(up)Ticky Boo

Two weeks ago, Reuters reported that the SEC was going to consider reinstating the Uptick Rule. Congress may beat them to the punch. On the 16th Edward Kaufman introduced S. 605 (C.R. S3121) which would require the SEC to reinstate the Uptick Rule. The bill has been referred to the Senate Banking Committee. S. 605 would also give long-term investors priority over short sellers, outlaw naked short selling and shorten the share delivery window to three days.

Restarting the Old Ticker

Reuters reports on the possibility that the SEC will reinstate the uptick rule.

"There is no Tomorrow"

...thunders Wachtell Lipton. After failing to convince the SEC to reinstate the Uptick Rule, Wachtell has taken its fight to the media. The full text of a memo excoriating Chairman Cox for not reinstating the rule was posted today on the New York Times DealBook blog.

Former rule 10a-1, better known as the Uptick Rule, was adopted by the SEC in 1938 because "The preponderance of available evidence points to the conclusion that in a declining market certain types of short sales are seriously destructive of stability" (Release No. 34-1548, 1938 WL 32911). 10a-1 made short sellers buy at market price or above. It was intended to prevent a "bear raid" where short sellers pile on a falling stock by betting that it will continue to fall - like what happened to Lehman.

Unlike the baroquely condemned Consolidated Supervised Entity program, which wasn't his fault, the repeal of 10a-1 can be laid at SEC Chairman Cox's door. Soon after his appointment he speechified against it and started a "pilot program" to see how we'd manage without it. His curiosity satisfied, he repealed 10a-1 in 2007 (Release No 34-55970, 2007 WL 1880054).

... Short Joke Here ...

In a short sale you sell something, wait a bit, and then buy it back. Thus, you have made a bet that the thing will decrease in value between when you sell and when you buy again. For instance: you sell Lehman for $10, wait a couple of hours and buy it back for $5 and you have twice as much Lehman for the same money. Notice that you bought it back. What you're betting is that Lehman is going down, not bust.

Short sales can be simple like that, or they can involve borrowing the stock or negotiating an option to buy it in the future.

Naked shorting is when you sell "borrowed" stock without bothering to check if anyone will loan it to you (what do you mean you don't want to sell your car!)

Back in July, the SEC banned most naked shorting. Yesterday it banned any short selling of financial institutions. You are now only allowed to bet that these stocks will go up. Anyone care to take that bet?