Uptick Rule

The Uptick Rule (also known as the 'plus tick rule') is a trading regulation designed to curb aggressive short selling and prevent downward price spirals in a falling stock. In its classic form, it stipulated that a stock could only be sold short if the last trade price was higher than the preceding trade price—that is, on an “uptick.” Imagine a stock's price ticking down: $50.25, $50.20, $50.15. Under the classic rule, you couldn't place a short-selling order. You'd have to wait for the price to tick up, say to $50.16, before your short sale could be executed. The core idea is to act as a speed bump for bears, preventing them from relentlessly hammering a stock's price lower and creating a panic. This rule was a cornerstone of US market regulation for nearly 70 years before being modified, and its spirit lives on in a different form today.

To understand the Uptick Rule, we need to hop in a time machine and go back to the aftermath of the stock market crash of 1929. In the wake of the Great Depression, regulators and the public were looking for culprits, and a finger was pointed squarely at short sellers. The theory was that unchecked short selling created a vicious cycle: short sellers would borrow and sell shares, pushing the price down, which would trigger more fear and selling, allowing them to push the price even lower. This practice, sometimes called a bear raid, was seen as a destructive force that could topple even healthy companies. In response, the newly formed Securities and Exchange Commission (SEC) introduced the Uptick Rule (officially Rule 10a-1) in 1938. The goal wasn't to ban short selling outright—which plays a vital role in price discovery—but to take away the bears' biggest weapon: the ability to pile on a stock that was already in freefall. For decades, this rule was the law of the land, a simple but powerful mechanism to promote market stability.

By the early 2000s, markets had grown vastly more complex and technologically advanced. The SEC began to question if the Uptick Rule was still necessary. Proponents of its removal argued that it was an archaic rule that hindered market efficiency and liquidity. They claimed other safeguards, like circuit breakers, were better suited to handling modern market volatility. In 2007, after extensive study, the SEC eliminated the rule. The timing, in hindsight, was less than ideal. Just over a year later, the 2008 financial crisis erupted, and the market witnessed catastrophic collapses of major financial institutions. Critics loudly argued that the absence of the Uptick Rule allowed short sellers to launch unstoppable attacks on bank stocks, creating self-fulfilling prophecies of doom. The debate reignited with a vengeance, and pressure mounted on the SEC to bring back some form of short-selling restriction. In 2010, the SEC introduced a compromise: Rule 201, known as the Alternative Uptick Rule. This is the “smarter” version of the old rule. It works like this:

• It's not always on. It only activates for a specific stock if its price falls by 10% or more from the previous day's closing price.
• When triggered, the restriction lasts for the rest of that trading day and the entire next one.
• The restriction itself is slightly different. During this period, you can only short the stock at a price above the current national best bid price. This prevents short sellers from hitting the bid and driving the price down but still allows short sales to occur if a buyer is willing to step up to a higher price.

For a dedicated value investor, the debate around the Uptick Rule is mostly academic noise. While the rule is intended to stabilize prices in the short term, a value investor's focus is firmly on the long term. Our job is to calculate a company's intrinsic value based on its business fundamentals—its earnings power, assets, and future prospects—not to worry about the frantic intraday wiggles of its stock price. Benjamin Graham, the father of value investing, taught us to view market volatility as an opportunity, not a threat. A market panic, with or without an Uptick Rule, can cause a wonderful business to be sold at a ridiculously cheap price. The actions of short sellers might create that panic, but they don't change the underlying value of the business. The takeaway is simple: Don't let the short-term games of traders distract you from your long-term strategy. The Alternative Uptick Rule may provide a temporary cushion for a falling stock, but it's a sticking plaster, not a cure for a failing business. Your focus should remain steadfast: Is this a good company? Is it available at a fair price? If the answer to both is yes, then the panicked selling of others—whether constrained by a rule or not—is simply your chance to buy.