SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Price pressure
DRAFT
Several empirical analyses address the question of whether an uptick rule can help
dampen downward price pressure, but the conclusions are mixed. The analyses
concluding that the uptick rule would limit price pressure by short sellers were less
rigorous than the studies drawing the opposite conclusion. However, while these latter
studies question the motivation for an uptick rule, they failed to fully contradict the claim
that the elimination of uptick rule may have aggravated the price declines
On one hand, some comment letters (Park National Corporation, General Electric
Company, Aflac Incorporated, International Bancshares Corporation and Jeff Wang)
conclude that the absence of an uptick rule has been detrimental to prices and generally
provided information on share prices, volume, and/or short interest. We observe,
however, that while some of the noted price declines coincide with increases in short
interest, some do not. The Park National letter, in particular, noted a stock price increase
associated with a decrease in short interest, supposedly resulting from the short selling
ban. However, a closer look at the data reveals that the price increase occurred over a
short window before the short selling ban started and coincided with an increase in the
entire market. In fact, none of these letters analyze the data closely enough to ascertain
whether the uptick rule would have made any difference to the stock prices analyzed. For
these reasons, we do not believe that these empirical analyses are reliable enough to
support the conclusion that the absence of an uptick rule and the actions of short sellers
result in prices that are below their fundamental levels.
An analysis by Martin Napor shows that the average total negative return during years
when the uptick was in place is lower compared to the average negative return when the
rule wasn’t in effect and Napor concludes that the presence of the uptick rule is sufficient
to reduce the risk of lower returns. The study lacks statistical analysis and the conclusions
fail to account for relevant economic differences between the time periods studied.
Further, the methodology does not lend itself to a powerful analysis of the study’s focus.
Other commenters provide compelling evidence to call into question the claim that the
uptick rule can decrease downward price pressure (Dialectic Capital Management LLC,
Managed Funds Association, and Security Traders Association). The main conclusions
are based on evidence that short interest initially fell immediately after the repeal of the
uptick rule and that either short interest or short selling volume fell for specific stocks
over periods of increased worries about the effect of short selling in those stocks (see
Credit Suisse analysis by Ana Avramovic 6 ). The overall evidence provided by these
studies is that the negative returns of financial securities cannot be attributed to short
selling activities. Some of these studies suffer from the same weaknesses as studies
generating the opposite conclusions in that they do not directly show that the uptick rule
has no effect on downward price pressure. 7 However, these results question the
6
Ana Avramovic, What Happened When Traders’ Short Were Pulled Down?, Credit Suisse Market
Commentary (September 2008).
7
Note that an OEA memo on returns on February 27, 2007 does provide some direct evidence that the
uptick rule does not alleviate downward price pressure.
5
SEC_OEA_FCIC_001764