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Repeal of the Uptick Rule: A Planned Program to Obliterate the
Stock Market
Barbara Minton
Natural News
Friday, Dec 05, 2008
Those wanting to see the future need look no further
than the latest legislation, rules and decisions put into force
by the people with the power. For example, there's the 2005 Supreme
Court eminent domain decision that allowed for private property
to be seized by developers solely for the purpose of increasing
municipal revenues. This decision, made at the height of the development
boom, paved the way for a massive land grab that is taking ownership
of huge tracts of land from the many and placing it in the hands
of the few. And today we are witnessing the results of the 2007
decision made by Securities and Exchange Commissioner Christopher
Cox to overturn the uptick rule, a decision that opened the door
for the largest looting of the American people in history, and
the unprecedented transfer of assets from private hands into the
control of the government.
What is a short sale?
If a trader thinks a particular stock is headed lower he can
sell it even if he doesn't own it. Then, when the price drops
to a level that pleases him, he can buy the shares, effectively
canceling out the trade in his account. For instance, he can sell
a stock at $99.50 and buy it back at $9.50, if it falls to that
level. He will then pocket $90.50 for every share he sold short.
If he sold 1000 shares short, his profit would be $90,500 less
small transaction costs. Obviously, if the market as a whole or
owners of a selected company in particular get into panic selling
mode, short sales can be incredibly profitable.
The rule for short selling is that the trader must borrow shares
to sell from his brokerage. If this rule is followed, a short
seller's action will be confined to the amount of shares a brokerage
has available to lend. However, the advent of online trading and
the indifference of the SEC has allowed this rule to be disregarded,
and traders can now engage in what is called naked shorting, shorting
unlimited amounts of a stock without needing to actually borrow
the shares. This has exponentially increased the amount of shares
sold short.
(ARTICLE CONTINUES BELOW)
Repeal of the uptick rule sets the stage for a market crash
The uptick rule was established after the great market crash
of 1929 to restrict short selling by permitting short sales only
following a trade where the traded price was higher than the previously
traded price (uptick). Think of a stock that was trading at $100
per share with the last two trades at $99.75 and $99.50. Under
the rule, anyone wanting to place a short sale of this stock would
have to wait for an uptick – a trade that took the sock
up from $99.50 to $99.75. The short sale could only be executed
when this uptick had occurred. The uptick of a stock price is
a signal that for almost all sellers, there are eager buyers.
Put into place to stabilize the marketplace after the extreme
market instability that occurred at the beginning of the Great
Depression, the job of the uptick rule was to keep the market
from plummeting downward as one short seller piled on top of another.
Without it, the first short seller could execute his trade at
$99.50, the next at $99.00, the next at $98.50 and so on down.
When short sellers smell fresh blood such as that, they rush in
to capitalize on it. Without the uptick rule, short sale following
on top of short sale can be executed until the price of the stock
goes into a nosedive. In markets that are trading down anyway,
the absence of the uptick rule assures a death spiral for any
stock where short sellers decide to pool.
The uptick rule prevented hedge funds and other professional
traders from pushing the stock down by shorting, more shorting,
and shorting again. Without the protection of the uptick rule,
once a stock is selected by short sellers its fate is sealed.
When market participants see an otherwise desirable stock plunging
at the hands of short sellers, they become wary and afraid there
is something serious wrong at the company. In self defense, they
sell their stocks and take their money out of the market. As this
type of selling spreads, panic becomes rampant throughout the
entire market. This is the kind of panic selling we have seen
in the U.S. and world markets since September of this year.
The withdrawal of the uptick rule followed on the heals of the
defeat of the efforts by the Bush administration to put Social
Security funds into the market, an initiative that would have
assured even more money for those in the know to grab when the
lights went out on Wall Street. On July 6, 2007, the day the uptick
rule was repealed, the Dow Jones Industrial Average stood at 13,611,
just three months away from its all-time high of 14,198. The timing
of the repeal was absolutely perfect. Repeal of the uptick rule
sent a clear signal to anyone paying attention that the party
was now over and it was time to establish a short position to
be sure of benefiting from the market's coming drop.
