EDMOND — Does it seem like the stock market has gotten more volatile than usual in the past year? It may not be your imagination. There was an important rule change last summer that you and most others probably never even noticed. But the result certainly has been noticed. On July 6, the SEC repealed the “uptick rule.” You probably never heard of this rule and don’t care. But you should care because you just got cheated by the big guys once again.
Short sellers bet a stock is overvalued and that its price is likely to fall. They borrow shares, sell them and then wait for the stock to fall so they can repurchase the shares at a lower price, return them to the lender and pocket the difference. Done correctly, this is a perfectly legitimate activity.
Back in the roaring 20s and Depression-era 30s, there were a number of wealthy investors who played all types of “games” to manipulate the stock market. One of these manipulations was where a number of large investors simultaneously would sell a stock short in an attempt to drive the price down. They often were successful. Of course, all the people who owned the stock suffered great losses.
Under the Securities Exchange Act of 1934, one of the new rules was designed to eliminate this sort of illegal activity. It was called the “uptick rule.” What this rule basically said was that before your order to sell short was executed, the last trade had to be an uptick, i.e. a price higher than the last one. That meant in order to sell short, a stock had to go up before it could be brought down. This prevented short sellers from selling in massive quantities to drive the price down.
Of course, this didn’t completely solve the problem. A common practice for “big money” on Wall Street was to craftily put in a significant amount of buy orders to move a stock to an uptick before then placing their real short sale order. But now that the SEC has eliminated the uptick rule, short selling is now more efficient for these institutions and funds.
Although not perfect, for 73 years this rule worked pretty well and kept the raiders somewhat at bay. For reasons that nobody seems to be able to explain, this rule was quietly repealed last summer because the SEC said it was no longer needed. Hedge funds lobbied heavily for its repeal and the SEC caved in. Since the rule was repealed, downside trades have proliferated and volatility has become increasingly prevalent in the stock market. Short interest is at a record high on both the NYSE and the Nasdaq.
Before revoking the rule, the SEC began a pilot program in 2005 to suspend the uptick for a group of 1,000 stocks. Ingrid Werner and two colleagues from Ohio State published a study examining the program and they found that short selling did increase and that the pilot stocks did experience higher short-term volatility immediately after the suspension. But the study also found that returns from the stocks and daily volatility were unaffected.
Of course, those tests were conducted in an up market where a bear raid was unlikely to happen. That’s certainly not the type of market that we’re living with now. It’s no coincidence that since then the size and severity of market declines is unprecedented. It was a hedge fund traders dream come true. When a group of hedge funds gang up and sell billions in what is called a “bear raid,” they can drive any stock down and you and I are left as innocent bystanders. Without the uptick rule, they can put anyone out of business.
What can we do about it? Write the SEC and write Congresswoman Mary Fallin and senators Jim Inhofe and Tom Coburn. Tell them you want the uptick rule reinstated. Tell them that greed has taken over again and the inmates have taken over the asylum. Investing is tough enough with a level playing field. This is criminal. Thanks for reading.
NICK MASSEY is a financial adviser and owner of Householder Group Estate & Retirement Specialists in Edmond. He also is a frequent guest analyst on CNBC and Bloomberg.
Business
Short selling rule change hurts market
- Business
-
-
VIDEO: Tumblr sold to Yahoo! for $1.1 billion
Yahoo! has purchased Tumblr for $1.1 billion, hoping to compete more effectively with sites like Google and Facebook.
-
Kia Optima is a hit with the buying public
When it comes to midsized family sedans, the Kia Optima ranks high on my list for its good looks, economy and value.
-
AT&T provides 5,000 career opportunities for veterans
AT&T is stepping up its veteran recruiting efforts with the goal of hiring 5,000 veterans and their family members into career opportunities during the next five years, consistent with its commitment to equal employment opportunities.
-
Frontier Country Marketing Association, Edmond CVB win tourism industry awards
Frontier Country Marketing Association and several of its members were honored May 6 at the annual RedBud Awards Ceremony during National Tourism Week, May 4-12. Lt. Gov. Todd Lamb and “Discover Oklahoma” host Jenifer Reynolds presented the prestigious awards to the tourism industry at the Oklahoma History Center in Oklahoma City.
-
Citizens Bank presents Small Business Week networking event
Citizens Bank of Edmond is supporting the Edmond Area Chamber of Commerce’s Small Business Week with a networking event scheduled for 4:30-6 p.m. Thursday at Citizens Bank of Edmond, 1 E. First St.
-
FAPC wine project adding value to Oklahoma wines
A project conducted at Oklahoma State University’s Robert M. Kerr Food & Agricultural Products Center aims to strengthen the quality of Oklahoma wines and help increase overall wine sales throughout the state.
-
Public relations firm hires former News 9 journalist
After spending countless hours covering breaking news, former television reporter Jacqueline Sit, of Edmond, is taking her journalism skills to serve as account executive for Oklahoma-based Candor Public Relations.
-
Arvest Bank promotes 4
Arvest Bank has announced the promotions of Gary Myles, Jarom Christie, Brent Sartin and Amanda Gillespie. Myles has been promoted to vice president, Christie and Sartin to assistant vice president and Gillespie to branch manager.
-
The Backyard Farmer opens at Shoppes at Northpark
In its 40th year, the Shoppes at Northpark welcomes Galt Ormiston’s Backyard Famer Stand, a traditional Oklahoman produce stand specializing in fresh locally grown foods. With more than 20 years experience, Galt is a gardening expert offering advice in custom design, installation and maintenance.
-
Steve’s Ribs grabs the silver ring
Steve’s Ribs owners just celebrated their silver anniversary with a new menu and extended summer hours.
- More Business Headlines
-
