Shorting? Restore the Uptick rule now.

 

We received this email from a Quebec resident who resides in the Montreal area. We did not edit or add anything to his email. It certainly makes sense and we welcome comments. He is French Canadian but he recognizes that the majority of the readers are Anglophones and he politely has written it in English. He requested that his name not be given.

En tant qu’investisseur Canadien, j’aimerais apporter à votre attention une situation que je trouve déplorable. Vu le fait que vos lecteurs sont anglophones, de vous transmet ma question en anglais. Merci,

Investors are embittered and frustrated with what has transpired in the markets particularly over the last twenty years. The major banks and brokers have been fined hundreds of billions of dollars for manipulations, fraud and other criminal actions with the public as the victim. It is no surprise that the public has such distrust and contempt for the large banks and major brokerages.

“Short selling” of listed stocks has occurred for decades and is at times essential, particularly by market makers in stocks. But for years it required an uptick in a stock’s price before a short sale could be initiated. That was the requirement, a transaction with an uptick was mandatory, thus the sale in which a stock was sold short had to occur at a higher price than the prior trade in that stock. That no longer in effect uptick rule in the U.S and Canada required that every short sale transaction be executed at a higher price than the price of the previous trade. It was a   fair rule and kept the market in a more proper balance.

The uptick rule prevented short sellers from artificially and unfairly adding to the downward pressure when the price of a stock(s) was already experiencing a decline. The uptick requirement was a method of regulating short sales since the fact is that the shares were never really the short sellers stock to sell-they borrowed it from true shareholders. My contention is that when some short sales are made, it can have an adverse influence on a stock’s price. It can create an image that shareholders are “getting out” or something is wrong at the company. Short sales can have a powerful influence on a stock’s price.

The uptick rule was effective for decades and should be reinstituted now as it protected the market from artificial down moves. Of course, true shareholders selling their shares is normal and to be expected as profits are taken and declines in price are a normal occurrence. But with no uptick required, short selling can be unfair to the shareholders of the stocks. Unfair? Yes, as the stock that is being sold is borrowed from a shareholder who owns the stock and obviously does not want to see his or her stock decline. It can create the perception that shareholders want to sell generating the impression of weakness. It is another valid reason why private investors have very little trust for the brokerage and banking industries.

The fact is that the shares that the short sellers sell are borrowed from legitimate shareholders who are the true owners of the shares. If an investor, a fund or institution is a shareholder, they do not want to see short sellers borrow their shares to enable them to short their stock?  It makes no sense. The fact is that most investors are not aware that their shares are being lent out to short sellers.

I am not underestimating the risk that the markets face, but I believe that we may be commencing a severe bear market. High frequency traders being able to short stocks with no uptick requirement can cause downside chaos in the markets. The time has come to reinstitute the uptick rule. Now!                                                                            Thank you, K.C. Grainger