In the wake of the SEC’s emergency short sale order, there is growing congressional sentiment for the SEC to reinstate the uptick rule, which was rescinded in 2007. The uptick rule, Rule 10a-1, required all short sale stock transactions to be conducted at a price that was higher than the price of the previous trade. The SEC claims that they fully researched the regulation before it was repealed, but some commenters have noted that the research took place during one of the biggest bull markets in history.
The most demonstrative signal of congressional intent is a bill introduced by Rep. Gary Ackerman that would order the SEC to reinstate the uptick rule within 90 days. HR 6517. In the wake of the elimination of the uptick rule, noted Mr. Ackerman, many volatile stocks that the regulation was designed to protect are being driven down as a result of manipulative short sale practices. He believes that the reinstatement of the uptick rule would help curb these abuses and ensure greater stability and confidence in the market. Under a reinstated uptick rule, he continued, fewer companies would fail, less investors would be driven out of the market, and more capital would remain in the stock markets.
In a short sale, an investor borrows shares of a stock from a broker, sells it to others, and then hopes to buy it back at a lower price before returning it to the lender. The difference, if any, is kept as a profit. The uptick rule was designed to prevent short sellers from being the only investors to cause a stock price to decline. Under the rule, a short sale could only be entered after a trade that caused the last price to increase. The uptick rule had been in place since 1938, and Rep. Ackerman does not fully understand why the SEC rescinded it.
The core provisions of Rule 10a-1 had remained virtually unchanged since its adoption 70 years ago. Over the years, however, in response to changes in the securities markets, including changes in trading strategies and systems used in the marketplace, the SEC had added exceptions to Rule 10a-1 and granted numerous requests for relief from the rule’s restrictions In addition, in rescinding the rule, the SEC noted that decimal pricing increments had substantially reduced the difficulty of short selling on an uptick.
In another signal of Congress’ concern, Rep. Mike Castle sent a letter to Chairman Cox noting that, since the rescission of the uptick rule, there has been a dramatic increase in short selling and substantial market volatility. He suggested that the volatility might, in some measure, be attributable to the withdrawal of the uptick rule. This rule had been in place since 1938, he said, and was responsible for limiting short selling in the securities markets.
Rep. Castle emphasized that it has been a long standing goal of the SEC to maintain an orderly market process that offers reasonable risks and rewards for those willing to invest in it. While speculation is an integral part of a vibrant market, he observed, today's market is vastly different than the market of 70 years ago and given that current market conditions are more volatile than those that previously prevailed, it is important that regulators monitor closely any impact of unrestricted short selling.