There have been many writing about the impact of the lack of an uptick rule in the present market. In the past, before a player could sell short, the stock had to trade up from the last trade — an uptick. This made it hard to short a stock too heavily, forcing the price down.
Well, maybe. I still think shorting is a pretty tough business. First, the long community is much larger than the short community. Second, the longs can always move their positions to the cash account if they don’t like other players borrowing their shares. (Move to the cash account, squeeze the shorts. Wait. You don’t want to lose the securities lending income? Shame on you; you should put client interests first.)
The thing is the uptick rule is not the real problem. The real problem is that shorts don’t have to get a positive locate at the time of the shorting; a mere indication from the broker enables the short for a few weeks, while search for loanable shares goes on. This is a computerized era. There is no reason why there can’t be real-time data on loanable shares.
There is a second problem, and less so with stocks, than with other financial instruments that are borrowed. There needs to be stricter rules/penalties on what happens when a party fails to deliver a security. As it is, when the cost of failing to deliver is miniscule, it can really bollix up the markets.
The longs have adequate tools to fight the uptick rule; they don’t have adequate tools to help against naked shorting and failures to deliver.
“This is a computerized era. There is no reason why there can’t be real-time data on loanable shares.”
This is much much much harder than what people without a technology background tend to think. There are too many moving parts in the financial system to coordinate. The cost of coordinating n agents typically scales n^2, hence this is not a tractable problem unless you slow down trading to a crawl or limit the number of market participants. The best way to deal with the problem is still trust that people are doing the right thing, but issue a stiff penalty when they’re caught.
“The thing is the uptick rule is not the real problem. The real problem is that shorts don’t have to get a positive locate at the time of the shorting”
“There is no reason why there can’t be real-time data on loanable shares.”
“There needs to be stricter rules/penalties on what happens when a party fails to deliver a security. As it is, when the cost of failing to deliver is miniscule, it can really bollix up the markets”
Thank you.
This is the real issue that no one seems to mention
My opinion the uptick rule is needed because the SEC is unwilling to enforce its other rules.
I was a programmer as an actuary… this is not a hard problem. Most IT professionals are wired to say, “That can’t be done,” and non-IT bosses roll over.
I understand that real time is not possible, but every broker has a list of loanable shares at the end of each day. It would be trivial to pool those lists and publish them before the next session opens.
[...] I am not a believer in the shorts being able to manipulate the markets as much as some would say. It’s easier to manipulate on the long side. Here is a good post at [...]