View Full Version : Repeal of the uptick rule designed to crash market

12-08-2008, 03:24 PM
A friend emailed me this article, and I thought I would pass it along to you good folk.


The uptick rule was established after the great market crash of 1929 to restrict short selling by permitting short sales only following a trade where the traded price was higher than the previously traded price (uptick). Think of a stock that was trading at $100 per share with the last two trades at $99.75 and $99.50. Under the rule, anyone wanting to place a short sale of this stock would have to wait for an uptick – a trade that took the sock up from $99.50 to $99.75. The short sale could only be executed when this uptick had occurred. The uptick of a stock price is a signal that for almost all sellers, there are eager buyers.

Put into place to stabilize the marketplace after the extreme market instability that occurred at the beginning of the Great Depression, the job of the uptick rule was to keep the market from plummeting downward as one short seller piled on top of another. Without it, the first short seller could execute his trade at $99.50, the next at $99.00, the next at $98.50 and so on down. When short sellers smell fresh blood such as that, they rush in to capitalize on it. Without the uptick rule, short sale following on top of short sale can be executed until the price of the stock goes into a nosedive. In markets that are trading down anyway, the absence of the uptick rule assures a death spiral for any stock where short sellers decide to pool.

I realize this is probably old news for most of you.