Volatility Index (VIX)
1 Year daily reading

Vix_1_year

Chart via Yahoo

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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!

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Bespoke Group has some words about the Uptick Rule and Its Pilot Period that are worth reviewing. 

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A comment asked for a longer term VIX chart:

click for larger chart
20_year_vix

Category: Options, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

42 Responses to “Impact of Eliminating Uptick Rule”

  1. Andy Tabbo says:

    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.

    AT

  2. Henry says:

    The purpose of this rule in the first place was to prevent the self-perpetuating strategy of “bear raids” (colluding and forcing down the price with the large volume of selling).

    It was working well for seventy years. The exchanges (higher volumes = more money) and hedge funds (easier to short and to manipulate short-term stock prices) have been lobbing the SEC since 1980s to remove this rule and the crooks have succeeded. The SEC has not resolved the naked short selling stock manipulation problem yet, but has already introduced another problem by removing the up-tick rule.

    Congress should investigate the SEC and ask them about their motivations (smells like bribery and corruption).

  3. michael schumacher says:

    You answer your own question with your own anecdotal info.

    >>Meanwhile, I can tell you anecdotally that many of the short firms we deal with are far more willing to cover positions quickly.>>

    Gee…eliminate the short rule and people cover quickly say in a Futures induced market rally perhaps??

    Really BR this is a stretch even for you….

    How you can wonder about what you’ve seen on each and every rally that is always attributed to what?

    Shorts covering. In the past shorts covering did not allow the indexes to hover around the HOD’s for the entire day. This is just another tool used to justify the injection of money to prop the markets.

    As I’ve said before….loading the boat faster allows them to sink it faster.

    AT misses the point ENTIRELY….go ahead and try to compete with an institution…..good luck with that.

    Ciao
    MS

  4. blin says:

    Barry,

    Of all people, you should have put up a longer term graph of the vix. Actually you should have put up the old vix – which is still in exitence and has about 15 years worth of data – called the VXO.

    I was attracted to this website through its name “The Big Picture”. I have vowed to always to search out the macro big picture before committing my dollars to the market. Which also means looking at long term charts.

    When looking at a 10 year chart of the VXO, one can easily see the volatile readings between 99 to the middle of 03. From the middle of 03 to the end of july 07, the activity of the VXO was very muted. Maybe this was the time of the the Greenspan Put, I’m not sure, but the markets refused to correct for more than 10% – it was a very strange time.

    Ever since august of last year, the markets returned to more normalized VXO activity of the past. I actually expect this activity to continue for a couple of more years until the unwinding of credit is complete.

    We might be due for an extreme VIX/VXO reading sometime this year. I don’t blame the uptick rule for the increased volatility but rather the situation in the markets.

    ~~~

    BR: Click the graph, it takes you to the full chart — you can set the time period to whatever you like.

    I’ll post it above

  5. DL says:

    The increase in VIX (summer of 2007) was not related to changes in the uptick rule, in my opinion. The increase was due to an increasing recognition of the worsening credit conditions at that time.
    As for right now, VIX is too low given the pitfalls that are out there. I would be surprised if we don’t revisit the 30 level on the VIX within the next two months.

  6. Ross says:

    It is counter intuitive but I think you’re right.

    It used to take time and patience to build a short position. No uptick makes it a little easier but the real problem I see is the ability to borrow stock. Case in point, Ambac late last year.

    Even with an uptick rule, the number of short ETF’s probably provide enough liquidity. But I agree. Volitility should be higher without that rule. But is that a bad thing???

  7. Andy Tabbo says:

    m. schumacher,

    I do not miss the point. I wasn’t talking about retail schmucks standing up to “shadowy, powerful hedge funds.” The people I hear whining about the uptick are money managers with a lot of investment under management. The point I’m trying to make is there’s a lot of “big boys” out there…and if you’re a money manager and you don’t like what’s happening to your stock because of “bear raid”…then sell some of your bonds and buy the stock…or sell other stocks and focus your powder on what’s getting cheaper. If you’re “right”, then you will make a lot of money within a few months. Shorts can certainly keep pressure on for “a while” but if the company really is producing good free cash flow and is well operated, then those shorts really will have to hit the exits…..if you can’t handle some swings…then you shouldn’t be in the markets.

    AT

  8. Estragon says:

    A cursory glance at a weekly vix chart appears to put the change in trend around February 2007.

    On the face of it, that alone suggests the demise of the uptick rule had nothing to do with the trend change in the vix.

    More generally, the vix measures implied volitility derived from options pricing. If the thesis involves actual volitility, shouldn’t a study of it be directed there?

