SEC Deluged by Support for Uptick Rule's Return
JUNE 10, 2009
By DAISY MAXEY
At 68, trucker Wayne Adamson planned to work a little longer. But with his nest egg diminished, he feels he doesn't have much choice. He blames hedge funds and others engaged in short selling.
"I'm a mover, so it's quite physical," say Mr. Adamson of Lake Havasu City, Ariz. "I probably intended on staying in it a little, regardless -- as long as I'm able -- but now, instead of it being sort of a volunteer situation, it's almost a mandatory situation."
If the Securities and Exchange Commission is seeking a consensus on its proposed measures to curb short selling of stocks, it has one. In the more than 800 letters the regulator has received since it put the proposal up for comment in April, investors, Mr. Adamson among them, are overwhelmingly calling for the return of the uptick rule, which restricts short selling when a stock's price moved downward in the most recent trade. It is seeking comment until June 19.
In a short sale, traders sell borrowed stock with the expectation they can buy it back later at a lower price.
Certainly, some of the writers say the uptick rule is ineffective in today's market, notably the Security Traders Association, an advocate group for professional equity traders.
However, many professional and nonprofessional investors, retirees and those still laboring in various trades plead for reinstatement of the rule, which was created in the Great Depression and repealed in 2007.
"The uptick rule should come back," writes Howard Ward, portfolio manager for the Gamco Growth Fund at Gamco Investors Inc., in an April 24 letter to the regulator. Mr. Ward also calls for the banning of "naked" short selling, when traders sell stocks they haven't borrowed; an increase in capital ratios; regulation of credit default swaps; and an examination of the role of leveraged exchange-traded funds.
Mark Johnson, of Santa Monica, Calif.-based Growth Strategies, manages Parallel Partners, a small hedge fund, and various individual accounts. He, too, urged the SEC to reinstate the uptick rule, which he said helps investor psychology. The rule's removal and the trading that results "takes an already emotional situation when stocks are dropping, and turns it into a highly exaggerated situation," Mr. Johnson said.
Financial adviser Paul Orlando, with Edward Jones Investments in Boise, Idaho, said in a May 5 letter that the rule's repeal "drastically changed the outcome of many stocks this past year." The SEC's proposal to select certain stocks for restrictions in volatile markets changes rules midstream, writes Mr. Orlando. Short sellers "know they won't be punished midstream," he said.
But James Cornehlsen, chief investment strategist at Dunn Warren Investment Advisers LLC, in Greenwood Village, Colo., says short selling is an integral part of price formation in the market, which the uptick rule "artificially impedes." In a May 2 letter, he urged the SEC to focus on discontinuing naked short selling.
The Security Traders Association, in a March 18 letter to the regulator, says, "short-selling is a legitimate and economically important activity," and that the SEC "bolstered the integrity of the markets" when it removed disparate price tests.
Mr. Adamson says he and those around him have already suffered great harm. "Isn't it coincidental that right at the time the uptick rule was abolished, the sharp spiral downturn started," he wrote in a May 4 letter.
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