The Uptick Rule: What Is It And Why Is The Trump Administration Taking A Second Look?

President Donald Trump may be looking to meddle with market forces by reinstating the uptick rule, which prior to 2007 restricted short selling while a stock is falling.

A recent tweet from the West Wing Reports Twitter Inc TWTR account cites a source in the treasury department claiming that the new administration is, "looking at uptick rule, which became rather infamous during econ. collapse of a decade ago."

Treasury Dept. source: Trump admin. looking at uptick rule, which became rather infamous during econ. collapse of a decade ago

— West Wing Reports (@WestWingReport) January 31, 2017

News of the tweet was poorly received on Tuesday's edition of Benzinga's PreMarket Prep Morning show, particularly by proprietary trader and co-host Dennis Dick who called it "the most horrible rule ever" and "just stupid."

The Downside Of The Uptick

Dick's primary issue with the measure is that the stopgap delay the rule creates artificially suspends the price of a falling stock. This hampers the stock from settling at its correct trading price, which, Dick argued, will happen regardless of the resistance posed by the rule: "Stocks will to go where they want to go. The tick doesn't really matter. All it does is create short-term inefficiencies."

The problem with these inefficiencies, as Dick presents it, is that individual traders are left buying overvalued stock during a downturn. "When a stock comes out with bad news, and there is no natural seller, the stock will just sit there because nobody can short it," Dick elaborated. "What happens is you have people that don't know the news and they actually buy it. And they're buying it at too high of a price because the stock hasn't gone to where it wants to go.

The Alternative Uptick

Dick also challenged the reason underlying the rumored resumption of the uptick rule, the fear of another massive market event or recession, "Because we took it out before the financial crisis, some people blame the financial crisis on the uptick rule, which is absolutely ridiculous."

In fact, an alternative uptick rule has already been introduced by the SEC following the financial crisis. The current restriction approximates the resistance provided by the uptick rule, prohibiting short sales for two days after a stock falls below 10 percent of its value the previous trading day.

Still, Dick was critical of this restriction as well, taking to Twitter following Tuesday's show calling the alternative worse than the standard uptick rule. "You basically have to post to short (in event stock falls 10%). This was a contributing factor to the Aug 24th liquidity event."

It's worse. You basically have to post to short (in event stock falls 10%). This was a contributing factor to the Aug 24th liquidity event. https://t.co/ysmVG4mYFG

— Dennis Dick (@TripleDTrader) January 31, 2017

Wait And See

Whether the rumor comes out as true and the uptick rule is re-implemented, it will be worth seeing what forces motivate the decision.

For his part, Dick is adamant that the rule will do nothing to prevent a drastic downturn in the market. "It doesn't save the market from financial crisis," he said. "It doesn't save the market from bear raids — that stuff can happen anyway. All it does is create inefficiencies, and the little guy gets hurt because they end up buying stocks at too high of prices when the stock can't correctly price itself to where it wants to be."

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