Oh come on. The uptick rule?<p>Great example of a thought experiment used to contradict the results of experiments actually carried out under real circumstances. (+ 5 points: <a href="http://math.ucr.edu/home/baez/crackpot.html" rel="nofollow">http://math.ucr.edu/home/baez/crackpot.html</a>)<p>Letting traders, market makers, and other market participants make bets on the value of a stock is vitally important. Liquidity is a good thing, highly informed markets are a good thing.<p>Is it really so terrible that insolvent companies' stocks go down?
Summary of the article: the elimination of the uptick rule is responsible (<a href="http://en.wikipedia.org/wiki/Uptick_rule" rel="nofollow">http://en.wikipedia.org/wiki/Uptick_rule</a> has some good background).<p>This is all new to me, and sounds compelling, but I have a question. If the elimination of the uptick rule in mid-2007 is exacerbating market volatility, why don't the market authorities (NYSE, NASDAQ) reinstate the uptick rule on their own?<p>Is it that they aren't allowed to make their own rules, within the SEC's regulatory oversight? Perhaps they see the increased volatility as a good thing for them? Are they so spooked by the current economic weather that they don't see the larger picture?
There are many, many different models that can <i>explain</i> economic instability. It is much harder for a model to <i>predict</i> what would happen if you changed a rule. In particular the uptick rule is the sort of thing that could easily have drastically different effects in a model than in real life, since it is focused on stopping "panics".