The Securities and Exchange Commission is expected to vote on rules that would restrict short selling in a company's stock if that stock fell precipitously, a person familiar with the SEC plan said.

Here are some of my initial thoughts...

1.  Bringing back the uptick rule is a no-brainer, it was removed at the top of the market and it's absence proved lethal.

2.  If we're enacting new short-selling rules with the intention of protecting companies from stock raiders, then let's keep it real - Credit Default Swaps are every bit as dangerous.  If you're looking to create the impression of fear and instability, it is a lot easier in most cases to rattle the markets by manipulating CDS spreads, which are more thinly-traded and grab the attention of the bond market.

3.  Contrary to some of the language I've heard in connection with this proposal, Lehman and Bear would NOT have been saved by any uptick rule.  Rather, Lehman and Bear would've been saved if they weren't run and staffed by complete bourgeois pigs gorging themselves at the mortgage/real estate trough.  When you have a few billion in cash and a trillion in derivative and debt exposure, the trading in your stock is the least of your troubles.

4.  So they're going to focus on an intra-day percentage drop as being the trigger of a short-selling curb.  I don't like it.  Blocking shorts from selling more shares of a stock that is already down, say, 10% would only make a decline longer and more drawn out, dragging the misery for shareholders into a second trading day.

5.  I highly recommend that whoever is voting on this thing look at the performance of financial stocks during the 2008 short-selling ban that they hastily enacted to prevent a banking system collapse.  For the most part, it was irrelevant and may have even contributed to the lack of bids due to there being an entire class of natural stock buyers missing from the picture - the short-sellers themselves!

We'll see what they come out with, clearly something is better than nothing in this situation, but I don't see the need for anything drastic.

Source:

SEC to consider new short sale curbs next week (Reuters)

Hot Links for Weekend Reading...

A roundup of US bank analyst reactions to the Volcker Rule and its potential impact.  (FTAlphaville)

What was your Stealth Inflation last year?  Ya know, the kind of price upticks that actually matter to you.  (BarbarianCapital)

Techie Wars: Fred Wilson vs Jason Calcanis vs Comscore's web traffic data.  (TechCrunch)

Mort Zuckerman on The Incredible Deflation of Barack Obama.  (USNews&WorldReport)

Will the Fed be keeping rates at zero until they can sell their own bond portfolio?  Hmmm.  (JrDeputyAccountant)

Justin Fox says goodbye to the Curious Capitalist blog.  (TIME)

A reminder for politicians: It wasn't the trading, it was the leverage.  (AlephBlog)

IBD rings the alarm, calling for a real correction for stocks, also doesn't like the leadership.  (PragCap)

Mish is organizing a phone drive to various senators to halt Bernanke's confirmation.  (Mish) and (LOLFed)

Bin Laden is claiming responsibility for the Detroit bomber.  Why can't his f*&$in' kidneys just kill him already?  (Bloomberg)

Meet TokTak, the dunking elephant.  (DailyMail)

And just because, here is Steve Ballmer autographing a college student's MacBook without killing anyone and eating their livers:

Its that time of year again...

As we speak, your neighborhood freak is busy shoving rusty screws into the Milky Way bars, teen boys are stocking up on eggs and toilet paper and teen girls are shopping for either a slutty nurse, slutty devil, slutty maid, or slutty marketing executive costume.

That's right!  Halloween is upon us!

Screams will be heard, children will be embarrassed by their parents, candy corn will be eaten (reluctantly).

Want to frighten an investor this year?  Here are the Top Ten Scariest Wall Street Halloween Costumes for 2009:

10. The National Debt Clock

9.   CIT's Balance Sheet

8.   Zombie Bank

7.   Goldman Sachs Vampire Squid

6.   AIG's Chief of Risk Management

5.   Ruth Madoff

4.   Ruth Madoff's Reflection in a Mirror

3.   The Inflation Boogie Man

2.   30 Year Treasury

1.   Barney Frank-enstein

Get out there in one of these costumes and scare the hell out of someone you love.

If those aren't in-stock, here are a few extra suggestions:  Nancy Pelosi, Maxine Waters, The Galleon Group Ghost Ship, Japan's Lost Decade, a Triple Leveraged ETF, The Phantom Uptick Rule or Alan Greenspan.

