This past Tuesday afternoon, April 7, Bloomberg News featured two prominent figures in the world of finance to discuss and debate the SEC’s proposed reinstatement of the traditional uptick rule, or the imposition of a modified version. It sure was a showdown in the world of market regulation. Here’s the recap and analysis…
In the Blue Corner arguing in favor of the uptick rule, we have Roel “Jor-El” Campos -Former SEC Commissioner, and advocate of more regulation in the area of naked short-selling.
In the Red Corner arguing against the uptick rule (and, it turns out, any and all short-selling restrictions of any kind) we have Manuel “Lex Luthor” Asensio – Managing Director of New York based Hedge fund, Millrock, (and best Lex Luthor look alike I’ve ever seen!)
Campos does a great job of actually explaining what the uptick rule is and, later in the interview, the difference between legal short-selling and illegal “naked” short-selling. In case you missed it, the uptick rule or uptick “test” would mean “that a short sale [order] cannot be executed [in the market] unless there is some evidence…[by either] a price test or a bid test…as to whether the stock is rising.” Essentially, this means that stocks can only be shorted when they are actually going up at the moment you place the short sale order. He also explains that the uptick rule is a bit of “Chicken soup,” meaning it’ll make the activists and congressional members that have pressured the SEC about it feel a little bit better about the prospect of abusive short-selling being less prevalent in the markets. However, with the markets as computerized as they are today, and with more advancements on the way, it’s still very easy for savvy, sophisticated, investors to “manipulate the tape” – create the appearance that a stock is experiencing buying or selling pressure by placing strategic large orders on the order book – and still get away with the type of dubious activity that the uptick rule is essentially looking to at least hinder. So, Campos actually even concedes to what he also believes as fact, that even restoring the uptick rule or something like it really won’t do much in the way of stopping illegal short-selling activity.
In response, however, Asensio starts off throwing wild accusations at Campos. He references a letter Campos wrote supporting the regulation of short-selling by imposing the uptick rule or some modified version, which was supported by many “main street companies.” Asensio says these companies that Campos represents are “very questionable companies…that should be the targets of the investigations themselves.” He then calls for more deregulation of the markets in regard to short-selling, stating “there is no economic reason why America should cause and force short-sellers to borrow stock.” He tries to make all short-sellers look like they are all some kind of investment superheroes that short stocks purely for the purposes of stopping price manipulation on the upside and to discover true price parity, or the true value of a stock. He even advocates for the legislation of whistleblower protection for members of public companies that are sued by those companies for blowing the whistle, and tries the old guilt-by-association tactic of trying to say Campos “represents” these types of companies. This guy is some piece of work, but if you keep an eye out for the signs and read between the lines, it’s very easy to see the wolf in sheep’s clothing.
First of all, I’ve been searching for this supposed letter by Campos, which is supported by these “questionable companies,” and I haven’t been able to come up with much. The two that are fairly recent and deal most directly with the issue at hand that I did locate, can be found by clicking the links in this sentence. But neither really mentions nor is endorsed by any public companies…unless Asensio was talking about the companies through which the letters were published? That doesn’t make much sense either though. So, what underhanded, “questionable” organizations is he talking about? To be honest, I don’t even think he knows what companies he’s trying to implicate by saying that. His entire performance is nothing more than the typical cloak and dagger tactics you would expect from a perfidious, villainous, Lex Luthor-ian salesman, especially now, and especially in the finance industry. Is it really a wonder why we are in the mess we are in right now with guys like this running hedge funds?
Secondly, the calmly arrogant demeanor that Asensio maintains throughout the interview is simply an extension of this surreptitiously evil mind trying to maintain this bogus façade of nobility and humility, trying to lure the viewer into seeing it his way, or at least see that he is perhaps much more credible than he obviously is in reality. Saying that short-sellers shouldn’t have to borrow any stock at all and should be able to sell shares at will with absolutely no regard for the downside and the possibility of that trade going against them, is just like saying buyers shouldn’t be forced to actually pay for the stock they buy, and should be able to buy at will. If this were truly allowed to happen, the current economic recession would feel like utopia compared to the economic situation we would be in as a nation if Joe the Plumber and his band of brothers could actually participate in the market without having to actually pay for any trades that went against them. The market would have dropped to 0 if these were the rules for investing, because once the market started to drop from 14,000+ in October 2007, no one would have paid for their trades! Anyone that pretty much bought stock from then through November 20th 2008 – some until March 9th of this year – has been losing money on that trade every day since they bought it! Why the fuck would you pay a trade they were down in by 2, 5, or 10% by settlement, especially if they didn’t have to? NOBODY!
Finally, it’s obvious that borrowing is what got not just us but the entire globe into this trouble in the first place. The fact that on many stocks, mostly very volatile ones, the extent to which you have to “borrow” (to cover for settlement) is as high as 75-80%, is a means of keeping that same type of out of control leverage that was prevalent in other markets and helped get us into this, away from these markets. All trades are based on ifs, and if that trade goes against you, you’ll be glad that the higher requirements saved you from getting crushed on the entire position, because you “were forced to protect” 75-80% of that highly speculative position. Now you’re only getting crushed on 20-25% of it, but at least you’re still in business. It’s tragic when going the wrong way on one trade in Volkswagen could cause a short-seller to take his life, so I’d say this type of protection is critical on all investments, but especially on ones that are tremendously high in speculation.
The uptick rule is like warning labels on cigarette boxes. Shorting, like smoking, is the other side of a 2 sided coin. Buyer’s, like non-smoker’s, and proponents of selling (smoking) restrictions. Non-smoker’s recognize the health risks that smoking poses to the overall community, as buyers recognize that deflating prices, by shorting stocks, brings the overall economy down thereby threatening the economic health of the overall community, along with the markets. Regardless, shorter’s are gonna short, and smokers and gonna smoke. The uptick rule, like a warning label, simply makes it a little less attractive to do it, and has been proven to have the overall effect of discouraging an action (naked short-selling and smoking) that has proven to at least inject more potential for unhealthy activity.
At the end of the day, it is clear that this was a very poor attempt by Manuel Asensio at trying to maintain the shroud of secrecy around what short-selling actually is and the market manipulation that can and does occur due to abusive naked short-selling. He does great job looking like one of the most diabolically evil genius’ of all comic book history, but is too transparent with his chicanery to truly pull off the full impersonation. In my eyes, Gene Hackman will always be the best Lex Luthor!