In July 2007 the SEC lifted its “uptick rule” which had been in place since 1938. The uptick rule said that you could only sell a stock short if it prices had gone up on the prior sale. The SEC’s decision was based on the 1st statement in this paper: Markets work smoothly when everyone plays fairly.
Unfortunately, everyone is not playing fairly. Remember the bullies in the school yard, all picking on a defenseless youngster. They all piled on and took shots at hurting the kid. That’s what’s happening on Wall Street. Investors are selling stocks short, not because they know something bad about these companies but because everyone else is.
If they drive companies into bankruptcy these investors come out winners. The losers are everyone else in the country.
The solution is simple: the SEC needs to reinstate the uptick rule. That’s all. The market will recover, the economy will recover, and the shorts will take a bath.
Harlan Platt, Ph.D., is a business turnaround expert and finance professor at Northeastern University College of Business Administration.