Though the rule was eliminated in 2007, the uptick rule was a Securities and Exchange Commission (SEC) requirement that every short sale be entered at a price above the price of the previous trade. The uptick rule was designed to prevent short sellers from further depressing the price of a stock that was already in a steep decline because the rule meant a short seller could only sell securities after a price increase.
Why is it called the uptick rule?
The rule is referred to as the “uptick rule” because an uptick is a transaction occurring at a higher price than the previous transaction, and the rule required every short sale to be conducted on an uptick. The rule is sometimes also referred to as the “plus tick rule.”
What is the history of the uptick rule?
The uptick rule was introduced in the Securities Exchange Act of 1934 and formally called Rule 10a-1. After the SEC temporarily suspended the uptick rule on some securities in 2004, the rule was completely eliminated on July 6, 2007. The economic turmoil of 2008 has led to increased calls for the uptick rules reinstatement, though research on whether the uptick rule is effective in preventing stock market manipulation is mixed.
Did the uptick rule apply to all financial instruments?
The uptick rule never applied to certain financial instruments that were considered liquid enough that short selling could not manipulate the price. For instance, futures, currencies or market Electronically Traded Funds (ETFs) could be sold short on a downtick.