The uptick rule is a trading restriction that states that
short selling
In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the a ...
a stock is allowed only on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price when the most recent movement between traded prices was upward (i.e. the security has traded below the last-traded price more recently than above that price).
The
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) defined the rule, and summarized it:"''Rule 10a-1(a)(1)'' provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions."
The rule went into effect in 1938 and was removed when ''Rule 201
Regulation SHO
Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed. When the seller does not obtain the asset and deliv ...
'' became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08. A modified form of the rule, known as a short-sale restriction, was adopted on 2010-02-24.
United States
Origin
In 1938, the
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) adopted the uptick rule, more formally known as
rule 10a-1', after conducting an inquiry into the effects of concentrated short selling during the market break of 1937. The original rule was implemented when
Joseph P. Kennedy, Sr.
Joseph Patrick Kennedy (September 6, 1888 – November 18, 1969) was an American businessman, investor, and politician. He is known for his own political prominence as well as that of his children and was the patriarch of the Irish-American Ken ...
was SEC commissioner.
In 1994, the
NASD and
Nasdaq
The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
adopted their own short sale price tests, known as NASD Rule 3350, based on the last
bid rather than on the last reported sale.
In 1978, the purpose of the uptick rule was described in a standard text "It was not unusual
rior to 1934to discover groups of
speculators
In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.)
Many s ...
pooling their
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
and selling short for the sole purpose of driving down the stock price of a particular security to a level where the stockholders would
panic
Panic is a sudden sensation of fear, which is so strong as to dominate or prevent reason and logical thinking, replacing it with overwhelming feelings of anxiety and frantic agitation consistent with an animalistic fight-or-flight reactio ...
and unload their fully owned shares. This, in turn, caused even greater declines in value."
SEC actions commencing in 2004 leading to the end of the uptick rule
"In 2004, the Commission initiated a year-long pilot that eliminated short sale price test restrictions from approximately one-third of the largest stocks. The purpose of the pilot was to study how the removal of such short sale price test restrictions impacted the market for those subject securities.
Short sale data was made publicly available during this pilot to allow the public and Commission staff to study the effects of eliminating short sale price test restrictions. Third-party researchers analyzed the publicly available data and presented their findings in a public Roundtable discussion in September 2006. The Commission staff also studied the pilot data extensively and made its findings available in draft form in September 2006, and final form in February 2007.
At the time the SEC acted in 2007, two different types of price tests covered significant numbers of securities. The Nasdaq "bid" test, based on the national best bid, covered approximately 2,900 Nasdaq securities in 2005 (or 44 million short sales). The SEC's former uptick test (former Rule 10a-1), based on the last sale price, covered approximately 4,000 exchange-listed securities (or 68 million short sales)."
Elimination of the uptick rule
Effective July 3, 2007, the Commission eliminated former Rule 10a-1 and added Rule 201 of Regulation SHO, prohibiting any SRO from having a short sale price test.
The SEC concluded from the study cited above: "The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test."
In addition, the Commission stated its belief that the amendments would bring increased
uniformity to short sale regulation, level the playing field for market participants, and remove an
opportunity for regulatory arbitrage.
Commenting on the scrapping of the uptick rule, ''The Economist'' reported that "short-sellers argue
twas largely symbolic, and it remains in place at only a few of the world's big stock exchanges."
Calls for reinstatement
On August 27, 2007, the ''New York Times'' published an article on
Muriel Siebert, former
state banking superintendent of New York, "Wall Street veteran and financial sage", and, in 1967, the first woman to become a member of the
New York Stock Exchange
The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed c ...
. In this article she expressed severe concerns about
market volatility
In finance, volatility (usually denoted by ''σ'') is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns.
Historic volatility measures a time series of past market prices ...
: "We've never seen volatility like this. We're watching history being made." Siebert pointed to the uptick rule, saying, "The S.E.C. took away the short-sale rule and when the markets were falling, institutional investors just pounded stocks because they didn't need an uptick."
On March 28, 2008
Jim Cramer
James Joseph Cramer (born February 10, 1955) is an American television personality and author. He is the host of ''Mad Money'' on CNBC and an anchor on ''Squawk on the Street''. A former hedge fund manager, founder, and senior partner of Cramer ...
of
CNBC
CNBC (formerly Consumer News and Business Channel) is an American basic cable business news channel. It provides business news programming on weekdays from 5:00 a.m. to 7:00 p.m., Eastern Time, while broadcasting talk sho ...
offered the opinion that the absence of the uptick rule harms the stock market today. He claimed that reintroducing the uptick rule would help stabilize the banking sector.
On July 3, 2008
Wachtell, Lipton, Rosen & Katz
Wachtell, Lipton, Rosen & Katz is an American law firm in New York City. The firm is known for corporate law, regularly handling large and complex transactions. On both a profit per lawyer, and profit per equity partner basis, it is the most p ...