Read Also:

Moody's to Introduce New Spokesmoose to Repair Image (TRB)

As we speak, your neighborhood freak is busy shoving rusty screws into the Milky Way bars, teen boys are stocking up on eggs and toilet paper and teen girls are shopping for either a slutty nurse, slutty devil, slutty maid, or slutty marketing executive costume.

That's right!  Halloween is upon us!

Screams will be heard, children will be embarrassed by their parents, candy corn will be eaten (reluctantly).

Want to frighten an investor this year?  Here are the Top Ten Scariest Wall Street Halloween Costumes for 2009:

10. The National Debt Clock

9.   CIT's Balance Sheet

8.   Zombie Bank

7.   Goldman Sachs Vampire Squid

6.   AIG's Chief of Risk Management

5.   Ruth Madoff

4.   Ruth Madoff's Reflection in a Mirror

3.   The Inflation Boogie Man

2.   30 Year Treasury

1.   Barney Frank-enstein

Get out there in one of these costumes and scare the hell out of someone you love.

If those aren't in-stock, here are a few extra suggestions:  Nancy Pelosi, Maxine Waters, The Galleon Group Ghost Ship, Japan's Lost Decade, a Triple Leveraged ETF, The Phantom Uptick Rule or Alan Greenspan.

Read Also:

Moody's to Introduce New Spokesmoose to Repair Image (TRB)

I just read some of the preliminary details on the upcoming Wall Street sequel from Oliver Stone over on Dealbreaker and I'm physically incapable of not chiming in on this one.

I'll quote Gordon Gecko himself to let you know how I feel about a sequel to the greatest movie about business ever made:

"Mixed emotions, buddy. Like Larry Wildman going off a cliff in my new Maserati."

In a nutshell, the plot goes like this, supposedly:

Gordon Gecko (Michael Douglas, thankfully) has served his time and is now a nobody on The Street.  He sees a disaster brought on by out-of-control short-selling coming down the pike but no one will listen to him.

In the meantime, his estranged daughter is dating a hotshot trader (played by Shia LaBeouf, for big box office receipts).  Shia's mentor kills himself and LaBeouf's character enlists Gecko's help in avenging his death against an evil, global short-selling hedgie played by Javier Bardem (who is The Man).

OK, so I'll vent now like every other crybaby with an internet connection and a spare 5 minutes.

I was ten years old when the original came out in the fall of 1987.  I'm not sure how I got into the theater, but the film was literally my first taste of Wall Street terminology, bravado, energy and mechanics.  Before that, the concepts of stocks, trading, investing and, to some extent, money itself didn't mean anything to me at all.

As with many guys of my generation, I re-watched the movie again and again over the years on TV and on VHS and eventually made the decision that I wanted to work on The Street one day.  And here I am, 22 years later.

Not that the movie was the only reason or even the main reason I do what I do, but goddamn if I don't feel like Gecko sometimes after taking a monster profit on a trade or landing a big deal.

And Bud Fox was a broker!  Not an analyst, a trader, an investment banker or a human resources manager...he was a broker.  Granted, he went bad, but he was a killer before the temptations began.  Sheen's performance made you want to pick up the phone and "bag the elephant".

So with that preamble, I'll run down my list of 5 things I'm not happy about with the sequel so far.

Full disclosure - I'm gonna go see it no matter what, I don't care if Gecko's selling Slap Chops on an infomercial.

Problem 1: Shia Labeouf is ok, I can take him or leave him, but c'mon.  I don't even keep up with the young actors these days and there are 5 of them I can name off the top of my head that would be better choices.  He was in that Indiana Jones sequel and it sucked (not his fault, but still) and he already is the face of the Transformers franchise.  Couldn't they have gone a bit edgier?

Problem 2: Gordon Gecko's deal with the hotshot is his help against the hedge fund villain in exchange for the kid's help to win back his daughter's affections.  WTF can that be about?  The real Gecko had no heart.  And warning us of the impending danger of short-sellers?  What would Gecko care?  So this is another "He really changed in the joint" redemption stories?  Sucks.  Boring.  Predictable.  The castration of Gordon Gecko.

