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Uptick rule
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The uptick rule is a trading restriction that states that short selling a stock is allowed only on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price when the most recent movement between traded prices was upward (i.e. the security has traded below the last-traded price more recently than above that price).

The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: "Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions."[1]

The rule went into effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on April 8, 2009.[2][3] A modified form of the rule, known as a short-sale restriction,[4] was adopted on February 24, 2010.[5]

United States

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Origin

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In 1938, the U.S. Securities and Exchange Commission (SEC) adopted the uptick rule, more formally known as rule 10a-1, after conducting an inquiry into the effects of concentrated short selling during the market break of 1937.[6] The original rule was implemented when Joseph P. Kennedy Sr. was SEC commissioner.[7]

In 1994, the NASD and Nasdaq adopted their own short sale price tests, known as NASD Rule 3350, based on the last bid rather than on the last reported sale.[8]

In 1978, the purpose of the uptick rule was described in a standard text "It was not unusual [prior to 1934] to discover groups of speculators pooling their capital and selling short for the sole purpose of driving down the stock price of a particular security to a level where the stockholders would panic and unload their fully owned shares. This, in turn, caused even greater declines in value."[9]

SEC actions commencing in 2004 leading to the end of the uptick rule

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"In 2004, the Commission initiated a year-long pilot that eliminated short sale price test restrictions from approximately one-third of the largest stocks. The purpose of the pilot was to study how the removal of such short sale price test restrictions impacted the market for those subject securities.

Short sale data was made publicly available during this pilot to allow the public and Commission staff to study the effects of eliminating short sale price test restrictions. Third-party researchers analyzed the publicly available data and presented their findings in a public Roundtable discussion in September 2006. The Commission staff also studied the pilot data extensively and made its findings available in draft form in September 2006, and final form in February 2007.

At the time the SEC acted in 2007, two different types of price tests covered significant numbers of securities. The Nasdaq "bid" test, based on the national best bid, covered approximately 2,900 Nasdaq securities in 2005 (or 44 million short sales). The SEC's former uptick test (former Rule 10a-1), based on the last sale price, covered approximately 4,000 exchange-listed securities (or 68 million short sales)."[10]

Elimination of the uptick rule

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Effective July 3, 2007, the Commission, under Chairman Christopher Cox, eliminated former Rule 10a-1 and added Rule 201 of Regulation SHO, prohibiting any SRO from having a short sale price test.[11] The SEC concluded from the study cited above: "The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test."[8]

In addition, the Commission stated its belief that the amendments would bring increased uniformity to short sale regulation, level the playing field for market participants, and remove an opportunity for regulatory arbitrage.[5][8]

Commenting on the scrapping of the uptick rule, The Economist reported that "short-sellers argue [it] was largely symbolic, and it remains in place at only a few of the world's big stock exchanges."[12]

Calls for reinstatement

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On August 27, 2007, the New York Times published an article on Muriel Siebert, former state banking superintendent of New York, "Wall Street veteran and financial sage", and, in 1967, the first woman to become a member of the New York Stock Exchange. In this article she expressed severe concerns about market volatility: "We've never seen volatility like this. We're watching history being made." Siebert pointed to the uptick rule, saying, "The S.E.C. took away the short-sale rule and when the markets were falling, institutional investors just pounded stocks because they didn't need an uptick."[13]

On March 28, 2008 Jim Cramer of CNBC offered the opinion that the absence of the uptick rule harms the stock market today. He claimed that reintroducing the uptick rule would help stabilize the banking sector.[14]

On July 3, 2008 Wachtell, Lipton, Rosen & Katz, an adviser on mergers and acquisitions, said short-selling was at record levels and asked the SEC to take urgent action and reinstate the 70-year-old uptick rule.[15] On November 20, 2008, they renewed their call stating "Decisive action cannot await ... a new S.E.C. Chairman. ... There is no tomorrow. The failure to reinstate the Uptick Rule is not acceptable."[16]

On July 16, 2008, Congressman Gary Ackerman (D-NY), Congresswoman Carolyn Maloney (D-NY) and Congressman Mike Capuano (D-MA) introduced H.R. 6517, "A bill to require the Securities and Exchange Commission to reinstate the uptick rule on short sales of securities."[17]

On September 18, 2008, presidential candidate and Senator John McCain (R-AZ) said that the SEC allowed short-selling to turn "our markets into a casino." McCain criticized the SEC and its chairman for eliminating the uptick rule.[18]

On October 6, 2008, Erik Sirri, director of the Securities and Exchange Commission's Division of Trading and Markets, said that the SEC is considering bringing back the uptick rule, stating, "It's something we have talked about and it may be something that we in fact do."[19]

On October 17, 2008, the New York Stock Exchange reported a survey with 85% of its members being in favor of reinstating the uptick rule with the dominant reason to "help instill market confidence".[20]

On November 18, 2008, The Wall Street Journal published an opinion editorial by Robert Pozen and Yaneer Bar-Yam describing an analysis of the difference between regulated and unregulated stocks during the SEC pilot program. By using an analysis they claimed to be more comprehensive than the SEC's original study, they showed that unregulated stocks have lower returns, with a difference that is both statistically and economically significant. They also reported that twice as many stocks had greater than 40% drops in corresponding 12 month periods before and after the repeal.[21][22]

On January 20, 2009, Ackerman received a letter from Chairman Cox—written the day he left the SEC—in which Cox said he supports the reinstatement of an uptick rule. The letter reads, "I have been interested in proposing an updated uptick rule. However, as you know, the SEC is a commission of five members. Throughout 2008 there was not a majority interested in reconsidering the 2007 decision to repeal the uptick rule, or in proposing some modernized variant of it. I sincerely hope that the commission, in the year ahead, continues to reassess this issue in light of the extraordinary market events of the last several months, with a view to implementing a modernized version of the uptick rule."[23]

On February 25, 2009, Chairman of the Federal Reserve, Ben Bernanke in testimony before the House Financial Services Committee stated he favored the SEC examining restoring the uptick-rule.[24]

