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Uptick Rule: Meaningful or Meaningless?

Sowanick said that while many other studies state that short selling may not necessarily have been the reason for the sharp decline experienced in the last few months, "everything is done at the margin. You never know where the tipping point is. Once you take away the guardrail, which is the uptick rule, you're more likely to drive off the side of the road."

Looking at Citigroup and Bank of America (BAC), which are both down 90% over the last 12 months, Sowanick argues that it's very clear that the shares didn't fall to current levels simply because retail investors have gotten out of their positions.

The so-called Main Street investors were made very aware of the uptick rule when they questioned why their 401(k) and mutual fund investments dwindled away over the past year, and many market observers offered up the elimination of the uptick rule as the reason. A revival of the rule is viewed as very favorable for small investors because of the residual effects.

At least some politicians are keenly aware of what a reinstitution of the uptick rule would mean for Main Street and Wall Street sentiment. Rep. Gary Ackerman (D - N.Y.) sponsored a bill in the House of Representatives that would require the SEC to restore it. The bill was referred to the House Committee on Financial Services in January.

Ackerman didn't waste much time in reaching out to Mary Schapiro, the new head of the SEC, who said she would consider reinstating the uptick rule during her confirmation hearings. On Schapiro's first day in office, Ackerman sent her a letter urging her to immediately put it back into effect.

"One of the simplest but most important and effective initiatives that the SEC could undertake immediately to combat market volatility is the reinstatement of a so-called 'uptick rule,'" Ackerman wrote in his letter to Schapiro. "While today is only your first day as Chairman of the SEC, I strongly urge you to make the reinstatement of an uptick rule your first priority; it is that important."

Former SEC Chairman Christopher Cox sent a letter to Ackerman dated Jan. 20 -- Cox's final day at the agency -- in which he offered support for returning to the rule. The note was a surprise to Ackerman considering the fact the SEC eliminated the uptick under Cox's tenure as chairman and failed to restore the regulation before the end of his term.

"I have been interested in proposing an updated uptick rule," Cox wrote in his letter to Ackerman. "However, as you know, the SEC is a commission of five members. Throughout 2008 there was not a majority interested in reconsidering the 2007 decision to repeal the uptick rule, or in proposing some modernized variant of it. I sincerely hope that the commission, in the year ahead, continues to reassess this issue in light of the extraordinary market events of the last several months, with a view to implementing a modernized version of the uptick rule."

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