The Market Crisis, Short Selling And The Uptick Rule

Earlier this year, the SEC lifted its ban on short selling without restoring the “uptick” rule which it abolished over a year ago. Last summer the SEC initially imposed a ban on short selling in the securities of certain financial institutions as the market crisis began to unfold as discussed here. That ban was later expanded and disclosure obligations were added, as discussed here. At the beginning of October however, the SEC lifted its short selling ban (here).

All of these actions followed the termination of the uptick rule last year. That rule essentially prevented short sellers from piling on as the price of a security tumbled down – a short sale could only be made when the price was going up or on an “uptick” in the price. The SEC concluded that the depression era rule was unnecessary.

While other market regulators, such as the UK’s Financial Services Authority joined the SEC in its market crisis short sale ban, all of those regulators did not agree with the Commission’s decision to lift the ban. The UK’s ban, and that of others, is still in place as discussed here.

Now, there are reports that financial institutions are lobbying the SEC to bring back the uptick rule. Citi, whose shares have been trading at penny stock levels, and others are apparently concerned that short sellers will push their share price even lower. According to some reports, short sellers significantly contributed to the demise of Bear Stearns. Others, such as the SEC’s inspector general (discussed here), seem to suggest different theories for the demise of the one-time Wall Street giant.

Regardless of the merits of the debate Bear Stearns, it is clear that executives on Wall Street are concerned about the impact of short selling. SEC Chairman Cox has in recent weeks called for additional regulation in view of the market crisis. To date, however the SEC has not indicated whether it will reconsider its position on the uptick rule.