Business Insight Zone

From a Wall Street Journal article that I overlooked last week . . .

Rule Change Ticks Off Some Traders
By AARON LUCCHETTI and PETER A. MCKAY

. . . Another factor some traders say is causing turmoil: an arcane rule change — referred to as the “downtick” rule — that kicked into effect in July that makes it easier for investors to bet on stock-price declines. Before July, investors typically had to wait until a stock was actually rising to bet on its downfall.

Lots of selling can feed off itself, prompting nervous investors to sell more, which adds to volatility. Often, heavily shorted stocks can be particularly volatile.

The old rule generally prohibited the shorting of a stock while its price was falling, or experiencing a “downtick” in trader slang. The rule was instituted after the 1929 market crash in order to discourage avalanches of short sales to push a particular stock — or even the broader market — precipitously lower. [...]

Gary Lahey, a former chairman of the Chicago Board Options Exchange, says it’s hard to quantify the added volatility given all the turmoil of late but there is no question it has had an impact. “You’re going to get more volatility because it’s easier to whack a stock,” says Mr. Lahey, who nevertheless favors the rule change.

On the New York Stock Exchange, Seaport Securities broker Theodore Weisberg agrees: “They quietly changed the ground rules,” says Mr. Weisberg. “There’s no question it’s been an aphrodisiac for volatility.”

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* “Multivalent,” that is, not “malevolent” — though many investors could be mistaken for thinking that market forces are malevolent these days.

Category: Finance & Real Estate