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McGroarty/Reaugh: Time to Do Away with Uptick Rule to Unleash Canada’s Resource Sector

The new year typically is the time for people to reflect on the preceding twelve months and make resolutions for the new year.  In an exclusive to the Vancouver Sun, our very own Daniel McGroarty, who serves on the advisory board of mining company American Manganese, joins ARPN expert and CEO of American Manganese, in reviewing 2015 as what may well be one of the worst years for the Canadian financial market.

Having posted the world’s third-worst decline, the Canadian financial market now has the dubious honor of having one of the world’s worst investment markets, a distinction it shares with “Europe’s economic basket case” Greece.

Reaugh and McGroarty argue that pointing the finger at the challenging overall climate in global resource market, which undoubtedly impacts Canada’s resource extraction-driven economy, captures only part of the issue. The underlying problem for Canadian companies, they say, is the end of the “uptick trading” rule – a financial market rule with a proven track record of restoring sanity for struggling markets.

Explain Reaugh and McGroarty:

“For reasons never fully explained to the public, regulators reacted to the aftermath of the 2008-09 financial meltdown by scrapping the uptick rule.

The change ushered in a kind of wild-west trading that no Canadian under 80 years old has seen in his or her lifetime. Here’s how it works. Speculators now don’t have to own a share of stock to sell short — they’re free to hit the bids with non-existent shares until the price crumbles. Eventually long-term shareholders feel pressed to sell, allowing the traders to cover their short position — pocketing investor money that could have gone to financing the company. And the company goes on life support without any regard to market fundamentals, or global demand for the resource in question.

The damage to the Canadian economy is considerable. Approximately 100,000 jobs have been lost directly and indirectly from the demise of the Venture Exchange — and who knows how many from the TSX itself?”

Pointing to the United States’ recent positive experience with at least partially reinstating the previously-ditched uptick rule in 2010 – a move that has helped the DOW climb significantly by over 7,500 points – Reaugh and McGroarty call on Canadian regulators to reinstate the rule for Canada so that the resource sector, and other key industries can unleash their full growth potential.

They say “Out with the old, in with the new” - for the sake of restoring market discipline to the resource sector, now would be a good time for Canadian regulators to reverse course and make reinstating the uptick rule their new year’s resolution for 2016.