Rep. Frank says ‘uptick rule’ for stocks could return soon
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
On a bullish day for Wall Street, Rep. Barney Frank has helped stoke the buying wave by raising hopes for a reinstatement of the so-called uptick rule to curb ‘short selling.’
From Bloomberg News:
‘I am hopeful that the uptick rule will be restored within a month,’ the Massachusetts Democrat told reporters in Washington today. Frank spoke after meeting with Democratic leaders including House Speaker Nancy Pelosi and House Ways and Means Chairman Charles Rangel on ways to restore confidence in the economy. Frank said discussion of the uptick rule with Securities and Exchange Commission Chairman Mary Schapiro left him confident the agency can restore it quickly. Schapiro said in January during her confirmation hearings that examining the rule is ‘one of the things that I would be committed to doing very quickly.’ Federal Reserve Chairman Ben S. Bernanke told Congress last month that the measure, removed by the SEC in 2007 after 69 years on the books, should be revisited.
But even if the SEC were to propose restoring the rule, it presumably would have to take public comment on the idea, which could delay any reinstatement.
The rule historically had been a barrier to rampant short selling -- bets on lower stock prices -- by prohibiting short sales on ‘downticks’ in stock prices. Instead, a short seller would have to wait for a stock’s price to move up at least slightly before shorting it.
The idea is to prevent a cascading effect by short sellers that can drive a stock mercilessly lower.
In a short sale, a trader borrows stock and sells it, in anticipation of falling prices. If the bet is correct, the trader can repurchase new shares later at a lower price to repay the loaned shares, pocketing the difference between the sale price and the repurchase price.
The SEC got rid of the rule in 2007 after finding that the restriction hurt liquidity in the market (by keeping some traders away) and wasn’t necessary to prevent manipulation of stocks. Plus, with decimal pricing of stocks, an uptick is just a one-cent move.
But given the market’s collapse since summer, many investors have demanded that the SEC take new steps to rein in short sellers who’ve profited mightily from plummeting prices.
-- Tom Petruno