SEC Moves to Reinstate Rule for Short-Sellers
Rule 10a-1. The arcane "uptick rule."
Created in 1938, toward the end of the Great Depression, and abolished in July 2007 by the federal Securities and Exchange Commission, the rule regulated short-selling on Wall Street by only allowing traders to make "short-sales" following a higher bid on a stock price.
For example, if a company's stock was trading at $30 per share and a trader thought the stock price would fall, he could borrow shares but not actually sell them until the stock price ticked higher, to $30.01, for example. (The trader would hope to be able to buy the shares back when the price fell and thus make money on the spread.)
In theory, the rule helped stop "bear raids" on stocks, when traders would gang together on particular stocks and force their prices down. But the SEC said the rule did not appear "necessary to prevent manipulation," according to a 2007 New York Times interview with Muriel Siebert, the former state banking superintendent of New York.
Without the rule, some observers argued that short-sellers were able to unfairly thrive in the market in 2008. And that, in turn, allegedly contributed to the market meltdown.
"The rule was designed as a guardrail that slowed down the short-selling process, preventing shorts from driving the price of a stock at a faster clip," TheStreet.com opined.
As the stock market plunged in late 2008, critics questioned the SEC's decision to get rid of the uptick rule.
On the campaign trail, Sen. John McCain (R-Ariz.) bemoaned its elimination, saying the move turned "our markets into a casino."
Federal Reserve Chairman Ben Bernanke, testifying last month before the House Financial Services Committee, said if the rule were in place last year, it "might have had some benefit" in preventing the market collapse.
In January, during her confirmation hearing, SEC Chairman Mary Schapiro said she would consider reinstating the rule; Schapiro was scheduled to appear today before a House Appropriations subcommittee in her first congressional testimony since taking office.
Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, seemed optimistic about a change, adding that Schapiro had told him the agency would take up the issue soon.
"I'm hopeful that the uptick rule will be restored within a month," Frank said yesterday, according to The Associated Press.
By Derek Kravitz |
March 11, 2009; 3:56 PM ET
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