The US Securities and Exchange Commission (SEC) adopted a new short selling rule on February 24, 2010. The new rule is intended to promote market stability and preserve investor confidence during periods of stress and volatility by restricting short sellers from being able to drive the price of a stock further down when it is already experiencing downward pressure. Short selling involves the sale of stock that an investor does not own or has borrowed, where the investor intends to profit by buying the stock back at a price that is lower than the price of the short sale. While acknowledging that short selling may be useful in that it can promote market liquidity and pricing efficiency, the SEC cautions that it may also be used to "improperly drive down the price of a security or to accelerate a declining market in a security."
The SEC considered various options over the course of the last year to address its concerns regarding short selling and has decided to implement an alternative uptick rule that would restrict short selling when the price of a security has fallen more than 10% in one day. This restriction would remain in effect for the remainder of the day as well as the next day and under such a scenario, short selling would only be permitted if the price of the security was above the current national best bid. The rule will apply to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market, and requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale. The rule will become effective 60 days after its publication in the Federal Register, while market participants will have six months to comply with its requirements.