A Big New Uptick Rule
David Serchuk, 03.26.09, 06:00 AM EDT
The major exchanges want a new version of the old rule, designed to slow short-selling. Our experts aren't sure it's needed.
It looks like the uptick rule might return from the dead. The 1938 rule--which stated that short-sellers could only sell securities after a share price increase--was repealed in July 2007 following studies that showed it no longer had much influence once stock spreads fell to a penny after decimalization.
But as markets have shriveled, the major exchanges have banded together to try to get some version of the uptick rule back in place. On March 24, NYSE Euronext (nyse: NYX - news - people ), Nasdaq OMX Group and BATS Exchange wrote to Securities and Exchange Commission Chairwoman Mary Shapiro with a plan for a modified uptick rule.
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While penny-pricing, aka decimalization, may have rendered the old rule moot, the exchanges propose now that short sales should be allowed only at prices that beat the current best bid. This would apply only to stocks that fall a certain amount during the day (10% is the figure mentioned) and would not apply to more liquid exchange-traded funds (the old rule never applied to such securities). The SEC will meet April 8 to discuss.
The impetus to remove the uptick rule came after the SEC conducted a pilot program that lasted from May 2, 2005, through July 3, 2007, and studied the trading patterns of 1,000 stocks no longer protected by the rule. The study concluded that there was no discernible difference in how the stocks traded, including how the stocks were short sold with or without the rule.
As former SEC Chairman Christopher Cox explained to Congress on July 24, 2008, stocks that fell like stones continued to do so even with penny-sized roadblocks along the way.
From Forbes.com