The Cramer Uptick Rule Petition

• Joshua M Brown
• May 13th, 2009

A group of market commentators from TheStreet.com, including James Cramer, have put out a petition which lobbies for the reinstatement of the original Uptick Rule, as opposed to a loophole-laden approximation filled with caveats and work-arounds as is rumored to be a possibility.

The SEC is currently seeking comment until June 19th.  There were only 27 comments received prior to the Uptick Rule being abolished in 2007, so this time, if you feel strongly, this petition gives you a way to make yourself heard.

Cramer's co-writers on the letter are Scott Rothbort, Eric Oberg and Bill Furber, all accomplished market watchers and participants in their own right.

There are two lines of reasoning that I'll highlight here before sending you over to read the letter in full or to sign the petition digitally if you agree with their rationale.

I would say that as a capitalist (and one who believes in a trader's right to short), the following is the most appealing argument to me in favor of having some regulations regarding shorting stocks:

When the Uptick Rule was initially implemented in the late 1930's, there was an implicit acknowledgement that companies were not commodities. There was recognition that the capital markets served the broader purpose of capital formation; that companies create products, provide services, employ citizens and pay taxes and thus there was an interest to promote market integrity and protect interstate commerce.

To me, this differentiation between corporations and commodities seems to be common sense, pro-business and frankly, pro-American.

The second line of reasoning I'll mention is probably going to be the most contentious point made in this debate, amongst investors of every stripe.  It concerns the proliferation and effect of leveraged short and ultra-short ETFs:

Another question that has arisen is the proliferation of levered "short side" sector based ETFs. These funds have mushroomed with the elimination of price tests, and have raised innumerable issues in the markets..These ETFs were somehow approved by the Commission, despite seemingly obviating the margin rules set forth by the Federal Reserve..These funds have exacerbated volatility and created significant selling pressure during the downturn...The great irony is that these products, due to their construct, do not even work for longer term holders, so in reality these are speculative instruments meant for intra-day trades, not for hedging or for investment. As intra-day speculative short selling vehicles unchecked by a plus tick test, they are sopping up available liquidity, rather than providing liquidity.

This leveraged ETF section of the letter has Eric Oberg's fingerprints all over it.  Oberg is a Goldman Sachs alum who has done a ton of homework on how these products work and he has been railing against them for the last few months.

I'm not sure that the empirical evidence presented on The Street.com or elsewhere has definitively made the case that these products have had a tremendous amount of impact on volatility, but there has been some interesting anecdotal evidence about these instruments' involvement in deliberate manipulation.

One of the other authors of the petition, Scott Rothbort of LakeView Asset Management, has just posted this graphic of the issues that the lack of a rule has engendered this morning:

Whether you are a proponent of the old Uptick Rule, a new one or none at all, this petition has the entire laundry list of aspects that should be considered and is worth a read.

Full Story: Uptick Rule Letter (TSC)

Read Also: My Previous Commentary on the Uptick Rule

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