Uptick Rule and Market Crisis
We have all seen what has happened to the financials over the past few weeks. One after the other they began to fall, merge, or became pressured to make moves that they normally would not make. The crisis had many worried about not only the economy, but where their money was, and whether it was safe. In response to all of this the government set up a few firewalls, one of which was to suspend short selling on certain equities.
Immediately after the government announced the ban on shorting, the market responded with positive waves, but they were short lived. The reason that the ban had little impact is because smart investors, and even the street KNOW that the move is temporary, and any gain as a result of the rule can be wiped out as soon as the shorts are allowed to work their magic again. What we have left are investors refusing to go long, and shorts unable to do anything.
Among the many news reports on the subject is a theory that if the uptick rule were put back into place that it would begin to level the playing field to at least some extent. Is it enough? Likely not, but it would at least give some measure of control into the markets.
The uptick rule is was adopted in 1938 and was designed to help regulate short selling in financial markets. Typically the rule mandated that when sold, a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected, or at the last sale price if it is higher than the last different price.
In July of 2007 the uptick rule was removed, giving short traders a free reign on shorting without any real mechanism to mitigate. Personally, I feel that something as simple as bringing back the uptick rule will not solve the overall problem. The problem runs deeper, and there is a systemic issue at hand that needs to be addressed. Borrowed shares for the purpose of shorting is one thing. Naked shorting is where the issue comes to a head. Investors who short a stock, but the shares never get borrowed, are actually diluting the overall stock of the company because they are profiting from share that do not exist.
Bring back the uptick rule would only be a start, but what other solutions can exist that will have enough teeth to curb the problem? To be fair, short selling should indeed be allowed. It is something that helps cash flow through the markets. The issue is, in my opinion, reaching a fair balance for those on both sides of the trade.
– One possible solution that may mitigate the unfair advantage enjoyed by the short side is giving investors have a mechanism to specify that their shares can not be borrowed, and that investors who are long a position benefit from allowing their shares to be borrowed. Some brokerages already pay longs to allow them to borrow shares, but the mechanism to do so across the board is not available. In keeping things fair for the brokerages, perhaps a trade that carries a “no-borrow” provision would have a higher price (i.e. instead of a $9.95 trade, the no borrow provision would be $12.95)
– Make strict and stringent penalties. Brokerages seem to be able to figure out how to restrict you from selling one equity, using those funds in buying another equity, and selling too soon. Put the onus on the brokerages to ensure that shares sold short get borrowed, and failure to deliver will penalize not only the investor, but the brokerage house as well. This will make the brokerages be SURE that they can borrow prior to executing the trade.
– Make the REGSHO failure to deliver list VERY PUBLIC. Name the firms that are not following the rules, and give them a set time-frame to get off of the list. Institute fines that accrue on a DAILY BASIS for however long the firm is on the list for failing to deliver.
– Strengthen the requirements that will place an equity on the REGSHO list. As it is currently done, the damage caused by failures to deliver is already done by the time an equity gets on the list. Consider an all out ban on shorting any equity on the REGSHO list until 30 after the company comes off of the list.
I am not saying that all of these ideas should happen, or even that these ideas are prudent for a long term solution (these are after all simply quick thoughts tossed at a massive problem). However something other than the selective ban on shorting needs to happen, and it all can start with bringing back the uptick rule, and then adding some long term strategies that level the playing field between going long and shorting. Now is the time when the SEC has a chance to make meaningful change that can help restore confidence in the market.
The brokerages should pay ME if they want to borrow my shares and short them. I should get at least a percentage of the profits of my holding broker.
Also another rule that was eliminated in 1999 I think was the ban on insurance companies and other financial institutions from being owned together. So this is how we got to the point where one massive company like AIG with its thumb in every type of financial industry in the country can bring the system to the edge of collapse….
Can Share holders oust Mel and the board like other companies have done and replace them with people who are efficient and Pro SiriusXM
Can shareholders call for an emergency meeting to hear what the H*LL is going on
Can someone with level 2
tell me what the hell happened at 11:30 am today.
Major sell off ? ANYBODY
I cant say about the sell of but i have a question of my own, i have watched football for the last few weeks and no advertisements anywere from siri. I think this ship has sunk along with all our moneys. Cant stop short selling for more than a week, fucking crazy
Asking for Mel’s head won’t change the market from teetering on the edge of the GREAT DEPRESSION PART DEUX…..nor does it address the INSANE and CRIMINAL merger delay by the FCC or the blatant naked shorting of Sirius for the past 2 years.
I am not a Mel apologist….but if you just LOOK for a minute, you’d realize that under his watch subs increased from 67,000 to nearly 20 million!
That alone should buy him some time. AT THE VERY LEAST until we get past this market crisis and Mel is able to refinance the outstanding debt.
I for one want to see what he comes up with and am holding off asking for his head anytime soon.
His contract is up in less than 2 years. I’m willing to give him that much time.
If the FCC had approved the merger in the winter of 2007 like it SHOULD have….many of us who feel STUCK right now….would have had a HUGE chance to get out over $5. Of that I have no doubt.
But that wasn’t the case. And thanks to the delay and the criminal short sellers(who are partially responsible for the DIRE economic crisis we now find ourselves in)…..we’ve been beaten down below a buck.
Yes…Mel made an ugly deal to close the merger….BUT….again…if the FCC had approved in a timely fashion, it would NOT have come to that. And if the SEC had done their job and ENFORCED the naked shorting rule….we wouldn’t have dropped as far as we have.
