Uptick rule to be reinstated

SEC chair Mary Schapiro had trailed this in a recent speech, but it's now definitely on the cards the FT reports. Cue much criticism from Wall Street no doubt, and accusations of regulators not knowing what they are doing. And actually there's a great line in the FT report that does not inspire confidence -

Fans of the rule - including Federal Reserve chairman Ben Bernanke and billionaire investor Warren Buffett - say its return is the easiest way to prevent bear raids on particular companies. The thinking seems to be that while there might not be any empirical evidence proving it provides any particular benefit, it does not do any harm either.

On this point, another hat-tip to Zedman who sent me some interesting research into the impact of shorting bans carried out by Credit Suisse (he also has a post about the uptick rule). They concluded that there may have been an impact, but it was dwarfed by other factors.

According to our analysis, the ban on short selling in Europe has increased bid-ask spreads on both restricted stocks and non-restricted stocks. The ban on short-selling has also removed the ability to hedge execution by going long/short an appropriate portfolio of stocks that would involve shorting the financial sector. The ban has effectively pulled the plug on a number of trading techniques incorporating this, resulting in lower intraday volumes.

This may be a sign that the ban has managed to curb part of the aggressive selling in Europe financials. However, the impact of the regulatory change has probably been dwarfed by the continuous negative news flow and sentiment on the financial sector since the ban – as demonstrated by the continued fall of the major indices following the initial jump caused by the ban.

Personally, I'm not convinced that such interventions achieve anything practical, though I'm not really decided either way as yet.

Finally, just as a reminder here's the door that Turner left ajar in his review of regulation:

Should decisions on for instance short selling recognise the dangers of market irrationality as well as market abuse?