Short Selling Tick Test-- Bye Bye!

[thetradingdoctor]

Here is an interesting take on elimination of the short selling tick rule and present market volatility:

http://www.thefreshtrader.com/stock-...ed-volatility/

Thanks!

Doctor Janice

[Minetoo]

I think the abolition of the 60+ year old uptick rule will have a fundamental effect on market mechanics. Internals like tick, trin, put-call will have to be recalibrated to allow for this profound change. It is truly surprising that this very important change has received so little attention. I can recall in my Prop Shop days the compliance officer hovering over my desk insisting I sign an Uptick rule liability waiver or I would be suspended from trading.
Think about it for a moment - no longer does there have to be price improvement before shorting. In other words, hedgies, brokers, banks, props and other big players can hammer the hell out of the bid with impunity. As we all know, as the cash index falls, large program trades are triggered to exploit this arbitrage opportunity and bring the premium back in line.
Watch the tape velocity to the downside as this happens - it is remarkable. All the noise about the sub-prime implosion is just exacerbated by the removal of this market protection.
Perhaps, the "bear raids" of the 1920s-1930s are coming back!!

[cooter]

	Quote:	Minetoo
	It is truly surprising that this very important change has received so little attention.

Actually, it has received quite a bit of attention, especially with regards to the $TICK levels now being out of whack. But the true impact on the markets has yet to be realized by the general public, as those "bear raids" could fast become the norm again, after 60+ years. You only have to look at the volatility of the past few weeks to see the potential damage that could arise as a result.

[The Bear]

	Quote:	Minetoo
	I think the abolition of the 60+ year old uptick rule will have a fundamental effect on market mechanics.

I was so happy when I heard this rule has finally been abolished. In my opinion the rule gave the bulls an un-fair advantage. Now stocks can plummet into a hole at normal speed (just as stocks are allowed to fly up at normal speed) - giving more balance to the market. Bring on the bear raids, i'll be right there rolling the ball.

Bear raids are healthy for the market.

[Minetoo]

	Quote:	The Bear
	I was so happy when I heard this rule has finally been abolished. In my opinion the rule gave the bulls an un-fair advantage. Now stocks can plummet into a hole at normal speed (just as stocks are allowed to fly up at normal speed) - giving more balance to the market. Bring on the bear raids, i'll be right there rolling the ball. Bear raids are healthy for the market.

Unfortunately the investor class would strongly disagree with your take since they have the silly goal of price appreciation in mind. Perhaps the SEC should legalize naked short selling too?

[Dogpile]

anyone who thinks this rule change is the cause of the volatility hasn't been trading very long. 'volatility storms' are a normal part of market behavior and existed frequently prior to the most recent 4-year period of unusually low volatility. Look at the VIX on a 15 year weekly chart and you will see that recent market behavior is not anything special.

[Minetoo]

Unless you are in your 90's, no one on these boards has ever traded without this rule in place. Consequently, how could we possibly conclude its impact with such a microscopically small sample period?
Do not confuse a contributing factor with a cause.

[cooter]

	Quote:	Minetoo
	Unless you are in your 90's, no one on these boards has ever traded without this rule in place. Consequently, how could we possibly conclude its impact with such a microscopically small sample period? Do not confuse a contributing factor with a cause.

You only have to compare the $TICK levels above +1000 before and after the uptick rule was removed to recognize the impact.

Since this is Dr. Janice's thread, I'd like to hear her seasoned perspective on all of this.

[thetradingdoctor]

I agree with Cooter's take on this, esp as regards the $TICK levels. How often are you seeing $TICK above 1000 since the short-selling rule was abolished? How often did you see it before? In addition to the state of confusion re: subprime mess, lack of transparency, lack of confidence and illiquidity in the bond markets---the "Bye Bye to Short Selling Tick Test" appears to be affecting market volatility in a significant manner. These markets are more deceptive than ever. I just sent out a "Little Shop Of Horrors" Alert. We are in no-man's land right now, waiting for the next pearl to drop from the lips of the almighty Fed. No matter what you think about the Fed, don't fight them. And- get used to the volatility, as it is likely to be around for some time. It is the absence of the short selling tick test plus the number of uncertain factors plaguing these markets at this time that will contribute to and continue this volatilty. There may be hope for reprieve from it in mid-Sept, but I wouldn't bet money on it right now. For market history buffs, the pattern of the DJIA in 2007 most closely resembles that of1946.

Thanks!

Doctor Janice

[Jakew]

That may partly explain why in July '07 a record high - for years - short sold stocks number has been recorded. Some misquided market analysts expected another bull rally following such a display of pessimism.

A big change in my opinion - aren't markets driven by (unreasonable and reasonable) perceptions?