The hearings wound up determining that the real cause of the crash was the bubble the preceeded it. That bubble was driven, in part, by what we might call a "bull raid" on investor's savings. Wall Street salesmen dumped toxic stocks on investors, gave the best deals away only to their friends, and encouraged speculation with bullish analysis and rumor.
The crash came when the market ran out of suckers and the suckers wised up. The uptick rule was put in place not to prevent fictional bear raids but to protect the Wall Street firms whose profits largely depended on bull markets. Like so much of financial regulation put in place to "restore investor confidence," it was mostly a subsidy for rent-seeking special interests. The SEC was warned by two commentators not to repeal the uptick rule since it limited "bear raids" -- when short sellers drive down a stock's price in the hopes of scaring other investors into dumping the stock or triggering margin calls to force liquidations.
In response, the agency approvingly summarized the views of three other commentators -- that bear raids "are highly unlikely to occur in today's markets, which are characterized by much smaller spreads, higher liquidity , and greater transparency than when the rule was adopted 70 years ago. But there's little evidence of actual bear raids occuring or creating lasting damage to investors.
In fact, the evidence marshalled to support the uptick rule seems to support the opposite. The SEC thought this difference was not statisically significant. But even if we agree for argument's sake with the authors that it was significant, shouldn't we draw the opposite conclusion that they authors of the op-ed. But why not conclude that stocks whose pricing process is muddied by regulatory interference tend to be over-priced?
The only way this supports the uptick rule is if we conclude that market processes only "work" if they result in the stock market going up. But that's just an argument for subsidized equities. Market processes should be applauded not for pushing equity prices up, but for getting them priced correctly.
We'd feel better about the uptick rule if its fans didn't constantly resort to nonsense demonology. It is not at all certain that the SEC will adopt a form of uptick rule or circuit-breaker rule, and it is not inconceivable that the SEC would not adopt any short selling regulations at this time. While the extreme market conditions that were prevalent when the SEC issued its original proposals last April appear to have subsided, conventional wisdom seems to be that the SEC will act promptly, one way or the other, after the comment period closes on September Prior to joining Cadwalader, Mr.
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