Problem 3: I get the need to keep things current, but the villain is a short-seller?  Ooooooh.  Hopefully Bardem will bring whatever crazy was left over from No Country For Old Men, but really, we can defeat this guy with an Uptick Rule and a no-borrow email.  Weak.  Ripped from the Headlines is good for a Law & Order episode, not this.

Problem 4: No Charlie Sheen.  Seriously, is there a single fan of the original that wouldn't want to see where Bud Fox's life is now?  To me, that's the real story to show.  We can live without Darryl Hannah's character, but not Charlie Sheen's!  Better at least be a cameo.

Problem 5: Supposedly the studio head calling the shots on the final product is a guy named Tom Rothman.  The hardcore film geeks hate this guy for his disproportionate willingness to sacrifice art for commerce.  One commenter on a film site put it thusly:

"I have concerns about this sequel...its being made under Tom Rothman’s regime. He’ll demand cuts, a PG-13 rating, shorter running time, change sets, and dumb down the financial lingo so it won’t go over the heads o the 13-25 year old demographic."

If they pull that PG 13 sh#t with Wall Street, they're toast.  I know the 14 year old girls will want to buy a ticket to see Shia, but if you're going to resurrect a property this revered, do it right and make it for the fans of the original, not their daughters.

OK, end of rant.  I'll take all the spoilers that surface on the film in stride and reserve real judgment for the the release next February (although I'll keep you guys updated here on TRB).

I just hope the sequel is even half as intelligent, riveting, character-driven and meaningful as the original.

Don't screw it up, Stone.

Sources:

Dealbreaker's Coverage

The Best Quotes from Wall Street (IMDB)

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

So the SEC voted to propose five uptick rule-related proposals.  The comment period, during which the SEC receives feedback from member firms, will be 60 days before anything is decided on.

From Pensions & Investments:
Among the proposals being considered, one is to reinstate the original rule that was introduced in 1938 and was in place until being repealed in July 2007. The original rule required that a stock’s last trade represent an increase in price before it could be sold short.

Other proposals up for comment include a modified uptick rule that would restrict shorting a stock at a price lower than the last best bid price.

There are also three variations on circuit-breaker rules that would halt short selling of a particular stock once its price has declined more than 10% over a set period.

For my take on the return of the uptick rule and its importance, read below:

The following is not an argument for or against shorting, as that is a non-debate.   The presence of short-selling is a necessary component of a free, liquid and healthy market.  The question we’ll focus on here is what type of form the safeguards against abusive short-selling should take when the discussion by regulators takes place on April 8th.

First, a bit of background on the uptick rule:

Read the rest:  Modified Uptick Rule Debate

Coming Soon!

The following is not an argument for or against shorting, as that is a non-debate.   The presence of short-selling is a necessary component of a free, liquid and healthy market.  The question we'll focus on here is what type of form the safeguards against abusive short-selling should take when the discussion by regulators takes place on April 8th.

First, a bit of background on the uptick rule:

The uptick rule, implemented during the last depression in the 1930's functioned for 7 decades as a curb against most forms of abusive short-selling tactics.  Essentially, it forced thos who wished to short a stock to wait for a buyer to come in before executing the sale.  For no apparent reason, this rule was done away with at the peak of the 2007 bull market, and the end result was a field day for shorts who were now able to "slam dunk" a stock lower, meaning short more shares on each successive tick.

This led to cascading share prices for many stocks, specifically financials, a sector where the stock price action actually did have a very real effect on the underlying business of the company; if the shares of a fast food restaurant were being pummeled, that wouldn't stop people from eating there, but would anyone want to deposit money into a bank whose stock was down 50% in a week's time?

The heads of several regulatory bodies and major exchanges, including the NYSE and the SEC, have issued a joint statement that they will be bringing back some form of the uptick rule, albeit a modified one to take into account the fact that the original was written in a time before electronic order entry and day trading.

The main objection that many trading entities seem to have to the new proposal being kicked around is that there is language in there about restricting shorts from operating when a stock is down 10% or more in a single session.

I happen to agree with the detractors of this proposal.  If you don't restrict the buying of a stock that is up 10% or more, then imposing price restrictions on shorting would be hypocritical and would probably create more distortions of price and what one skeptic has called "synthetic short activity".

An alternate proposal would be a push for more disclosure from shorts on their positions and trades so that regulators can detect and punish those with patterns of abuse and manipulation.