On March 10, 2009, the SEC and Congressman Barney Frank (D-MA), Chairman of the Financial Services Committee announced plans to restore the uptick rule. Frank said he was hopeful that it would be restored within a month.[25][26]

2008 Financial Crisis

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A paper from the New England Complex Systems Institute claims that they have found evidence that suggests the 2008 financial crisis was triggered by a "Bear Raid" market manipulation by short sellers against Citigroup late in 2007. The uptick rule was repealed in July, 2007, and the alleged bear raid took place in November, 2007.[27]

This paper has an addendum based on additional data provided by the NYSE for short sells during the time period that in fact the uptick rule would not have prevented what occurred. To quote the paper directly:

The new information we received implies that the sale of borrowed shares reflected in the increase in borrowed shares on November 1 and the corresponding decrease on November 7 may have been done in a way that would not have been prevented by the uptick rule. A more detailed inquiry into the means by which such selling could have been done is beyond the current work.

Proposals for restoration of the uptick rule

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On April 8, 2009, the SEC voted to seek public comment on the following proposals to restore a form of the uptick rule.[10]

The SEC disclosed the 273 page text of the proposals on April 17, 2009.[28] The comment period closed on June 19, 2009.

Market-Wide, Permanent Approach:

  • Proposed Modified Uptick Rule: A market-wide short sale price test based on the national best bid (a proposed modified uptick rule).
  • Proposed Uptick Rule: A market-wide short sale price test based on the last sale price or tick (a proposed uptick rule).

Security-Specific, Temporary Approach:

  • Circuit Breaker: A circuit breaker that would either:
    • Ban short selling in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker halt rule).
    • Impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker modified uptick rule).
    • Impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker uptick rule).

Adoption of Alternative Uptick Rule

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On February 24, 2010, the SEC adopted the alternative uptick rule, by amending Rules 200(g) and 201 of Regulation SHO [17 CFR 242.200(g) and 17 CFR 242.201] under the Exchange Act.[5] The new rule does not apply to all securities. It is triggered when a security's price decreases by 10% or more from the previous day's closing price and is effective until the close of the next day.[29]

Specifically Rule 201(b) has the following amendments:

(b) (1) A trading center shall establish, maintain, and enforce written policies and procedures reasonably designed to:

(i) Prevent the execution or display of a short sale order of a covered security at a price that is less than or equal to the current national best bid if the price of that covered security decreases by 10% or more from the covered security's closing price as determined by the listing market for the covered security as of the end of regular trading hours on the prior day; and

(ii) Impose the requirements of paragraph (b)(1)(i) of this section for the remainder of the day and the following day when a national best bid for the covered security is calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan.

(iii) Provided, however, that the policies and procedures must be reasonably designed to permit:

(A) The execution of a displayed short sale order of a covered security by a trading center if, at the time of initial display of the short sale order, the order was at a price above the current national best bid; and

(B) The execution or display of a short sale order of a covered security marked "short exempt" without regard to whether the order is at a price that is less than or equal to the current national best bid.

Hong Kong

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Hong Kong traditionally had no uptick rule, a situation depicted in James Clavell's novel Noble House.[30] They instituted one following the 1997 Asian financial crisis.[31]

Effectiveness of the rule

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Gordon J. Alexander and Mark A. Peterson, in an academic study of the uptick rule, found "the execution quality of short-sell orders is adversely affected by the Uptick Rule, even when stocks are trading in advancing markets. This is inconsistent with one of the three stated objectives of the rule, i.e., to allow relatively unrestricted short selling when a firm's stock is advancing so that the rule does not affect price discovery during such times."[32]

Karl B. Diether, Kuan-Hui Lee, and Ingrid M. Werner stated in their study: "The results suggest that the effect of the price-tests on market quality can largely be attributed to the distortions in order flow created by the price-tests in the first place. Therefore, we believe that the price-tests can safely be permanently suspended."[33]

One empirical study found no statistically significant link between the uptick rule and the rates of price decline.[34]

A 2006 study by Alexander and Peterson found no substantial differences between stocks subjected to the rule and those that were not.[35]

While the market experienced a brief upward trend when the rule first became effective in February 1938, it ultimately continued the broad decline that had begun in 1937—though the fact that the market suffers a short-term decline does not necessarily establish that the rule is ineffective in contributing to long-term market confidence.[36]

References

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Uptick rule

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from Grokipedia
The uptick rule, designated as Rule 10a-1 under the Securities Exchange Act of 1934, is a U.S. Securities and Exchange Commission (SEC) regulation that restricts short sales by requiring them to occur at a price above the immediately preceding trade price (an "uptick") or, in some formulations, at or above the current national best bid, thereby aiming to prevent rapid, manipulative declines in stock prices driven by concentrated short selling. Adopted in 1938 in response to the 1929 stock market crash and subsequent investigations revealing abusive short-selling practices, the rule sought to maintain orderly markets by curbing "bear raids" where speculators could exacerbate downturns without requiring genuine price discovery. The rule's enforcement persisted for nearly seven decades until its full repeal on July 3, 2007, following SEC pilot programs from 2004–2006 that analyzed trading in nearly 1,000 s and found no material differences in volatility, , or pricing between rule-bound and rule-free environments, leading regulators to conclude it imposed unnecessary constraints in modern electronic markets. However, the , marked by sharp declines in financial s amid short-selling pressures, prompted renewed scrutiny; in February 2010, the SEC adopted a modified "alternative uptick rule" (Rule 201 of Regulation SHO), which activates circuit-breaker restrictions—banning short sales below the current bid—only when a drops 10% or more from the prior day's close, reflecting a compromise to address extreme volatility without broad interference. Empirical analyses of the original rule's effects, including post-repeal data, indicate modest influences on short-sale volumes and intraday returns but limited overall stabilization of prices or reduction in crashes, with some evidence of distortions like reduced in constrained scenarios; debates persist among academics and regulators over whether such restrictions meaningfully enhance market resilience or merely hinder efficient price adjustment to negative information.

