Short-Sale Rule

DEFINITION of 'Short-Sale Rule'

A Securities and Exchange Commission (SEC) trading regulation that restricted short sales of stock from being placed on a downtick in the market price of the shares. Short sales could only be permitted on upticks (last trade higher than the one before) or zero-plus ticks (last trade is the same as previous, which was an uptick). The regulation was passed in 1938 to prevent selling shares short into a declining market; at the time market mechanisms and liquidity couldn't be guaranteed to prevent panic share declines or outright manipulation.

This regulation was rescinded in July 2007 by decree of the SEC; as a result short sales can occur (where eligible) on any price tick in the market, whether up or down.

The short sale rule was also known as the "plus-tick rule", "tick-test rule", or "uptick rule".

BREAKING DOWN 'Short-Sale Rule'

The SEC began examining the possibility of eliminating this short-sale rule following the decimalization of the major stock exchanges in the early 2000s. Because tick changes were shrinking in magnitude following the change away from fractions, and U.S. stock markets had become more stable, it was felt that the restriction was no longer necessary.

The SEC ran a test program of stocks in 2003 to see if removing the short-sale rule would have any negative effects. After reviewing the results it was decided that the rule no longer needed to exist. However, naked shorting - selling shares short that don't exist or can't be verified - is still illegal.

RELATED TERMS
  1. Zero Plus Tick

    A security trade that is executed at the same price as the preceding ...
  2. Tick Test Rules

    A now defunct rule that placed restrictions on when a short sale ...
  3. Uptick Rule

    A former rule established by the SEC that requires that every ...
  4. Zero Uptick

    A transaction executed at the same price as the trade immediately ...
  5. Short Exempt

    A short sale order in which the uptick rule doesn't apply to ...
  6. Zero Minus Tick

    A securities trade executed on an exchange at the same price ...
Related Articles
  1. Trading

    Why Is Short Selling Legal? A Brief History

    Short selling -- selling borrowed stock in hopes the price goes down -- was unregulated until the Great Depression.
  2. Trading

    Why Is Short Selling Legal? A Brief History

    In the U.S., before a short sale can occur, broker/dealers must have reasonable grounds to believe that shares can be borrowed and delivered on time.
  3. Investing

    The Basics Of Short Selling

    Short sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
  4. Investing

    Short Selling: Why Short?

    Generally, the two main reasons to short are to either speculate or to hedge. When you speculate, you are watching for fluctuations in the market in order to quickly make a big profit off of ...
  5. Financial Advisor

    The SEC Fiduciary Rule Explained

    The SEC plans to propose its own set of fiduciary rules next year. These are some of the potential implications for advisors.
  6. Trading

    Rules and Strategies For Profitable Short Selling

    Short sales work well in bull and bear markets but strict entry and risk management rules are required to overcome the threat of short squeezes.
  7. Investing

    Policing The Securities Market: An Overview Of The SEC

    Find out how this regulatory body protects the rights of investors.
  8. Investing

    Short Selling: Conclusion

    Short selling is another technique you can add to your trading toolbox. That is, if it fits with your risk tolerance and investing style. Short selling provides a sizable opportunity with a hefty ...
  9. Markets

    Understanding the SEC

    The SEC's triple mandate of investor protection, maintenance of orderly markets and facilitation of capital formation makes it a vital player in capital markets.
  10. Markets

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
RELATED FAQS
  1. What kinds of restrictions does the SEC put on short selling?

    Learn about the rules and regulations on short selling enforced by the U.S. Securities and Exchange Commission, or SEC, including ... Read Answer >>
  2. What is the downtick-uptick rule on the NYSE?

    To ensure orderly markets, the New York Stock Exchange (NYSE) has a set of restrictions that it can implement when experiencing ... Read Answer >>
  3. What is a common strategy traders implement when using the Uptick Volume?

    Learn how traders use uptick and downtick volume with VWAP cross to identify trends and momentum and identify points of big ... Read Answer >>
  4. What are the best technical indicators to complement the Uptick Volume?

    See how uptick volume can be used to help confirm price trends from nearly every trend-following indicator, especially when ... Read Answer >>
  5. What is the Uptick Volume formula and how is it calculated?

    Learn more about uptick volume, a measurement of the number of trades that take place during a time when an asset's price ... Read Answer >>
  6. Can you short sell ETFs?

    ETFs (an acronym for exchange-traded funds) are treated like stock on exchanges; as such, they are also allowed to be sold ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center