Monthly Archives: April 2020

THE SEC SHOULD IMMEDIATELY REINSTATE THE UPTICK RULE TO HELP STABILIZE THE SECURITIES MARKETS

The securities markets have been subject to large percentage daily swings over the last month. The shutdown of a large portion of the economy following the spread of the Covid-19 virus, Democrat primary voting prior to the withdrawal of Bernie Sanders and actions by the Fed, Congress and the Executive branch were precipitating factors, but chart theory, short selling and stop loss orders clearly played a significant role. In my article published on this website on June 3, 2019 I explained why the uptick rule should be reinstated. and margin buying should be more restricted . My blog is not widely followed and my suggestions have been ignored. They should be considered immediately as the markets remain vulnerable to permitted abuses.

The reinstatement and tightening of the up-tick rule is urgently needed. I recently heard on one of the tv talk shows that over $50 billion of securities were sold short during the first week of the recent decline. Every short sale in a declining market contributes to market volatility and a potential market collapse. Traders, like Leon Cooperman who recently suggested the reinstatement of the up-tick rule on CNBC, are aware of the deleterious effects of short selling in a declining market. The ridiculously stupid short selling rules, which the SEC adopted which the current SEC chairman believes are effective and support market liquidity, are on their face worthless. They do not come into play unless a security declines by 10% in a single day. In other words the rule does not become effective until the stock price of the security has already collapsed. Short selling on down-ticks is likely to have significantly contributed to or even been the material cause of the collapse. Furthermore, when the current rule kicks in after a 10% decline it prevents selling at the bid, but doesn’t prevent further abuse that extends the decline.

For example, suppose a $100 stock has declined below $90 in one day with a last sale at $89.60 is bid $89.55 and asked $89.60. The short seller can’t sell at the bid, but can lower the asked by offering to sell below the last sale price as long as the offer is not below $89.56. The short seller may have a large short position and may have sold a large number of shares at declining prices during the decline in price from $100 to $90. If he offers to sell a significant number of shares at $89.56 buyers for such number of shares have to buy at such price before the stock price can sell above that price. Other investors who are long the stock and aware of the price decline and the number of shares and offering price of the shares being offered by the short seller, may anticipate a decline and offer to sell at the bid. The net result is that the bid price is likely to quickly decline further allowing the short seller to lower his asking price. It is no wonder that many sophisticated traders and other investors most of whom are oblivious to the role of short selling but have observed rapid market declines, sell their shares.

I suggest that short selling should be prohibited when any of the major market averages have declined by 20% from the last high point. Such prohibition should continue until all leading averages have recovered at least 10%. from their low point but the short selling prohibition should be reinstated if any of such market average declines below its prior low point within 6 months.