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 SEC's Uptick Rule requires short sales to be conducted at a higher price than the previous trade. There are limited exemptions to the rule. A revised rule implemented in 2010 lets investors exit long positions before short selling is triggered.
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 sells? ›
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 for short selling? ›
First proposed in late 2021 and early 2022, the rules will require investors to report their short positions to the agency, and companies that lend out shares to report that activity to the Financial Industry Regulatory Authority (FINRA), a self-regulatory body that polices brokers.
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 in 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.
What is the 10 percent short selling rule? ›
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.
Can the SEC ban short selling? ›
The SEC adopted its uptick rule in 1938 to combat unrestricted short selling. Known as Rule 10a-1, the regulation forbids shorting a stock unless the last trade was at a higher price than the previous trade, which was meant to slow the momentum of a security's decline.
What rule did the SEC adopt to increase transparency into short selling? ›
The SEC adopted new Rule 13f-2 to provide greater transparency into Short-Selling. Rule 13f-2 will require institutional investment managers that meet or exceed certain thresholds to report on Form SHO via EDGAR specified short position data and short activity data for equity securities.
What is the final rule of the SEC short reporting? ›
The final rule is intended to provide increased transparency regarding short selling activities in the securities market and to augment short sale-related information that is publicly available or accessible for a fee from existing short sale reporting regimes provided by some registered national securities exchanges ...
To qualify for Rule 147 and Rule 147A, the company's officers, partners, or managers must primarily direct, control, and coordinate the business's activities in-state. Sales of securities by the company must be limited to in-state residents or persons who the company reasonably believes are in-state residents.
What is a short sale Rule 200? ›
Rule 200(g) requires that a broker-dealer must mark all sell orders of any equity security as “long,” “short” or “short exempt.” A sell order may only be marked “long” if the seller is “deemed to own” the security being sold and either: (i) the security to be delivered is in the physical possession or control of the ...
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 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.
How much can a stock go up in a short squeeze? ›
But there's no ceiling on the stock. You can sell it at $10 and then be forced to buy it back at $20 … or $200 … or $2 million. There is no theoretical limit on how high a stock can go. The first way to avoid getting squeezed is simply to avoid shorting.
What is a high short sale percentage? ›
Short interest as a percentage of float above 10% is fairly high, indicating significant pessimistic sentiment. Short interest as a percentage of float above 20% is extremely high.