Repeal of the uptick rule helps engineer the financial crisis
The decision of the SEC to repeal the uptick rule exposed the
markets to the very same "bear raids" and "runs
on banks" that prompted the original enactment of the rule
following the huge market declines of the early 1930's. The repeal
has left the markets wide open to predatory trading abuses such
as naked short selling, the equivalent of financial terrorism.
Since the goal of these terrorists was to create utter and complete
financial instability, a financial institution was chosen as the
example of how to completely destroy a company in short order.
Bear Stearns was the first to go down, dropping from $61.58 to
$2.84 in just five trading days (March 14 to March 20) on jaw
dropping volume that equaled 4.2 times its total share float.
We can only guess who placed the initial short sales that got
the ball rolling. Then came Fannie Mae whose shares were selling
for 49 dollars one year ago and now sell for 49 cents. Freddie
Mac had a similar price decline.
Lehman Brothers, a venerable institution with derivative products
held by most of the major financial institutions worldwide, took
a similar dive, going from $16.20 to 15 cents in five trading
days on volume three times its total float. Such volume increases
reflect extensive naked shorting. In the face of these startling
declines, the ability of these firms to fund their daily businesses
disappeared, and they were doomed to fall under government control.
When the government gathered these entities into its arms, the
holders of the common stock received nothing.
The latest casualty is the powerful global franchise Citigroup,
whose 52 week share price high was $35.29, followed by its low
of $3.05. The government now owns a major portion of it too.
Evidence is plentiful that the uptick repeal torpedoed the markets
A study by Birinyi Associates in April provides ample evidence
that the repeal of the uptick rule increased market volatility.
On the day the uptick repeal was announced, the market Volatility
Index had a huge and immediate spike from 13.25 to 23.55. The
Birinyi study also showed that during the same period, the absolute
dollar value of the daily change in each stock in the S&P
500 index increased from $1.02 to $1.77.
Market volume showed an immediate and dramatic shift from up
ticks to down ticks, highlighting that those in the know got the
message as soon as it was issued. Unbridled shorting began with
gusto on the day the uptick rule was repealed.
Calls to reinstate the uptick rule have been soundly ignored
The data used by the SEC in their attempt to justify their abandonment
of the uptick rule is clearly flawed. A study by the New England
Comlex Systems Institute (NECSI) found that this data was unsound
and left the markets vulnerable to spikes and drops. It was collected
at a time of market stability when prices were steadily rising.
Stocks no longer regulated by the uptick rule were never put through
the rigors of a test during volatile market times.
NECSI researchers compared stocks before and after the repeal
during volatile 12 month periods and found dramatic results: a
doubling in the number of stocks losing over 40% of their value
in a single day. They have called, unsuccessfully, for the SEC
to reinstate the uptick rule.
Wachtell, Lipton, Rosen & Katz, a firm whose client list
reads like a Who's Who of Corporate America, sent a memo to clients
saying that the conditions that led to the original adoption of
the uptick rule are in existence today. They sharply criticized
SEC Chairman Cox for not acting to reinstate the rule as millions
of investors lose their life savings and retirement assets, and
widespread manipulative short-selling and bear raids continue.
The SEC has historically played a leadership role during market
crises to assure that the markets are fair and orderly. They have
generally been creative and innovative in protecting the securities
markets and financial intermediaries from manipulative conduct.
This new failure of the SEC to act on behalf of the investors
they are mandated to protect is viewed as incomprehensible by
many onlookers. Others have begun to connect the dots and see
the SEC's indifference as a chilling cue that huge market declines
are part of a preplanned effort to bring the world's financial
institutions to their knees along with the economies they represent
so that these assets can be gathered under government control.
The further collapse of these markets may also allow for a massive
currency devaluation or the implementation of a new currency as
called for in the plan for the New World Order under which the
economies of the world would be homogenized.
Having ownership of assets in many private hands safeguards against
abuse
One of the fundamental safeguards of freedom and liberty is the
holding of assets by a broad base of people. This system respects
the wide distribution of assets so that no large concentration
is held by any one person or group. It is a system of checks and
balances just as necessary to the preservation of the American
way as the maintaining of the three branches of government. When
assets become nationalized, power becomes centralized in the hands
of the owner of the assets. When the balance of power is lost,
the installation of a dictatorship is almost complete.
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