What Is the Uptick Rule?
The Uptick Rule (also known as the "plus tick rule") is a rule established by the Securities and Exchange Commission (SEC) that requires short sales to be conducted at a higher price than the previous trade. The rule was introduced by the Securities Exchange Act of 1934 as Rule 10a-1 and implemented in 1938. It prevents short sellers from accelerating the downward momentum of a securities price already in sharp decline. The SEC eliminated the original rule in 2007, but approved an alternative rule in 2010.
BREAKING DOWN Uptick Rule
By entering a short-sale order with a price above the current bid, a short seller ensures his order is filled on an uptick. There are limited exemptions to the uptick rule for futures. 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.
The Alternative Uptick Rule
In 2010, the SEC constructed an alternative uptick rule designed to let investors exit long positions before short selling is triggered. The rule is triggered when a stock price falls at least 10% in one day. At that point, short selling is permitted if the price 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: a 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.