What Is the Uptick Rule?
The Uptick Rule (also known as the "plus tick rule") is a rule established by the Securities and Exchange Commission (SEC)that requires short sales to be conducted at a higher price than theprevious trade.
Investors engage in short sales when they expect a securities price to fall. The tactic involves selling high and buying low. While short selling can improve market liquidity and pricing efficiency, it can also be used improperly to drive down the price of a security or to accelerate a market decline.
Key Takeaways
- The SEC's Uptick Rule requires short sales to be conducted at a higher price than theprevious trade.
- There are limited exemptions to the rule.
- A revised rule implemented in 2010 lets investors exit long positions before short selling is triggered.
Understanding the Uptick Rule
The Uptick Rule prevents sellers from accelerating the downward momentumof a securities price already in sharp decline. By entering a short-sale order with a price above the current bid, a short seller ensures that an order is filled on an uptick.
The original rule was introduced by the Securities Exchange Act of 1934 as Rule 10a-1 and implemented in 1938. The SEC eliminated the original rule in 2007, but approved an alternative rule in 2010. The rule requires trading centers to establish and enforce procedures that prevent the execution or display of a prohibited short sale.
The Alternative Uptick Rule
The 2010 alternative uptick rule (Rule 201) allows investors to exit long positions before short selling occurs. The rule is triggered when a stock price falls at least 10% in one day.At that point, short selling is permitted if the price is above the current best bid. This aims to preserve investorconfidence and promote market stability during periods of stress and volatility.
The rule's "duration of price test restriction"applies the rule for the remainder of the trading day and the following day. It generally applies to all equity securities listed on a national securities exchange, whether traded via the exchange or over the counter.
The Uptick Rule is designed to preserve investorconfidence and stabilize the market during periods of stress and volatility, such as a market "panic" that sends prices plummeting.
Exemptions to the Rule
For futures, there are limited exemptions to the uptick rule. These instruments can be shorted on a downtick because they are highly liquid and have enough buyers willing to enter into a long position, ensuring that the price will rarely be driven to unjustifiably low levels.
To qualify for the exemption, the futures contract must be deemed to be "owned by the seller." This means that according to the SEC, that the person "holds a security futures contract to purchase it and has received notice that the position will be physically settled and is irrevocably bound to receive the underlying security.”
FAQs
The Alternative Uptick Rule
What is the uptick rule for short selling? ›
Under the short-sale rule, shorts could only be placed at a price above the most recent trade, i.e., an uptick in the share's price. With only limited exceptions, the rule forbade trading shorts on a downtick in share price. The rule was also known as the uptick rule, "plus tick rule," and tick-test rule."
What is the SEC rule 201 for short selling? ›
Rule 201 is triggered for a stock when the stock's price declines by 10% or more from the previous day's close. When a stock is triggered, traders can only execute short sales of the stock above the National Best Bid (NBB) price.
Can the SEC ban short selling? ›
The US's Long Story on Shorts
The SEC adopted its uptick rule in 1938 to combat unrestricted short selling. Known as Rule 10a-1, the regulation forbids shorting a stock unless the last trade was at a higher price than the previous trade, which was meant to slow the momentum of a security's decline.
How do you calculate short sale restrictions? ›
According to the short sale restriction rule, traders cannot short a stock on a downtick that has already fallen by more than 10% versus the closing price of the prior session.
What is the new rule for short selling? ›
The new rule will require investors to implement systems that permit them to monitor their daily short position and related activity in order to timely file any required Form SHO.
What is the SEC short sale rule? ›
The SEC's Uptick Rule requires short sales to be conducted at a higher price than the previous trade. There are limited exemptions to the rule. A revised rule implemented in 2010 lets investors exit long positions before short selling is triggered.
What is SEC Rule 105 short selling? ›
As currently in force, Rule 105 prohibits any person from purchasing securities from an underwriter or broker-dealer in a firm commitment equity offering if that person had previously sold short the security that is now the subject of the offering during the Rule 105 restricted period (i.e., the shorter of the period ( ...
What is the 2.50 rule for shorting? ›
The $2.50 rule is a rule that affects short sellers. It basically means if you short a stock trading under $1, it doesn't matter how much each share is — you still have to put up $2.50 per share of buying power.
When was the uptick rule removed? ›
The uptick rule was repealed in July, 2007, and the alleged bear raid took place in November, 2007. This paper has an addendum based on additional data provided by the NYSE for short sells during the time period that in fact the uptick rule would not have prevented what occurred.
The Securities and Exchange Commission today adopted new Rule 13f-2 to provide greater transparency to investors and other market participants by increasing the public availability of short sale related data.
What are the short selling regulations 2024? ›
It provides the FCA with powers to restrict short selling in certain circ*mstances to prevent a disorderly decline in the price of a financial instrument or in response to a serious threat to financial stability or market confidence. 6.
What are the restrictions on short selling? ›
The implementation of the Short Selling Framework allowed both retail and institutional investors to engage in short selling. However, the Short Selling Framework expressly prohibits naked short selling and requires investors to mandatorily honor their obligation of delivering the securities at the time of settlement.
What is the uptick rule? ›
The uptick rule is a regulation requiring any short sale to take place at a higher price than the stock's last trading price if that stock is down 10% or more from the last trading day's closing price. It was put in place by the Securities and Exchange Commission (SEC) in 2010.
What triggers a short sale restriction? ›
Practical Example of a Short Sale Restriction
For example, if a stock's price falls by 10% from its closing price on the previous day, the SSR is triggered. This means that traders can only execute a short sale at a price higher than the current highest bid, preventing them from contributing to the stock's decline.
What is the formula for short sales? ›
How to Calculate a Short Sale Return. To calculate the return on any short sale, simply determine the difference between the proceeds from the sale and the cost associated with selling off that particular position. This value is then divided by the initial proceeds from the sale of the borrowed shares.
What is the $2.50 rule in shorting? ›
The $2.50 rule is a rule that affects short sellers. It basically means if you short a stock trading under $1, it doesn't matter how much each share is — you still have to put up $2.50 per share of buying power.
What is the maximum gain when you short sell a stock? ›
The maximum profit you can make from short selling a stock is 100% because the lowest price at which a stock can trade is $0. However, the maximum profit in practice is due to be less than 100% once stock-borrowing costs and margin interest are included.
Is there a limit on short selling? ›
There is no time limit on how long a short sale can or cannot be open for. Thus, a short sale is, by default, held indefinitely.
What is the limit on short sale? ›
Short selling limits maximum gains while potentially exposing the investor to unlimited losses. A stock can only fall to zero, resulting in a 100% loss for a long investor, but there is no limit to how high a stock can theoretically go.
