by Ofuoma Odje

Created on: April 14, 2009   Last Updated: April 21, 2009

On the recent market crash, the uptick rule established after the 1929 crash, may have contributed to the recent market declines.

Not acting quickly to restore this rule may still be costly to the markets.

It is clear that massive shorting of stocks of major financial institutions by big hedge funds and other big investors were a catalyst to the current financial crisis.

Even worse was the illegal naked shorting these stocks. Usually when shorting a stock the trader or investor borrows the stock on margin and sells in the market with the expectation that the stock price will go down in the future in which case he would buy and return the stocks but keep the difference as profit.

Naked shorting however is a practice of selling the stock without borrowing or owning them to ensure that the transaction can be completed within the required time frame. This is pure speculation and can be used to manipulate the market.

Naked shorting sometimes leads to a result known as a "fail to deliver, which means the seller does not obtain the shares within the required time frame. However the damage to a stock price would have been complete at that stage.

One way to realize how damaging this practice can be to the financials is highlighted in this scenario.

Take a blue-chip company like Coca Cola or say Johnson and Johnson.

If the stocks of these 2 companies are shorted and go down to extremely low levels, people will still continue to buy and drink coke and use baby care products, Listerine mouthwash etc because these are essentials, therefore the companies will still continue to conduct business as usual even at low stock prices.

However, when stocks of banks are shorted and go to very low levels, people get concerned and begin a run on the banks because they are concerned about the safety of their deposits.

This in turn diminishes the banks' financial posture in addition to market cap lost by the price drop in stock. It even goes on to hurt their credit rating with the rating agencies who could downgrade the bank's bonds(debt) to junk status and increases cost of credit to the bank who are often asked to put up more assets as collateral against its debt since a loss in market cap would hurt any debt secured by its stock.

Also small investors see their trading accounts and 401ks take a big hit. In extreme cases the bank gets seized by the FDIC and the deposits are sold to a healthier bank and the common equity holders are left holding the bag. The demise of Washington Mutual was one

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