By Brandon Wendell, Online Trading Academy Senior Instructor and Trader Mentor
Ask most Americans what they think about Wall Street brokerages after the 2008 market collapse and you can imagine that the responses may not be fit to print in this article. However, is the best answer more government regulation? In a recent misguided attempt to "fix" the markets, the SEC voted 3-2 to reinstate a version of the old uptick rule.
If you aren't familiar with the rule, let me explain. First, you need to understand what constitutes an uptick. To make it more confusing, the NASDAQ and the NYSE define a tick differently. In the NYSE, an uptick is created when the price of the last trade is a minimum of $0.01 higher than the previous trade. A downtick happens when the last trade is at least $0.01 lower than the previous trade. However, in the NASDAQ, no trade needs to occur. An uptick is created when the bid increases by at least $0.01. A downtick would occur with the bid decreasing by at least $0.01.
The old uptick rule prevented short selling a stock while it was in a downtick. To initiate a short during a downtick, you would have to use a limit order by offering the stock for sale at least $0.01 above the inside bid price. This would be the case for either exchange. The new uptick rule, which should take effect in six months, would only come into effect on stocks that drop more than 10% in price in a single day. The uptick rule would remain in effect for the remainder of the day and the following trading day.
I am perplexed as to why the SEC felt the need to institute this rule. Are they fearful of a massive collapse in stock prices in the near term? Is there something they are seeing in the markets? Additionally, the so-called rampant, uncontrolled short selling simply does not exist. The markets were completely overbought in 2007 and the cause for the price collapse was selling and credit purge, not short sellers.
The SEC has not put in exemptions for market makers who use short selling to increase liquidity in the markets! I think this is a clear example of acting for the sake of acting without fully understanding the problem or the impact of your decision. Overall, the SEC estimated that this senseless rule will cost approximately one billion dollars to implement and an additional billion every year to maintain!
An additional senseless act would be H.R. 1068 and H.R. 4191. The "Let Wall Street Pay for Wall Street's Bailout Act of 2009," and the "Let Wall Street Pay for the Restoration of Main Street Act," would impose taxes on every transaction in the equities, futures, and options markets. This tax could have a major impact on both individual traders as well as financial institutions. By imposing a 0.25% tax on our transactions, we may see the end of trading as we know it, as well as a liquidity drop in our markets. I highly suggest that you write your representative and voice your opposition against these bills. Do you think that the institutions would absorb these taxes or pass it onto their customers? Think 12(b) 1 fees on mutual funds are high now? Wait until your 401k has to pay for that additional tax.
Overall, change is coming. This seems to be a case of where the medicine is worse than the illness itself. The President spoke of creating jobs and opportunity during his State of the Union Speech. Eliminating the income of many Americans who trade for a living and reducing the profits in 401k that have already been decimated is not the answer. We as traders and voters need to make our voices heard loud and clear while we still can.
Have a great day.
- Brandon Wendell bwendell@tradingacademy.com
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