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Short-Sale Rule

What is the ‘Short-Sale Dominate’

The short-sale rule was a Securities and Exchange Commission (SEC) trading regulation that circumscribed short sales of stock from being placed on a downtick in the peddle price of the shares. 

BREAKING DOWN the ‘Short-Sale Rule’

Under the short-sale bar, shorts could only be traded at or above the most recently interchanged price of the security if the most recent price movement was upward. It prohibited with only limited exceptions the trading of shorts on downticks in the appropriate price. The rule was also known as the “plus-tick rule,” “tick-test statute,” or “uptick rule.”

The rule went into effect in 1938 and was discontinued by the SEC in 2007, allowing short sales to occur (where eligible) on any price tick in the make available, whether up or down. However, in 2010 the SEC adopted an alternative uptick supervise. It does not apply to all securities, and restrictions in trading on downticks are generally not restricted in narrowly-defined circumstances, such as when the price of a security has lessen visited by 10% or more from the previous day’s closing price. 

Policy CV of the Short-Sale Rule

The SEC adopted the short-sale rule during the Great Pit in response to a widespread practice in which shareholders pooled their wherewithal and shorted shares, in the hopes that other shareholders would lose ones nerve and sell their shares quickly as well. The conspiring shareholders could then buy multifarious of the security at a reduced price, but they would do so by driving the value of the divisions even further down in the short term, and reducing the wealth of departed shareholders.

The SEC began examining the possibility of eliminating the short-sale rule believe in the decimalization of the major stock exchanges in the early 2000s. Because tick modulations were shrinking in magnitude following the change away from fractions, and U.S. handle markets had become more stable, it was felt that the restriction was no longer urgent.

The SEC ran a test program of stocks in 2003 to see if removing the short-sale rule would enjoy any negative effects. After reviewing the results it was decided that the determine no longer needed to exist, and it was dropped in 2007. However, naked underfunded – selling shares short that don’t exist or can’t be verified – is still outlawed.

The abandonment of the short-sale rule was met with considerable scrutiny and controversy, not itsy-bitsiest because it closely preceded the 2008 financial crisis. The SEC opened up the achievable reinstatement of the short-sale rule to public comment and review, and in 2010 over the alternative uptick rule restricting short sales on downticks of 10% or uncountable. 

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