  9. michael schumacher says:

    then make your point without the histronics…

    your second post says what you tried to say in the first one….the first one comes off as just disagreeing/whining for no apparent reason.

    you still don’t get it though…

    Ciao
    MS

  10. Chief Elf says:

    Re: “Perversely, the initial effect seems to be increased upside volatility!”, I think this is natural. Shorting is done in a leisurely manner over time. Panic short covering occurs ….. in a panic, ergo, increased volatility on the upside.

  11. michael schumacher says:

    options pricing (on the put side) has been ridiculous….what can we determine from that?

    The options writers understand what the rest of the market has failed to even acknowledge….

    That options markets have already priced in the coming haircut (at least in financially related puts) but the rest of the markets either ignore this or whistle past the graveyard.

    That the Vix is this low most likely has a lot to do with the implied pricing of those bank related puts.

    The demise of the uptick rule may not have been the cause however it has a larger affect that the options markets have already priced in….no wonder it remains flat in spite of all the wonderful news we keep getting.

    Ciao
    MS

  12. b says:

    Volatility always increases in market downturns and decreases in more sedate environments.

    Given the limited data set available since uptick rule was removed, there is no statistically valid way of imputing the cost of the removal of the rule in terms of increased volatility.

  13. Mike W. says:

    The pilot study of 1000 stocks was an extremely poor designed study producing misleading conclusions for the following reasons (people with background in statistics know the study was garbage).

    1. Very small sample size that produced not statistically significant results (sample error)
    2. The same short selling hedge funds that have been lobbying the SEC to eliminate this rule knew ahead of the time which stocks not to short for the period of this study (they manipulated the study by manipulating these stocks [easy to manipulate small caps stocks])
    3. The study was not well publicized. Many traders continued shorting these 1000 stocks as up-tick stocks. They did not know that they can short them on a down click and waited for an up-tick before shorting (it distorted the study)

  14. Mike W. says:

    The pilot study of 1000 stocks was an extremely poor designed study producing misleading conclusions for the following reasons (people with background in statistics know the study was garbage).

    1. Very small sample size that produced not statistically significant results (sample error)
    2. The same short selling hedge funds that have been lobbying the SEC to eliminate this rule knew ahead of the time which stocks not to short for the period of this study (they manipulated the study by manipulating these stocks [easy to manipulate small caps stocks])
    3. The study was not well publicized. Many traders continued shorting these 1000 stocks as up-tick stocks. They did not know that they can short them on a down tick and waited for an up-tick before shorting (it distorted the study)

  15. michael schumacher says:

    the bespoke piece says nothing or does not take into account the problem of eliminating the rule in the first place……it only speaks to the doom and gloom mentality of a perma bull who thinks the market is being taken out from underneath them. As if to say that the market will be fine unless those nasty shorts have there way..

    They probably believe that shorts caused the run on BSC as well…

    Pretty amusing

    Ciao
    MS

  16. Mike W. says:

    Looking at the longer-term volatility chart, it is obvious that the RATE (how brisk was the increase in volatility) of volatility increase is much higher this time without the rule (even though the levels of volatility were high; nevertheless, the rate of increase was lower with this rule in place)

  17. SteveC says:

    As I recall, it was the exchanges that pushed for this rule change to increase volume through increased volatility. Volatility has increased, not sure if its related to deteriorating business conditions or the rule change. Volume has been up during the big swings, but much lower lately. As a trader, I like increased volatility.

  18. Emmanuelle says:

    As always, follow the money (how the rich are getting richer by screwing an average Joe-six pack)

    Q: Who has benefitted from higher volatility and higher trading volumes?
    A: Exchanges, prime brokers and hedge funds (a few privileged individuals like John Paulson, George Soros, James Simmons, Philip Falcone, Ken Griffin, Steven Cohen, etc.)

    Q: Who has been milked by the higher volatility?
    A: Retail investors, municipalities, pension funds, etc

  19. Emmanuelle says:

    As always, follow the money (how the rich are getting richer by screwing an average Joe-six pack)

    Q: Who has benefitted from higher volatility and higher trading volumes?
    A: Exchanges, prime brokers and hedge funds (a few privileged individuals like John Paulson, George Soros, James Simmons, Philip Falcone, Ken Griffin, Steven Cohen, etc.)

    Q: Who has been milked by the higher volatility?
    A: Retail investors, municipalities, pension funds, etc

  20. Ross says:

    Emmanuelle,
    You underestimate the great unwashed, myself included.

    “Who has benefited from higher volitility and increased volumes’?………..me.

    Volitility evens out over long periods of time. Trade em if you got em. I too long for upward trending markets but that is so last century.

  21. mhm says:

    The title should be a question: “Impact of Eliminating Uptick Rule?”

