Arguing Against the Uptick Rule
Exone Company (XONE) lowered guidance after the bell tonight. 3D Systems (DDD) immediately started getting whacked on the news in sympathy, but Stratasys (SSYS), another sympathy play, was slow to respond.
Some might argue that SSYS lowered guidance earlier this morning and their down move was already priced in, but this was not the case. In fact, the stock could not immediately trade lower on the XONE lowered guidance due to the uptick rule.
Yes, the uptick rule still exists, but it only applies in certain situations. The uptick rule still applies if a security drops by more than 10% (which SSYS did today). So nobody can short the stock without an uptick for the remainder of the day (and the following day).
But this rule actually interferes with the natural price discovery process, and uninformed investors can be punished as a result.
Let’s dive into the details of the SSYS trading action after the bell:
The XONE news breaks shortly after 16:05, and everyone gangs up on the offer at $119.06 to try to short SSYS (myself included). You can see how the offer builds in this image:
Then some unfortunate traders decide to place buy orders for the stock and are executed against the $119.06 offer (My offer was not one that was executed).
These traders are completely uninformed because the SSYS price has not fully adjusted for the news, and cannot adjust until a natural seller sells the stock which happens here:
The price drops to $119, and informed traders gang up on the offer again at $119.01 trying to get short:
Eventually another natural seller comes in and the stock falls down to a price of $116 a few minutes later.
My issue here is with the unfortunate buyer of the stock at $119.06. Had the uptick rule not been in place, the SSYS price would have been able to adjust much more quickly, and the unfortunate traders that bought the stock at $119.06 would have likely gotten a much better price.
This is a good example of why we should not reinstate the uptick rule, and in my opinion the rule shouldn’t exist at all as it slows down the price discovery process.
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