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SEC Moves to Reinstate Rule for Short-Sellers

POSTED: 03:56 PM ET, 03/11/2009 by Derek Kravitz

Rule 10a-1. The arcane "uptick rule."

Created in 1938, toward the end of the Great Depression, and abolished in July 2007 by the federal Securities and Exchange Commission, the rule regulated short-selling on Wall Street by only allowing traders to make "short-sales" following a higher bid on a stock price.

For example, if a company's stock was trading at $30 per share and a trader thought the stock price would fall, he could borrow shares but not actually sell them until the stock price ticked higher, to $30.01, for example. (The trader would hope to be able to buy the shares back when the price fell and thus make money on the spread.)

In theory, the rule helped stop "bear raids" on stocks, when traders would gang together on particular stocks and force their prices down. But the SEC said the rule did not appear "necessary to prevent manipulation," according to a 2007 New York Times interview with Muriel Siebert, the former state banking superintendent of New York.

Without the rule, some observers argued that short-sellers were able to unfairly thrive in the market in 2008. And that, in turn, allegedly contributed to the market meltdown.

"The rule was designed as a guardrail that slowed down the short-selling process, preventing shorts from driving the price of a stock at a faster clip," opined.

As the stock market plunged in late 2008, critics questioned the SEC's decision to get rid of the uptick rule.

On the campaign trail, Sen. John McCain (R-Ariz.) bemoaned its elimination, saying the move turned "our markets into a casino."

Federal Reserve Chairman Ben Bernanke, testifying last month before the House Financial Services Committee, said if the rule were in place last year, it "might have had some benefit" in preventing the market collapse.

In January, during her confirmation hearing, SEC Chairman Mary Schapiro said she would consider reinstating the rule; Schapiro was scheduled to appear today before a House Appropriations subcommittee in her first congressional testimony since taking office.

Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, seemed optimistic about a change, adding that Schapiro had told him the agency would take up the issue soon.

"I'm hopeful that the uptick rule will be restored within a month," Frank said yesterday, according to The Associated Press.

By Derek Kravitz |  March 11, 2009; 3:56 PM ET Economy Watch
Previous: Madoff Faces Life, Somali Americans Being Recruited and Intelligence Pick Withdraws | Next: Madoff Appears in Court, Cuomo Calls Merrill 'Misleading', Fraud Prosecutions Surge


Please email us to report offensive comments.

Amen to this!

Posted by: www_modulusfe_com | March 12, 2009 4:07 PM

This would appear to be forward progress, but all we have is rumors at this point. The SEC Chairman, Mary Schapiro, spoke before the House Financial Services Committee on March 11, 2009 and didn't mention the uptick rule. If you are in favor of reinstating the uptick rule, it might help to send her an email at with your opinion.

When the SEC removed the uptick rule, one of the comments made was that a rule must scream for attention, and it seemed that the uptick rule only whispered. It still must be whispering because they haven't reinstated it yet.

Posted by: NonLinear | March 13, 2009 5:46 PM

The uptick rule succeeded more at reducing returns for short sellers than at protecting losing stocks. It should also be noted that the SEC handles short runs on the market by other means, such as the temporary ban on all short selling in September 2008, and the longer term ban on naked short selling that was enacted in 2005.
It is also important to remember that short selling is risky, since there is no upper limit to how much money you can lose if the stock goes up rather than down.
In short, the uptick wouldn't prevent market manipulation, since one could collude to drive the price up temporarily to enable one to sell his stock. It does, however, make it difficult to hedge.

Posted by: CatotheElder | March 14, 2009 10:13 AM

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