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This regulation was rescinded in July 2007 by decree of the SEC; as a result short sales can occur (where eligible) on any price tick in the market, whether up or down.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

    The illegal practice of short selling shares that have not been ...
  3. Bear

    An investor who believes that a particular security or market ...
  4. Tick Test Rules

    A now defunct rule that placed restrictions on when a short sale ...
  5. Zero Plus Tick

    A security trade that is executed at the same price as the preceding ...
  6. Decimalization

    A system where security prices are quoted using a decimal format ...
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