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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. [1] The original rule was implemented by Joseph P. Kennedy, Sr., the first SEC commissioner.[2]
The NASD and Nasdaq adopted their own short sale price tests based on the last bid rather than on the last reported sale.[3]
[edit] Elimination
The SEC eliminated the uptick rule on July 6, 2007.[4] 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 a six-month period starting May 2, 2005. 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."[3]
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.[5]
[edit] Calls for reinstatement
On August 27, 2007, the New York Times published an article on Muriel Siebert, former state banking superintendent of New York, "Wall Street veteran and financial sage", and, in 1967, the first woman to become a member of the New York Stock Exchange. In this article she expressed severe concerns about market volatility: “We’ve never seen volatility like this. We’re watching history being made.” Siebert pointed to the uptick rule, saying, “The S.E.C. took away the short-sale rule and when the markets were falling, institutional investors just pounded stocks because they didn’t need an uptick." Volatility increased dramatically in bonds, commodities and virtually all asset classes, and the uptick rule only applies to equities, so it's removal was arguably not related to the fall in the markets.[6]
On the March 20, 2008 episode of Mad Money, Jim Cramer launched his campaign to reinstate the uptick rule. 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.[7] On the November 22, 2008 episode, Jim Cramer further underscored the true scale of the absence of the uptick rule, exclaiming that Obama must "reinstate [the uptick rule], a rule put in place to prevent a repeat of the great crash."
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.[8] On November 20, 2008, they renewed their call stating "Decisive action cannot await ... a new S.E.C. Chairman. ... There is no tomorrow. The failure to reinstate the Uptick Rule is not acceptable." [9]
On July 16, 2008, Congressman Gary Ackerman, Congresswoman Carolyn Maloney and Congressman Mike Capuano introduced H.R. 6517, "A bill to require the Securities and Exchange Commission to reinstate the uptick rule on short sales of securities."[10]
On September 18, 2008, Republican presidential candidate and Senator John McCain said that the SEC allowed short-selling to turn "our markets into a casino." Sen. McCain criticized the SEC and its Chairman for eliminating the uptick rule.[11]
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."[12]
On October 17, 2008, the New York Stock Exchange reported a survey with 85% of its members being in favor of reinstating the uptick rule with the dominant reason to "help instill market confidence".[13]
On November 18, 2008, the Wall Street Journal published an Op Ed by Robert Pozen and Yaneer Bar-Yam describing an analysis of the difference between regulated and unregulated stocks during the SEC pilot program. By using an analysis they claimed to be more comprehensive than the SEC's original study, they showed that unregulated stocks have lower returns, with a difference that is both statistically and economically significant. They also reported that twice as many stocks had greater than 40% drops in corresponding 12 month periods before and after the repeal.[14] [15]
On February 25, 2009, Chairman of the Federal Reserve, Ben Bernanke, favored the SEC to examine the restoration of the uptick-rule, in front of House of Representative.
