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thetradingdoctor

Short Selling Tick Test-- Bye Bye!

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SEC: Short-Selling Tick Test Is History

Jun-14-2007 | Source: Hedge Fund Daily

 

 

The Securities and Exchange Commission has unanimously voted to end the so-called “tick test,†which means short sellers will no longer be restricted from selling shares they don’t own just because the price is falling. The test, introduced in 1938 and applied only to listed securities other than those listed on the Nasdaq, after it was believed that short selling would have a negative impact in a declining market. Three years ago, the SEC embarked on a one-year pilot program to suspend the test, and has concluded that the general consensus was that that SEC “should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation.†Furthermore, says the commission, “the empirical evidence did not provide strong support for extending a price test to either small or thinly traded securities not currently subject to a price test.†The SEC also voted to adopt final amendments to Rules 200 and 2003 of Regulation SHO, aimed at reducing naked short selling, that would eliminate grandfather provisions regarding fail-to-deliver positions. The commission also has reproposed amendments aimed at further reducing fails to deliver in certain equity securities by eliminating the options market maker exception to the close-out requirement of Regulation SHO. The new rules will go into effect 60 days after publication in the Federal Register.

 

http://institutionalinvestor.com/Article.aspx?ArticleID=1377545

 

 

Have a great weekend, all!

 

Janice

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More Bye Bye! Seems like lots of saying goodbye these past few days.

 

Anyway---- Bye Bye ER2 ( Russell 2000 minis)! Looks like they will stop trading sometime in mid-September and then who knows what will happen?

 

 

Reminds me of that beautiful song by Sara Brightman and Andreas Boccelli:

 

YouTube - TIME TO SAY GOODBYE

 

Bye Bye For Now ;-)

 

Janice

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Guest cooter

Look for the Merc to make a push for their mini S&P MidCap400 contract (same tick/point value as the current Russell 2000 mini). Keep in mind that the real money is in the large RL pit-traded Russell 2000 contract, so this is the contract that the "big boys" will be really concerned about.

 

Also, you'll be able to trade the mini-Russell on the ICE platform from the NYBOT - although most brokers probably aren't setup for trading on it yet electronically. This is another reason to give FCMs a reason to use the ICE to trade electronically.

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The SEC has approved amendments rule 10a-1 to remove the "short sale tick test" requirement effective Friday, July 6th, 2007.

 

Effective Friday, July 6, traders will be able to short all securities without a required up tick, up bid, or short exempt designation.

 

 

Please refer to the following for additional information:

 

http://www.sec.gov/rules/final/2007/34-55970.pdf

 

http://www.sec.gov/news/speech/2006/spch120406ccc-10a.htm

http://www.sec.gov/news/press/2007/2007-114.htm

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Guest cooter

Nickm,

Thanks for providing the definitive word on this.

 

Hopefully this topic and source material can be made into a sticky, or added to the forthcoming wiki.

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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!!

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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.

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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.

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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?

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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.

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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.

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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.

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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

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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?

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Doc i finally read this article. Here's my comments:

 

>I cannot see how that does not cause more volatility

 

This is purely an opinion piece. This person has ZERO DATA to back up their conclusions.

 

>This will make the price become oversold to a point where value investors step >in and cause the stock to whip back up. The whip back up will be exaggerated >due to the fact that short-sellers now need to cover and buy at any price.

 

This WILL do that, and this WILL happen. Unless you have access to the data that matters, it's impossible to come to these conclusions, even by looking at the TICK. I've been watching the TICK and the DOW for some time before the removal of the rule....and I've witnessed many 1000 readings.

 

>The specialist and market makers have a new dynamic to contend with now >after the rule change. Before, they could see short sellers in their book >waiting for up-ticks to be executed.

 

Exactly, they have some advantage here, and now it's been taken away from them for the better. Additionally all this talk about Specialist is sort of dated. The specialist system is slowly diminishing. The NYSE Hybrid system pretty much killed most of them. The floor is a very sleepy place these days, simply because they can't make as much money anymore.

 

I personally would be OK to see all of them removed and just have IT guys operating the systems. I can't say for sure that they would have an advantage over a small speculator like me, because I have no data to back it up, but removing all of them LIKELY couldn't hurt me in any way.

 

They had a reporter on CNBC trying to justify their staying there, as they were blaming John Thain or someone (one of the execs) for killing them. Their claim is that, when the bear raid starts, it would be that much worse if they weren't there. To me it sounds like a poor attempt to justify themselves.

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