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Saturday, 10/05/2019 2:54:10 PM

Saturday, October 05, 2019 2:54:10 PM

Post# of 440
Good Read Here.

The SEC adopted Rule 10a-1in 1937, also known as the uptick rule, which stated market participants could legally sell short shares of stock only if it occurred on a price uptick from the previous sale. Short sales on down ticks (with some narrow exceptions) were forbidden. This rule prevented short selling at successively lower prices, a strategy intended to artificially drive a stock price down. The uptick rule allowed unrestricted short selling when the market was moving up, increasing liquidity and acting as a check on upside price swings. (For more, see The Uptick Rule: Does It Keep Bear Markets Ticking?)

Despite its new legal status and the apparent benefits of short selling, many policymakers, regulators – and the public – remained suspicious of the practice. Being able to profit from the losses of others in a bear market just seemed unfair and unethical to many people. As a result, in 1963, Congress ordered the SEC to examine the effect of short selling on subsequent price trends. The study showed that the ratio of short sales to total stock market volume increased in a declining market. Then, in 1976, a public investigation into short selling was initiated, testing what would happen if rule 10a-1 were revised or eliminated. Stock exchanges and market advocates objected to these proposed changes and the SEC withdrew its proposals in 1980, leaving the uptick rule in place.

The SEC eventually eliminated the uptick rule in 2007, following a yearslong study that concluded that the regulation did little to curb abusive behavior and had the potential to limit market liquidity. Many other academic studies of the effectiveness of short-selling bans also determined that banning the practice did not moderate market dynamics. Following the stock market decline and recession of 2008, many called for greater restriction on short selling, including reinstating the uptick rule. Currently, the SEC has in effect an alternative uptick rule, which does not apply to all securities and is only triggered by a 10% or greater price drop from its previous close. (For more, see: The Uptick Rule Debate.)


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