Definition and Mechanism

Core Provisions

The Uptick Rule, formally Rule 10a-1 under the , restricted short selling of securities registered on or admitted to unlisted trading privileges on a national securities exchange by prohibiting such sales unless executed at a price above the price of the immediately preceding sale (an "uptick") or at the last sale price when that price exceeded the most recent different price (a "zero-plus tick"). This tick-test mechanism aimed to prevent short sellers from initiating or exacerbating sharp declines through consecutive downtick sales, thereby curbing potential manipulation while permitting short selling when prices showed signs of stabilization or rebound. The rule applied exclusively to short sales effected directly on national exchanges, excluding over-the-counter transactions and initially Nasdaq-listed securities, which operated under separate quoting conventions until later amendments. Key exceptions to the tick-test requirement included short sales undertaken for bona fide market stabilization activities, such as those during new issuances or secondary distributions; odd-lot transactions; and continuous short sales in the same security by the same person on the same day, provided they were not manipulative. Additionally, exchanges could designate specific securities for exemption if short selling posed no threat of manipulation, though such designations required SEC approval and were rarely invoked. The rule's enforcement relied on self-regulatory organizations, like the New York Stock Exchange, to monitor compliance via trade reporting systems, with violations subject to SEC sanctions under broader antifraud provisions. Implementation details specified that the "immediately preceding sale" referenced the last reported transaction in the consolidated tape system, allowing flexibility for exchanges to use their own execution data if equivalent to national reporting. No minimum increment was mandated beyond prevailing tick sizes, and the rule did not restrict long sales or overall short interest levels, focusing solely on execution timing to mitigate panic-driven cascades observed in pre-1938 market crashes. These provisions remained substantively intact from the rule's 1938 adoption until its 2007 repeal, adapting only marginally to technological changes like decimalization in 2001, which reduced tick sizes but preserved the core price-test logic.

Theoretical Foundations

The uptick rule, formally Rule 10a-1 under the , rests on the principle that unrestricted short selling can exacerbate price declines through self-reinforcing mechanisms, particularly during periods of market stress. Short sellers borrowing and selling shares against a falling price create additional downward pressure, potentially triggering spirals where margin calls and forced liquidations amplify the drop, as sellers compete to exit positions amid thinning buy-side . By mandating that short sales execute only on an uptick (a price higher than the immediate prior trade) or zero-plus tick, the rule introduces a causal barrier: it requires of temporary buying before allowing shorts, thereby interrupting one-sided ish momentum and reducing the likelihood of manipulative "bear raids"—coordinated short selling intended to artificially depress prices for profit. This mechanism draws from observations of pre-1938 market dynamics, where unchecked shorting contributed to the 1929 crash's severity by enabling rapid, panic-driven plunges without countervailing forces. Theoretically, the rule aligns with causal models of emphasizing order flow imbalances. In variants, short selling enhances by incorporating negative information, but empirical patterns of and feedback trading suggest that downtick shorts can dominate during declines, creating path-dependent volatility unrelated to fundamentals. The uptick constraint mitigates this by enforcing sequential price recovery signals, theoretically preserving short selling's informational benefits while curbing non-informational predation; for instance, it prevents shorts from "piling on" without interspersed buys, which signal potential undervaluation. Proponents argue this fosters orderly markets by balancing bullish and bearish pressures, as evidenced in pre-repeal analyses showing reduced execution of manipulative orders under the rule. Critics, however, contend it mildly distorts prices by constraining disagreement-based trading, per models like Miller's (1977) where short-sale limits inflate optimistic valuations, though the uptick's tick-based trigger—rather than outright bans—minimizes such distortions compared to stricter regimes. From a first-principles standpoint, the rule addresses the asymmetry in trading frictions: long positions require , inherently limited by capital, whereas leverage borrowed shares, enabling outsized downward bets that can overwhelm natural buyers in illiquid conditions. This realism underpins its design to promote resilience against exogenous shocks, ensuring shorting contributes to equilibrium rather than disequilibrium cascades, a rationale upheld in regulatory evaluations despite repeal debates.

Historical Development

Origins in the 1930s

The of October 1929, which initiated the , prompted widespread scrutiny of short selling practices perceived as exacerbating volatility through coordinated "bear raids" that drove prices lower. Public and congressional investigations, including those by the Senate Banking Committee, highlighted manipulative short sales as a contributing factor to market instability, though empirical evidence on their causal role remained debated. In response, the (NYSE) enacted ad hoc restrictions without federal oversight. On September 30, 1931, following sharp declines, the NYSE temporarily banned all short sales for two days to stem panic selling. It then prohibited short sales executed at prices below the last sale (downtick rule), aiming to prevent shorts from initiating further drops. By April 1932, amid ongoing market weakness, the NYSE required brokers to obtain written customer authorization before effecting short sales, further tightening controls to verify legitimacy and reduce speculation. These measures, while stabilizing prices temporarily, were criticized for arbitrariness and inconsistency across exchanges. The Securities Exchange Act of 1934 established the U.S. Securities and Exchange Commission (SEC) to regulate markets systematically, including short selling under Section 10(a). The SEC initiated a comprehensive study of short selling practices, reviewing data from the 1929 crash and subsequent years to assess their impact on liquidity and price discovery. Concluding that unrestricted shorting on downticks could amplify declines without providing counterbalancing benefits in falling markets, the SEC adopted Rule 10a-1 on February 8, 1938, mandating that short sales occur only on an uptick (a price higher than the immediate prior trade) or zero-plus tick (same price as prior but higher than the last different price). This formalized a price test to curb manipulative pressure while permitting shorting in rising markets, marking the uptick rule's enduring framework.