As Mel said, this SUCKS….and it’s being COMPOUNDED by being on the verge of ECONOMIC ARMAGGEDON!
There is REAL panic in the street…and NOTHING right now is going to ease Sirius Shareholder pain. Not ousting Mel. Not hearing “GOOD” news. NOTHING.
We are a small fish in a big pond that “MAY” be drained. This is a CRAZY situation. Something us Sirius shareholders SHOULD be used to. If ANYONE out there is CONDITIONED to KEEP THEIR HEADS while all about them everyone is LOSING THEIRS…..it’s US SIRIUS SHAREHOLDERS.
So lets buck up. We’ve weathered a storm long before any of this happened. We have already been battle tested and gone thru the ups and downs. We should be better prepared than ANYONE to remain calm.
Because if this bail out fails….our Sirius shares will be the least of our worries. We’d be talking about a TOTAL collapse. Not being able to access our funds from ATMS. Of 30% unemployment. Of rioting in the streets.
Not to be overly dramatic, but lets get thru this crisis. Lets weather this mother of all storms. Lets wait(something we’re good at) for the dust to settle and the market to stabilize.
With alittle luck, that will happen before the debt is due in February. THEN we can judge Mel more clearly.
I wish things were different. But this is what it is.
Long and Strong could never mean more right about now.
To point out the severity of the situation…there have been NO NEGATIVE articles printed today about Sirius.
That speaks volumes.
ALL EYES are on capital hill right now. This is SERIOUS folks.
Thanks FrigginRegan for your words of wisdom.
The big boys have really handed it to the American people and you are right about the fear level – even fear among those who are employed and have money in the bank (not to mention those who are already in financial trouble).
Things are so intertwined in this 2008 economy that it will take great foresight and wisdom (not the usual politics) to get this thing right.
Luckily, $12.95 a month is a lot less than the cost of a dinner out, so I think Sirius XM will weather this, but it will be a nailbiter for us all in the meantime.
Thanks again for your puting things in perspective.
I am sorry, but
Did any moron in D.C ask why did this happen? who did it? and where are those trilions of dollars have gone? certainly, there are paper trails of those who made billions while DC was asleep.
Is not bank robbery is a crime weather you use a gun point or a pen to sign billions of dollars for bonuses and bogus loans to friends and families.
Mr Paulsin admits few people manipulated the market and made billions !!!! duh, can you name Mr Paulsin and make some arrests like they did with Martha Stewart
correction
Does any one know why the government does not want to name those people and make arrests??????
Paulson came from Goldman Sachs. He is worth $100 million. He wants the golden parachutes for his cronies. He wants unchecked power over distribution of a trillion dollars. He wants power to bail out foreign big wigs.
IMHO our foreign financiers have demanded that Paulson “fix this” and make Americans pay for it. Billionaires who reaped the fruits of the disaster want to strap the middle class with paying for it. Socializing losses and privatizing profits. America needs a prudent strategy that lays the bulk of this bailout at the feet of the Millionaire class.
horsecork, wow. I didn’t realize that Paulson was the former CEO of GD. That is pretty scary and seems to put into context what we are seeing with GS and in fact his whole bailout plan.
I agree with your second paragraph as well.
scary sh!t
meant to write GS, not GD on the first line
Some reports show Paulson is/was worth closer to $500 million.
Tyler I absolutely agree with your assessment that the “Up Tick” rule is but a small effort to fix a huge problem. The “Up Tick” rule will do nothing to stop “Naked Shorting”, it simply puts a restriction on the practice of legally shorting an equity and is easily overcome by the pros. Naked shorting is a market wide practice that undermines the legal forces of our free market and needs to be strongly opposed and punished by the powers that be.
Unfortunately during this “Market Crisis”, as is becoming popular to describe the utter greed and runaway practices of financial institutions in their treatment of our real estate assets, the restriction on legal short selling is a stop gap measure for the market to take a breath. It IS NOT THE CAUSE of this event.
Unrestricted leveraging of good and bad “paper”, leveraged at a rate of $1 of bank capital for $30 borrowed against it on the open broker to broker market is how we got here. Picture that $1 dollar of capital, your home or commercial property, pooled with every piece of paper signed during the 80%-20% nothing down mortgage era, and the interest only mortgage held by RE investors, and the negative equity variable rate mortgage given to the first time buyer, and now you have a very complicated pool of paper that is just barely performing (people making their payments).
Picture that pool of paper given a value by Credit Rating Agencies, who had know way of knowing what this paper was really worth, for the purpose of selling it to the Hedge Fund gurus, who are totally unregulated, and who leverage it again. That’s How we got here.
Now look at all that paper and its tenuous market value being based on the market value of the underlying property in your neighborhood and around the country. In 18 months from Dec. 2005 to June 2007 the price of the underlying property lost value and continues to do so. What is that paper on Wall Street, that is now leveraged beyond what most people want to even consider, really worth. If that first $1 of capital was devalued in that period to even $.75 then what happens to all that leveraged paper? PANIC, you can’t borrow any money and any cash you have is frozen to cover the assets that have been leveraged, BEAR STERNS.
Yeah they were shorted but that is not the problem. It is an outcome of a deeper problem that is going to cost my generation, my kids generation, and my parents who are dependent on my generation to take care of them. The next time someone says deregulation, make sure your on the right side of that decision or else pay for the consequences.