The Uptick Rule and Market Slide
August 10, 2011
RUSH: Sarah in Greensboro, North Carolina. Hi, and welcome to the EIB Network.
CALLER: Hi. Thanks for taking my call. Regarding the market slide, don't you think short selling is definitely a huge factor in this because the Clinton administration removed the circuit breakers, including the uptick rule. It's being totally exploited, and the traders are making billions on it. They have to buy back in. They have to cover their shorts, the effect of the bounce. Goldman Sachs probably drove the market up so they could start selling again.
RUSH: I think George Soros is driving the market down. I think if you want to find somebody who's really shorting the market... There was a story out that some unnamed billionaire is scoring big and everybody's trying to guess who it might be on the market plunge, and of course the educated guess somebody's making is George Soros.
RUSH: But short selling is as much a part of the market as going long is. There's nothing inherently sinister about it. The Kennedy family got wealthy doing it.
CALLER: Why haven't the "Republicats" restore the uptick rule, restore Glass-Steagall to protect the American people?
RUSH: Explain the uptick rule.
RUSH: Explain the uptick rule to people who don't know what it is.
CALLER: In very general terms, they can't short sell except on an uptick in the market. That's what Goldman Sachs did yesterday except they're not required to do it; they did it to increase their profit margin --
RUSH: Well --
CALLER: -- and it provides some protection against short selling slide, which is apparently a factor in what's happening today.
RUSH: Well, obviously people are selling short in this. There are people selling short all the time, but there's nothing --
CALLER: Short selling with no controls on it will drive the market into the tank and those traders will make billions driving it down.
RUSH: Yeah, but I think, isn't there a rule in place that if you're gonna go short, you've got to have your margin call. You can't just go short without nothing to back up what's gonna happen? I think something's been put in place. I'm gonna have to double-check that because that's just on the fringes of my fertile memory here.
CALLER: Well, thank you. It would be great if you would look into that. Regarding Wisconsin which is inspiring, I still greatly fear that in the 2012 elections -- and you did a brilliant segment on this not long ago -- the issues won't be factor, that that election will be taken by fraud. ACORN is alive and well, heavily funded with billions.
RUSH: Well, it's the only way the Democrats can win it. It's the only way they can win it is by fraud. Nobody will vote for 'em.
RUSH: Well, as always, there's a lot of confusion over what the uptick rule is. I found three -- just in the short four-minute time-out we had, I found three -- different versions of the uptick rule. Basically the uptick rule is that you cannot sell short unless there's an uptick defined as a buyer. You can't wildly sell short unless there is a buyer. That's the uptick. This was done to prevent or reduce down-side stampedes, and it worked well. But now there's some information out there that says the uptick rule is not currently in place, that it was allowed to expire, or they just eliminated it. Example: One source says that the rule was removed in 2007. It says, "The uptick rule refers to a trading restriction that disallows short selling of stock except on an uptick.
"For the rule to be satisfied, the short sell must be either at a price above the last traded price of the stock or at the last traded price if that price was higher than the price of the previous trade." Now, that's easy to follow, Rule 201, the so-called "naked short selling rule," but that might not be the rule that I had in mind, since this one doesn't deal explicitly with margins. It's more about actually identifying the stock. But there is, apparently, folks, bipartisan support to reinstall the short uptick rule. McCain even ran on it, so you know it's bipartisan. (wild laughing) But the uptick rule is not in place right now. It went into effect in 1938, and was removed when Rule 201 Regulation SHO became effective in 2007. So we are back in a situation like 1938, and that's what the caller was talking about. There is no uptick rule, so there's naked short selling that's permitted. I'm sure that helps.