The Securities and Exchange Commission [SEC] has eliminated the so-called “uptick rule,” which prevents short-sellers from selling stock in a down market. SEC commissioners voted 5-0 to eliminate the rule, which was established in 1938 as a way to prevent disorderly selling during market downturns. Under the rule, a short sale could only be executed on an “uptick,” i.e., when a share was trading up. The idea was to prevent stocks in free fall from being forced ever lower by short-sellers.
The SEC has considered eliminating the rule for years, and ran tests recently to see how individual stocks would trade if the rule was removed. It found that there was no substantial difference in performance so it’s eliminating the restriction.
The development is of interest to the ETF community because many ETFs were exempt from this rule to begin with. That exemption was one of the selling points for ETFs, and often highlighted as one of the reasons they were appealing to traders and hedge funds. In reality, those traders will likely continue to use ETFs for short purposes, as the funds have other advantages over individual stocks as well.