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Bring Back the Uptick Rule!

madhedgefundtrader's picture




 

When the Dow crashed 514 points on August 8, the market lost a staggering $850 billion in market capitalization. High frequency traders were possibly responsible for half of this move, but generated a mere $65 million in profits, some 7/1,000’s of a percent of the total loss. Are market authorities and regulators being penny wise, but pound foolish?

The carnage the HF traders are causing is triggering a rising cry from market participants to ban the despised strategy. Many are calling for the return of the “short sale test tick rule”, or SEC Rule 17 CFR 240.10a-1, otherwise known as the “uptick rule”, which permits traders to execute short sales only if the previous trade caused an uptick in prices. The rule was created eons ago to prevent the sort of cascading, snowballing selling that we are seeing today. It was repealed on July 6, 2007. Check out a chart of the volatility that ensued and it will make your hair raise on the back of your neck.

Those unfamiliar with how algorithmic trading works see it as something akin to illegal front running. “Co-location” of mainframes with exchange computers, or having them in adjacent rooms, gives them another head start over the rest of us. Much of the trading sees HF traders battling each other, and involves what used to be called “spoofing”, the placing of large, out of the market orders with no intention of execution. Needless to say, if you or I tried any of these shenanigans, the SEC would lock us up in the can so fast it would make your head spin.

Many accuse exchange authorities of a conflict of interest, allowing members to reap sizeable custody fees from HF traders, while the rest of us get taken to the cleaners. Co-location fees run in the hundreds of thousands of dollars per customer. This is happening while traditional revenue sources, like proprietary trading, are disappearing, thanks to Dodd-Frank. There is no doubt that the volatility is driving the retail investor from the market. August has seen the highest equity mutual fund redemptions in history.

In fact, HF trading has been around since the late nineties, back when the uptick rule was still in place and colocation was a term out of Star Trek. But it was small potatoes then, confined to a few niche players like Renaissance, and certainly lacked the firepower to engineer 500 point market swings.

The big problem with this solution is that HF trading now account for up to 70% of the daily trading volume. Ban them, and the market volatility will shrink back to double digit trading ranges that will put us all asleep. The diminished liquidity might make it difficult for the 800 pound gorillas of the market, like Fidelity and Caplers, to execute trades, further frightening end investors from equities. It is possible that we have become so addicted to the crack cocaine that HF traders provide us that we can’t live without it?

For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put “Macro Millionaire” in the subject line, as we are getting buried in emails.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

 

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Wed, 09/14/2011 - 03:06 | 1666853 chinawholesaler
chinawholesaler's picture

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Fri, 09/09/2011 - 06:13 | 1649844 Zero Govt
Zero Govt's picture

"Needless to say, if you or I tried any of these shenanigans, the SEC would lock us up in the can so fast it would make your head spin."

Actually it's the complete incompetence of the SEC (and all regulators worldwide) and how they maintain their worthless existence, even have the temerity to call for "more money" in the face of their record for total ineptness and failure, that makes my head spin

Thu, 09/08/2011 - 13:59 | 1646964 WSP
WSP's picture

" Are market authorities and regulators being penny wise, but pound foolish?"

Absolutely NOT.   The "authorities and regulators" (a.k.a. kleptocrats) have lots of financial needs, and they get a "cut" off of all the corruption.  Think of them just as you would Jon Gotti with a dash of Bernie Madoff.  

And have you no sympathy?  This "scheme" only generated 65 million in profits, but better days lie ahead once they convince the sheeple to trade more in our "Free markets".  Better days are ahead.

Thu, 09/08/2011 - 12:47 | 1646636 chirobliss
chirobliss's picture

Hey MadHedge, shut up and trade.  Stop cryin' in yer conflakes.

You'll be asking them to ban shorting altogether next.

Thu, 09/08/2011 - 12:26 | 1646552 ItsDanger
ItsDanger's picture

Waste of time.  They should just ensure that shares traded actually exist for once.

Thu, 09/08/2011 - 12:11 | 1646488 ATG
ATG's picture

Double darn:

John Thomas Jolly Rodger MHFT arguments prove flaccid yet again.

