The uptick rule is a former rule established by the SEC as part of the Securities Exchange Act of 1934. Also known as Rule 10a-1, it required that every short sale transaction be entered at a price that was higher than that of the previous trade, i.e. it only permitted short sales when stock prices were stable or rising. Created in the wake of the stock market crash of 1929, it was intended to prevent short selling in a declining market.
The uptick rule did not apply to certain types of financial instruments such as futures, single stock futures, currencies or ETFs such as the QQQQ or SPDRs. Because these instruments are highly liquid, there are generally enough buyers willing to take a long position, thereby preventing the price from being driven down too far.
In March 2009, amid blame for the rapid decline of many stocks over the past couple of years, the Securities and Exchange Commission said it would consider bringing back the uptick rule. On March 24, NYSE Euronext, Nasdaq OMX Group Inc. and Bats Exchange Inc. proposed bringing back a modified version of the uptick rule, which would apply to stocks that had fallen a certain amount, such as 10 percent. It would be used in conjunction with a circuit breaker that would kick in if a stock's value dropped sharply.
The SEC responded by proposing two short-selling restrictions; one that would apply on a permanent, market-wide basis, and one that would only apply to a particular security in case of a severe decline in value. The market-wide restriction would be a modified uptick rule, as the exchanges suggested, based on the national best bid, or a reinstatement of the old uptick rule, which is based on the last sale price or tick.
For the temporary security-specific restriction, the SEC proposed a circuit breaker that, if a particular security's value were to drop severely, would either ban short-selling in the security for the rest of the day, impose the national best bid uptick rule for the security for the rest of the day, or impose the last sale price uptick rule on the security for the rest of the day.
In the end, the SEC voted 3-2 in favor of what is known as the alternative uptick rule.
- "How to Handle the Uptick Rule Removal". TheStreet.com.
- SEC May Reconsider 'Uptick Rule'. The Wall Street Journal.
- U.S. Exchanges Propose Rule to Restrict Short Selling. Bloomberg.
- SEC explores new US short-selling restrictions. The Trade News.