This Alternative Ascending Rule It is a rule of the US Securities and Exchange Commission that prevents short sellers from selling short after stocks have fallen 10% in a day.
Once the restrictions are in place, short selling cannot be higher than the national best buying price of the stock. In other words, short selling must be executed when it rises-that is, when buyers place orders based on the asking price.
For example, stock XYZ fell 10% today, which is a Tuesday. At this time, the exchange will automatically activate these short selling restrictions. If the buy/sell price of XYZ is US$10.50-US$10.55, the short selling must be executed at a price higher than US$10.50 (the buying price).
The short-selling restrictions stipulated by the alternative upswing rule will take effect during the rest of today (Tuesday) and the next trading day (Wednesday).
The alternative upward adjustment rule is officially called Article 201 of the SHO Rules. The SHO regulation is a set of rules for managing short selling introduced by the SEC in 2005.
When does the Uptick rule take effect?
According to the alternative rise rule implemented by the US Securities and Exchange Commission in 2010 (SHO Regulation 201), the rise rule is activated when the stock falls by 10% within a trading day. It takes effect for the remainder of the session and the next day.
Why is there an alternative rising rule?
As in any collapse, society needs a scapegoat. A convenient scapegoat during the Great Depression was a short seller. They profit from falling stock prices, and they must be evil, or theoretically so.
Representative Adolf Sabas Even drafted a bill Short selling was made illegal in 1932. He blamed short sellers for the Great Depression, claiming that they manipulated the stock price to cause the crash. He said in a speech to the U.S. Congress: “As far as I know, short selling is the biggest crime allowed by the government.“
Jesse Livermore was actually blamed for the crash because he shorted the market during the crash and made $100 million in the process.In Livermore’s book How to trade stocks, He writes that most sudden price shocks are caused by coordinated “plunger” activities in which a group of traders work together to manipulate stock prices. Here are some quotes from the book:
“The theory is that most sudden drops or particularly sharp breaks are the result of some plunger operation… But when the break is the result of an operator’s surprise attack, it is unwise to exit because he stopped the price There must be a rebound in a moment.”
If the stock has enough selling pressure, when every buy order is quickly hit by the seller, the buyer will eventually dry up and the owner of the stock will start panic selling at any price.
The upward rule aims to curb downward pressure at least for a short period of time. Since short selling must be done when the price rises, short sellers cannot hit all fancy bids and must place passive limit orders that do not move the price immediately.
The history of rising rules
The stock market crash of the Great Depression in 1929 led the US Congress to pass comprehensive market regulation: the Securities Exchange Act of 1934.
The bill created the US Securities and Exchange Commission and gave them extensive powers to regulate securities trading and broker-dealer activities. The rising rule is one of the many rules implemented by the bill.
This rule has hardly changed for decades, until the US Securities and Exchange Commission cancelled the rule in 2007, just before the Great Financial Crisis.
From the perspective of the legal and financial circles, short selling has never enjoyed a reputation. Therefore, the rules were reintroduced in 2010 as part of the supervision of SHO, which is a set of rules governing short selling.
Although the rule was revised only once in 2010, at several points in the process, regulators were interested in expanding the scope of the rule or taking action entirely against short selling. One example is that after Black Monday, the US Congress held a hearing in 1989 to resolve the short-selling issue.
Looking ahead, after the short wave of stocks such as GameStop and AMC in 2021, we may see more short-sale regulation. Whether the structural problems of short selling cause these problems, there is public support and political will, so keep an eye on it.
Once triggered, the way stocks are traded will be different Short selling restrictions. Suppose you view the market as a balancing act between buyers and sellers.
In this case, a disadvantaged position (short sellers cannot sell quickly) may significantly affect the market and benefit buyers. For this reason, it is not uncommon for stocks to stabilize once the rising rule is activated.