The U.S. Securities and Exchange Commission has voted to stop short selling if the share-price falls over 10% in one day.
Branded the alternative uptick rule, the move will “preserve investor confidence and promote market efficiency, recognizing short selling can potentially have both a beneficial and a harmful impact on the market,” according to SEC Chairman Mary L. Schapiro.
Once the stock has fallen over 10%, short selling would only be permitted if the price of the security is above the current best bid.
The move mirrors the traditional uptick rule introduced in 1938, when the stock may be sold short at a price above the preceding sale regardless of the shares volatility that day. The SEC eliminated the uptick rule in 2007 after an SEC Commission found that the regulator should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test.”
The SEC voted 3-2 in favour of the new alternative uptick rule.
The new rule more formally known as Rule 201, incorporates the following features:
– Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day’s closing price.
– Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.
– Securities Covered by Price Test Restriction: The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.
– Implementation: The rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.
Market participants will have eight months to comply with the ruling.