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 theprevious trade.
Investors engage in short sales when they expect a securities price to fall. The tactic involves selling high and buying low. While short selling can improve market liquidity and pricing efficiency, it can also be used improperly to drive down the price of a security or to accelerate a market decline.
Key Takeaways
- The SEC's Uptick Rule requires short sales to be conducted at a higher price than theprevious trade.
- There are limited exemptions to the rule.
- A revised rule implemented in 2010 lets investors exit long positions before short selling is triggered.
Understanding the Uptick Rule
The Uptick Rule prevents sellers from accelerating the downward momentumof a securities price already in sharp decline. By entering a short-sale order with a price above the current bid, a short seller ensures that an order is filled on an uptick.
The original rule was introduced by the Securities Exchange Act of 1934 as Rule 10a-1 and implemented in 1938. The SEC eliminated the original rule in 2007, but approved an alternative rule in 2010. The rule requires trading centers to establish and enforce procedures that prevent the execution or display of a prohibited short sale.
The Alternative Uptick Rule
The 2010 alternative uptick rule (Rule 201) allows investors to exit long positions before short selling occurs. 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 investorconfidence and promote market stability during periods of stress and volatility.
The rule's "duration of price test restriction"applies the rule for the remainder of the trading day and the following day. It generally applies to all equity securities listed on a national securities exchange, whether traded via the exchange or over the counter.
The Uptick Rule is designed to preserve investorconfidence and stabilize the market during periods of stress and volatility, such as a market "panic" that sends prices plummeting.
Exemptions to the Rule
For futures, there are limited exemptions to the uptick rule. 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.
To qualify for the exemption, the futures contract must be deemed to be "owned by the seller." This means that according to the SEC, that the person "holds a security futures contract to purchase it and has received notice that the position will be physically settled and is irrevocably bound to receive the underlying security.”
FAQs
The Alternative Uptick Rule
What is the uptick rule for shorts? ›
Under the short-sale rule, shorts could only be placed at a price above the most recent trade, i.e., an uptick in the share's price. With only limited exceptions, the rule forbade trading shorts on a downtick in share price. The rule was also known as the uptick rule, "plus tick rule," and tick-test rule."
What is the SEC rule for short selling? ›
An essential rule for short selling involves the availability of the stock to be sold. It must be readily accessible by the broker-dealer for delivery at settlement; otherwise, it is a failed delivery or a naked short sale.
What is the 10% rule for short selling? ›
Rule 201 is triggered for a stock when the stock's price declines by 10% or more from the previous day's close. When a stock is triggered, traders can only execute short sales of the stock above the National Best Bid (NBB) price.
What is the exemption for the uptick rule? ›
Stock Ownership ☑
The number one exemption to the alternative uptick rule is that the trader owns the stock they are trying to sell. Remember that most short sales of stock are done on borrowed shares.
What is the 2.50 rule for shorting? ›
Shorting anything that is trading at or below $2.50 per share has a $2.50 per share requirement (so the requirement can actually be higher than 100% of the value of the position; this is set by FINRA).
What is the rule of thumb for shorts? ›
A good rule of thumb is that shorts should end approximately two inches above the top of the kneecap. This tends to be a sweet spot for men who want true shorts, but not short shorts. This placement is also a good place to start when considering a client's body type in a conversation about shorts.
What is SEC Rule 105 short selling? ›
As currently in force, Rule 105 prohibits any person from purchasing securities from an underwriter or broker-dealer in a firm commitment equity offering if that person had previously sold short the security that is now the subject of the offering during the Rule 105 restricted period (i.e., the shorter of the period ( ...
Is short selling banned in 2024? ›
South Korea has been widening a probe into global investment banks to weed out illegal short-sellers from the local stock market after it imposed a full ban on short-selling in November through the end of June 2024.
What is the SEC rule 201 for short sales? ›
The 2010 alternative uptick rule (Rule 201) allows investors to exit long positions before short selling occurs. The rule is triggered when a stock price falls at least 10% in one day.
United States: The first rule on short selling in the United States was the downtick rule that went into effect in 1931 and later was changed to the uptick rule in 1938. This rule was in effect for about 70 years and was repealed on July 3, 2007.
What is the formula for short selling? ›
How to Calculate a Short Sale Return. To calculate the return on any short sale, simply determine the difference between the proceeds from the sale and the cost associated with selling off that particular position. This value is then divided by the initial proceeds from the sale of the borrowed shares.
What is illegal short selling? ›
Naked short selling is illegal because it involves the selling of securities that the seller does not actually own or have borrowed, which can result in a lack of sufficient supply of the securities in the market and potentially lead to a decline in the price of the securities.
What are uptick requirements? ›
Android
- Minimum Android version: Android 10.0 (released September 2019)
- We recommend purchasing devices released in the past 3 years, with 6"+ screens, 64GB+ storage and 4GB+ RAM.
- We recommend purchasing mid-to-high end devices to provide the best Uptick experience (battery life, screen responsiveness, processing power)
Regulation SHO defines ownership of securities, specifies aggregation of long and short positions, and requires broker-dealers to mark sales in all equity securities "long," "short," or "short exempt." Regulation SHO also includes a temporary rule that establishes procedures for the Commission to suspend temporarily ...
What is alternative uptick rule example? ›
If the bid/ask for XYZ is $10.50 – $10.55, short sales must be executed at a price above $10.50, which is the bid price. The short-sale restrictions laid out by the alternative uptick rule will be in effect for the rest of today (Tuesday) and the following trading day (Wednesday).
Does buying shorts increase stock price? ›
By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.
How can more than 100 percent of stock be shorted? ›
When the security is sold in that second step, there is nothing preventing the new owner of the stock from relending it. Thus, the same share can be borrowed and lent several times, and potentially enough times that short interest exceeds 100 percent.
How do shorts control stock price? ›
Short selling is when a trader borrows shares and sells them, hoping the price will fall after so they can buy them back for cheaper. Shorting can help traders profit from downturns in stocks and protect themselves from losses.
What is the short stock rule? ›
The Short Sale Rule originated in 1938 as the Uptick Rule. This SEC rule required that any short sale take place at a higher price than the prior trade. In effect, it meant that stocks could only be sold short when the price was going up.
