Several prominent investors and executives wants to reinstitute the uptick rule

1 Apr, 2020 06:58
source: Singularity Financial

Singularity Financial Hong Kong April 1, 2020 – by David Lee

A recent report by The New York Post pointed out, several prominent investors and executives have asked the Trump administration to bring back a legacy securities regulation called the “uptick rule,” according to a White House adviser.

The rule, which got scrapped in 2007 by the Securities and Exchange Commission, bars short sellers from betting against stocks when their prices are falling. To place a so-called short bet that the stock will continue to fall, investors must wait for it to rise.

“There’s a crowd that wants to reinstitute the uptick rule,” the source said. “It’s out there for discussion.”

The uptick rule was originally adopted by the SEC in 1938 under the securities regulator’s first chairman, Joseph Kennedy, to stop short raids that can lead to panic selling. When the SEC scotched the rule in 2007, it argued that it was hampering liquidity.

Critics have likewise argued that excessive regulations against short selling can expose the markets to dangerous bubbles.

However, in an August 2007 column published in National Review titled “What was the SEC thinking?,” Larry Kudlow, who is now director of President Trump’s National Economic Council, argued that eliminating the rule led to more “bear raids on stocks.”

In 2010, the SEC approved an amended uptick rule so that shorts need to be bought on an uptick when a stock falls by 10 percent or more compared to the prior day’s close.

Over the past week, it is has not been short sellers that have been dragging down stocks, said Ihor Dusaniwsky, managing partner and head of predictive analytics at S3 Partners.

The purpose of the uptick rule is giving a long seller a chance to sell their position without competing with a short seller, according to Dusaniwsky.