, an adviser on mergers and acquisitions, said short-selling was at record levels and asked the SEC to take urgent action and reinstate the 70-year-old uptick rule.
On November 20, 2008, they renewed their call stating "Decisive action cannot await ... a new S.E.C. Chairman. ... There is no tomorrow. The failure to reinstate the Uptick Rule is not acceptable."
On July 16, 2008, Congressman
Gary Ackerman
Gary Leonard Ackerman (born November 19, 1942) is an American retired politician and former U.S. Representative from New York, serving from 1983 to 2013. He is a member of the Democratic Party. On March 15, 2012, Ackerman announced that he wou ...
(D-NY), Congresswoman
Carolyn Maloney
Carolyn Jane Maloney (née Bosher, February 19, 1946) is an American politician serving as the U.S. representative for since 2013, and for from 1993 to 2013. The district includes most of Manhattan's East Side, Astoria and Long Island City i ...
(D-NY) and Congressman
Mike Capuano
Michael Everett Capuano ( ; born January 9, 1952) is an American politician and attorney who served as a U.S. Representative from Massachusetts from 1999 to 2019. A Democrat, his district included the northern three-fourths of Boston, as well a ...
(D-MA) introduced H.R. 6517, "A bill to require the Securities and Exchange Commission to reinstate the uptick rule on short sales of securities."
On September 18, 2008, presidential candidate and Senator
John McCain
John Sidney McCain III (August 29, 1936 – August 25, 2018) was an American politician and United States Navy officer who served as a United States senator from Arizona from 1987 until his death in 2018. He previously served two terms ...
(R-AZ) said that the SEC allowed short-selling to turn "our markets into a casino." McCain criticized the SEC and its Chairman for eliminating the uptick rule.
On October 6, 2008, Erik Sirri, director of the Securities and Exchange Commission's Division of Trading and Markets, said that the SEC is considering bringing back the uptick rule, stating, "It's something we have talked about and it may be something that we in fact do."
On October 17, 2008, the New York Stock Exchange reported a survey with 85% of its members being in favor of reinstating the uptick rule with the dominant reason to "help instill market confidence".
On November 18, 2008, ''
The Wall Street Journal
''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' published an opinion editorial by
Robert Pozen
Robert Charles Pozen known as "Bob" (born 1946) is an American financial executive with a strong interest in public policy. Pozen currently teaches executives about how to be more productive and serves as an executive coach and mentor, www.bobpozen ...
and
Yaneer Bar-Yam
Yaneer Bar-Yam (born 1959) is an American scientist and activist specializing in complex systems. An expert in the quantitative analysis of pandemics, he advised policy makers on the Western African Ebola virus epidemic and founded EndCoronavir ...
describing an analysis of the difference between regulated and unregulated stocks during the SEC pilot program. By using an analysis they claimed to be more comprehensive than the SEC's original study, they showed that unregulated stocks have lower returns, with a difference that is both statistically and economically significant. They also reported that twice as many stocks had greater than 40% drops in corresponding 12 month periods before and after the repeal.
On January 20, 2009, Ackerman received a letter from Chairman Cox—written the day he left the SEC—in which Cox said he supports the reinstatement of an uptick rule. The letter reads, "I have been interested in proposing an updated uptick rule. However, as you know, the SEC is a commission of five members. Throughout 2008 there was not a majority interested in reconsidering the 2007 decision to repeal the uptick rule, or in proposing some modernized variant of it. I sincerely hope that the commission, in the year ahead, continues to reassess this issue in light of the extraordinary market events of the last several months, with a view to implementing a modernized version of the uptick rule."
On February 25, 2009,
Chairman of the Federal Reserve
The chair of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Federal Reserve Board of Governors, Board of Governors of the Federal Reserve System. The chair shal ...
,
Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
in testimony before the
House Financial Services Committee
The United States House Committee on Financial Services, also referred to as the House Banking Committee and previously known as the Committee on Banking and Currency, is the committee of the United States House of Representatives that oversees t ...
stated he favored the SEC examining restoring the uptick-rule.
On March 10, 2009, the SEC and Congressman
Barney Frank
Barnett Frank (born March 31, 1940) is a former American politician. He served as a member of the U.S. House of Representatives from Massachusetts from 1981 to 2013. A Democrat, Frank served as chairman of the House Financial Services Committee ...
(D-MA), Chairman of the Financial Services Committee announced plans to restore the uptick rule. Frank said he was hopeful that it would be restored within a month.
2008 Financial Crisis
A paper from the ''
New England Complex Systems Institute
The New England Complex Systems Institute (NECSI) is an independent American research institution and think tank dedicated to advancing analytics and its application to the challenges of society, and the interaction of complex systems with the envi ...
