Uptick Rule

The uptick rule is an SEC regulation that restricts when short sales may be executed to help prevent short sellers from accelerating a sharp decline in a security’s price. Under the rule, short-sale orders must be executed at a price above the current market price reference (an “uptick” or above the national best bid), rather than at or below it.

Key takeaways

• Designed to reduce downward price momentum during periods of stress and to preserve investor confidence.
• The original uptick rule (Rule 10a‑1) was adopted in the 1930s and repealed in 2007.
• A revised version (Rule 201, the “alternative uptick rule”) was adopted in 2010 and is triggered by large intraday drops.
• Limited exemptions exist for certain highly liquid instruments such as some futures contracts.

History and purpose

The original uptick rule was established under the Securities Exchange Act of 1934 (implemented in 1938) to prevent short sellers from piling on during falling markets. The SEC repealed that original rule in 2007, then adopted a modified approach in 2010 after market events highlighted the need for a mechanism to limit abusive short selling during rapid price declines.

The rule’s core purpose is to slow or limit the ability of short sellers to accelerate price declines, thereby promoting market stability during volatile or panic-driven sell-offs.

How the alternative uptick rule (Rule 201) works

• Trigger: Rule 201 is activated for a given equity when its price falls by at least 10% from the previous day’s closing price during regular trading hours.
• Restriction: Once triggered, short sales in that security may not be executed at a price at or below the national best bid; short sales are allowed only at a price above the best bid (an “uptick”).
• Duration: The restriction remains in effect for the remainder of the trading day on which the trigger occurred and for the entire following trading day.
• Scope: The rule generally applies to equity securities listed on national securities exchanges, including trades routed through exchanges or executed over-the-counter where applicable.
• Practical effect: The restriction still permits legitimate shorting but makes it harder to enter new short positions at depressed prices, and it allows investors to exit long positions before short sales are permitted at the bid.

Exemptions and special cases

Certain highly liquid instruments, notably some futures contracts, can be exempted from the uptick restriction because their liquidity reduces the risk that shorting will artificially depress prices. To qualify for such exemptions, the futures position typically must be “owned” in a manner consistent with SEC criteria—for example, the seller holds a security futures contract with notice of physical settlement and is irrevocably bound to receive the underlying security.

What investors should know

• The modern uptick mechanism (Rule 201) is a targeted, temporary restriction, not a permanent ban on short selling.
• It activates only after significant intraday price moves and aims to temper panic-driven selling rather than prevent normal market activity.
• Traders should be aware of the trigger threshold and restriction duration when planning short-sale strategies, especially in volatile markets.

Source

U.S. Securities and Exchange Commission — Rule 201 (alternative uptick rule).