire power to (I'm sure, unintentionally) kill a stock? Clearly the panicky longs !!!

To refine this, some of these shorts have been short since Oct. or Nov. They have not been involved in shorting at lower prices. So you really got to figure it is the NEW SHORTS vs. the OLD LONGS. That ratio is probably easily 20 to 1 in favor of the longs on the book.

What I'm saying is that your "long-term investor" class had ample signs and time to vacate these stocks and go elsewhere. And many did. Some of these bear raids you are imagining were just spells of concentrated or panicked long liquidation.

3. You have said that you have noticed, sort of "out the side of your eye" some price action in thinly traded stocks.

These are, however, stocks that you, yourself, haven't even bothered to trade.

The price action, however, was so "startling" that you were inspired to post here and argue for a reversal of the 7/07/07 SEC decision.

But because these are stocks that you "sort of, kind of" only follow out of the side of your eye, but do not actually trade - you don't even know the actual symbols of these stocks.

Based upon this, you want a RULE CHANGE?

Meanwhile, I DO trade KO and WMT. And despite the fact that these stocks have proven that they (and the shareholders in them) do not need any 'uptick rule protection' - YOU want ME and my trading/investing to be affected (I referenced how KO and WMT have both performed positively in a weak general market earlier).

KO and WMT have performed well, but over the past 8 months they have been, like any stock, overvalued from time to time.

Your argument is that - I can't simply short and profit from a good stock simply being revalued a bit lower because you have SEEN "disturbing" price action in some "thinly traded stocks" that you don't even trade?

By shorting KO, I am initiating panic selling? In KO?

Dude. "MER." The CEO got fired. "C." The CEO got fired. "BSC." The CEO went on TV and said - "all is well" before the weekend where JPM made a $2/sh bid.

The "LEH" deal was, apparently, "we'll be okay - but only if we get this $4b hook up nice and fast." Up until then, their CEO was mum.

With a sector in disarray like this, THERE WAS REASON TO PANIC.

Like I said earlier. When the implied vols started getting to the 70 to 80 range, if you are long - you should have a good and solid reason for being in or getting into the stock.

Like "I really believe LEH will get financing" or "I really believe C's new CEO will turn things around" ... or ... "I really believe JPM or someone will ultimately bid close to $10 for BSC" or "The Fed will take care of everything" ... or ... whatever.

In which case, YOU SHOULDN'T CARE if a new short is voting along side a panicked long - because you think they are both wrong.

If really believe this is how things will play out - you will not get "stopped out." You will buy more.

If, instead, you DON'T KNOW how it is going to play out - vacate the stock. Before the 75% implied vol turns into 125% vol and you are stopped out by the 15% to 20% sell off you complained about in your original post.

 

Now that the proposal for consolidation of agencies is out, there won't be alot of new regulation. Besides, they just repealed the UT rule less than a year ago. They won't put it back for at least 5 years.

 

kiefer - just an fyi...stocks on the nasdaq small cap area weren't, to the best of my knowledge, *subject* to the uptick rule.

in addition, there was lots of testing on a wide variety of stocks by the SEC pre-removal. they let some stocks - small, mid and large cap - not have the uptick rule. miraculously, none of those stocks immediately went to zero.