Duncan Niederauer, CEO of NYSE Euronext, 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.”
Referring to the trading community, he 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 said. Niederauer spoke Tuesday evening at the Museum of American Finance on Wall Street.
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 yesterday. Mary Schapiro, the new SEC chief, said in her confirmation hearings in mid-January that she would review the elimination of the uptick rule.
The SEC eliminated all price-related tests for short sales in 2007. The NYSE’s former uptick rule, a stricter version of which was first put in place in 1938 after the previous year’s market drop of 35 percent, required short sales to occur on a plus tick or at the last-sale price if that was an uptick from the previous price. Nasdaq had a different rule.
Outgoing SEC chairman Christopher Cox wrote in a letter to Congressman Gary Ackerman (Dem.-NY) in late January 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 as a general matter.”
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 we got 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 CDS [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.
