Uptick Rule

In June 2007, the SEC adopted one of the most significant changes to the regulation of short sales in nearly 70 years. The commission unanimously voted to eliminate the “tick rule” found in securities exchange act rule 10a-1 and to prohibit any securities SRO from imposing a price restriction.(85)

The tick rule had been adopted by the SEC in 1938 after several years of considering the impact of short selling on the 1929 market crash and the general effects of short selling in a declining market. The rule had prohibited selling a security short on a “down-tick,” a price below its preceding reported sale price, or on a “zero down-tick,” a price equal to its preceding reported sale price if that price is below the preceding different reported sale price.(86)

In testimony before a House Appropriations subcommittee, SEC Chairwoman Mary Schapiro said her agency would issue a proposal in April 2009 to restore the so-called uptick rule and will look at other ways to address short selling in the stock market. “We are going to ask some questions about other alternatives. There are going to be some other ideas that we will float.”(87)

However, a December 2008 study by SEC economists Daniel Aromi and Cecilia Caglio concluded that the uptick rule was less effective when needed most, during panics that drive down stock prices and increase volatility. Further, the SEC’s Division of trading and markets said operational issues at brokerages would make it “impossible” to reinstate the rule in its previous form, according to a January 20, 2009 letter sent to Representative Gary Ackerman, a New York Democrat, by former SEC Chairman Christopher Cox.(88)

SEC Analysis Supported Removal of Short Sale Price Test

“The Commission’s Office of Economic Analysis gathered the data made public during the Pilot, analyzed this data and publicly issued a report on the Pilot, which can be found on the commission’s website. Generally, the OEA study, other academic studies of the Pilot data, and the panelists at the commission’s regulation SHO roundtable, concluded that price tests do not have a large impact on market quality and urged removal of short sale price test restrictions. In addition, OEA’s analysis of the Pilot results did not evidence an increase in manipulative short selling after removal of price tests.”

James A. Brigagliano
Associate Director
Office of Trading Practices and Processes Division of Market Regulation, SEC
March 22, 2007 (69)

CONTINUE

Uptick Rule

69. James A. Brigagliano, Associate Director, Office of Trading Practices and Processing, Division of Market Regulation, SEC. “Short Sale Regulation: A Targeted Approach for Efficient Markets. Keynote Address at the MFA Seminar Series 2007,” March 22, 2007. Available at: http://www.sec.gov/news/speech/2007/spch032207jab.htm

85. “SEC Votes on Regulation SHO Amendments and Proposals; Also Votes to Eliminate ‘Tick’ Test”. SEC Press Release. June 13, 2007. Available at: http://www.sec.gov/news/press/2007/2007-114.htm. 17 CFR 240.10a-1 and 17 CFR 242.200 et seq.

86. 17 CFR 240.10a-1

87. Rachelle Younglai, “SEC Looks at More Short-Selling Measures.” Reuters. March 11, 2009. Available at: http://news.yahoo.com. Jesse Westbrook and Edgar Ortega, “SEC May Weigh Reviving Uptick Rule to Bolster Markets.” Bloomberg. March 10, 2009. Available at: http://www.bloomberg.com

88. See: Edgar Ortega, “Short-Sale Rule Undermined as Bernanke Backs Review.” Bloomberg. March 4, 2009. Available at: http://www.bloomberg.com. He reports that: “Daniel Aromi and Cecilia Caglio, economists at the SEC in Washington, said in a December report to former Chairman Christopher Cox that the so-called uptick rule was less effective when needed most, during panics that drive prices down and volatility up. Even with delays imposed by the curb, short sellers in a simulation executed trades 25 percent faster on average when stocks plunged than when prices were steady, according to the study.”