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SEC Seeking Public Ridicule On Uptick Rule And Circuit Breaker Restrictions
From the SEC's press release:
The Commission voted to propose two approaches to restrictions on short selling. One would apply on a market wide and permanent basis, while the other would apply only to a particular security during severe market declines in that security. They include:
Market-Wide, Permanent Approach
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Proposed Modified Uptick Rule: A market-wide short sale price test based on the national best bid (a proposed modified uptick rule).
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Proposed Uptick Rule: A market-wide short sale price test based on the last sale price or tick (a proposed uptick rule).
Security-Specific, Temporary Approach
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Circuit Breaker: A circuit breaker that would either:
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Ban short selling in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker halt rule).
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Impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker modified uptick rule).
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Impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker uptick rule).
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"Since the Commission eliminated short sale price tests two years ago, we have seen market conditions and events that differ sharply from those of previous years," said Erik Sirri, Director of the SEC's Division of Trading and Markets. "In that time, the Commission has received many requests to reinstate short sale price test restrictions. The proposals we have recommended today are part of an overall effort to seek comment and input from all market participants, analyze and if necessary modify our previous actions, and boost investor confidence."
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Always smart - let's nudge the formerly efficient market just a little more and see exactly when it will break (for insights of what happens when the market is wrong and you are right, we refer you to this).
Paging Mr. Ben N. Dover III for some highly erudite and probing commentaries. Readers can submit their thoughts directly to the SEC here.
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Confessions of a Wall St. Trader
To whom it may Concern,
I have been trading the market for twelve years now and have gone thru all the regulatory and technology changes that have occurred in this time period. From fractions, to decimal trading, from human specialist to hybrid trading, from non Reg NMS to reg NMS, from Uptick rule to non Uptick rule, from just the NYSE and NASDAQ exchanges to myriad ECN’s and Dark Liquidity Pools. I continuously watch the market from the 9:30 opening bell to the closing bell tick by precious tick.
There have been two major developments in the past week that reinforces your arguments of how crucial the uptick rule really is.
First of all please turn your attention to the AIG trade. AIG last week did a 1 for 20 reverse split, once the split took effect on July 1st, it opened up for trading at 19.65 and in the last 6 trading days went all the way down to 8.22. Now one might ask one very important question, what exactly CHANGED in the fundamentals of the company AIG in the past week to justify an over 50% drop in a government sponsored enterprise that is using precious taxpayer money to remain as an ongoing viable concern. The answer is absolutely NOTHING! The only thing that changed, is as soon as the reverse split took effect, once again, AIG (from a trading perspective) became a tradable stock where there wasn’t hundreds of thousands of shares at each penny bid, such as when it was trading at 1$ prior to the split. The short predators recognized the obvious money making opening and used AIG as a vehicle to drive down the price over 50% in one week knowing that nothing fundamental would stop them from doing so since AIG is a severely wounded corporate casualty. Now granted if the uptick rule was in place there is no guarantee that there wouldn’t have been a downturn in AIG. It would’ve still been possible for short sellers to impact the price. However there is ABSOLUTELY no way they would have been able to crush the stock in the manner that they have done so in the past week. (please follow the Time and Sales Level 2 price action where the drop has been incredulous, moving down points at a time without so much of an uptick). It is quite clear if there was an uptick rule in place that it would slow down the downward price action and put a floor on the severity of the price drops. The trading action in AIG in the past week is identical to the panic in the financial stocks of the last year and a half. It is the ability of short sellers to control the action in weak corporations and create downward panic without impediment and pile into the trade without any restrictions that ends up damaging any faith that retail individuals or long term buy and hold investors might have in the market.
The second development is news out of Goldman Sachs that a rogue programmer stole the proprietary code of their automated trading strategy that they use in the equity markets. The latest numbers of the NYSE is that over 50% of the trades that are executed in any given day are program trades and Goldman Sachs controls a majority of those programs. So what we have essentially for all intents and purposes is Goldman Sachs controlling thru their automated trading network and manipulating all financial markets. This issue is especially important in today’s market where volume is extremely light and there are no real bids or offers. These so called BOT programs are designed to back away and spoof the market. If you watch closely to a real time live Level 2 box you will see how the inside bids and offers are just imaginary relative to the actual volume and trades that get completed. Now one must ask why is it legal for Goldman Sachs or any other bank that employs an automated liquidity market making strategy to back away from bids and offers when it was illegal for NYSE specialists and qualified market makers to do so in the past when human beings actually controlled the markets. The advent of purely electronic trading on the NYSE and the explosion in Dark Liquidity pool volume has shifted any real executable trades from exchanges to private institutional networks where the average retail investor has no realistic chance of getting an execution and allowing the banks to create automated programs to take advantage of any retail order flow and front run orders or manipulate price for their own benefit. An uptick rule will level the playing field and shift the power, it will not allow dark liquidity pools to get the mid point pricing they desperately need to create off exchange volume and will slow down the effect of market making strategies on exchanges as they will not be able to effectively hedge positions. (uptick rule will slow down executions on the short side by preventing shorts to get filled on trades instantaneously restricting them only when there is liquidity being added thus leaving banks exposed by not being able to hedge instantaneously on automated market making strategies).
Thank you for your support and effort in trying to level the playing field in the markets and for realizing how important of a fight it is to reinstate the uptick rule.
Yours Truly,
Anonymous