The SEC is finally listening. Today, the five member commission will debate on possible proposals of reinstating a modified version of the uptick rule to prevent manipulation of the stock market and drive stock prices down.
Investors have been crying foul for months since the uptick rule was taken off. The rule, which was created following the stock market crash in 1929, states that short selling can only occur when the last price change was a positive one (hence the phrase “up” tick). The idea is that whenever a stock is in free fall, it provides a speed bump on the way down so short sellers can’t pile in and bid the prices lower and lower without consequences.
However, in 2007, the SEC decided that the uptick rule no longer made a difference and took it out of the regulation. Since then, the S&P 500 and the Dow fell 40%+.
This meeting is intended to debate whether the uptick rule is necessary and whether a modified version of it will help markets in the short and long term. Other than the original rule, proposals include:
- Shorting is only allowed if the best available bid was higher than the last
- A circuit breaker (like the bid test mentioned above) would trigger if a stock fell by 10 percent or some other amount
- Flat out ban short selling in a particular stock for the rest of the day once a threshold is reached
- Trigger he original uptick rule for the rest of the day as the circuit breaker
- Other circuit breakers are triggering a temporary suspension of short selling in a particular stock, or temporary application of the uptick or bid rule in a security
Once the SEC decided which proposals are more sensible, they will announce it to the public for comment for 60 days. After 60 days, they will decide on the best course of action.