The market spiked another 1% this afternoon (on top of its morning gains) after Barney Frank announced the likelihood of the SEC repealing the uptick rule next month. Many market participants think we should reinstate the uptick rule because it is making the market too volatile and puts companies at risk of “bear raids” that drive down prices. Neither of those arguments have holes in them.
I don’t necessarily disagree with reinstating the rule, but I don’t think it will have much of an impact. If you run a company poorly the market is going to send your stock down no matter what. The one thing this will do is help protect against bear raids and manipulation, but it won’t protect your company from being run poorly. If you’ve got some firepower, an edgy market and some negative news it is easy to send a stock into a free fall by hitting the bids. That needs to be stopped as deflation is as much a function of psychology as money supply. Anything that exacerbates the negative deflationary psychology in this market needs to be stopped.
Has the stock market been more volatile lately? Perhaps, but so has every other asset class. There has been a pick-up in volatility in currencies, commodities, bonds and every other asset class. Correlation and causation are two different things. In my opinion, the pick-up in volatility is as much a function of the awful and unique times as the rule change. There is no definitive evidence blaming the change in volatility on this rule.
All in all, I think this is a relatively unimportant matter. If the economy continues to worsen and companies continue to be run poorly, stocks will fall. Bottom line.