Should The Uptick Rule Be Reinstated?

Many people blame short sellers for the stock market’s steep decline. Could the reinstatement of the uptick rule help the market recover?

Photo by Payton Chung, courtesy of flickr

At a press conference, U.S. Representative Barney Frank said the uptick rule could be back soon.

The uptick rule was designed to set limits on short sellers. Since short sellers profit from lower stock prices, they could be inclined to put downward pressure on stocks in a variety of ways.

The uptick rule stipulates that a short sale can only be processed at a price higher than the previous trade.

The rule was introduced in 1934. After a pilot program which suspended the rule on sales of certain securities, the SEC eliminated the uptick rule in 2007.

Obviously, the market has declined significantly since then. View the chart of the three major indexes. Short sellers definitely profited from the decline. But with so many other factors influencing the market, who knows what role the elimination of the uptick rule played.

Red tape and all, the rule probably would not return for at least a couple of months. Should it return at all?