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.

RELATED TERMS
  1. Short-Sale Rule

    The short-sale rule was a Securities and Exchange Commission ...
  2. Downtick

    A downtick is transaction on an exchange that occurs at a price ...
  3. Short Exempt

    Short exempt refers to a short sale order exempted from the uptick ...
  4. Call Rule

    The call rule is a rule for trading markets that makes the next ...
  5. Rule 144

    Rule 144 is an SEC rule that sets the conditions under which ...
  6. 25% Rule

    The 25% rule is the idea that a local government's long-term ...
Related Articles
  1. Trading

    Why is Short Selling Legal? A Brief History

    Despite short selling's legal status and its apparent market benefits, many policymakers, regulators and the public remain suspicious of the practice.
  2. Investing

    Short selling basics

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

    Ready for the Fiduciary Rule? You Should Be

    Despite the opposition it faces, advisors should still plan to comply with the fiduciary rule. Here's why.
  4. Personal Finance

    Short Selling: Making The Ban

    Short selling has been around as long as the stock market, and it hasn't always been looked on favorably.
  5. Financial Advisor

    Vanguard's Bogle: The SEC Should Issue Its Own Fiduciary Rule

    Vanguard founder John Bogle says that the SEC should have been “the first in line” to issue a fiduciary rule instead of the DOL.
  6. Investing

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  7. Insights

    DOL Clarifies New, More Lenient Conduct Standards

    The Department of Labor's latest fiduciary guidance allows financial advisors to operate under existing conduct standards.
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 (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. Why do you need a margin account to short sell stocks?

    The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a ... Read Answer >>
  4. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  5. What is the Rule of 72?

    The "Rule of 72" determines roughly how long an investment will take to double, given a fixed annual rate of interest. It ... Read Answer >>
  6. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Although it is not a requirement set by FINRA or the SEC, brokers will often tell investors that only stocks above $5 can ... Read Answer >>
Trading Center