Cramer and Over 5,000 Formally Seek Short Sale Changes

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There has been an ongoing war between those who think short selling should be allowed under any circumstances and those who want the practice curbed.  That argument is likely to heat up again based upon a press release this morning from none other than Jim Cramer, along with investors Eric Oberg, William Furber, and Scott Rothbort.  These investors have presented the Securities and Exchange Commission with a petition signed by 5,691 individuals calling for reinstatement of the Uptick Rule.

The petition was hosted by TheStreet.com, which Cramer co-founded, and you have undoubtedly heard Cramer make the same case on CNBC or perhaps on other websites such as BloggingStocks.com from AOL.

The Uptick Rule was in place until 2007 after being on the books as a regulatory curb that was passed in 1938.  It seems that the regulators in the 1930’s decided they should do something to keep speculators from being able to endlessly attack weak companies after about 8 or 9 years of the pain of the Great Depression.  The rule prohibits the short selling of securities except on an uptick.

The debate is not one which can be won in a sentence by either side.  Short selling is part of an orderly market.  Most market participants agree that short selling should not be eliminated.  The problem comes down to when short selling can become a mere attack and when it should not be allowed.

The only argument against an uptick rule is that now in the world of decimals in trading, an uptick can be artificially created in order to get a large block of stock sold short underneath it.  Many firms have also been accused of never making sure that shares were even available for borrowing before letting customers short sell a stock.

There have been many proposed rules for short selling, and some include higher margin rates to short sell or some include individual stock circuit breakers rather than just market circuit breakers.

The Uptick Rule is under a review and public comment period at the SEC.  Which way this exact ruling goes, that will take some time.  It goes without saying that no matter what the new rules decided upon are, they will not be satisfactory for a large number of market participants.

JON C. OGG
June 2, 2009

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