    It depends on your point of view. If you think the recent volatility is due to the removal of the uptick… then you giving too little attention to the whole housing, energy, commodity, credit and currency turmoil.

    It might be better to study the ratio of order sizes. Large blocks versus hundreds of round lots. That affects volatility giving the same total volume… (I was involved in capacity planing for a trading system a couple of years ago)

  22. Emmanuelle says:

    “You underestimate the great unwashed, myself included.”

    Honey,

    Nothing personal but you do not count (you are a small tiny fish in the pond). I am talking about billions of dollars (not your relatively tiny lunch money). I doubt you have made a few billion of dollars last year like John Paulson, George Soros, James Simmons, Philip Falcone, Ken Griffin, Steven Cohen, etc.

  23. Alfred says:

    How can the abolition of uptick rule get tangled up with volatility? If anything it should reduce volatility.
    The move in volatility is the result of paying higher option premiums for increased demand for downside protection.

  24. Boris says:

    Barry- can you please tell me what is going on with Amazon.com?? WHy is this stock going up so much?! What does this say about the US CONSUMER? Or does it say the US investor is a moron???

  25. mhm says:

    [OT]

    Looks like the USA will have a (one) national airline company.

    ” American Airlines in talks with Continental, US Airways”
    http://news.yahoo.com/s/nm/20080425/bs_nm/american_dc_1

  26. Ross says:

    Emmanuelle,
    How can you be so cruel? I do not count?
    I am a small fish?

    And about my lunch money. IT”S MINE I TELL YOU, MINE.

    Does this have anything to do with last weekend?

    I used to tell clients that some very wealthy people make poor returns on their investments. So, for several years I’ve had very nice returns on my lunch money. In 99 I did OK and Soros lost $2 billion to the Moscow mafia. It’s all relative.

    P.S.
    Whatever it was that somebody did that you didn’t want done, I didn’t do it!

  27. Steve Barry says:

    I really don’t look at VIX much anymore…prefer 10 day MA on total put/call…in a couple of days, it will be flashing SELLLLLLL…it is .95 now and plunging.

  28. Andy Tabbo says:

    I’m not sure how many of you trade index options, but volatility seems incredibly low right now…if you’re bullish the S&P500, purchasing otm calls seems like a much better way to trade the long side v. outright buying the index….16.6 vol on the 1450 calls?

    The S&P 500 is heading for 1454 as the 61.8 retrace…when this market is trading 1450s….those put options should look like a screaming buy….in a few weeks.

    AT

  29. wunsacon says:

    >>you still don’t get it though…

    MS, what does “it” refer to? I probably don’t get it either…

    >> “You underestimate the great unwashed, myself included.”
    >> Honey,

    Emmanuelle, Ross might be a small fish but he knows too much (a) to be counted as one of the great unwashed and (b) to be called “Honey”!

  30. Steve Barry says:

    There have been only two days of 65 trading days since January 23 that I would characterize as strong volume for QQQQ. Only 7 of those 65 days even cracked the 100 day MA for volume. I don’t have the tools to do a study, but the math guy in my head says this is unprecedented lack of volume. Perhaps the new ultra long and short ETFs are stealing volume. Short interest in individual names also seems very low, some way under 1 day short ratio. Then again the moving avg takes into account only the last 100 samples, so those trends should be baked into the cake.

  31. Karl K says:

    This notion that the uptick rule has caused increased volatility is so beyond absurd that is beyond ridiculous.

    Really, this isn’t that hard. The market is volatile when stocks go down. It is less volatile when stocks go up.

    I think it speaks volumes when Jim Cramer is the leading proponent of reinstating the uptick rule. Yeah, Jim, THAT would have save Bear Stearns.

    Meanwhile, if a somebody wants to be short 1000 shares of a stock in an uptick rule environment, guess what he does?

    He puts in a 100 share long order that’s sure to generate an uptick, and then follow behind with a short for 1100 shares.

  32. Nihilism says:

    Un-restricted access to leverage for banks, Broker-dealers & hedge funds thru’ carry trades, derivatives & structured financing may be what caused the “low” volatility in this brave new global world before this “surge” in volatility since July 2007 when uptick rule was eliminated.

    Here are volatility numbers for “typical” Aggresive Gr (95% in R3K), Growth (80% in R3K) and Growth with Income (60% in R3K) type allocations over last 3, 5 & 10 years!

    Risk (Standard Deviation) * AG G GWI
    3 Year 7.84% 6.54% 4.87%
    5 Year 8.59% 7.21% 5.46%
    10 Year 14.19% 11.85% 8.78%

    Shouldn’t the short-term volatility be higher? My guess is we will get more.

