The Return of the Uptick Rule?

More

Bloomberg News just announced that the SEC is talking about bringing back the Uptick Rule, which prevents people from shortselling while the stock is on its way down.  I don't understand why the Commission doesn't focus on something more effective, like installing lavish statues of Mammon on trading floors so that traders can better propitiate him. 



Every time markets fall, people start looking for a hidden villain, and short sellers are often a convenient target.  We are not, after all, overfond of people who make their living by betting against other peoples' success.  But shorts actually provide a valuable service:  they make market prices more efficient, by pricing in the shorts' expectations that prices will fall.  There are two determinants of a stock's price:  where people are willing to sell, and where they are willing to buy.  Because a short is more willing to drop the price at which he sells than someone who is long the stock and would have to take a loss, they help more quickly drive the price down to the level at which there are willing buyers.

Without them, market prices would be too optimistic--which sounds great if you're a corporate executive, but also means that your return on the stocks you bought would be, on average, lower, since the long term value of a stock has to roughly track its future cash flows.  Moreover, there's little evidence that short selling on the downtick can cause death spirals in stock prices; death spirals tend to follow bad, bad news about the stock, not ambitious shorting.

But the SEC needs to be seen DOING SOMETHING, and what better to do than to go after the much-unloved short sellers?  If you want to know what's actually driving prices down, however, don't look at short sellers; look at this graph, courtesy of Clusterstock:
 
s&p1871onward-0.54x0.54.jpg



Jump to comments
Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Get Today's Top Stories in Your Inbox (preview)

The Time JFK Called the Air Force to Complain About a 'Silly Bastard'

51 years ago, President John F. Kennedy made a very angry phone call.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In