In early December 2008, the SEC placed my article proposing a remedy for short-selling manipulation on their website for consideration. My solution entailed enacting a simple rule: disallowing short-selling on the bid.
This idea is somewhat different than reinstating the uptick rule in that the latter solution provides that a short sale can only be entered after a trade causes the last price to increase; a short-seller can still short on the bid as soon as the last trade causes the stock price to go up (shorting allowed when the green "U" symbol or neutral "zero plus" shows up on Level 2).
Securities Exchange Act of 1934 Rule 10a-1 -- Short Sales
:
No person shall, for his own account or for the account of any other person,
effect a short sale of any security registered on, or admitted to unlisted trading privileges on, a national securities exchange, if trades in such securities are reported pursuant to an "effective transaction reporting plan" as defined in Rule 242.600 of this chapter and information as to such trades is made available in accordance with such plan on a real-time basis to vendors of market transaction information:
A. Below the price at which the last sale thereof, regular way, was reported pursuant to an effective transaction reporting plan; or
B. At such price unless such price is above the next proceeding different price at which a sale of such security, regular way, was reported pursuant to an effective transaction reporting plan.
My solution would allow shorting at any price and at any time, just not on the bid price, and negates most prevalent kinds of downward manipulation tactics employed by short-sellers to push stock prices lower and lower using a technique called "pinning the bid."
If short-sellers were operating ethically, they would want to short at as high a price as possible, and then have the stock move organically lower. Instead, shorts rely on attacking the bid price until it "caves"- which, in turn, results in longs panicking and selling lower than they would have. And potential longs (the smart ones) simply wait for the "pin the bid" attack (bear raid) to end--which is the point in time when shorts start to feel the bear raid may be overdone, and/or that a short squeeze is overdue.
http://seekingalpha.com/article/123689-sec-exploring-remedies-for-short-selling-manipulation
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