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April 15, 2009

NYSE Chief Calls for Uptick Rule

By Nina Mehta

A top industry official has come out in favor of curbing short selling by means of an uptick rule. Duncan Niederauer, CEO of NYSE Euronext, speaking last month at the Museum of American Finance on Wall Street, said he would like to see the Securities and Exchange Commission reinstate the uptick rule for short sales, even if it's mainly for the sake of bucking up "investor psychology."

His comments came just before the SEC announced it might propose new measures to restrain short selling, including the introduction of an uptick rule.

Referring to the trading community, Niederauer said, "we've got to come out with a definitive statement" for investors. He noted that last fall exchanges were not able to agree on an approach to limiting rapid declines in stock prices, such as an uptick rule or a circuit breaker for individual stocks.

But he also laid responsibility at the SEC's feet, calling on the Commission to decide how it wants to approach this issue. "No more rhetoric, no more maybes-just what are they going to do?" he asked.

The SEC hasn't committed to any new course of action, or indeed any action at all. "The chairman plans to review the issue, but there's no specific proposal under consideration," an SEC spokesman told Traders Magazine. Mary Schapiro, the new SEC chief, said in her confirmation hearings in mid-January that she would review the elimination of the uptick rule.

An SEC spokesperson said last month the SEC might issue a proposal in April. The SEC eliminated all price-related tests for short sales in 2007.

In late January, outgoing SEC chairman Christopher Cox wrote in a letter to Congressman Gary Ackerman, D-N.Y., that during 2008 the SEC never had a majority of commissioners interested in reinstating the uptick rule or considering a "modernized variant of it." In addition, he said, Nasdaq and BATS "have informed the Commission of their opposition to either the old or a reconfigured uptick rule."

Since the SEC's emergency ban on short sales in financial stocks last September, many in the industry have argued that the uptick rule or a price test should be brought back to prevent stocks from being pounded down by short sellers.

Many others, however, have argued that in the current fast-moving market, in which prices skip around rapidly, these tests simply rein in liquidity and potentially distort the market. The SEC's Office of Economic Analysis and a handful of academic studies, which analyzed data from a pilot that ran from 2005 until 2007, found that the lack of price tests did not adversely impact market quality.

Niederauer acknowledges this. The SEC and other studies, he said, presented a "good case why we didn't need it anymore." But while "there's no economic benefit from having an uptick rule," he continued, "I'm not sure there was any economic disbenefit. If the question is, 'Would people think it's a fairer game if we had an uptick rule?' the answer is yes."

Steve Wunsch, a market structure expert and former executive at ISE Stock Exchange, agrees that the uptick is worth another look. "An uptick rule may help stabilize the market and throw a little bit of extra process at those credit-default-swap buyers and rumormongers trying to drive a firm's stock price to zero," he said.

In Wunsch's view, short sellers appear to have had the upper hand in recent months. "Restoring the uptick might redress the imbalance," he said. "Even if the main benefit were only public relations, that's still not a reason to dismiss it."

However, many say the uptick wouldn't function as an effective brake in a fast-paced electronic market. The operational issues around reintroducing the uptick rule or some version of it could also be onerous.

Dan Mathisson, head of the Advanced Execution Services group at Credit Suisse, doesn't think reinstating the uptick rule makes much sense. "With 40 markets, how would you stitch it all together?" he said. "It would be almost as complicated as Regulation NMS, and implementing it would be ugly." He added that if the SEC does consider a rule change around short selling, he hopes it would go through the normal rule-making process, with a public comment period.

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