Pool operator Joe Kennedy instigated the cosmetic feelgood uptick rule Germany still has to no avail when he became first SEC boss in 1938 during the last Depression.

Somehow, stocks keep going down and up, mostly down in real terms since we re-entered Depression in 2000.

It was downhill since 1938, FDR and Joe Kennedy for John Q Public, now abandoning electronic virtual markets in droves after being fleeced again and again by Wall Street and the District of Criminals.

Somehow the futures exchanges continued to thrive without the uptick rule, which 85% of NYSE members favoured, despite empirical evidence the uptick rule reduced market liquidity. Hmmm. Does less liquidity mean bigger profits for members?

Gary Ackerman, Ben Bernanke, Mike Capuano, Chris Cox, Jim Cramer, Barney Frank, Carolyn Maloney, John McCain, Mickey Siebert, Wachtell, Lipton, Rosen & Katz all favour throwback return to the uptick rule with their vested interests that may not benefit the majority.

The uptick rule was eliminated by the SEC in 2007 after actual security exchange trading studies without it dating from 2004 found no benefit of the atavistic rule.

As several here suggested, requiring the public to borrow shorts while JPM Morgan et al continue to trade nakeds is a giant indictment of government regulation failures to enforce back dating options, conflicts of interest, failure to deliver, fake quotes, front-running, major insider violations, mark to market, painting the market or transparency.

The only good news about naked shorts is JPM short 50 B ounces of silver. Too bad the government they own lets them not mark to market. One of these days Jamie...

Thu, 09/08/2011 - 11:57 | 1646413 bid the soldier...
bid the soldiers shoot's picture

SEC ends up tick rule July 6, 2007
DOW turns down from its all-time high of 14,000 July 19, 2007.

Pay no attention to the man behind the curtain.

Thu, 09/08/2011 - 12:13 | 1646493 ATG
ATG's picture

Actually, they eliminated it in 2004 as a study

http://en.wikipedia.org/wiki/Uptick_rule

Correlation is not causation

 

Thu, 09/08/2011 - 13:50 | 1646911 bid the soldier...
bid the soldiers shoot's picture

"In 2004, the Commission initiated a year-long pilot that eliminated short sale price test restrictions from approximately one-third of the largest stocks. The purpose of the pilot was to study how the removal of such short sale price test restrictions impacted the market for those subject securities."

1/3rd is not all stocks.

1 year is not till up to today.

Find out how many of the Dow 30 were in the pilot and let me know.

Thu, 09/08/2011 - 11:18 | 1646265 TooBearish
TooBearish's picture

Dream on MHFT - since exchanges de-mutualized an exist as for profit entities the raping will continue sos they may rent out colocated server farms for 200K/month and latency arb Etrade point and click traders - welcome to the 21st century economy bitch

Thu, 09/08/2011 - 10:41 | 1646045 DeweyLeon
DeweyLeon's picture

Since we're talking about bringing things back how about bringing back the gold standard and the Dukes of Hazzard.

Thu, 09/08/2011 - 11:13 | 1646235 alien-IQ
alien-IQ's picture

and 8 track tape decks.

Thu, 09/08/2011 - 10:34 | 1645996 the last bagholder
the last bagholder's picture

What is the real solution to black box trading? An outright ban is the wrong way, that's the Ned Ludd solution. That said, the machines need to be regulated. The retail investor is getting annihilated.

Thu, 09/08/2011 - 10:33 | 1645990 ww2vet
ww2vet's picture

some (small) truth in this article but REAL problem with shorts is that most are illegal- gs, ms never borrow, never deliver. short sale rules are FEDERAL rules.but noone goes to jail

Thu, 09/08/2011 - 10:27 | 1645963 Hulk
Hulk's picture

The uptick rule and glass steagal are gone forever. The government will not reverse bad decisions, unless lobbied to do so...

