uptick rule

CFA Level I
#1

What is the rationale behind the uptick rule?

#2

read this. uptick rule is out. http://www.analystforum.com/phorums/read.php?11,575684,575684#msg-575684

#3

Yeah me too! see the extracted paragraph in the text: “Three technical points affect short sales. First, a short sale can be made only on an uptick trade, meaning the price of the short sale must be higher than the last trade price. This is because the exchanges do not want traders to force a profit on a short sale by pushing the price down through continually selling short. Therefore, the transaction price for a short sale must be an uptick or, without any change in price, the previous price must have been higher than its previous price (a zero uptick). For an example of a zero uptick, consider the following set of transaction prices: 42, 42.25, 42.25. You could sell short at 42.25 even though it is no change from the previous trade at 42.25 because that prior trade was an uptick trade.” I don’t get why the price of the short sale must be higher than the last trade since someone who is doing short selling will have a profit if the sale the stocks at the higher price then buy the stock if the price went down? (I might be thinking too much co’z I just starting reading the equity sessions)

#4

Yes, they finally did away with the uptick rule in July – so you probably won’t be tested on it, but . . . the rationale was that they didn’t want short-sellers running “bear-raids” on stocks – that is, artificially depressing the prices of stocks, creating a panic among longs, and then covering for a profit. So with the uptick rule the idea was that short sellers should only be allowed to sell if they could get a buyer to pay “up” for their stock; long sellers are the other hand were allowed to sell stock on “minus-ticks” down to zero if they so chose.

#5

Now I get it! thanks for the input gideon.

#6

So now the bears can with convertible bonds can do the death spiral trick again?

#7

Foretunately we have all the CFA charterholders who will recognize a silly short seller ploy, not panic, and pick up all the stock on the cheap.