Upticks: More Freedom, Less Security

As noted below, Birinyi Associates was recently cited in the news about a study done on the SEC's repealing of the uptick rule and its possible impact on the market.  For those not familiar, the "uptick rule" required that a short seller offered their stock above the previous trade, so as not to cause declines in price as a result of shorting. 

The rule was repealed after the close of trading on July 6, 2007.  Since that was a Friday, we first begin to see the impact on Monday, July 9th.  The three charts presented below illustrate different measures of market activity that have changed since that rule was repealed.  We grant that the subprime mortgage market has become more of an issue since then, and its legitimate impact on corporate earnings cannot be denied, but we must ask whether market volatility has been aggravated by regulatory changes.

The DJIA money flows had been strongly positive throughout this cycle, until the regulatory change.

We also notice increases in volatility based on the two measures shown below.

At 3:40pm on November 15, 2007 the market is down 1.8%.  By nature stocks decline in price more rapidly than they gain, but how much has shorting impacted the total decline on the day?

Comments

I am a long time member of the futures exchanges and have always hated the uptick rule. I believe it is too early to tell how big a factor changing it has been. But I have noticed something I would like your opinion on. i believe the explosion of ETFs and arbitrage associated with them has lead to increased correlation between individual securities. I believe this shows up primarily on volatile days.