Schwab: Restore the Uptick Rule

[Munger]

Does he really think recent downswings and volatility are due to manipulative short sellers?

Unfortunately, in a shortsighted move, the Securities and Exchange Commission (SEC) eliminated the rule in July 2007, just as we were about to need it most. Investors have now been whipsawed by what appears to be manipulative trading, what we used to call "bear raids," which drive stock prices down without warning and at breakneck speed. Average investors feel the deck is stacked against them and are losing confidence in the markets.

For the sake of our children and grandchildren, and to avoid a needless future repeat of a bad situation, it is time to restore the uptick rule.

The uptick rule may seem far from a kitchen-table issue, but it is critically important to ordinary investors. With more than half of all U.S. households invested in the stock market, either directly or through a retirement plan, it matters a great deal. The average 401(k) retirement account has lost 20%-30% of its value over the last 18 months -- more than $2 trillion in retirement savings has been wiped out. Behind those numbers are real people who planned and saved, and who are suddenly facing an uncertain retirement and the prospect of working longer.

In the wake of the Great Depression, the uptick rule was established to eliminate manipulation and boost investor confidence. The rule said that short sales could be made only after the price of a stock had moved up (an "uptick") over the prior sale. This slowed the short selling process making it more expensive and limiting the ability of short sellers to manipulate stocks lower by piling on, driving the share price quickly down and quickly profiting from the downdraft they created. In July 2007, however, the SEC repealed the uptick rule after a brief study. Manipulative short sellers couldn't believe their luck.

The SEC's study took place during a period of low volatility and overall rising stock prices in 2005 through part of 2007 and didn't anticipate the kind of market we are experiencing today. We live in an environment now where 200 point drops or more in the Dow Jones Industrial Average are increasingly common, where a stock losing 20%, 30% or even more of its value in a single day barely warrants a second glance at the ticker. Ironically, it was just this sort of volatility that inspired the regulators of the 1930s to implement the uptick rule in the first place. Without this vital control mechanism, short sellers have been having a field day, betting heavily on lower prices and triggering panicked investors to sell even more.

http://online.wsj.com/article/SB122878208553589809.html

[LinusK]

Re: Schwab: Restore the Uptick Rule

I wrote something on thiis just now. It doesn't exactly answer your question, but it's pretty close.





The Wall Street Journal today has the kind of article that always makes me a little crazy.
Charles R. Schwab argues that it's short sellers who're responsible for falling prices, and something called the "uptick rule" is needed to make them go away, so that stocks can go up again.
I think he's wrong on both counts. But that's not the issue here.
It's the all-too-common assumptions that 1.) the stock market is like a giant piggy bank, where you go to stash your money, so it can grow. And 2.) that higher prices are always better.
Both are wrong.
First, the market is not a piggy bank. No money is saved there. There is no money "in" the market. (Despite people's use of that phrase.)
So when Schwab writes, "more than $2 trillion in retirement savings has been wiped out," he's wrong. Money is transferred through the market. It isn't stored there, and it can't be lost or made.
The reason is that for every buyer there's a seller. What that means is that regardless of whether stocks trade high or low, the sum total of money is the same. It just changes hands.
Some people make money, and some people lose money, but the sum of all transactions is always 0. (Minus fees, of course.)
The market transfers money, it doesn't create it or destroy it.
Which leads to the second point. When people talk about retiring and living off their portfolios, what they're really talking about is a transfer of wealth from the next generation, to them.
Of course they, like all sellers, want prices to go up. Conversely, anyone looking to buy should root for prices to go down.
But the thing is, the two sides cancel out.
"For the sake of our children and grandchildren," Mr. Schwab writes, "and to avoid a needless future repeat of a bad situation, it is time to restore the uptick rule."
But if he really wants to help his children and grandchildren, he should advocate lower prices, not higher ones.
And if he wants to a needles future repeat of a bad situation, he should be rooting against ridiculous unsustainable bubbles, not for them.

[Rajiv]

Re: Schwab: Restore the Uptick Rule

The problem is not short selling, but rather "Failures to Deliver" and I am not sure whether the "uptick rule" has any effect on that at all.

See Regulators Spring Into Action Against Naked Short Sellers. Or not

As is explained in numerous pieces in DeepCapture, there are many cracks in the settlement system, one of them being the DTCC’s Continuous Net Settlement system, or CNS. I am highly confident that the federales (at least, the SEC) are not permitted to explore the other cracks, that the failures to deliver that they see within the CNS are thus but a small fraction of all that exist, and that, therefore, trying to gauge the depth of the naked short selling problem from the level of FTD’s in the CNS is like trying to guess the condition of an automobile from the level of water in its radiator.
But it’s a start. Given that the CNS system is the one place the SEC can look, and might be able to do something about, it is instructive to see how well they are cleaning up unsettled trades there. Towards that end, DeepCapture has analyzed the data that the SEC released last week. These graphs show their fine progress in that regard.

Also useful is this comment in that thread

If you give me your car and ask me to register it for you while you are out of town, I am the “actual” owner and you are the “beneficial” owner.

If I refuse to give it to you when you get back, you can sue me, but I own it until the judge says otherwise.

You won’t like the answer.

You can own 300% of the outstanding shares “beneficially”, but you aren’t allowed to vote.

Only the “actual owner”, Cede & Co. is allowed to vote. Via contract with you, they may choose to take instructions on how to vote, but if there are a lot of IOU’s out there, they might only assign each one of your virtual votes 1/10th of a real vote.

Only people that own certificates (electronically or physically) own real shares and have a real right to vote. If you haven’t transferred your shares out of your brokerage account and registered them via the DTC FAST direct ownership to become an “actual owner”, you are part of the problem.
Much of what is talked about here:
http://www.bearfactsspecialistreport...%20America.doc
is that because Cede & Co. doesn’t have to vote the way they are instructed and has the right to vote if you don’t instruct them, they have voting control of every major corporation in the country, including all media outlets. By controlling media, they know that they don’t have to follow the constitution as applies to property law.

Cede & Co. is NOT the DTC or the DTCC. It predates it by at least 22 years. It is the privately owned partnership the DTC nominated to own the shares on their behalf.

Think about it. Trillions of dollars of stock, bonds, commodities and derivatives are owned by a corporation of unknown domicile and unknown ownership that has been accused of being a nominee monopoly owner of US corporations for some super rich group for 40 years.

What’s really encouraging is we are digging out works by people like Richard Ney that were ignored in 1971 and via the internet, we are mobilizing tremendous change and the banksters are going to lose and people that really produce goods and services for a living are going to have a much higher standard of living.

[raja]

Re: Schwab: Restore the Uptick Rule

Does he really think recent downswings and volatility are due to manipulative short sellers?

http://online.wsj.com/article/SB122878208553589809.html

Would the passage of a short-seller law of this type have an affect on SRS, SFK, or the like?

[blazespinnaker]

Re: Schwab: Restore the Uptick Rule

Does he really think recent downswings and volatility are due to manipulative short sellers?

http://online.wsj.com/article/SB122878208553589809.html

No, I'd go with your gut instinct, that you know more than Charles Schwab.

[Munger]

Re: Schwab: Restore the Uptick Rule

No, I'd go with your gut instinct, that you know more than Charles Schwab.

Touche.

I should have said, "Does he really think the solution to the economic mess is to restore the uptick rule?" Banning the sale of equities completely would stabilize prices and the value of people's "savings" nicely as well.