Dion Harmon and Yaneer Bar-Yam, Technical report on the SEC uptick repeal pilot, NECSI Technical Report 2008-11 (November 18, 2008).
The rapid decline of value of individual corporations and the stock market as a whole in 2008 has been variously blamed on changes in fundamental value or selling of borrowed securities (short selling) exaggerating the loss of value of mortgage-backed securities. Here we reanalyze the decision of the Securities and Exchange Commission (SEC) to repeal a rule constraining short selling (the “uptick rule”) in July of 2007. This rule was implemented in 1938 following the market crash of 1929 and the early 1930s. We find that a pilot study performed by the SEC prior to the repeal was incorrectly analyzed and actually demonstrated an economically and statistically significant impact of the uptick rule consistent with the dramatic effects observed following its repeal. Our results suggest that the uptick rule should be restored.