On February 24, 2010, in a split vote, the SEC adopted an alternative uptick rule in which a security-specific circuit breaker would be triggered if a stock's price declines by 10% or more from the previous trading day's closing price, resulting in a temporary restriction on short selling in the stock. Short Selling

Short selling involves selling a stock that the seller has borrowed. In popular lore, short selling is often depicted as questionable and a form of stock market manipulation. Short selling can, however, also confer a number of economic benefits on markets, including providing them with the following:
Greater Market Liquidity. In an analysis of results from the pilot, the SEC's Office of Economic Analysis found that short trade restrictions had a limited effect on a stock price and that there appeared to be no association between manipulative short selling activities like "bear raids," and the presence of the tick test. American Stock Exchange (AMEX) officials expressed related concerns. In particular, a NECSI study criticized the SEC for dismissing as statistically insignificant its finding that stocks that were not subject to the uptick rule observed 2% lower returns than the stocks that were subject to the rule. In the context of the claims that rescinding the uptick rule added to market volatility, another possible view is that the lifting of the short sale restrictions may have had a marginal impact on volatility but that larger and more significant forces were already at work before the restriction was rescinded. However ... throughout 2008 there was not a majority [of the five SEC commissioners] interested in reconsidering the 2007 decision to repeal the uptick rule...."

	Key Developments Between September 2008 and April 2009

On September 18, 2008, as the financial crisis deepened, the SEC announced that it was immediately implementing a temporary emergency ban on short selling in the securities of what would eventually amount to nearly 1,000 financial firms. 110-343 ) on October 3, 2008. For example, Steve Forbes, editor and CEO of Forbes magazine, charged that the rule's removal was responsible for an explosion in market volatility. It will limit the ability of a small number of professional investors to trigger fast dramatic price drops that create panic among investors…"
On March 24, 2009, the three largest U.S. stock exchanges (BATS Trading, the New York Stock Exchange, and Nasdaq) joined with the smaller National Stock Exchange to send a joint letter to the SEC urging it to consider adopting (1) a modified uptick rule, which would only would only allow short selling at a price above the highest prevailing national bid (offer to buy) by posting a quote for a short sale order above the national bid; and (2) a circuit breaker rule, which would trigger the modified uptick rule only after the price of a stock has experienced a precipitous decline by perhaps 10%. In addition, in March 2009, both House Financial Services Committee Chairman Barney Frank and Senate Banking, Housing, and Urban Affairs Committee Chairman Dodd reportedly indicated that they hoped that the SEC would reinstate the uptick rule. In the event that such a circuit breaker is triggered, short selling in that stock will only be permitted if its price is above the current national best bid. Once triggered, the circuit breaker would remain in effect for the remainder of that day through the following trading day. There is little empirical evidence that short sales contributed to the market crisis. These include
H.R. 302 (Ackerman, introduced January 8, 2009 ), which would require the SEC to reinstate the uptick rule on short sales of securities; and S. 605 (Kaufman, introduced March 16, 2009), which would require the SEC to prohibit short sales of the securities of any financial institution, unless that trade is effected at a price (in minimum lots, as specified by the agency) that is at least $0.05 higher than the immediately preceding transaction.
Historically, in much of the popular lore surrounding short selling (borrowing stock with the objective of making a profit if its price falls), the activity has been unfavorably described as a destructive force for both stock markets and the firms whose shares are sold short. In the 1930s, due to concerns that a concerted kind of manipulative short selling known as a bear raid had contributed to the stock market collapse, federal securities regulations were adopted that restricted short selling. Known as the uptick rule, the restriction essentially forbade short sales on stocks unless a stock's previous price movement had been upward.
By contrast, modern economics orthodoxy generally views short selling to be a beneficial economic force. Among the benefits ascribed to shorting are its ability to (1) counter an unwarranted, speculative upward price pressure in stocks, and even help uncover and expose fraudulent issuer activities; (2) enable an entity to hedge the risk of a stock position owned, thus protecting against price declines; and (3) provide liquidity in response to buyer demand.
This perspective received added credibility after a Securities and Exchange Commission (SEC) based pilot program found no significant adverse economic outcomes when a sample of stocks were not subject to the uptick rule. In June 2007, the agency voted to rescind the uptick rule.
In the aftermath of the repeal, there was concern over the role that the repeal may have had in exacerbating stock market volatility. Months into 2008, in the midst of a deepening financial crisis, officials at a number of large financial firms claimed that short sellers were responsible for their falling stock prices. Responding to what he called the need for a temporary timeout in the midst of abnormally functioning financial markets, SEC Chairman Christopher Cox banned short selling of stocks in nearly 1,000 financial firms between September 19, 2008, and October 3, 2008, a decision he later indicated regretting.
In early 2009, House Financial Services Committee Chairman Barney Frank and Senate Banking, Housing, and Urban Affairs Committee Chairman Christopher Dodd reportedly expressed hope that the SEC would reinstate the uptick rule. Among those in the private sector also supporting reinstatement were the entrepreneurs Charles Schwab and Steve Forbes. In addition, several major stock exchanges (including BATS Trading, the New York Stock Exchange, and Nasdaq) jointly wrote to the SEC, urging it to consider adopting a modified uptick rule. Still, a number of studies, including an internal SEC study, raised doubts about charges that the uptick rule's repeal had a deleterious market impact. On April 8, 2009, the SEC issued several uptick rule-related reform proposals. Later, on February 24, 2010, the SEC adopted an alternative uptick rule in which a security-specific circuit breaker is triggered if a stock's price declines by 10% or more from the previous trading day's closing price. Short selling in the stock would then only be allowed if its price remains above the current national best bid for the remainder of that day through the next trading day. The SEC indicated that the reform would help market stability and help restore investor confidence in uncertain markets. Critics, including two Republican SEC commissioners and some securities industry and hedge fund trade groups, have questioned whether the SEC provided sufficient evidence that short selling has been harmful. They also indicated that recent SEC reforms curtailing naked shorting have reduced manipulative short selling and predicted that restricting short selling would have harmful market consequences. The investor confidence rationale used in part to justify the rulemaking was also greeted with skepticism.
H.R. 302 (Ackerman) and S. 605 (Kaufman) would both require the SEC to reinstate the uptick rule. This report will be updated as developments warrant.