Trader’s Narrative

In this quiet, shortened trading week, something historic will happen. As of today, July 3rd 2007 the ‘uptick’ rule will be eliminated.

If you’re new to all this, the uptick rule limits how a trader can sell a stock short. The rule only allowed short selling when the last bid wasn’t lower than the previous inside bid (Nasdaq) or for the NYSE, an uptick or zero plus tick. The intention of the rule was to prevent someone leaning into a stock and just hammering away at every single bid.

This was a rule that came about after the public uproar over the great bear market of the late 1920’s. It has been in effect since the SEC Act of 1934. This act not only brought about sweeping changes to the US financial markets, it established the SEC as the defacto guardians entrusted with policing the hobbled stock market.

A lot of good was done in the SEC Act of 1934. Pretty much everything we are now familiar with, from IPO’s, annual reports, quarterly statements, etc. all are thanks to it. But I am glad the uptick rule was thrown away.

It’s not like it was really accomplishing anything. For a long, long time now people have been getting around it. First using ‘bullets’ (or married puts) and then using single stock futures. Thanks to the ever changing landscape and the indefatigable creativity on Wall Street the uptick rule became the vermiform appendix of the financial markets.

If you want the complete lowdown, read the SEC ruling in full (pdf)