Wednesday, February 24, 2010


The SEC adopted a new rule today to place restrictions on short selling when a stock is experiencing significant downward price pressure. The alternative uptick rule (Rule 201) is meant to limit short selling from further driving down the price of a stock that has dropped more than 10 percent in one day. It will enable long sellers to stand in the front of the line and sell their shares before any short sellers once the circuit breaker is triggered.

The rule imposes restrictions on short selling only when a stock has triggered a "circuit breaker" by experiencing a price decline of at least 10 percent in one day. After the triggering event, short selling would be permitted if the price of the security is above the current national best bid.

Rule 201 includes 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.

Commissioner Luis Aguilar added the following commentary at the SEC Open Meeting held today:

"If every short sale were harmful, or every short sale benign, our task would be straightforward. There is a tension in regulating short sales. Efforts to reduce the potential for short sales to facilitate dangerous declines in securities prices, market manipulation, and diminished market confidence can conflict with efforts to permit short sales for hedging, improved liquidity, and price discovery. I believe that the rule before us today strikes a workable balance."

A copy of the SEC press release announcing adoption of the rule can be found here. Commissioner Aguilar's comments at the Open Meeting can be found here.

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