Impact of Eliminating Uptick Rule
Volatility Index (VIX)
1 Year daily reading
Chart via Yahoo
I haven't done a study on the actual correlation between the dropping of the uptick rule in July 2007 and what its impact has been on volatility. My assumption is that it would lead to an increase in the VIX readings, and that is what you see on the chart above.
While there is correlation, I do not if there is any causation for sure. Some smart academic should do a study on this.
Meanwhile, I can tell you anecdotally that many of the short firms we deal with are far more willing to cover positions quickly. Last Friday's rally is a perfect example. There is less of a worry of being able to get an uptick to reshort a position.
Perversely, the initial effect seems to be increased upside volatilty!
Bespoke Group has some words about the Uptick Rule and Its Pilot Period that are worth reviewing.
A comment asked for a longer term VIX chart:
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I am sick and tired of the whiny babies crying about the elimination of the uptick rule. If you don't like the fact that some short seller is pouding a stock down....then buy some damn stock! If you really like the equity, then that silly ol' aggressive short seller is just making it a better value.
There was no 'down tick rule' for shorts who get caught out in a short squeeze....all's fair in love and war.
Posted by: Andy Tabbo | Apr 25, 2008 11:56:22 AM
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