The Short-Sale Rule, rescinded in 2007, was a Securities and Exchange Commission rule that required short sales to be made only in a rising market. Also known as the plus-tick rule.
The Short-Sale Rule was a regulation instituted by the Securities and Exchange Commission (SEC) that governed how short sales of securities could be conducted in the U.S. stock market. Formally known as the plus-tick rule, this rule was established to mitigate excessive downward price pressure on securities by permitting short sales only in a rising market condition.
The Short-Sale Rule was first introduced by the SEC in 1938 under Rule 10a-1 of the Securities Exchange Act of 1934. It was formulated in response to concerns that unrestricted short selling could exacerbate market declines and lead to unwarranted market volatility.
The rule specified that a short sale could only be executed on a price uptick, defined as a price higher than the previous different traded price (or zero-plus tick, which occurs with no change in price from the last different price). This was meant to ensure that short selling did not contribute to further downward pressure on security prices during market downturns.
The SEC officially rescinded the Short-Sale Rule on July 6, 2007, following extensive studies and public comments. It was determined that the regulatory landscape and trading environment had sufficiently evolved to a point where the rule was no longer deemed necessary to protect investors and maintain fair and orderly markets.
By requiring short sales to occur only on an uptick, the rule aimed to prevent price manipulation and stabilize the markets during periods of stress. This helped to balance the benefits of short selling, such as adding liquidity and price discovery, with the need to protect against its potential to amplify downward market trends.
Since the rescission of the Short-Sale Rule, market participants have operated under a less restrictive framework for short selling. However, the SEC has introduced other measures to address concerns similar to those that originally gave rise to the plus-tick rule, including:
Consider a stock trading at $50 per share. Under the Short-Sale Rule, if the last sale price was $50, a short sale could only be executed if the next transaction occurred at a price higher than $50.01 or above. This ensured that short sellers wouldn’t put additional downward pressure on the stock price during a declining market trend.
Post-2007, traders could short sell without waiting for an uptick, which provided more flexibility and potential profit opportunities. However, this also brought increased scrutiny regarding market manipulation and pressure on stock prices during downturns.