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Free Article - WSJ.com
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Aug 13, 2007 8:25pm
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•http://online.wsj.com/article/heard_o...
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The markets have been in turmoil in recent weeks as the fallout from soaring defaults on riskier home-mortgage loans spread. Since hitting a record in late July, the Dow Jones Industrial Average has fallen more than 5%, and people looking to sell their holdings, especially bonds, have often had trouble finding buyers.
Another factor some traders say is causing turmoil: an arcane rule change -- referred to as the "downtick" rule -- that kicked into effect in July that makes it easier for investors to bet on stock-price declines. Before July, investors typically had to wait until a stock was actually rising to bet on its downfall.
Lots of selling can feed off itself, prompting nervous investors to sell more, which adds to volatility. Often, heavily shorted stocks can be particularly volatile.
The old rule generally prohibited the shorting of a stock while its price was falling, or experiencing a "downtick" in trader slang. The rule was instituted after the 1929 market crash in order to discourage avalanches of short sales to push a particular stock -- or even the broader market -- precipitously lower.
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