WASHINGTON — The Securities and Exchange Commission plans to unveil several short selling restriction proposals Wednesday.
One includes reinstating the “uptick rule,” a Depression-era rule abolished by the SEC in 2007 that prevented traders from short selling unless the price of the stock from the most recent trade was higher than the previous price. Short selling is the sale of borrowed shares by an investor hoping to profit by buying an equal number of shares later at a lower price to replace the borrowed stock. The rule was abolished after several studies showed it had little effect.
The recent financial crisis has raised short-selling concerns and prompted calls from politicians and some industry players to reinstate a version of the old rule.
SEC Chairman Mary Schapiro indicated Monday the commission plans to seek public comment on as many as four different options. One closely resembles the old uptick rule, while a second would propose a bid test, which permits short-selling only if the last offer to buy a stock is rising.
“This is an issue that has both strong supporters and detractors, and we will be very deliberative in our effort to determine what is in the best interest of investors,” Ms. Schapiro said in a speech this week. “In addition to seeking comments on the new proposals, we will also convene a roundtable to seek a range of views from many experts on the topic.”
The exchanges’ proposal advocates imposing short-selling restrictions only in the cases where a stock declines by a certain percentage, possibly 10%, in a single session. If this so-called “circuit breaker” is triggered, the exchanges suggest a “modified uptick rule” should go into effect, which would only allow short-selling at a price above the highest prevailing national bid.
Christopher Concannon, the executive vice president for transaction services at Nasdaq OMX, said the exchanges favor the circuit-breaker model in part because its easier to implement in today’s world of fast-paced electronic trading.
“When there are hundreds of trades in a given second on active stocks, it takes a lot of computer processing when deciding how to price your order,” he said. “That is one of the challenges with the old uptick rule. It was truly designed for a market that traded a few million shares. Today message traffic has increased to over 10 billion shares per day.”
Mr. Concannon said if the SEC adopted the exchanges’ proposal after the public comment period, the industry could implement the new rules some time in the third quarter.
My gut feeling is that the best option is to either reinstate the original uptick rule that was overturned in 2007, or the “bid test” uptick rule alternative.
I don’t think that the either of the circuit breaker rules are the way to go because there is a lot of manipulation that could be done before the circuit breakers kick in. Knock it down 9% today, another 9% tomorrow, and another 9% the day after that … and the circuit breakers would never kick in.
The SEC is facing a great deal of political pressure to act on short selling soon.
Several U.S. Senators, including Ted Kaufman (D., Del.), and Johnny Isakson (R., Ga.), have sent letters to the SEC and introduced legislation to force the old uptick rule’s reinstatement. In the U.S. House, Rep. Gary Ackerman (D., N.Y.), also introduced a similar bill in January.
“I’m trying to see why it’s taking so long to do this,” Sen. Kaufman said in a recent interview with Dow Jones Newswires, noting he thinks a return of the uptick rule should help restore some confidence in the markets.
Not everyone is in such a rush to reinstate the rule.
Eric W. Hess, the general counsel at Direct Edge, points to the SEC’s own past studies showing the rule’s ineffectiveness and said any version of an uptick rule could harm liquidity. Direct Edge is currently neck-and-neck with BATS to be the third-largest equities trading venue behind NYSE and Nasdaq.
“We are against restricting one kind of liquidity over another,” Hess said, noting the SEC should focus on attacking abusive trading conduct instead of imposing restrictions.
“Liquidity, efficiency, transparency and fairness — those are the cornerstones of a healthy market,” he added. “And when you start imposing restrictions that discriminate against one kind of liquidity versus another, it can have a ripple effect on the market.”
Sounds like Hess is really just thinking about the health of his own company than the health of the markets as a whole.