Long and Short of It: The Securities and Exchange Commission Should Reinstate a Price Restriction Test to Regulate Short Selling, The

Abstract

INTRODUCTION|After the 1937 market break, the Securities and Exchange Commission ("SEC") adopted a rule involving short sale price restrictions to restrict short selling. The rule was known as the uptick rule and it prevented a security from being sold short unless one of the following exceptions was met. First, the SEC allowed a security to be sold short if the short sale was at a price higher than the immediately preceding sale price of the security. Second, the SEC allowed the short sale of a security when the short sale was at the same price as the last sale price so long as the last sale price was greater than the last different price of the security. After the implementation of the uptick rule, the SEC left the chief provisions of the rule fundamentally unchanged for virtually seventy years. However, in mid 2007, the SEC eliminated the uptick rule altogether and prohibited any self-regulatory organization from implementing any type of short sale price test. Since the elimination of the uptick rule, the financial markets experienced extreme turbulence due to turmoil in the financial sector as well as severe volatility and sharp declines in securities prices. In 2008 and early 2009, significant financial institutions experienced sizeable reductions in the value of their securities. Volatility and steep changes in the prices of securities scarred the status of the markets subsequent to the elimination of the uptick rule. Although the SEC did not recognize any empirical data that the elimination of the uptick rule increased the volatility of the markets, many investors and...