Uptick rule (rule 10a-1)- restriction of trading in securities on the American stock market, which does not allow opening short position (shorts) except on the "ap-tic", that is, the minimum upward price movement. In fact, this implies, that you cannot go short in the market, but only with a limit order for 1 tick movement from the current price up.
As a matter of fact, the price of your short sale should simply be higher by any value of the price of the last trade on the exchange.
The Up-Tick rule is designed to prevent the onset of the so-called cascade effect., when the bears push the stock price down, to profit from the growth. Like other regulators, the up-tick rule is intended to rid the market of the risk of unscrupulous manipulation.
History
Initially, was correctly adopted in the United States in 1938 year the Securities and Exchange Commission (SEC), was canceled 6 July 2007 year. In March 2009 there was talk of restoring the rule after the crisis. 9 April 2009 the rule was restored.
When the Uptick rule is turned on?
If stock during the trading session fell by 10% and more, then until the end of the current session and for the entire next trading day, the Uptick rule is introduced for the security. There are situations when a stock still loses more than 10% its value, then at the opening of the trading session on the paper, the Uptick rule will apply.
How to trade with the Uptick rule?
To enter a position, the execution price of a trader's short order must be any value higher, than the price of the last deal on the traded instrument. It is important to understand, that the main purpose of the Uptick rule is to limit the pressure of market speculators on a falling share.
If a trader needs to go short on a security with the Uptick rule but the estimated price, on which they will give a position, will be bad and will not fit into the risk of the trade – you can send a limit sell order at the price the trader needs. In such a situation, there is a possibility of missing a deal., but the risk will not be exceeded, which means, that the acquired position will comply with the money management rules.
There are situations, when a trader needs to go short in the market, but when the Uptick rule is in effect, its market order can be in an active state for a long time and will be executed only on a first come, first served basis at the nearest “ap tike”.
It is worth noting, that the rule does not apply to exiting a long position, that's why trader can go out without hindrance “hitting the market” from a long position, regardless of whether the Uptick rule works on the stock or not.
Impact of the Uptick rule on the market
The Securities and Exchange Commission carefully reviewed short sales prior to the adoption of the Rule 201(SSR short for Short Sale Rule) , after its adoption, during implementation, as well as during the full compliance period, beginning with 28 January 2011 of the year. As a result of the analysis, it was found that:
- Prior to the adoption of the Rule 201 short sales were down in minutes, hours and days, following a 10 percent decline in share price. Interesting, what's selling short, usually, decline in periods, following negative profits, and increase in periods, following positive profit. Prior to the adoption of the Rule 201 no evidence of increased short sales in targeted promotions was found, even on strongly declining days. The SEC determines the exact time of the 10 percent price cut and conducts minute-by-minute time analysis and percentage-wise profit analysis. Short sales declined after falling prices, even before the adoption of the Rule 201. In this way, continuing to limit the natural decline in short sales after negative earnings, The rule 201 negatively affects the benefits of short selling while, giving no benefit to speculators from price manipulation.
- Surprisingly, but the stock price recovers better in the absence of the Rule 201. Analysis of the movement of shares before and after the introduction of the Rule 201 Showed, that after the introduction of the Uptick rule, price recovers more slowly, what can be an incentive for sellers to short, rather than scare them away.
- Effectiveness Rule 201 was analyzed by simulating short orders and estimating the volume of short sales during an instant market crash during the crisis 2008 of the year. Simulated Short Order Execution Ratio, subject to the Rule 201, is 83% during 5 minutes after sending the order. This indicates, what Rule 201 would have no impact on short sellers during a crisis or instant crash, if it existed at that time. Furthermore, our research shows, what Rule 201 more restricts short selling during normal periods, than in crisis.
- Analysis of the influence of the Rule 201 on the liquidity of those shares, which it concerns showed, what is the change in spreads “bid-ask” at the close and the volume of traded shares during the trading session, following the session with a 10 percent drop, changed insignificantly after the Rule was applied 201.
- Regression analysis of the nature of the movement of shares falling under the Uptick rule revealed, what Rule 201 reduces short sales only slightly better, than the negative profit itself.
Since the Rule 201 is not an effective tool for preventing short selling during sudden market crashes or prolonged financial crises. SEC can be expected to introduce new rules and restrictions to improve regulation of short selling.
