Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Uptick Rule Not To Blame For Volatility


Adapt to markets changes, don't complain about them.

We've been bandying the plus tick rule (or 'uptick rule') on my site a bit, and I received this thought-provoking comment from "Phil".

The uptick rule was simply designed to stop panic selling. The rule is, very simply, that you can only short a trade when the last trade is priced higher than the previous one (hence, the UPtick).

We already accept days where the market goes up 200 then down 200 in the same session, and volatility is through the roof since the July 6th removal of the rule.

I don't agree with the sentiment that "it's a tough market - deal with it." It's the Securities and Exchange Commission's (SEC) job (or it used to be) to protect the small investor.

Removing this rule was a mistake, the SEC should put it back and we can deal with that.

Click here to read more

Phil makes some good points, and his observations seem very real. The market and individual stocks are seeing volatility as high as any time in the past five years. Some traders are clearly going to thrive in that environment, others will get shelled.

Where I differ is in cause and effect. And what to do about it.

Volatiility trends are cyclical and long-lasting. Bill at VIX and More suggest they last 2-4 years. February 2007 was around five years into a downtrend measure from the highs in 2002. It also measured three and a half years from the end of the "up" era of volatility after the collapsing of the tech bubble. I suggest the pendulum was ready to swing north in volatility anyway.

It's important to note that generally uptrending volatility began in February of last year, four months before the plus tick rule ended. The collapse of the credit markets impacted volatility much more than anything else.

Furthemore, we're talking about market. Traders can short the market on minus ticks forever in the form of futures. Betting short has become exponentially easier over the years with minis, exchange traded funds (ETFs) and now inverse ETF's.

Trading rules and conditions change constantly. The switch from 1/8th's to 1/16th's and then to pennies arguably did more to enable shorting than anything else. Combine that with electronic communications networks, or ECN's, taking a bigger and bigger slice of the volume and you have trouble even defining a plus tick. By the time the SEC actually got around to changing the rule last July, it was a complete anachronism.

On an individual basis, I can sympathize with changes in the marketplace effecting trading models. I was an AMEX market maker from 1988-2001 and would love to go back in time a decade before automation, decimals and multiple listings. Spreads were wide and we effectively controlled them. But it's not happening. And the plus tick rule is probably not coming back either.

So I would summarize in a few points. Changes in the marketplace have happened all through time, this is just another one. It's not as cosmic as it seems. But whatever you think of the rule, the best response is to learn to adapt instead of looking for blame for a rough trading patch.

< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos