Uptick Rule: An SEC Rule Governing Short Sales (2024)

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.”

Uptick Rule: An SEC Rule Governing Short Sales (2024)


Uptick Rule: An SEC Rule Governing Short Sales? ›

The Alternative Uptick Rule

What is the uptick rule for short selling? ›

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? ›

3 Rule 3b-3 under the Exchange Act, 17 CFR 240.3b-3, defines a short sale as "any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller." Pursuant to Rule 3b-3, a seller of an equity security subject to Rule 10a-1 ...

What is the new rule of short selling? ›

On 5th January 2024, SEBI issued the latest circular on the framework for short-selling adding two new provisions where institutional investors now have to disclose upfront whenever they place a short-sell order and exchanges shall publish the information for the public every week.

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 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 ( ...

What is the 2.50 rule for shorting? ›

The $2.50 rule is a rule that affects short sellers. It basically means if you short a stock trading under $1, it doesn't matter how much each share is — you still have to put up $2.50 per share of buying power.

Can SEC ban short selling? ›

Throughout history, regulators and legislators have banned short selling, either temporarily or more permanently, in order to restore investor confidence or to stabilize falling markets under the belief that selling short either triggered a crisis or made it worse.

What is the 10% rule for short selling? ›

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.

What are the restrictions on short selling? ›

Short sale restriction is a rule that came out in 2010 and it's also referred as the alternate uptick rule, which means that you can only short a stock on an uptick. This is kind of an unusual thing when you first think about it. It restricts the ability to short a stock as it's dropping down.

What is the maximum profit on short selling? ›

The short seller hopes that this liability will vanish, which can only happen if the share price drops to zero. That is why the maximum gain on a short sale is 100%. The maximum amount the short seller could ever take home is essentially the proceeds from the short sale.

What is illegal short selling? ›

Naked shorting is the illegal practice of selling short shares that have not yet been determined to exist or that the trader hasn't secured in some way. Ordinarily, traders must first borrow a stock or determine that it can be borrowed before selling it short.

What is the limit on short sale? ›

Short selling limits maximum gains while potentially exposing the investor to unlimited losses. A stock can only fall to zero, resulting in a 100% loss for a long investor, but there is no limit to how high a stock can theoretically go.

When was the uptick rule removed? ›

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 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).

What is 10b 18 uptick rule? ›

Rule 10b-18 provides an issuer and its affiliated purchasers with a non-exclusive safe harbor from liability under certain market manipulation rules and Rule 10b-5 under the Securities Exchange Act of 1934, as amended (Exchange Act) when repurchases of the issuer's common stock satisfy the Rule's conditions.

What is the maximum gain when you short sell a stock? ›

The maximum profit you can make from short selling a stock is 100% because the lowest price at which a stock can trade is $0. However, the maximum profit in practice is due to be less than 100% once stock-borrowing costs and margin interest are included.

What is the limit on short selling? ›

This is the opposite of a traditional long position where an investor hopes to profit from rising prices. There is no time limit on how long a short sale can or cannot be open for. Thus, a short sale is, by default, held indefinitely.

What is the short selling restriction rule? ›

The Short Sale Rule is an SEC rule that governs when and how stocks can be sold short. Briefly, the rule dictates that once a stock falls more than 10% from its previous close, that stock cannot be shorted at the bid price for the remainder of the current trading session or for the entirety of the next session.

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