Thu, 09/08/2011 - 10:27 | 1645962 tradewithdave
tradewithdave's picture

...and destroy the entire high frequency trading industry. What about that hotel near the NYSE with all those servers? What about the 100 quants employed by the prime brokers. Have you no mercy? We need to scalp every $7 ScotTrade and Fidelity ActiveTrader. It's capitalism at its most blatant.... finally an "invisible hand" that works for a living. John Locke would be proud. No uptick for anyone but those who can afford their own rule, lobby and congressman. It's not personal... just business... monkey business. Don't monkey with it.

Dave Harrison
www.tradewithdave.com

Thu, 09/08/2011 - 10:25 | 1645948 alien-IQ
alien-IQ's picture

funny how you only complain when this bloated market gets whacked but are perfectly happy to see it get ramped to unjustifiable stratospheres on vapor volume.

Have you considered that the heavy volume selloffs are the truth and the vapor volume meltups are the lie?

Thu, 09/08/2011 - 12:14 | 1646497 Tuffmug
Tuffmug's picture

Uptick rule is an inflationary bias for stocks. Glad it's gone. If you want to tame HFT then require 1 cent fee per phantom bid/ask and most of the HFT abuses will disappear.  

Thu, 09/08/2011 - 12:49 | 1646643 chirobliss
chirobliss's picture

+10 fer the mug!

Thu, 09/08/2011 - 10:12 | 1645874 DavosSherman
DavosSherman's picture

Pretty fucking amazing how a million bloggers know HFaT is illegal bullshit and because some naked babe isn't wearing a trampstamp tat that says "HFaT is insider trading" on her ass some masterbating sec moron can't figure it out.

Right up there with Moron Greenspan and Moron Summers muzzling Brooksley Born's who wanted to protect us from the derivative timebomb.

 

Thu, 09/08/2011 - 11:16 | 1646248 Ned Zeppelin
Ned Zeppelin's picture

Don't forget Moron Rubin, The Third or "Shemp" of the Three Stooges.

Or was he Curly Joe. 

Thu, 09/08/2011 - 10:09 | 1645869 Robslob
Robslob's picture

 

 

 

Madhedgefund trader and other "men of money" will cry for anything to sustain an already broken and corrupt market.

People whos sole existance is to take a pile of crap currency and turn it into a larger pile of crap currency IS the main reason economies die.

Money was only to be used as a means of exchange...not a means to grow a pile of paper and declare that you did something good for humanity.

All men of money should take gun, insert in mouth and pull trigger...shortly after the economy will fix itself and the rest of us PRODUCTIVE human beings can get on with our lives...without worry of the value of that money.

 

 

Thu, 09/08/2011 - 10:36 | 1646008 adr
adr's picture

They won't ever stick the gun in their mouth, but we can do it for them and make it look like suicide.

Thu, 09/08/2011 - 10:00 | 1645836 LawsofPhysics
LawsofPhysics's picture

How about prosecuting fucking fraud and having some of these fucks go to a real prison for a change.  I bet that alone would do wonders for the "free markets" LOL!

Thu, 09/08/2011 - 09:58 | 1645828 disabledvet
disabledvet's picture

apparently the down trick...i mean "tick"...rule isn't working either.

Thu, 09/08/2011 - 09:54 | 1645814 Ruffcut
Ruffcut's picture

and glass steagle, too.

and jail time for fraud, too

 

Thu, 09/08/2011 - 09:38 | 1645744 Everybodys All ...
Everybodys All American's picture

Bring back marked to market

Thu, 09/08/2011 - 12:05 | 1646463 Cdad
Cdad's picture

Bring back...the market.

Thu, 09/08/2011 - 09:31 | 1645718 BeerGoggles
Thu, 09/08/2011 - 12:59 | 1646669 HCSKnight
HCSKnight's picture

You are too kind, MHT is an idiot of the Friedman order.

re: "The diminished liquidity might make it difficult for the 800 pound gorillas of the market, like Fidelity and Caplers, to execute trades, further frightening end investors from equities."

Really?  Really?  Gosh, what did they do before HFTs?... Hmmmmm

Thu, 09/08/2011 - 09:42 | 1645752 Leopold B. Scotch
Leopold B. Scotch's picture

Nahh. Just bring out the gimp!

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