What is the 'Uptick Rule'

The Uptick Rule (also known as the "plus tick rule") is a former law established by the Securities Exchange Commission (SEC) that requires every short sale transaction to be entered at a higher price than the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and implemented in 1938. It prevents short sellers from adding to the downward momentum of an asset already experiencing sharp declines.

BREAKING DOWN 'Uptick Rule'

The Uptick Rule was eliminated by the SEC on July 6, 2007, but in March of 2009, following a conversation with SEC Chair Mary Schapiro, Rep. Barney Frank of the House Financial Services Committee said the rule could be restored. Representative Frank's conversations were spurred by several members of Congress hoping to restore the rule. In January 2008, legislation reintroduced for its reinstatement. On April 9, 2009, the SEC approved the release of five proposals for reinstating the uptick rule, which was each put out for a 60-day public comment period.

By entering a short sale order with a price above the current bid, a short seller ensures their order is filled on an uptick. The uptick rule is disregarded when trading some types of financial instruments such as futures, single stock futures, currencies or market ETFs such as the QQQQ or SPDRs. 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.

Adoption of Alternative Uptick Rule

In 2010, the SEC constructed an alternative uptick rule to restrict short selling from further driving down a stock price that has dropped more than 10% in one day. It's designed to enable investors to exit long positions before short selling is triggered. The alternative uptick rule is triggered when a stock experiences a price decline of at least 10% in one day. At that point, short selling would be permitted if the price of the security is above the current best bid. This aims to preserve investor confidence and promote market stability during periods of stress and volatility.

The rule includes the following features: short sales related circuit breaker, duration of price test restriction, securities covered by price test restriction, and implementation. In other words, most securities are covered by the rule and in the event it is activated, the alternative uptick rule would apply to short sale orders for the remainder of the day as well as the following day.

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