Uptick rule

Uptick rule

The uptick rule is a securities trading rule used to regulate short selling in financial markets. The rule mandates, subject to certain exceptions, that when sold, a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected, or at the last sale price if it is higher than the last different price. In 1938, the 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. [http://www.sec.gov/rules/concept/34-42037.htm#P49_9887]

The NASD and Nasdaq adopted their own short sale price tests based on the last bid rather than on the last reported sale.http://www.sec.gov/news/press/2007/2007-114.htm]

Elimination

The SEC eliminated the uptick rule on July 6, 2007.http://www.sec.gov/rules/final/2007/34-55970.pdf] The elimination of the rule was preceded by a SEC order, placed on July 28, 2004, to create a one-year pilot temporarily suspending the uptick rule on select securities. The purpose of the suspension was so that the commission could study the effectiveness of the rule. The SEC's Office of Economic Analysis and academic researchers provided the SEC with analysis of the data obtained during the pilot. The consensus was against the uptick rule, with the commission concluding that the uptick rule "modestly reduce [d] liquidity and do [es] not appear necessary to prevent manipulation."

The rule was originally put in place to avoid the perpetration of a financial crime known as a bear raid. However, short sellers themselves viewed the rule as "largely symbolic" and having little actual effect on short selling.cite news
title = Nasty, brutish and short
publisher = "The Economist"
date = 2008-06-19
url = http://www.economist.com/displaystory.cfm?story_id=11591349
accessdate = 2008-06-21 ]

Reinstatement

On the March 20, 2008 episode of "Mad Money", Jim Cramer launched his campaign to reinstate the uptick rule. [http://www.cnbc.com/id/23728522 Cramer video] Citing the wild swings of the market since its elimination, Cramer said that the SEC eliminated the rule during a bull market, when liquidity was not a problem. Cramer believes that, without the uptick rule in place, short sellers are devaluing perfectly solid stocks.

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.cite news
title = SEC told to act on short-sellers
publisher = "Financial Times"
date = 2008-07-12
url = http://www.ft.com/cms/s/0/e9125b62-4897-11dd-a851-000077b07658.html
accessdate = 2008-07-12 ]

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." He spoke at an Investment Company Institute conference in New York.

References


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