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Short Sellers Up in Arms Over Uptick

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September 29, 2009 – Comments (10)

Tue Sep 29 2009 10:37:17 AM EDT  
 
Morning Perspective

Powered by Minyanville: Short Sellers Up in Arms Over Uptick

This week the Securities and Exchange Commission will hold a round table discussion on the issue of short selling. The main topic will be whether or not the "Uptick" rule should be reinstated.

According to a Wall Street Journal article, this has upset some of the largest Wall Street firms as a number of them filed letters last week with the SEC objecting the new short selling rules. Under the new "Uptick" rule, traders would only be able to sell a stock short after the price has ticked higher. Advocates of the rule think it would keep Hedge Funds from masterminding "bear raids" that many commentators blamed for the excessive selling during the financial crisis.

While the rule seems fair for most individual investors (and is strangely similar to the rule that was removed in 2007), the larger firms have complained that short sellers provide the needed liquidity for efficient markets.

10 Comments – Post Your Own

#1) On September 29, 2009 at 10:52 AM, Rehydrogenated (36.05) wrote:

I used to be anti uptick rule. But at this point I'm pro anything that pisses off large wall street firms.

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#2) On September 29, 2009 at 10:54 AM, portefeuille (99.78) wrote:

 

more from Ackman is here.

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#3) On September 29, 2009 at 10:57 AM, portefeuille (99.78) wrote:

 

 

 

These videos are not on the uptick rule but on short selling and somewhat entertaining ...

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#4) On September 29, 2009 at 11:11 AM, EverydayInvestor (< 20) wrote:

Actually, most of the current SEC round table discussion is about securities lending and not short selling per se.

You can see the round table discussion live here:

http://www.connectlive.com/events/secroundtable0909/

I have previously written the only summary of research on the effects of the uptick rule available freely on the web:

http://www.goodevalue.com/2009/05/03/the-traders-guide-to-the-uptick-rule/

And the one proven case of bear raids I have found was in fact caused by the uptick rule:

http://www.goodevalue.com/2009/05/12/how-the-uptick-rule-abbetted-illegal-bear-raids/

On the other hand, bull raids (pump & dumps) remain common:

http://www.goodevalue.com/2009/05/16/how-i-stopped-the-alanco-alan-bull-raid/

http://www.reapertrades.com/2009/09/genova-biotherapeutics-is-a-perfect-pump-dump/

http://www.reapertrades.com/2009/09/trade-recap-for-september-17th-im-going-to-destroy-this-stock/

http://www.nypost.com/p/news/business/not_spongeworthy_ZZZ1QlWllnBaSYuVjqYysK?offset=8

http://timothysykes.com/blog/2009/09/27/why-bestdamnpennystocks.com-is-a-liar/

http://timothysykes.com/blog/2009/09/25/the-details-on-this-latest-80-million-pump-dump-whose-ceo-lost-his-medical-license/

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#5) On September 29, 2009 at 11:11 AM, EverydayInvestor (< 20) wrote:

Actually, most of the current SEC round table discussion is about securities lending and not short selling per se.

You can see the round table discussion live here:

http://www.connectlive.com/events/secroundtable0909/

I have previously written the only summary of research on the effects of the uptick rule available freely on the web:

http://www.goodevalue.com/2009/05/03/the-traders-guide-to-the-uptick-rule/

And the one proven case of bear raids I have found was in fact caused by the uptick rule:

http://www.goodevalue.com/2009/05/12/how-the-uptick-rule-abbetted-illegal-bear-raids/

On the other hand, bull raids (pump & dumps) remain common:

http://www.goodevalue.com/2009/05/16/how-i-stopped-the-alanco-alan-bull-raid/

http://www.reapertrades.com/2009/09/genova-biotherapeutics-is-a-perfect-pump-dump/

http://www.reapertrades.com/2009/09/trade-recap-for-september-17th-im-going-to-destroy-this-stock/

http://www.nypost.com/p/news/business/not_spongeworthy_ZZZ1QlWllnBaSYuVjqYysK?offset=8

http://timothysykes.com/blog/2009/09/27/why-bestdamnpennystocks.com-is-a-liar/

http://timothysykes.com/blog/2009/09/25/the-details-on-this-latest-80-million-pump-dump-whose-ceo-lost-his-medical-license/

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#6) On September 29, 2009 at 11:16 AM, topsecret09 (52.76) wrote:

 Links don't work.........

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#7) On September 29, 2009 at 11:19 AM, AdirondackFund (< 20) wrote:

Not only are these Investors 'investigated' for selling short, they are also thereafter surveilled under The Patriot Act.  It's a spy vs. spy world out there.

The uptick rule is the only market discipline which when applied actually causes markets to rally.  It is used as a form of Government Manipulation through the regulation of Markets.  You cannot get cascading declines as we saw in 2008 under an uptick rule.  There is simply no opportunity to short and sell into markets forcing them lower, while at the same time instigating rabid selling upon which shorts then cover and close their positions.     

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#8) On September 29, 2009 at 11:20 AM, AdirondackFund (< 20) wrote:

Not only are these Investors 'investigated' for selling short, they are also thereafter surveilled under The Patriot Act.  It's a spy vs. spy world out there.

The uptick rule is the only market discipline which when applied actually causes markets to rally.  It is used as a form of Government Manipulation through the regulation of Markets.  You cannot get cascading declines as we saw in 2008 under an uptick rule.  There is simply no opportunity to short and sell into markets forcing them lower, while at the same time instigating rabid selling upon which shorts then cover and close their positions.     