'' claims that they have found evidence that suggests the 2008 financial crisis was triggered by a "
Bear Raid
A bear raid is a type of stock market strategy, where a trader (or group of traders) attempts to force down the price of a stock to cover a short position. The name is derived from the common use of
''bear'' or ''bearish'' in the language of ma ...
"
market manipulation
In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
by short sellers against
Citigroup
Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
late in 2007. 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. To quote the paper directly:
The new information we received implies that the sale of borrowed shares reflected in the increase in borrowed shares on November 1 and the corresponding decrease on November 7 may have been done in a way that would not have been prevented by the uptick rule. A more detailed inquiry into the means by which such selling could have been done is beyond the current work.
Proposals for restoration of the uptick rule
On April 8, 2009, the SEC voted to seek public comment on the following proposals to restore a form of the uptick rule.
The SEC disclosed the 273 page text of the proposals on April 17, 2009. The comment period closed on June 19, 2009.
''Market-Wide, Permanent Approach:''
*''Proposed Modified Uptick Rule'': A market-wide short sale price test based on the national best bid (a proposed modified uptick rule).
*''Proposed Uptick Rule'': A market-wide short sale price test based on the last sale price or tick (a proposed uptick rule).
''Security-Specific, Temporary Approach:''
*''Circuit Breaker'': A circuit breaker that would either:
**Ban short selling in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker halt rule).
**Impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker modified uptick rule).
**Impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker uptick rule).
Adoption of Alternative Uptick Rule
On February 24, 2010 the SEC adopted the alternative uptick rule, by amending Rules 200(g) and 201 of Regulation SHO
7 CFR 242.200(g) and 17 CFR 242.201under the Exchange Act.
The new rule does not apply to all securities. It is triggered when a security's price decreases by 10% or more from the previous day's closing price and is effective until the close of the next day.
Specifically Rule 201(b) has the following amendments:
(b) (1) A trading center shall establish, maintain, and enforce written policies and
procedures reasonably designed to:
(i) Prevent the execution or display of a short sale order of a covered security at a price
that is less than or equal to the current national best bid if the price of that covered security
decreases by 10% or more from the covered security's closing price as determined by the listing
market for the covered security as of the end of regular trading hours on the prior day; and
(ii) Impose the requirements of paragraph (b)(1)(i) of this section for the remainder of the
day and the following day when a national best bid for the covered security is calculated and
disseminated on a current and continuing basis by a plan processor pursuant to an effective
national market system plan.
(iii) Provided, however, that the policies and procedures must be reasonably designed to
permit:
(A) The execution of a displayed short sale order of a covered security by a trading center
if, at the time of initial display of the short sale order, the order was at a price above the current
national best bid; and
(B) The execution or display of a short sale order of a covered security marked "short
exempt" without regard to whether the order is at a price that is less than or equal to the current
national best bid.
Hong Kong
Hong Kong traditionally had no uptick rule, a situation depicted in
James Clavell
James Clavell (born Charles Edmund Dumaresq Clavell; 10 October 1921 – 7 September 1994) was an Australian-born British (later naturalized American) writer, screenwriter, director, and World War II veteran and prisoner of war. Clavell is best ...
's novel ''
Noble House''.
They instituted one following the
1997 Asian Financial Crisis
The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998–1 ...
.
Effectiveness of the rule
Gordon J. Alexander and Mark A. Peterson, in an academic study of the uptick rule, found "the execution quality of short-sell orders is adversely affected by the Uptick Rule, even when stocks are trading in advancing markets. This is inconsistent with one of the three stated objectives of the rule, i.e., to allow relatively unrestricted short selling when a firm's stock is advancing so that the rule does not affect
price discovery
In economics and finance, the price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers.
Overview
Price discovery is diff ...
during such times."
Karl B. Diether, Kuan-Hui Lee, and Ingrid M. Werner stated in their study: "The results suggest that the effect of the price-tests on market quality can largely be attributed to the distortions in order flow created by the price-tests in the first place. Therefore, we believe that the price-tests can safely be permanently suspended."
One empirical study found no statistically significant link between the uptick rule and the rates of price decline.
A 2006 study by Alexander and Peterson found no substantial differences between stocks subjected to the rule and those that were not.
[ Working Paper Series]
While the market experienced a brief upward trend when the rule first became effective in February 1938, it ultimately continued the broad decline that had begun in 1937—though the fact that the market suffers a short-term decline does not necessarily establish that the rule is ineffective in contributing to long-term market confidence.
[Uptick Rule: May Help Sustain Long-Term Recovery, but Not Likely a Short-Term Fix, Thoughtsworththinking.net, posted April 8, 2009, http://www.thoughtsworththinking.net/2009/04/uptick-rule-may-help-sustain-long-term-recovery-but-not-likely-a-short-term-fix/]
References
{{DEFAULTSORT:Uptick Rule
United States securities law
Stock market