What is the uptick-rule? Simply put; it is a rule used to regulate short selling in the financial markets. Specifically, the rule limits the timing of short sales. It 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 affected or at the last sale price if it is higher than the last different price. In 1938, the U.S. Securities and Exchange Commission (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.
The SEC eliminated the uptick-rule on July 6, 2007. The elimination of the rule was preceded by an 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 reduced liquidity but did not appear necessary to prevent manipulation.” However, the pilot test for one year did not test for a rogue wave thought to have partly caused the 1929 crash, and for which there was no known theory in money markets.
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