Many accuse short-selling as the cause for the plunge in the markets last year. But as some experts pointed out, this was just far from the truth. It was suspended for some time last year but the drop in the markets still continued, defying the belief of others that short-selling is the suspect. So it was brought back. Now, the SEC came out with a new idea as to how short-selling could be done. A modified version of the uptick rule that was in place a few years back.
The proposal would require that short sales be made only at a price higher than the current best price being offered by would-be buyers of the stock. It is similar to the so-called tick-test, which was effective on many stock markets before 2007, but would be more restrictive and could be easier to apply given the current structure of markets. There is now no limit on short-selling, so long as the seller can locate shares to borrow.
The modified version of the uptick rule, wherein stocks could only be sold short after an uptick in the price of the stock, would only allow short-selling at a price higher than the best bid price for a particular stock.
From the same piece in the NYT:
The “alternative uptick rule” that the S.E.C. suggested on Monday would be based solely on the current best bid price for a stock — a figure that is kept up to date and is readily accessible. If the best bid for a stock was $20 a share, a short-seller could put in a sell order at $20.01. If someone agreed to buy at that price, the trade could be completed.
But no short sale could be executed immediately, at least until all the buy orders at the best bid price had been filled. The commission said that could “potentially lessen some of the benefits of legitimate short-selling, including market liquidity and pricing efficiency,” and asked for comment on whether that was likely.
SEC is hoping to receive feedback on this proposal. Plus, there are many things that are still being considered to be included in this, such as the idea of a “circuit breaker” tripping wherein stocks could only be sold short after it declines by a significant amount in a trading day.