Reinstatement of the uptick rule is essential to rein in these abuses and restore much-needed stability and confidence to our financial markets, the statement said.
Although reinstatement of the rule is still up to the SEC, and Congress has not traditionally taken to forcing the SEC to make rules, Mr. Ackerman's proposal is seen by many as a step in the right direction.
The basic argument is that if traders are restricted from betting that stock prices will decline, the markets will stop falling, or at least stop falling so rapidly.
This is the same kind of thinking that led to a temporary ban on short selling of nearly 1,000 financial-industry stocks after the markets started crashing in September.
Since then, several academic studies have shown that the short-sale bans introduced in varying degrees in 17 countries have had no measurable positive effect on the markets. In fact, the bans have not prevented protected financial-stock prices from declining more than the overall market.
The good news is, the ban didnt cause any lasting damage, said Charles Jones, chairman of the finance and economics division at Columbia Business School, part of Columbia University in New York.
He sees the uptick rule as more of the same line of thinking, but with fewer negative consequences.
When the uptick rule was in place, most short-sellers considered it a minor nuisance, he said.
According to the SEC, which evaluated the rules effectiveness for more than three years prior to its repeal, the core provisions of the 1938 uptick rule designed to prevent bear raids were no longer a match for the modern stock market.
After decades of granting general and specific rule exemptions to keep pace with changes in products, practices and systems, the SEC concluded that the rule no longer made sense. The conversion of stock market pricing from eighths of a dollar to pennies in 2001 was the final straw.
The introduction of what is commonly known as decimalization made it too easy to create an uptick, said Charles Gradante, managing principal of Hennessee Group LLC in New York, which advises institutional investors on hedge fund allocations. One of the reasons the SEC dropped the rule is that it was too easy to manipulate, he said.
Mr. Gradante favors reinstating the rule with revisions that might make it more difficult to circumvent.
Some suggestions include prohibiting a short sale by anyone who purchases the same stock during the same trading day, or requiring a certain percentage increase before a stock can be shorted, he said.
According to SEC spokesman John Heine, the commission is not currently considering reinstating the rule.
Mary Schapiro, the new chairwoman of the SEC, has stated that she favors reinstating the uptick rule, according to published reports.
Curiously, reinstating the uptick rule has drawn a muted reaction from the hedge fund industry the segment of the financial markets most associated with short-selling practices.
The Alternative Investment Management Association in London declined to comment on the proposed rule change.
Many short sellers, however, would prefer the constraints of an uptick rule to another outright ban on short selling.