Obscure Rule Change Blamed for Wild Market

'Downtick' regulation helped check stock free falls
By Peter Fearon,  Newser Staff
Posted Aug 14, 2007 1:22 AM CDT
Obscure Rule Change Blamed for Wild Market
Specialist James Maher, left, directs trading in shares of Countrywide Financial on the floor of the New York Stock Exchange, Friday, Aug. 10, 2007. The Calabasas, Calif.-based lender in a filing with the Securities and Exchange Commission Thursday cited "unprecedented disruption" in the trading markets...   (Associated Press)

A change in an arcane rule governing stock trading is being blamed for some of the recent volatility in the stock market, the Wall Street Journal reports. For more than 75 years, the "downtick rule" prevented traders from shorting a stock as the price fell. Its repeal last month coincided with some wild swings in the market.

Short sellers borrow shares and sell them, betting the price will fall and that they'll be able to repurchase them for less for return to the lender. The downtick rule was established to check cascading short sales that could destroy a stock. "They quietly changed the ground rules," said one trader. "There's no question it's been an aphrodisiac for volatility." (More SEC stories.)

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