The huge sell-off in the U.S. stock market this week has gotten the attention of both investors and market experts. Billionaire Omega Advisors hedge fund manager Leon Cooperman called out the U.S. Securities and Exchange Commission on Thursday for its role in the volatility.
What He Said
Cooperman in a CNBC interview said the increase in market volatility in the past decade is largely due to to the elimination of the Uptick Rule, a trading regulation eliminated in 2008 that required every short selling trade to be executed at a higher price than the previous trade.
“I think your next guest ought to be somebody from the SEC to explain why they have sat back calmly, quietly, without saying anything and allowing these algorithmic, trend-following models to wreak havoc with what has, up to now, been the best capital market in the world,” Cooperman said.
“Get somebody from the SEC to explain why they eliminated the Uptick Rule and what do they think about these quantitative trading systems that have created tremendously of volatility in the market, scared the public, [and] effectively raised the cost of capital to business.”
What It Means
The uptick rule was abolished in 2008 and replaced in 2010 by what is known as the alternative uptick rule. The alternative uptick rule is similar to the previous uptick rule, but it only kicks in once a stock is down at least 10 percent in a single day. At that point, short sellers can only execute trades on a price uptick for the rest of that day and the following trading day.
Cooperman and other supporters of the classic uptick rule argue that trading algorithms create unnecessary volatility in the stock market without a rule in place preventing them from automatically shorting stocks on days of heavy selling and compounding losses.
Opponents of the uptick rule, such as Benzinga's PreMarket Prep co-host Dennis Dick, say the uptick rule prevents accurate market pricing.
He's wrong here. We should have no uptick rule at all. Leads to major pricing inefficiencies and uninformed traders often pay too high of a price because stocks can't price to where they should be. Saw this in dozens of stocks this morning (because of alternative uptick rule).
— Dennis Dick (@TripleDTrader) December 6, 2018
"We should have no uptick rule at all. Leads to major pricing inefficiencies and uninformed traders often pay too high of a price because stocks can't price to where they should be. Saw this in dozens of stocks this morning (because of alternative uptick rule)," Dick said in a follow-up tweet.
Traders will be watching to see whether or not this week’s volatility picks up or dissipates heading into the end of the year. They will also be on the lookout for additional criticism of the alternative uptick rule from high-profile investors like Cooperman, as well as a potential response from the SEC.
After dropping nearly 800 points for the second consecutive day on Thursday, the Dow recovered somewhat to trade down by only around 500 points in midday trading.
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