One other factor that should probably be included in any serious discussion of abusive short-selling tactics is the role that derivatives play in the manipulation of stocks.  Many players don't even bother shorting stocks when, with less capital, they can sell S&P futures contracts and e-minis, as well as use the credit default swaps market to produce the same effect.  If you can sell enough call option contracts or spike up the put options, you can create the perception that something is "wrong" with the company.  This leads to panicky shareholders and momentum traders doing the heavy lifting for you by obliterating the stock's price on the way out of it.

As someone who does business with high net worth retail clients, I am often asked about the mechanics of shorting stocks and even criticized for shorting, as to some, the idea of betting against a company is un-American.  My retort would be that shorting stocks, which theoretically carries a greater degree of risk because of the undefined downside (a stock can go up forever), should only be done by sophisticated investors.  Further, nothing is more American than capitalizing on yur research and beliefs, and if this happens on the short side of a trade, so be it.  Profits are profits so long as you are within the boundaries of good taste and the law.

And for the wingnuts arguing for no uptick rule at all...the Dow lost 8000 points give-or-take since the repeal.  Granted, there were a host of factors involved that had nothing to do with abusive short-selling, but it certainly didn't help matters that a handful of hedge funds were able to create panic at will.  Don't be a schmuck, we've learned about the consequences of a zero-regulation environment....10% unemployment and a 10 kajillion dollar deficit that your grandchildrens' sperm and eggs will be paying off long after you're gone.

I'll be watching with interest and updating The Reformed Broker as news on the modified uptick rule develops.  In the meantime, feel free to chime in below with your two cents...

OOOOOOOHHH!  The Financial Accounting Standards Board (known as FASB in the 'hood) is meeting today to discuss, err, a possible, shall we say...relaxation of its policies regarding hard-to-value assets.

I haven't been this excited since I was a little girl waiting in the rain for New Kids On The Block tickets in 1989!  JK.

By giving banks more flexibility in how they value toxic assets, we may actually still have a bank left standing by the time we get through this.  The only question is, if Mark-To Market is out, what's the new methodology?

Luckily for the global economy, The Reformed Broker's got some helpful suggestions...

Option A)  Mark-To-Gravity

CFO of bank climbs to the rooftop of corporate headquarters and drops a file folder containing the details of each asset.  Comparative valuations are determined by the order in which said files hit the street below.

Option B)  Mark-To-Margarine

Focus group is brought in and asked to taste-test CDO certificates with a creamy butter-like spread as a topping.  CFAs watch from behind two-way glass and calculate valuations based on the preferences and commentary of participants.

Option C)  Mark-To-Mark Cuban

The Maverick Billionaire himself is brought in to use his legendary skill at being lucky in the hopes that some of his good fortune will rub off on the toxic debt obligations themselves, thus negating the need to divine a value for them.

Read Also:  Coming Soon - The Uptick Rule

Updated!

From Bloomberg:
April 2 (Bloomberg) -- The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

Full Story:  FASB Votes to Chill Out on Standards

The word today is that The Uptick Rule, the best line of defense we haven't had in place for the last year, may be making a comeback.

Rep. Barney Frank (D-Mass.), the head of the House Financial Services committee, said that the SEC should restore the so-called "uptick" rule within a month, Reuters is reporting.

The uptick rule forces short-sellers to sell at a price higher than the previous trade. It was put in place by the SEC following the Great Depression and rescinded in 2007.

I caught up with The Uptick Rule this afternoon at P.J. Clark's in midtown over a cheeseburger, here's what he had to say about it:

So you thought you could live without me, huh?

74 years of keeping you people safe from abusive short-selling, and you tossed me by the side of the road like a piece of trash.

OK, I had to get that out of my system...

Give me one good reason I should come back.  Just one.

What's that?  Barney Frank wants me back?  You go tell mumbles that I don't give an Eff.  I offered to come back while his two pets Fannie and Freddie were under siege last fall and guess what...he couldn't even call me back!

Look, here's the deal. I'm down with Chris Dodd and Barney and really, I like all of you guys...but if you ever EVER toss me by the wayside again, I'm done, man. I mean it, I'm Audi 5000.

Don't worry, I still have the extra key you gave me

Welcome back, Uptick Rule, we've missed you.