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Interesting Blog I came across
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Topic Started: Oct 14 2008, 11:21 PM (124 Views)
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Heather
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Oct 14 2008, 11:21 PM
Post #1
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Vice Admiral
- Posts:
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- Quote:
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Idiotic Revocation of Uptick Rule Leads to Banning of Stock Pessimism
Ignoring options trading, there are two basic ways to bet on the future prospects of a stock: to go short or long. To go "long" a stock is simply to buy it. Obviously, this is what you do if you think a stock is going to go up or if you got a tip from your Uncle Lou that some company is about to get acquired for a 50% premium. To go "short" is the opposite. Basically, you sell shares of a stock you don't own (you borrow them) hoping to buy back in at a lower price later and keep the difference.
There used to be an excellent rule regarding when you could short a stock. Essentially, you could only short a stock on the uptick (when it is rising in value) which prevented short sellers from lowering the price artificially simply by shorting it. Last year, the SEC removed this rule, allowing nefarious traders to put insane pressure on the price of the stock by flooding the market with short shares in hopes of creating a selling panic. They would often spread rumors of an impeding bankruptcy to aid the nosedive. Once the price dumped, these short sellers could buy back in on the cheap to replace the shares they had borrowed. They keep the profit and the little guy who panicked keeps the sore asshole.
So now that shares in the U.S. financial sector are being pummeled daily, the NYSE is wondering if removing the Uptick Rule was a bad idea. Uh, newsflash morons: it was! Instead of re-instituting the Uptick Rule, the NYSE has now created a list of financial companies in which the short selling of their stocks is banned. Somehow, the financial industry thinks that by banning pessimism, the market will go up. They would be wrong in this assumption.
The Uptick Rule is a rational and well-reasoned compromise. It allows the free market to reign while protecting the integrity of the market. People who think a stock will surge can buy it and those that think it will plummet can short it, but short sellers cannot create a self-fulfilling prophecy simply by shorting millions of shares at once. Imagine waking up, logging into your E-Trade account and seeing a stock you own down 30% for no apparent reason. You would probably assume that the big wigs have inside news and are dumping en masse and so you sell to cut your losses. What you could have been the victim of, however, was just a well-capitalized hedge fund systematically shorting a flood of shares at once to create the appearance of financial ruin. When little investors see this, they panic and sell. Then the hedge fund buys all these panic shares and in a few days the stock price recovers except your money is now owned by those bastards.
When the SEC removed the Uptick Rule, they set in motion a series of events that has led to our current predicament. Now that they realize the error of their mistake, why don't they just re-institute the Uptick Rule and let the markets recover? The answer is... I don't know. The creation of a list from which investors cannot short certainly feels like an over-correction and just delays the time when the market returns to rationality. The rumors of banking collapse were originally started by short sellers to aid their manipulation of share prices after the demise of the Uptick Rule. When the shares dropped precipitously, companies' lenders started calling in their debt out of fear that bankruptcy was brewing (imagine your bank calling you tomorrow and asking for your mortgage balance to be paid in full). As more and more creditors panicked and demanded their loans repaid immediately, companies sought to borrow more money to pay them but, because their stock price was in the gutter, no one would lend them any. It wasn't long before companies--unable to pay--began to default for real, in large part due to the shenanigans made possible by the abolishment of the Uptick Rule.
It is important to realize that the banking sector was simply a convenient victim. With those companies now protected on some special list, the hedge funds will simply move to another industry like a swarm of locusts and do the same thing, causing turmoil in yet another industry. The only way to stop the damage they have caused and prevent it from spreading is to bring back the damn Uptick Rule!
So do you think there's any truth to this?
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