Implementation and Early Enforcement (1938–2007)

The U.S. Securities and Exchange Commission (SEC) adopted Rule 10a-1 on January 24, 1938, formalizing the uptick rule under Section 10(a) of the to restrict short selling that could accelerate declines. The provision barred short sales of exchange-listed securities at or below the last sale unless executed on an uptick (a higher than the immediate prior trade) or a zero-plus tick (a sale at the last following a higher preceding ). This measure addressed concerns from the 1929 market crash and subsequent investigations, which identified short selling as a factor in disorderly declines, building on voluntary restrictions against downtick short sales implemented since 1931. Implementation mandated that national securities exchanges and national securities associations adopt and enforce rules consistent with Rule 10a-1, including real-time trade reporting to determine tick status. Trading centers were required to establish surveillance systems for compliance, with the SEC providing oversight through examinations and data analysis from consolidated reporting plans. Initial enforcement focused on curbing manipulative practices in over-the-counter and listed markets, with the rule applying to short sales by any , including market makers under limited exemptions for bona fide transactions. The core mechanism remained largely unchanged through the post-World War II era, adapting only to definitional updates for automated quotation systems introduced in later decades. From the 1940s to the 1990s, the SEC enforced the rule via administrative proceedings, civil injunctions, and penalties for violations such as unauthorized downtick shorts, often integrated into broader cases of or . Compliance was facilitated by manual and later electronic monitoring on exchanges like the NYSE and , with violations typically resulting in fines, suspensions, or rather than systemic challenges to the rule's framework. The rule withstood major market disruptions, including the 1962 "," the 1973-1974 bear market, and the 1987 crash, without repeal or substantial revision, as studies and SEC reviews affirmed its role in mitigating panic selling. Amendments were minor, such as clarifications for ex-dividend trades and options-related shorts, preserving the tick test's intent amid evolving trading volumes. By the early 2000s, heightened scrutiny arose amid decimalization and , prompting the SEC's 2004 adoption of Regulation SHO to target persistent fails-to-deliver in short sales—primarily affecting small-capitalization stocks—while upholding the uptick rule for all securities. A pilot under Regulation SHO temporarily suspended the rule for portions of the to assess liquidity and volatility impacts, revealing no significant adverse effects in tested environments but fueling debates on its obsolescence. Enforcement during this transition emphasized procedural compliance, with the SEC issuing guidance on short sale marking and borrow locate requirements intertwined with tick test adherence, until the rule's full suspension in 2007.

Path to Repeal (2004–2007)

In October 2003, the SEC proposed Regulation SHO to modernize short sale regulations, including consideration of suspending price tests like the uptick rule amid evolving market structures such as decimalization and . On July 28, 2004, the SEC adopted Regulation SHO and announced a one-year pilot program suspending short sale price restrictions, including the uptick rule under Rule 10a-1, for a randomly selected sample of approximately 1,000 securities listed on the NYSE and , aiming to assess impacts on , volatility, and price efficiency. The pilot's design compared pilot securities (without price tests) against a control group retaining the restrictions, with data collection to inform whether the uptick rule remained necessary in contemporary markets characterized by reduced tick sizes and . Implementation delays arose due to operational challenges; on November 29, 2004, the SEC reset the pilot to commence on May 2, 2005, and conclude on April 28, 2006, allowing additional time for broker-dealers and exchanges to adapt systems. During the pilot, short selling volume in pilot securities increased modestly without evidence of heightened manipulation or bear raids, as preliminary data showed no statistically significant differences in intraday volatility or spreads compared to control securities. Market participants, including exchanges and broker-dealers, submitted comments highlighting that the uptick rule constrained liquidity in downtrending stocks and was obsolete given automated surveillance and circuit breakers already mitigating abusive practices. On December 14, 2006, the SEC proposed amendments to Regulation SHO to permanently eliminate the tick test for all equity securities, citing pilot observations and broader regulatory reviews that found the rule ineffective at preventing downward pressure while imposing unnecessary costs on legitimate short selling. In 2007, the SEC's Office of Economic Analysis released a comprehensive study of the pilot, concluding that suspension of price tests did not degrade market quality; specifically, pilot stocks exhibited similar bid-ask spreads (averaging 0.02% narrower), volatility measures, and short interest levels to controls, supporting repeal as markets had adapted through other safeguards like order protection rules. Critics, including some investor advocates, argued the study underrepresented manipulation risks in less liquid stocks, but SEC staff emphasized empirical metrics over anecdotal concerns, privileging data from over 1,000 securities across varying sizes and sectors. These findings, combined with public comments favoring deregulation to enhance , paved the way for the Commission's forthcoming vote.

Repeal and Immediate Aftermath

SEC's 2007 Decision

On June 13, 2007, the U.S. Securities and Exchange Commission (SEC) voted unanimously to repeal Rule 10a-1 under the , which had implemented the uptick rule since 1938. The rule required short sales of exchange-listed securities to occur only on an uptick (a price higher than the previous trade) or a zero-plus tick (a price equal to the previous trade but higher than the last trade at a different price). The repeal was part of broader amendments to Regulation SHO, aimed at modernizing short sale regulation by eliminating all price test restrictions. The decision stemmed from empirical findings of the Regulation SHO pilot program, initiated in , which suspended uptick requirements for a subset of approximately 1,000 securities. SEC staff analysis of the pilot, covering data from May 2, 2005, to April 30, 2006, indicated that removing price tests generally enhanced market quality: short sale increased, improved (as measured by narrower bid-ask spreads), and there was no evidence of heightened volatility or increased instances of abusive short selling in pilot compared to non-pilot . Specifically, the found that price tests "modestly reduce and provide only limited to individual from downward price pressure caused by short selling," concluding they were outdated in electronic, high-speed markets where short selling aids price efficiency and . The SEC argued that the uptick rule, originally designed to curb bear raids amid market manipulations, had become obsolete amid technological advances and greater , potentially hindering legitimate hedging and without commensurate benefits. Adoption of the amendments occurred via a 3-2 vote among commissioners present, though described as unanimous in some accounts due to absences; the final rule release on June 28, 2007, eliminated price tests effective immediately for compliance purposes, with full implementation phased to address fail-to-deliver issues. This move aligned with recommendations from market participants and academics favoring to promote efficient pricing, though critics later contended the pilot's scope overlooked rare but severe manipulation risks.

