The Short Sale Restriction (SSR), also known as the “Short Sale Rule,” is a trading regulation that has been in place between 1938 and 2007. Its goal was to restrict aggressive short stocks strategies in a down market to prevent pricing manipulation and avoid excessive drops in share prices. There isn’t anything magical about the 10% number, but the restriction does make it more difficult for short sellers to intentionally tank a falling stock. Just keep in mind that if you are looking to short sell a stock with SSR in place, you’ll need to do so on an uptick in price. Many short-biased traders like to hammer the bid on weakness in a stock.
It is a good one because it helps prevent traders from creating a flash crash in a stock. When you’re part of the Trading Challenge you’ll start to understand why. If you want to learn how to short properly, apply for the Trading Challenge today. Alternatively, you can search the ticker symbol on the NASDAQ website or view the current list of stocks that have the SSR enabled. Most brokerage platforms have the SSR listed on the level 2 montage window of a stock that has the SSR enabled.
Alternative Uptick Rule of 2010
The SEC conducted a pilot program of stocks between 2003 and 2004 to see if removing the short-sale rule would have any negative effects. In 2007, the SEC reviewed the results and concluded that removing short-selling constraints would have no “deleterious impact on market quality or liquidity.” Indeed, there are many trading professionals who have specialised in shorting stocks. Also, it prevents many inexperienced traders from shorting a stock that is falling without doing any research. A good thing is that you can always find other companies that will have such a drop if you do good research. For example, assume that the share price of a company is trading at $10 and you believe that it will drop to $5.
If it doesn’t have the locates, then this is considered a naked short sell. Ultimately, the SEC decided on introducing a new short-sale rule—also known as the alternative uptick rule—in 2010. This new rule is arguably laxer than the old one as short-selling of stocks that are dropping is still permitted as long as the drop isn’t larger than 10%.
When is a Stock Put Under SSR?
A short squeeze occurs when you have a crowded trade on the short side. As you might imagine, the short-sale rule gets triggered rather often especially in periods of increased volatility such as during the initial phases of the covid-19 pandemic. For example, Elon Musk’s Tesla had a very rough week back in February 2020 when the Chinese vice-president announced that car deliveries would suffer delays due to supply-chain issues. Furthermore, its existence doesn’t really appear to be impacting shorting as a whole negatively since short-sellers have made more than $100 billion throughout 2021. The timing of the implementation of the old short-selling rule, as well as the moment it was removed, makes it very hard to discern the actual effects it had on the market.
- Ultimately, the SEC decided on introducing a new short-sale rule—also known as the alternative uptick rule—in 2010.
- There are several practical limitations that limit how much time traders can…
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- The short sale restriction is essential to limit the ways short selling can be abused.
You borrow shares from your broker, and then by them back at a lower price. If you are confused by short-selling, make sure to read this blog before continuing in this article. The above example should give you enough context to understand how the SSR works.
An example of the former can be a board-level problem or controversy, a black-swan event, a lawsuit, a major advantage for a competitor or else. Alternatively – any unexpected news might lead traders to consider selling their shares en masse due to expected price drops. The reason for this is likely to allow the stock to recover somewhat from a major selloff. Or, at the very least, it allows the engines to cool on the volatility. Alternatively, if the stock continues to sell off by another 10% during the following session, then the short sale restriction will continue for one more day. One obstacle is ensuring the brokerage you are shorting with has the shares to lend you if you want to short the stock.
The Uptick Rule was a direct response to the market crash of 1937, which came in the midst of the Great Depression – an event that many at the time believed was instigated in part by short selling activity. The rule remained in effect until 2007, when the SEC concluded after several years of study that it was not playing a significant role in stabilizing the stock market. If you have no idea what short selling is then please read this to understand how short selling works. Becoming a consistently profitable stock trader isn’t easy, or an overnight process. That’s why our 60-day Live Trading Boot Camp is designed specifically to help struggling traders overcome their weaknesses, and expedite their path towards profitability.
How Do Market Makers Make Money?
The goal is to prevent short sellers from pushing the shares of a company lower. Originally, the rule that was in place on the US markets between 1938 and 2007, prohibited any short position to be established on a downtick of a stock. In 2007, the SEC lifted this rule altogether, allowing the ability to short a stock at any time.
Alternatively, you can search the ticker symbol on the NASDQ website to see if that particular stock has the SSR enabled. Similarly, the partial removal of SSR in 2004 could hardly be regarded as a key factor during the generally bullish first half of the 2000s. All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
If a stock is falling with strong momentum, it becomes an obvious target for short sellers. Short sellers piling in can push the price down further, encouraging more short selling and launching a cycle that could push a stock’s price far below reasonable levels. The Securities and Exchange Commission (SEC) established the uptick rule to protect investors.
Conclusion: Short Selling Restriction
If you attempt to to short at the bid price when the SSR is enabled, your order will automatically be routed to the offer/ask price until a buyer fills your short order. If you’ve been trading stocks for a while, you’ve probably heard the term SSR or “Short Sale Restriction” which is often referred to as the Uptick Rule. In this post we will explore the pros and cons of the SSR and learn how to identify when it is in effect. Without the short-side sell rule, at least in theory, a security’s price can be manipulated to embrace a downward trajectory that could fall far below any realistic market price or even go into the ground.