the shares. Now we are theoretically long the stock and can therefore sell it
without waiting for the uptick. This loophole has, however, been detected
and is now disallowed by the SEC.
In another approach to circumvent the uptick rule, one may also enter
into a stock swap, receiving the acquirer’s stock in exchange for cash. Now
we are long the stock and can therefore sell the stock without the uptick rule
restriction. To settle, we buy the acquirer’s stock in the market and return it
or pay the stock returns. In turn, we would receive LIBOR with a haircut.
Notice that this is similar to short selling except that we pay a premium for
the stock.
SUMMARY
The arbitrageur normally executes the paired transaction through a
broker.
Verifying the executions by pairing them is an approach fraught with in-
consistencies. It makes sense for the arbitrageur to insist on a firm aver-
age spread or better.
It is possible to put on a spread position during the pricing period and
be perfectly hedged. In such situations, however, the exact position size
of the target stock is gradually revealed.
Putting on a spread position typically involves a short sale and must be
executed in accordance with the uptick rule.FURTHER READING MATERIAL
On Linear Programming and Network Flows
Chavatal, Vasek. Linear Programming. (New York: Freeman, 1983).
Trade Execution 167