Market Pilot Program Results

The Regulation SHO pilot program, initiated by the U.S. Securities and Exchange Commission (SEC) on May 2, 2005, suspended the short sale price test—commonly known as the uptick rule—for approximately one-third of stocks in the , comprising around 1,000 securities designated as pilot stocks. These pilot stocks were compared to a control group of remaining stocks that retained the price test, allowing empirical assessment of the rule's impact on market dynamics over the subsequent two years until the program's conclusion in mid-2007. The SEC's economic analysis, drawing on trading data from exchanges and alternative trading systems, evaluated metrics including short selling activity, , volatility, and price efficiency to determine whether the price restrictions provided meaningful protections against abusive short selling. Short selling volume as a of total trading volume rose modestly in pilot relative to controls, increasing by approximately 1.9% for exchange-listed and 1.7% for Nasdaq National Market , with at the 1% level. This suggests the price test had constrained short selling activity, but the effect was limited and did not translate to disproportionate downward price pressure. measures showed mixed results: quoted depths decreased (e.g., ask-side depth fell by about 5% for listed pilot ), indicating reduced provision on the ask side without the test, while effective spreads—reflecting realized transaction costs—exhibited no significant changes. Volatility analysis revealed that the tick test (for listed stocks) slightly dampened 5-minute intraday return volatility, but daily volatility showed no material differences between pilot and control groups. Price efficiency metrics, including long-term alphas and return predictability, indicated no sustained distortions; pilot stocks experienced a minor 24 basis point underperformance on the program's start date for listed securities, but alphas converged over six months, implying no persistent over- or undervaluation. Indicators of potential manipulation, such as return skewness and price reversal rates, displayed no evidence of heightened bear raids or abusive practices in pilot stocks, with reversal magnitudes higher but balanced across positive and negative returns. Overall, the SEC's evaluation concluded that while price restrictions modestly impeded short selling execution, they did not demonstrably enhance market quality or prevent significant adverse outcomes, leading to the determination that the uptick rule had outlived its purpose. This assessment informed the full repeal of the rule in July 2007, though subsequent academic studies using pilot data have noted nuances, such as potential spillover effects across stocks that could complicate causal inferences.

Response to the 2008 Financial Crisis

Emergency Measures

On September 18, 2008, amid escalating market volatility following the Lehman Brothers bankruptcy, the U.S. Securities and Exchange Commission (SEC) exercised its emergency authority under Section 12(k)(2) of the Securities Exchange Act of 1934 to issue Order 34-58592, prohibiting short selling in publicly traded securities of designated financial institutions, including investment banks, bank holding companies, thrifts, and insurance companies listed in an annexed schedule of 19 firms. This measure targeted potential abusive practices exacerbating price declines, with exceptions for market stabilization activities, bona fide market making, and certain hedging transactions by primary dealers. The following day, September 19, 2008, the SEC broadened the restriction via an emergency order banning most short sales across approximately 1,000 financial sector , including those of banks, broker-dealers, companies, and savings associations, to curb perceived manipulative short selling that was accelerating downturns in financial equities. The ban, effective immediately, applied to all persons and covered transactions in U.S. exchanges and over-the-counter markets, while permitting limited exceptions such as short sales pursuant to Rule 10b5-1 plans or for covering fails-to-deliver. Initially set to expire at 11:59 p.m. ET on October 2, 2008, it was extended to October 8, 2008, coinciding with the implementation of provisions in the Emergency Economic Stabilization Act of 2008. Concurrently, on September 18, , the SEC adopted interim final Rule 10b-21, an anti-fraud provision criminalizing deceptive short selling practices, such as failing to deliver securities while misleading brokers about locate requirements or closing intentions. This rule, effective at 12:01 a.m. ET on September 18, aimed to deter " by treating delivery failures as potential when paired with false representations. These actions marked a departure from the prior year's repeal of the uptick rule, imposing outright prohibitions rather than price-triggered restrictions to address immediate threats to market integrity during the crisis.

Calls for Reinstatement

Following the intensification of the , particularly after the September 2008 collapse of and sharp declines in financial sector stocks, numerous market participants and policymakers advocated for reinstating the uptick rule to mitigate perceived abusive short selling that exacerbated downward price spirals. Investors and financial advisers argued that the rule's absence enabled unchecked bear raids, eroding investor confidence and accelerating sell-offs in vulnerable stocks. For instance, prominent host publicly urged restoration of the rule, contending it would prevent manipulative practices observed during the crisis. Lawmakers echoed these sentiments amid emergency regulatory responses, including the SEC's temporary short-selling bans on 799 financial firms announced on September 19, 2008. House Financial Services Committee Chairman called for the uptick rule's reinstatement in March 2009, stating that every crisis demanded action to restore market stability, regardless of debates over its prior efficacy. Similarly, Chairman supported exploring its revival, viewing it as a potential check on panic-driven declines. Commentators in outlets like argued in December 2008 that reinstating the rule would directly address manipulation risks and bolster confidence, as short sales under the original framework required an uptick to avoid piling on falling prices. The SEC itself faced mounting pressure, with incoming Chairman indicating in March 2009 that the agency hoped to propose reinstatement or variants by April, citing crisis-era evidence of short-selling abuses. Public feedback reinforced these calls; by June 2009, the SEC reported being deluged with supportive comments from investors and executives, many emphasizing the rule's role in curbing in shorting during downturns. Over 1,000 comment letters submitted in response to early proposals overwhelmingly favored some form of price test, with critics of the 2007 repeal attributing crisis severity partly to unrestricted shorting. These advocacy efforts highlighted divisions, as short sellers and some academics opposed reinstatement, arguing it impeded , but proponent arguments centered on empirical observations of heightened volatility post-repeal.

