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This regulation was rescinded in July 2007 by decree of the SEC; as a result short sales can occur (where eligible) on any price tick in the market, whether up or down.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

  1. Short Selling

    Short selling is the sale of a security that is not owned by ...
  2. Zero Plus Tick

    A security trade that is executed at the same price as the preceding ...
  3. Naked Shorting

    The illegal practice of short selling shares that have not been ...
  4. Tick Test Rules

    A now defunct rule that placed restrictions on when a short sale ...
  5. Bear

    An investor who believes that a particular security or market ...
  6. Decimalization

    A system where security prices are quoted using a decimal format ...
Related Articles
  1. Fundamental Analysis

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  2. Options & Futures

    Using Mutual Funds To Profit From Market Dips

    Stop hoping for the indexes to go up and start investing in the reverse.
  3. Active Trading Fundamentals

    The Short And Distort: Stock Manipulation In A Bear Market

    High-quality stock reports needn't be confused with stock manipulators' dramatic claims.
  4. Active Trading Fundamentals

    Short Selling Tutorial

    Want to profit on declining stocks? This trading strategy does just that.
  5. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  6. Investing

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  7. Economics

    The 5 Countries That Produce the Most Carbon Dioxide (CO2)

    Learn about the top five countries, China, the United States, India, Russia and Japan, that are the largest contributors to carbon dioxide emissions.
  8. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  9. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  10. Investing Basics

    Explaining the 10-K

    A 10-K is an annual comprehensive report that thoroughly recaps a company’s performance.
  1. Is a financial advisor allowed to pay a referral fee?

    A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and ... Read Full Answer >>
  2. How often do mutual funds report their holdings?

    The Securities and Exchange Commission (SEC) requires mutual funds to report complete lists of their holdings on a quarterly ... Read Full Answer >>
  3. Do financial advisors need to be approved by FINRA?

    The term "financial advisor" can refer to a couple of different roles. It most often refers to a broker-dealer or an investment ... Read Full Answer >>
  4. What are the disclosure requirements for a private placement?

    The U.S. Securities and Exchange Commission (SEC) has set forth disclosure requirements for private placements, including ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What role does the Inspector General play with the Securities and Exchange Commission?

    The inspector general of the U.S. Securities and Exchange Commission (SEC) oversees, audits and conducts investigations of ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!