Lots of reasons UB. First of all the uptick rule is a micro solution to a macro problem. The markets can still panic and have a bank run with the uptick rule.
From a hedging perspective is what I mean where it doesn't work. My argument was that short selling is necessary for derivatives markets to function properly. An example:
Someone wants to purchase put options on a stock. They go to market makers to buy these options. Against being short puts, the market makers need to sell shares. If there was just an uptick, the first market maker to the market gets to sell, but the rest are hosed. And if it was a downtick, none of the market makers get to sell shares and they are all hosed. In any case, the incentives to provide liquidity in the options markets has just diminished because market makers risk "missing their hedge." The rule can never go in their favor, it can only go agains them. So if they can only be hurt by this activity, they will require more premium or edge to do a trade - and this is what we all know very well as market inefficiency. The equity derivatives market drys up. Loads of people use the equity derivatives market "legitimately" as a hedge and not for pure speculation. So what have you done, you've taken away people's ability to hedge in an efficient marketplace - you have made the markets as a whole less efficient. This has a contagion effect to all other markets: when one market is less efficient, other related markets become less efficient (market makers require more edge or premium to do a trade) and the inefficiency ripples out into the broader economy.
Punish those who illegally use short selling. Don't punish the market.
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