Are the ups and downs in the stock market making you crazy? Do you avert your eyes when the financial news comes on because the gyrations in your portfolio nauseate you?

These may be extreme reactions, but there’s no doubt that the volatility in the stock market has increased, and not everyone is happy about it. Birinyi Associates, a research and money management firm that specializes in examining trading anomalies, pins the blame for the heightened stock price swings squarely on the removal of the so-called uptick rule on July 6, 2007.

A chart that tracks the VIX index over the past year shows that, sure enough, the price of that measure of stock price volatility moved significantly higher after the uptick rule was removed. Having spent the early months of last year trading between 10 and 20, the VIX (^VIX 25) closed on July 6 at 14.72; by the end of the month it had surpassed its high earlier in the year and closed at 21. For the balance of the year it mostly traded in the mid- to high 20s, topping 30 on two occasions. Birinyi also plots the average daily absolute change of S&P 500 shares, another indicator of volatility, and it, too, moved into higher gear once the uptick rule was dropped. Are the two events connected?

A Birinyi associate, Clive Ruekert, says work done by the group leads it to speculate that “a lot of big [market] moves have been the result of the market being flooded with sales” — sales that might not have been made under the former rules. Until last July, traders could sell a stock short only if the last transaction had been at a higher price (or uptick). The rule, in place since the 1930s, was supposed to prevent short sellers from “piling on” and creating a cascading decline in a stock.

The Securities and Exchange Commission performed a “test” with the stocks of the Russell 1000 in the two years leading up to last summer’s decision, and it was satisfied that the impact to the overall stock market would not be meaningful. However, the staff did report that the rule change “is associated with an increase in some measures of intraday volatility” and mentioned that smaller stocks in particular were likely to experience greater gyrations. The staff also concluded that traders “with manipulative intentions might be on good behavior if they believe that heightened scrutiny during the Pilot increases their chances of being caught.” In other words, maybe the test wasn’t so realistic after all.

Is increased volatility a good thing or a bad thing? That depends on whom you ask. The management of a company that’s trying to figure out financing alternatives will undoubtedly complain that having the stock bounce around 10% from high to low each day makes planning a little difficult. A hedge fund manager who pined for arbitrage opportunities in 2006 when the market was as calm as a glassy sea is no doubt ecstatic to be riding the waves once again. The exchanges, including the Chicago Board Options Exchange, which trades the VIX, the brokers — they are all delighted with higher volatility. Greater market fluctuations create opportunities for nimble investors and create volume, the bread and honey for the exchanges.

What about the individual investor? The editor of BetterInvesting magazine, Adam Ritt, is about as close to a spokesman for the little guy as one can find. Mr. Ritter’s organization has about 110,000 members who belong to some 11,000 investment clubs across the country. His view? “Individual investors don’t like volatility, mainly because of the psychological impact.” Mr. Ritt says individuals increasingly are responding to the market’s unpredictability by investing with mutual funds instead of going it alone, looking for greater stability and diversification.

Of course, the little guy is also responding to the drubbing he took when the tech bubble burst and his portfolio ended up looking like shredded lettuce. Before the collapse, there were some half million members of BetterInvesting.

A spokesman for the New York Stock Exchange, Scott Peterson, refutes the notion that the uptick rule alone has boosted volatility. He claims that a “perfect storm” of factors led to the increase. He points out that while on July 6 the SEC removed the limits on short selling, on July 9 the first phase of Regulation NMS went into effect, increasing the pace and scope of trading, and in November the exchange adopted its current “hybrid” model, effectively encouraging electronic trading, which now accounts for some 85% of overall trading.

He also points out that midsummer was when the subprime mortgage crisis began to seep into the nation’s consciousness, jolting investor confidence. Certainly the flow of bad news picked up last summer. Rising uncertainty on its own could account for some gain in the VIX.

In other words, there have been a lot of changes taking place in the trading and the investing landscape. Mr. Ruekert says that the SEC changed the rule because “there’s a lot of concern that the U.S. is falling behind in the way our markets are regulated; this was an effort to stay competitive. It gives large funds more freedom to execute program trades.”

That may be true, but if the heightened volatility persists, the SEC may want to take another look. At the moment, an SEC spokesman says it has no plans to review the rule change, and that it has not seen any studies that argue for a reversal.

They may be distracted. The growth of “dark pools,” or trading venues off the radar screen of the SEC, continues apace. There are now 40 such platforms, including a new one from the NYSE Euronext called MatchPoint. The exchange describes this new trading opportunity as providing “the best environment for finding natural opaque block liquidity.” So much for the calls for transparency.

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