Uptick Rule Not to Blame for Market Volatility

Thomas Catino reports:

Some traders are crying foul, citing the "uptick rule" that was eliminated by the Securities and Exchange Commission on July 6 as a cause of recent market volatility. But it's unfairly being used as a scapegoat for volatility. The rule was introduced by the Securities Exchange Act way back in 1934 after the stock market crash in order to prevent short sellers from adding to the downward momentum when an asset was declining in price. Basically, it prevents short selling when the last bid is lower than the previous inside bid. But it's now become old and obsolete because in this day and age, there are many ways to get around it - especially because of the advent of new financial instruments such as single stock futures, currencies or market ETFs such as the QQQQs or SPDRs that disregard the uptick rule. So maybe we should be concentrating instead on the fallout from credit market problems that really seems to be the reason behind the recent volatility. And did the uptick rule even really work in the first place?

Before the SEC took this action, it conducted a pilot program in 2005 and suspended the tick test for 1,000 stocks; a group that comprised of 47.8% NASDAQ National Market listed securities, 50% NYSE listed securities and just 2.2% of AMEX listed securities. A study by professors at Ohio State University found that short selling increased; raw data showed short selling for NYSE stocks rose to 25.7% from 24.8% and for NASDAQ stocks jumped to 39.2% from 36.5% after the restrictions were removed. Though there was an uptick in short selling, daily volatility didn't change and stock returns weren't affected.

You'll be hearing more about this in the future.