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#9) On September 29, 2009 at 11:29 AM, checklist34 (99.79) wrote:

not to barge in and astutely observe the obvious, but David Einhorn's speech on ALD was not intended to serve the greater good, did not have altruism or nobility as a majority motive, or anything else. 

It was self-serving.  (that was a period after serving, btw)

AND HE WASN'T RIGHT.  It took a credit crunch far in the future the largest seeds of which were not even sewn at the time and the scope of which could not possibly have been seen at the time to bring ALD down.  Without this once in a lifetime event and mistakes made by ALD LONG AFTER EINHORN WENT SHORT (i.e., buying into the private equity / mezzanine bubbles of 06 and 07), Einhorn would have badly lost.

He was wrong.  considering that in being short shares you are liable for paying the dividend and so forth, barring him getting bailed out by a once-in-a-lifetime credit crunch, and not knowing if he covered at some point in between "the speech" and reporting a profit on the stake, and how much effort he put into slandering ALD and so forth (writing books on it no less), he was badly wrong.

 thanks for the links again porte, very good.

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#10) On September 29, 2009 at 12:19 PM, checklist34 (99.79) wrote:

another note about short selling.

I am not, in making this note, saying that pump and dump isn't a problem (it is, remember the ARNA situation a while back when that hyped up email went out everywhere, i got like 10 copies, the price rallied only to crash again).  And pump and dump is probably a significant part of how "pros" transfer money to them from "individuals".  I do not deny manipulation on the long side and I don't dispute everydays insinuation that this is more common than short side manipulation.

But it is worth mentioning several points:

A)  pump and dump cannot cause permanent harm to a company or its shareholders.  in the fullness of time the shares will be worth what they will be worth and will gravitate towards something resembling fair value.  if they baloon over that for a time, ... no actual permanent harm is done to the whole, although significant harm may befall the few.

 

B) short selling can cause permanent harm to shareholders and a company.  Take a case like what may hav ehappened to MGM earlier this year.  The shares hit $14, the announced a secondary, the shareddropped dramatically in hours, and the secondary wound up being priced at $7.  The net result of this is that MGM shareholders were diluted mor ethan would have been necessary, a permanent harm.  Also the company loses some incremental ability to raise equity in the future via this dilution, a permanent harm.  Was that the result of a bear raid, a short attack? I haven't any clue, but if a company announced a secondary and I was short I'd be real interested in knocking the offering price down for the reasons above.  

Similarly, companies like REITs and BDCs which rely on share issuance for basic operations and growth.  The model is to issue shares, invest the proceeds from the share offerings, then turn around and distribute the profits from those investments to shareholders.  An assault on a BDC - which have hardly been infrequent from what I gather over the years - risks permanent damage to the business model and with it permanent damage to the small businesses that it services.

Pump and dump does not create a potential for permanent harm to a whole of an organization, its risk is limited to permanent harm to the "suckers" that bought into the pump.

That is a fundamental and sweeping difference that should not be ignored.

 

C) rising stock markets create wealth and in more ways than just the on paper marmket cap of the NYSE.  They instill confidence, they empower companies to invest (as with share prices at reasonable levels they have reasonable means of raising capital should need be), they empower consumers and others to spend and invest, they create the opposite, to an extent, of a Keynesian downward spiarl. The aftermath of a bubble gone wild can be radical and horrendous.  Indeed we are quite probably in an economic situation with some roots in the Nasdaq bubble of long ago.  

Could the ability to short-sell house prices have somehow helped prevent the bubble and prevent the subsequent catastrophe?  Its possible.  

Everyday, in his link above, suggests loosely that the uptick rule is actually able to make bear raids easier.  Well if thats the case why do persons interested in short selling oppose its return while those interested in markets rising generally favor it?  I realize thats a bit of loose logic I've offered, but the question seems valid.

The only potential positive that I can see from a "greater good" sense for enabling short selling is bubble prevention, or possibly liquidity increases, but can anybody quantify what % of liquidity comes from short selling?  And, if the uptick rule can actually empower bear raids, and if as I suggested above short selling could have a benefit of preventing market bubbles...  I'd politely observe that it sure didn't help prevent the Nasdaq bubble, did it?

Anyway, radically falling stock markets (and part of why they fell so radically was short selling last fall and early this year) work to create a Keynesian downard spiral (things are bad so people panic and don't spend and lay off which makes things worse which prompts more bad, etc.).  They destroy wealth and confidence and result in great transfer of wealth from themany to the few.  That is not good.

 

D)  naked short selling is absolutely preposterous.  you have, literally, in naked shorting a stock diluted it and reduced its value by increasing the float.  You've created shares that don't actually exist (same effect as dilution, net effect is to at least unti you cover, provided naked shorts do always cover, you have actually lowered the value of each share).  Any argument to this is folly, in my view.

 

E)  short sellers have that coffee-shop-intellectual snideness that is typical of people who hold "others-thinking-they-are-smart" as important to them.  This is to be distinctly, and dramatically differentiated from actual intelligence or intellectual capability.  search "coffee shop intellectual" on caps to read my comments on that.

As such they annoy me to an extent and at times, and anything that annoys them is thusly mildly amusing to me.  :) 

 

In sum, short selling does carry actual fundamental risk and can cause permanent harm to companies and individuals in addition to a sort of transfer-of-wealth-effect from peopel nerviously selling out as prices drop.  Pump and dumpcan only cause the transfer-of-wealth damage and is not as great a potential evil as short manipulation.  A bull raid cannot cause as much harm as a bear raid.

here endeth the commentary

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