Although the daily volatility in the stock market has declined precipitously over the past four months, it seems that lawmakers are still looking for ways to “kill the shorts.” If you will recall, it was the elimination of the “uptick rule” in July of 2007 that many blame for the extreme level of destruction seen in the bank stocks during the bear market. And some go so far as to say that it was the evil short sellers that put firms like Lehman Brothers and Bear Stearns out of business.
However, looking at things from a more practical standpoint, the uptick rule was likely eliminated to pave the way for a horde of new inverse ETF’s. The new batch of ETF’s, which are designed to advance when the underlying index the ETF is based on declines, have become a big hit with the fast money hedge fund crowd.
If you are looking for a way to profit from a market decline, it is much easier and far cheaper to simply buy an inverse ETF than it is to sell short a handful of stocks. So, from our perspective, the uptick rule was eliminated to allow Wall Street to market a new product line.
However, today the SEC meets to consider four proposals to restrict short selling. The most popular of which includes the restoration of the "uptick rule," which requires that a stock can only be shorted after an up-tick in price.
The other proposals include a "bid test," which would only allow shorting at a price above the highest available bid; and two other so-called "circuit breaker" proposals.
One of the “circuit breaker” proposals would temporarily halt short sales of a stock if the stock has already fallen by a certain percentage while the other would trigger the application of an “uptick rule” or “bid test” after the price of a stock experienced a decline by a certain percentage.
Two bills to reinstate the uptick rule have already been introduced in the House and a similar measure has been put forth in the Senate.
It is important to note that a final rule will not be adopted at today’s SEC meeting. The SEC will still need to solicit public comment on its proposals and hold another meeting to decide on final short sale restrictions as part of its normal rulemaking process.
How these new rules will impact the growing number of inverse ETF’s is not clear, but it would appear to be something to watch.
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