On Feb. 24, 2010, the SEC finally approved restrictions on short selling. Upon a drop in a stock's price of 10 percent or more in a trading day, short selling can occur on the market centers only at a price greater than the national best bid (representing an uptick). While this amendment may take some of the pressure off of the SEC to rein in short selling, the compromise does not satisfy either proponents or antagonists of short sale restrictions.

The proponents of greater short selling restrictions typically are worried about market manipulation or shorting a stock to zero, or believe that selling a stock you don't own is somehow wrong or immoral. The antagonists generally fall into three camps: traders looking for liquidity; practitioners arguing about the impractical nature of policing up-tick restrictions in a penny-spread, fragmented, millisecond-based market; and academics who believe that no clear evidence that up-tick restrictions work.

Before criticizing the SEC, however, the political pressure waged against the regulator must be taken into consideration. The SEC has been under tremendous pressure from Congress to do something after failing to uncover the Madoff debacle or to head off the financial crisis. In addition, the market turbulence of 2008-09 proceeded to give rise to investor and citizen ire directed at regulators. Out of this uproar a number of legislators fixated on short sale restrictions, as any solution that would be perceived as slowing declining asset prices and helping constituents maintain their worth while targeting a not-well-understood practice that people think may be manipulated, wrong or immoral would fall into the trifecta of political success -- even if there is no proof that the elimination of uptick rules hurts companies, the market or the economy.

Nonetheless, neither side of this argument is happy with the release of this Regulation SHO amendment. The proponents of greater restrictions are not satisfied with the 10 percent circuit breaker and want a more rigorous uptick test, believing that greater regulation will reduce market manipulation as well as limit downward volatility. Proponents of fewer restrictions believe that, while a 10 percent circuit breaker is better than anything more rigorous, there is little correlation between an uptick rule and market stability, and there is no proof that the new rule will provide significant value. In addition, those opposed to short sale restrictions believe rule making within a political environment taints the supposedly politically neutral SEC, undermining the commission's credibility and threatening its rule-making ability down the road.

While friends and foes of the latest uptick regulation will fight for years about its outcome, I believe the SEC did a good job of balancing politics and market reality -- not that I am an uptick supporter. The evidence of the ineffectual nature of an uptick rule is strong, and the argument for an uptick restriction is weak. What also was strong, however, was the political pressure to implement an uptick rule.

If the SEC didn't pass something to calm legislative fears, Congress would have (and may still) take stronger, anti-SEC action. While I doubt that Congress would legislate anything so myopic as an uptick test, there is significant pending financial regulation that could be shifted to provide the SEC with a greater -- or diminished -- role in financial regulation moving forward. Far be it from me to know the inside horse trading that happens in Washington, but I am sure that if Congress felt that the SEC was deaf to its wishes, pending legislation could easily be altered to favor another regulator.

While these new short sale restrictions may be ineffective at slowing down the market and expensive for brokers and exchange providers to implement, I am not sure that the SEC at the end of the day had much choice. The larger and unanswered question is: Will the political nature of this decision come back to haunt the SEC and possibly the market?

While one more ineffectual rule will have little market impact, if political pressure is significant enough to change market structure, then where will it stop? Do we rely on political pressure to regulate dark pools and consolidate a fragmented marketplace, or just to ensure that markets can't go down? While keeping political pressure out of market structure decisions may sound good to many market participants, I am not sure that it is in our national best interest, and it certainly is not in the best interest of the SEC.