  33. B.B. says:

    Andy T,

    Gotta agree with you…

  34. wunsacon says:

    >> There have been only two days of 65 trading days since January 23 that I would characterize as strong volume for QQQQ.
    >> Posted by: Steve Barry

    Steve,

    This might be a stupid question. But, I’ll ask anyway.

    I read about some newer exchanges that companies are trading on to avoid some amount of monitoring. Are they avoiding tipping their hand to the “volume-confirms-price” crowd?

  35. Steve Barry says:

    Squirells,

    Chinese will stop building for Olympics shortly…since markets look ahead 6 months I am told, Shanghai market has plunged around 50% already as you might expect. There goes your China story, where the average worker makes $2000 a year, which may all go for rice soon. U.S. real GDP has been negative for awhile already if you measure inflation correctly. Housing is in a depression…if housinfg just crashes to 2001 levels, that is 2 million jobs wiped out per my numbers. Good luck with your non-recession call.

  36. Steve Barry says:

    Wunsacon,

    Interesting question…would they be able to avoid reporting short interest? Again, I am judging volume with its own 100 day moving average, so even if your suspicion is somewhat true, it is something that has taken off in a matter of less than 2 months or so…not likely. Something like that would probably start gradually.

  37. Steve Barry says:

    OT:

    Reverend Al Sharpton is going to close down Wall Street to protest the Bell verdicts. I don’t get the connection there…also two of the shooters were black.

    Mr. Sharpton should picket Take Two Interactive instead, which encourages violence that could cause this type of incident.

    Grand Theft Auto 4

  38. What everyone else knows is not worth knowing Steve B. The market has already discounted “We are already in a recession” B.S.; to outperform the averages, you have to know something not widely known (I am giving you a secret, there will be no recession). Stocks are always overvalued during a bull market and extremely undervalued in a bear market. I think you should start buying (pyramid your buys starting with an initial small position and then add to it only if the trade moves in your favor).

    Disclosure: I have called the stock market bottom on this blog when S&P was trading at 1285 (was laughed at and called “clueless” by the perma-bears here, but I do not care), levered 4x and currently fully invested (only 10% cash). Currently, I am closely watching 1400 level. We should get a fake breakout above 1405 (do not buy it) that will wash out buy-stop orders, cause bear covering panic hysteria and will create an opportunity to unload 50% of my positions into the rally. I will re-load only if we see a blast over 1400 that settles back and holds, if not I will trade around my 1x core position.

  39. Steve Barry says:

    Squirrels,

    You are right to try to play what you know that is not widely known…you are playing the no recession card, but have given zero rationale of your own to back that up. I agree there won’t be a typical recession…there will be something much worse and over the weeks have given many reasons for it (overvaluation, housing, China crash, lack of volume on rally, lack of QQQQ short interest, rampant inflation, etc…)

  40. Ross says:

    Quit your bickerin, chilren…

    I admire Jeff Saut a lot but Mr. Market doesn’t care about resessions, near resessions or modest depressions.

    Good luck, Squirrels, but hey man, you’re playing stud poker and you’ve turned over your hold card! Whaz up wit dat? Hubris?

  41. kimphat says:

    It has been 204 days since the no-uptick rule was repealed (7/6/07). According to the SEC, the uptick rule was put in place in 1938. One way to look at volatility is actual stdev of returns. Using DJIA daily return data 1939-2008, determined stdev of daily returns for each of the(non-overlapping) 204 day periods.

    It turns out the current (post-no-uptick) period ranks 11th out of 86 such periods,
    which though in the top 13% does not appear unusual enough to argue the rule’s repeal is anything more than partially causal. Here are the top 20 periods:

    Date 204 sd
    03/10/88 0.0243
    05/05/75 0.0152
    06/24/03 0.0151
    09/03/02 0.0145
    06/21/40 0.0143
    11/09/01 0.0140
    06/09/99 0.0137
    05/16/83 0.0131
    07/16/74 0.0128
    08/29/39 0.0124
    04/25/08 0.0122
    01/17/01 0.0120
    03/28/00 0.0119
    12/23/46 0.0117
    10/27/97 0.0116
    05/28/91 0.0113
    02/26/63 0.0109
    08/18/98 0.0104
    05/21/87 0.0104
    07/08/70 0.0102

  42. Jason Green says:

    The real reason Wall Street types don’t like the elimination of the uptick rule is that it opens up short selling to non-professional investors.

    The professionals don’t like that. They want non-pros to be limited in what they do, and just buy long and hold, while the pros jerk the market all over the place with program trading and short the market only when they see fit.

    It didn’t really come to me until I heard someone on CNBC say how the elimination of the uptick rule made the ETFs that shorted much more effective. If someone wants to short oil, they can use DUG or DCR. I’d like to see a commodity short ETF and one for gold.