Short Sale Rules And The Alternative Uptick Rule

The original 1930s "uptick rule" required every short sale to occur at a price higher than the previous trade, permanently, for every stock. The idea was to stop short sellers from piling on and mechanically driving a falling price down further through their own selling. The SEC repealed that blanket rule in 2007, then reintroduced a narrower version after the 2008 financial crisis: the Alternative Uptick Rule, Rule 201 of Regulation SHO, which only switches on when a stock is already falling sharply.

The rule triggers when a stock's price drops 10% or more from its previous closing price, intraday. Once triggered, a circuit breaker on short selling activates for the rest of that trading day and all of the next: short sale orders can only be executed at a price above the current national best bid, never at or below it. This doesn't ban short selling in the stock — it just prevents a short seller from being the one to hit the bid and push the price down further; they can still sell short into strength, or against a rising quote, but not into weakness.

The logic mirrors the market-wide circuit breaker idea at the single-stock level: a stock that's already down 10% in a day may be in the middle of a panic-driven, self-reinforcing slide, and restricting short sellers from accelerating that slide — without stopping them from trading altogether — gives the stock some protection from a purely mechanical downward spiral, while still allowing price discovery and hedging to continue.

Worked example. A stock closes the prior day at $50.00 and falls to $44.50 intraday — a 11% decline — triggering Rule 201. For the rest of that day and all of the next trading day, any short sale order in that stock can only execute at a price above the current national best bid; if the bid is $44.00, a short seller cannot sell short at $44.00 or below, only above it, even though a regular (long) seller faces no such restriction and can sell at the bid freely.