Uptick Rule: An SEC Rule Governing Short Sales

what is the uptick rule

Whether it was by chance, or the beginning of World War II, the rule seemed to work, as the Great Depression came to an end just one year later. Thus, the SEC kept the rule in place, and traders obeyed the rule for decades, even as trading transitioned to free stock trading platforms. An uptick in bond yields means the returns that an investor will receive from investing in the bond will be higher.

what is the uptick rule

Global application of similar rules

what is the uptick rule

Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any financial institution. For most stocks, SSR is usually fx choice review triggered when there is a breaking news. On the other hand, when you short, your goal is to benefit when the price moves downwards. In the above example, you would benefit when the firm’s shares drops to $361 and below.

What Is Uptick Volume?

You must wait until the price of the stock you are looking to sell short has an uptick before you can enter your trade. This is typically only allowed for highly volatile stocks which fluctuate noticeably over the course of one day. There are also additional restrictions to this rule, which is why many platforms don’t allow this exemption to the uptick rule.

Example of a Short Sale restriction

  1. The uptick rule does this by requiring that any short sale must take place at a higher price than the last trade if that stock is trading at a price that’s down 10% or more from the previous trading day’s closing price.
  2. Uptick volume is used by technical traders, who use it to determine a stock’s net volume; the difference between its uptick volume and downtick volume.
  3. SSR, also known as uptick rule, is a process aimed at limiting short selling in the stock market.
  4. On the other hand, when you short a stock, there is no limit to where the stock can go.
  5. This directive, originally in place from 1938 to 2007, dictated that a short sale could only be made on an uptick.

Even the top top online short-selling stock brokers have restrictions that will automatically turn on when someone tries to short sell a stock that has already declined 10% in one day. The owner of this website may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear), with exception for mortgage and home lending related products. SuperMoney strives to provide a wide array of offers for our users, but our offers do not represent all financial services companies or products.

The 2008 financial crisis

The rule requires trading centers to establish and enforce procedures that prevent the execution or display of a prohibited short sale. For example, if the stock under SSR is at $10, you can place a sell limit order at $13. This order will initiate the short position automatically once the price is triggered. When it comes down to it, whether or not the uptick rule has done what it was established to do depends on who you ask.

In trading, there are several positions where a trader must buy and sell a certain number of shares of a stock, say 100 shares and this is called a lot. If an investor who has borrowed shares is trying to sell shares to close out an odd-lot position, as in they had 123 shares when the lot size is 100, this trade is exempt from the alternative uptick rule. The uptick rule is a regulation imposed by the SEC (Securities and Exchanges Commission) to control the rate and frequency of short selling happening within the stock market.

The SEC allows investors to skip the part of the regulation where they must sell the stock for higher than the market price if they sell at a volume-weighted average weighted price. This is basically the average price the stock has sold at over the course of the day. Sometimes, when companies hit hard times, they are required to release employees, and along with it, sell stock to stay afloat. When it is the institution itself selling the stock in response to a negative event like a lay off, this trade is exempt to the regulations. In the early 2000’s, many investors began to ask whether they even needed the uptick rule anymore because life had changed so much since the 1930’s. As a result, the SEC ran a test in 2004, eliminating the uptick rule on a certain set of select stocks on the market.

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