Adoption of the Alternative Uptick Rule

Rule 201 Framework

Rule 201 of Regulation SHO implements a short sale price test applicable to covered securities, which are exchange-listed National Market System (NMS) stocks. The rule's framework centers on a trigger mechanism monitored by the security's primary listing exchange or national securities association (collectively, listing market), which assesses intra-day trade prices during regular trading hours (9:30 a.m. to 4:00 p.m. ET) to determine if the security has declined by 10% or more from the previous trading day's closing price, using last sale-eligible trades. Upon triggering, the listing market disseminates the fact of the trigger to other self-regulatory organizations (SROs), trading centers, and broker-dealers, enabling coordinated enforcement across markets. The restrictions activate immediately upon the trigger for the remainder of that trading day and extend through the entire following trading day, regardless of subsequent price recovery, until 12:01 a.m. ET the day after the trigger day. During this period, all persons are prohibited from effecting short sales of the covered security at or below the current national best bid (NBB), requiring instead execution at a price strictly above the NBB to qualify as compliant. This uptick-like price test applies universally to short sales, including those by market makers, unless an exemption under Rule 201(d) permits marking the order as "short exempt," such as for bona fide market making activities that provide without exacerbating downward pressure, odd-lot transactions, certain strategies, riskless principal trades, or sales involving delayed delivery where the short seller owns the security by settlement. Trading centers, including exchanges and alternative trading systems, bear primary responsibility for compliance by establishing, documenting, and enforcing written policies and procedures to prevent the execution or display of non-compliant short sale orders, including surveillance s to monitor for violations and reject or re-price orders as needed. Broker-dealers submitting or routing short sale orders must reasonably believe the order will execute above the NBB, relying on their own s or the trading center's policies, and must mark all short sale orders during the restricted period appropriately, with "short exempt" markings restricted to qualifying exemptions to avoid misuse. The framework includes no fixed halt on trading but focuses on curbing short selling's potential to amplify declines, with triggers possible multiple times without limit if conditions recur, and delayed application for newly listed securities lacking a prior closing price until their second trading day. Adopted on February 24, 2010, the rule became effective May 10, 2010, with phased compliance culminating by February 28, 2011, to allow adaptations.

Triggers and Operations

Rule 201 of Regulation SHO establishes a short sale-related for covered securities, which are all equity securities listed on a national securities exchange or nationally recognized quotation system, excluding certain options and debt securities. The trigger occurs when the price of a covered security declines by 10% or more from its closing price on the previous trading day, as calculated by the primary listing exchange using last-sale eligible prices during regular trading hours from 9:30 a.m. to 4:00 p.m. Eastern Time. This threshold is assessed intraday, and the listing exchange determines the trigger based on real-time data reported to the consolidated tape. Once triggered, the listing exchange promptly notifies the single plan processor under the consolidated transaction reporting plan, which disseminates the information via the national to alert trading centers and market participants. Upon triggering, the restrictions activate immediately for the remainder of the trading day and extend through the close of the next trading day, regardless of subsequent price recovery. Trading centers must implement policies and procedures to prevent the execution or display of short sale orders in the covered security at or below the current national best bid (NBB), defined as the highest displayed bid among all national market centers. This effectively requires short sales to occur at a price strictly above the NBB, functioning as an "alternative uptick" test relative to the bid rather than the prior trade price, to curb potential downward pressure from short selling during periods of significant decline. The rule permits limited exceptions to maintain market functionality, including the execution of short sale orders marked "short exempt" without price restrictions if they qualify under criteria such as bona fide market making, ownership positions under Rule 200(g) of Regulation SHO, or certain riskless principal transactions. Additionally, displayed short sale orders initially priced above the NBB at the time of display may be executed even if the NBB subsequently rises to match or exceed that price. Compliance is enforced across all U.S. trading venues, with no restrictions on long sales or other order types, and the trigger can recur on consecutive days if the 10% decline condition is met anew. The SEC adopted these mechanics in February 2010 to enhance market stability without broadly prohibiting short selling, with full implementation required by November 10, 2010.

International Variations

Hong Kong's Approach

In Hong Kong, short selling is regulated under the Securities and Futures Ordinance (Cap. 571) and the rules of the (HKEX), permitting only "regulated short selling" for a designated list of eligible securities, primarily large-cap stocks with sufficient liquidity and . These designated securities are updated quarterly by HKEX, ensuring short selling occurs only in covered transactions where the seller has borrowing arrangements or equivalent rights to the securities, prohibiting . Central to Hong Kong's framework is the "tick rule," which mandates that short sale orders for designated securities must not be executed below specified reference prices: the pre-opening session (POS) reference price during POS, the best current during continuous trading session (CTS), or the closing auction session (CAS) reference price during CAS. This rule, distinct from the traditional U.S. uptick rule that conditions short sales on an increase from the prior price, instead ties execution to the prevailing to curb aggressive downward pressure on bids without referencing sequential trade ticks. Introduced in 1994 as part of a pilot scheme for 17 securities, the tick rule was briefly abolished in March 1996 before reinstatement following the 1998 Asian financial crisis to enhance market stability amid volatility concerns. The (SFC) oversees enforcement, with breaches punishable by fines up to HK$100,000 and imprisonment for up to two years, alongside mandatory daily reporting of short positions exceeding 0.02% of issued shares or HK$30 million in value since June 2012. Exemptions apply for market makers and certain index arbitrage activities, but the rule remains a core safeguard, applied solely to the roughly 200-300 designated securities out of over 2,500 listed on HKEX as of 2023. This approach prioritizes orderly markets over unrestricted shorting, reflecting lessons from regional crises rather than global uptick standards.

Other Global Examples

In , the (now part of Japan Exchange Group) enforces an uptick rule prohibiting short sales at a price equal to or lower than the last traded price, applicable to exchange-traded short selling orders. This restriction, in place as a standard market safeguard, aims to prevent exacerbating downward price pressure and has remained consistent post-regulatory amendments in 2013 that clarified covered short selling requirements. Exemptions apply to certain hedging transactions and market-making activities, but the core tick test persists to maintain orderly trading. Canada's Universal Market Integrity Rules (UMIR), administered by the Canadian Investment Regulatory Organization (CIRO), stipulate under Rule 3.1 that short sales by participants or access persons must occur at a not below the last sale , functioning as a de facto uptick mechanism. Introduced to curb manipulative practices, this rule includes exemptions for bona fide market-making and certain index but applies broadly to equity securities, with enforcement emphasizing compliance through pre-trade checks. Unlike trigger-based systems, it operates continuously without circuit breakers, reflecting a focus on baseline discipline amid Canada's integrated North American trading environment. Turkey's adopted an uptick rule effective September 3, 2025, mandating that short sales execute at a price higher than the immediately preceding trade to mitigate volatility in domestic equities. This measure, introduced amid regional market pressures, aligns with global efforts to balance short-selling benefits against crash risks, though its long-term impact remains under evaluation given the implementation's recency.

