SEC Seeks to Limit Short-Selling: Return of Uptick Rule?

April 8, 2009

(ChattahBox)—SEC Chairman Mary Schapiro plans to open public comment on Wednesday, to consider the reinstatement of some form of the old uptick rule, limiting short selling in the present volatile market. The SEC is under pressure from Congress and financial experts to curb the free-wheeling short selling trades that many see as contributing to the financial crisis. The former uptick rule was abolished in 2007 as part of the de-regulation policy of the Bush administration.

Short selling is the sale of borrowed shares, with the intention of earning a profit by later buying the same number of shares as soon as the price goes down. The old uptick rule banned short selling unless the price of the later trade trade was higher.

The SEC says it’s considering several versions of the old uptick rule. The old rule was abolished , because industry analysts believed it didn’t work to curb short trades.

The Nasdaq along with the NYSE and other exchanges proposed a modified version of the old uptick rule that’s under serious consideration by the SEC. The modified rule would only ban short sales when the price of the stock declines by a certain percentage. This percentage rule is more in line with high volume electronic trading in today’s market, industry experts say.

Critics of reinstating a short-selling ban, say reinstating the rule would have a negative effect on liquidity. However, the writing is on the wall for increased regulation of the unfettered financial markets and a type of short selling ban is surely on its way.

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