by A.W. Berry

Created on: March 31, 2009   Last Updated: March 12, 2011

An up-tick is simply an upward movement in the price of a financial security such as stock price. In the summer of 2007 an interesting event occurred in the regulation of securities exchanges, specifically the Securities and Exchange Commission (SEC) eliminated the requirement for what is called the up-tick rule. Since then, the combination of the financial crisis coupled with the elimination of the up-tick rule led to

increased scrutiny of the rule despite the SEC's initial reasons for implementing the 2007 amendments to rule SHO.

The elimination of the up-tick rule profits short-sellers who are locking into sales prices they think will be higher than the actual future price. Since the up-tick rule required there to be an upward movement in price(s) before a short sale can be initiated, the rule made it more difficult for prices to move downward as fast as they could have the rule not existed. With the elimination of the up-tick rule, short sellers of financial securities have the added advantage of downward price movements in the event of a low buy to sell price ratio.

Illustration of the Uptick rule:

To illustrate the above with an example, if you know the price of 100 cattle is $2000.00/head and you want to profit off the price movements of those cattle, you may enter into a short-sale contract at the Chicago Mercantile Exchange (CME). The reason you might do this is because you think sales of beef are on the decline and that will cause downward price movement on the price of cattle. If no up-tick rule is in place and lots of other futures traders also think there will be a downward movement in the price of cattle, then there is one less obstacle in the way of declining cattle prices.

Elimination and reinstatement of the uptick rule:

The up-tick rule was eliminated from securities regulation after the bursting of the housing prices bubble had begun and during the early phase of the credit-crisis. Financial observers of the up-tick rule removal postulated the move aggravated and exaggerated the decline in market prices that helped develop the credit crisis into something worse causing the ensuing financial crises. In other words, the timing of the up-tick rule elimination might explain why some IRA's or 401K's might have experienced shocking losses of value.

Had the up-tick rule been in place during the credit-crisis, the massive 1-day declines seen in the stock market might not have been so volatile and steep. In light of mounting evidence and pressure

• 1
• 2
• Next Page >>