Empirical Assessments

Studies on Price Stability

A study by Naik and Seetharaman (2010) examined the effects of the U.S. Securities and Exchange Commission's (SEC) elimination of the uptick rule in July 2007, analyzing volatility in the S&P 500 index and individual stocks. The researchers found that both overall and intraday volatility increased significantly post-repeal, particularly over a 50-day window, with statistical tests confirming higher standard deviations in returns for affected securities compared to pre-repeal periods. This suggests the rule previously dampened excessive price swings by constraining short sales during downturns. In contrast, Boehmer, Jones, Zhang, and Zhu (2013) conducted a comprehensive empirical analysis of the 2007 repeal using transaction-level data from U.S. exchanges. Their findings indicated that while short-selling volume rose modestly, there was no material increase in stock price volatility or crash risk; instead, prices became more efficient in reflecting information, as measured by lower post-earnings announcement drift and reduced overpricing in constrained stocks. The study attributed minimal destabilizing effects to the prevalence of other short-selling mechanisms, such as options, that bypassed the rule. Further evidence from international contexts supports a stabilizing role in volatile conditions. A 2025 analysis of Taiwan's uptick rule, implemented in to restrict short sales to prices at or above the prior close, showed it enhanced market stability by reducing return volatility during high short-interest periods, though at the cost of slower . Theoretical models, such as those employing adaptive rational equilibrium dynamics, corroborate this by demonstrating the rule's ability to curb predatory short selling and limit downward spirals in undervalued stocks, albeit with potential for delayed upward adjustments. Diether, Malloy, and Scherbina (various works summarized in 2017) assessed the rule's broader impacts and concluded its effects on volatility were small and primarily distortive, with no strong evidence of systemic stabilization benefits outweighing costs in normal markets. These divergent results highlight methodological differences, such as sample periods encompassing the 2008 crisis (favoring stabilization claims) versus calm periods, underscoring the rule's conditional efficacy during extreme declines rather than routine trading.

Effects on Liquidity and Efficiency

The SEC's Regulation SHO pilot program, conducted from 2005 to 2007, examined the effects of eliminating short-sale price tests (including the ) for a sample of with high short interest. measures showed minimal changes: quoted bid-ask spreads declined by approximately 0.3 cents for pilot , effective spreads remained unaffected, and while quote depth decreased slightly (particularly on the ask side for exchange-listed ), overall realized was not significantly impaired. Regarding market , the study found no evidence of long-term over- or underpricing, with pilot exhibiting similar risk-adjusted returns to controls over six months, though listed pilot underperformed by 24 basis points on the initial implementation day. Studies on the alternative uptick rule (SEC Rule 201, effective from 2010) indicate that its activation during 10% intraday price declines reduces short-sale volume by about 8% but does not broadly harm liquidity. Narrower bid-ask spreads and increased depth at the best ask price (up 11%) were observed during restrictions, as short sellers shifted toward liquidity provision on the ask side, though seller-initiated volume fell by 4.6%. Price efficiency appears mixed, with restrictions lowering spot volatility and preventing further declines (daily returns rose 35 basis points on triggered days), but discontinuities in returns at the -10% threshold suggest potential temporary inefficiencies or delayed price discovery. Broader attributes small overall distortions to the uptick rule, with short-sale constraints like price tests having negligible impacts on and volatility compared to outright bans. For instance, Diether, Lee, and Werner (2009) analyzed the Reg SHO pilot and concluded that price tests create minor frictions, but their removal led to modest improvements without compromising . In contrast, theoretical models and cross-sectional evidence link tighter short-sale limits to reduced informational , as uninhibited short selling accelerates the incorporation of negative information into prices, though uptick rules' targeted nature mutes these effects relative to blanket restrictions.

Evidence from Crises and Pilots

The SEC conducted a pilot program from 2003 to 2007 exempting approximately 1,000 stocks from the uptick rule to assess its impacts on market quality. Analysis of the pilot data revealed no significant differences in , volatility, or price efficiency between exempt and non-exempt stocks, with short-selling activity showing limited variation. Short sellers in exempt stocks experienced negligible changes in execution costs or profitability, suggesting the rule imposed minimal constraints on their operations. These findings contributed to the SEC's decision to the rule in July 2007, as the pilot indicated no substantial adverse effects from its absence. Reanalysis of the pilot by independent researchers highlighted potential underestimation of effects, noting that exempt exhibited about 2% lower returns over six months compared to rule-bound counterparts, though the SEC deemed this statistically insignificant. Spillover effects across complicated , as short-selling bans in pilot may have influenced non-pilot trading, potentially masking broader market stabilization benefits. Overall, the pilot provided weak evidence supporting the rule's necessity for preventing manipulative declines, with metrics like bid-ask spreads and trading volume remaining stable without it. In historical crises, the original uptick rule's implementation followed the 1929 stock market crash, aimed at curbing bear raids, but lacked controlled empirical tests due to its absence beforehand. During the October 1987 crash, the rule reportedly hindered , exacerbating intraday price drops by delaying short sales needed for hedging, as arbitrageurs could not efficiently unwind positions. Post-repeal in 2008, amid the , temporary short-sale bans on financial stocks were imposed, but subsequent reviews found no causal link between the rule's absence and heightened volatility, with short selling not identified as a primary driver of declines. The 2010 alternative uptick rule (Rule 201), triggered by a 10% daily decline, has faced limited crisis testing, including the 2020 market downturn, where it activated sporadically without evidence of mitigating panic selling or stabilizing prices beyond baseline recovery dynamics. Studies of Rule 201 indicate it rarely binds during stress periods, affecting few trades and showing no robust with reduced crash risk, as short-sale volumes remained subdued by other factors like margin requirements. Critics note that while pilots and crises reveal the rule's marginal role in preservation, its circuit-breaker design may inadvertently delay in rapid declines.

Ongoing Debates

Proponents' Arguments

Proponents of the uptick rule, including major exchanges such as the NYSE and , argue that it curbs manipulative short selling by preventing traders from piling into declining stocks without restraint, thereby reducing the risk of coordinated "bear raids" that accelerate drops. This mechanism, originally enacted by the SEC in 1938 under Rule 10a-1 following the 1929 market crash, requires short sales to occur only at a price above the immediately preceding (an uptick) or at the last if it followed an uptick, allowing long-position sellers to offload holdings first during downturns and thereby moderating sell-side imbalances. In the modern context, supporters such as Charles Schwab and have endorsed variants like the 2010 alternative uptick rule (Rule 201), which activates after a 10% intraday price decline and imposes short-sale price tests until the next trading day, claiming it diminishes manipulative activity and promotes smoother market declines without broadly impeding short selling. They contend this targeted approach preserves investor confidence by signaling regulatory safeguards against abusive practices, particularly during crises like the 2008 financial meltdown, where unrestricted shorting was blamed for exacerbating volatility in financial stocks. Legislative figures including House Financial Services Chairman and Senate Banking Chairman Christopher Dodd also backed reinstatement efforts, viewing the rule as essential for restoring market stability amid post-crisis turmoil. Empirical support cited by proponents includes a 2007-2008 analysis of stocks, which found significantly higher intraday volatility in 27 of 30 components in the 50 days following the uptick rule's repeal on July 6, 2007, using the Garman-Klass , and elevated historical volatility in 17 of 30 over 30 days. The SEC's adoption of Rule 201 in February was predicated on preventing short selling from further eroding prices in already weakened securities, with the agency noting its design to balance benefits of shorting against risks of downward spirals. Overall, advocates maintain that such restrictions foster orderly markets by prioritizing over unchecked bearish bets, without evidence of broad harm in compliant environments.

Opponents' Critiques

Opponents of the uptick rule, including financial economists and market participants, contend that it fails to achieve its intended goal of curbing manipulative short selling or preventing excessive price declines, as evidenced by the U.S. Securities and Exchange Commission's (SEC) decision to repeal the original Rule 10a-1 in July 2007 following empirical analyses that found no significant protective effects during market stress periods like the 1987 crash. Studies reviewed by the SEC indicated that the rule did not demonstrably reduce volatility or bear raids, with short selling instead serving as a natural counterbalance to overvaluation rather than a primary driver of downturns. A core critique is that the rule impairs by limiting short sellers' ability to provide buying interest on downticks, potentially exacerbating price swings through reduced trading volume and wider bid-ask spreads, as observed in analyses of short-sale constraints where restricted stocks exhibited slower price adjustments and higher transaction costs. For instance, during the , temporary short-sale bans correlated with diminished metrics, such as increased volatility and poorer market quality, suggesting that uptick-like restrictions hinder the market's self-correcting mechanisms rather than stabilizing them. Critics further argue that the rule distorts by delaying the incorporation of negative information, allowing overpricing to persist and ultimately leading to sharper when shorts are eventually permitted, as supported by showing constrained short selling results in slower reflection of bad in stock prices compared to unconstrained environments. managers and trading firms, in submissions to the SEC during the 2010 for the alternative uptick trigger (Rule 201), highlighted that rapid renders tick-based restrictions obsolete and prone to circumvention via like options, which undermine the rule's without addressing underlying issues like high-frequency manipulation. Empirical assessments post-repeal, including data from 2007 to 2010, revealed no surge in abusive short selling or market instability attributable to the absence of the rule, reinforcing opponents' view that it imposes unnecessary frictions in efficient markets; dissenting SEC commissioners in 2010 echoed this, warning that Rule 201 could foster distrust by signaling regulatory overreach without proportional benefits. Overall, the prevailing academic consensus, drawn from event studies and cross-market comparisons, holds that such price tests are either ineffective or counterproductive, potentially harming long-term more than they protect against rare manipulations.

Recent Proposals and Status (as of 2025)

As of October 2025, the U.S. Securities and Exchange Commission (SEC) has not reinstated the original uptick rule (former Rule 10a-1 under the ), which was repealed effective July 3, 2007, following empirical reviews indicating limited evidence of its necessity in modern electronic markets. Instead, Regulation SHO's Rule 201, the alternative uptick rule adopted in 2010, remains the operative short-sale price test, activating a for individual securities that decline 10% or more from the prior day's closing price during regular trading hours. Once triggered, short sales must execute at a price above the current national best bid (typically by the minimum , such as $0.01 for most ), persisting until the next trading day or longer if the exchange deems necessary; exchanges like and NYSE oversee triggering and dissemination. No formal SEC rulemaking proposals to modify Rule 201 or revive the permanent uptick rule advanced in 2024 or 2025, despite periodic advocacy from market participants citing volatility episodes like the 2021 meme stock squeezes. Recent SEC focus on short-selling has centered on disclosure enhancements, such as Rule 13f-2's monthly reporting of significant short positions (effective January 2025 for certain institutional managers), aimed at improving transparency rather than altering price restrictions. A 2024 study analyzing Rule 201 triggers found it curbs aggressive shorting during downturns but may inadvertently boost options-based circumvention, prompting calls for complementary reforms without yielding actionable proposals. Internationally, regulatory bodies have shown nascent interest; for instance, on April 10, 2025, the Prospectors & Developers Association of urged the Canadian Investment Regulatory Organization to reinstate a general uptick rule to mitigate perceived short-selling abuses in resource sectors, though no implementation has occurred. In the U.S., ongoing debates emphasize Rule 201's conditional nature as a balanced alternative, with proponents arguing it preserves absent chronic manipulation, while critics contend broader restrictions could enhance stability without the repeal's observed uptick in bear raid risks. Absent new empirical catalysts, the endures, with compliance monitored via self-regulatory organizations like FINRA.

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