Uptick Rule Showdown Coming Wednesday

Comment letters are pouring into the Securities and Exchange Commission as the agency is set to weigh in on the proposed reinstitution of the uptick rule, setting up a showdown between vocal proponents and critics of the measure.

On Wednesday, the SEC is expected to announce several proposals to permanently restrict traders who engage in abusive short selling. "We are going to put forward about four different proposals, and one of them does include the original," SEC Chair Mary Schapiro said Monday in an address to a conference organized by the Council of Institutional Investors.

However, comment letters fielded by the commission are divided in their support of an uptick rule or a modified version of one. Some state that a form of an uptick rule will help restore investor confidence in U.S. equities, while others argue that a reinstitution of short sale restrictions is ineffective and could be harmful to capital markets.

The uptick rule, created by the SEC in 1938 following the Great Depression, said that the short selling of stocks could be done only after the share price "ticked" higher above the prior sale. The rule was designed as a guardrail that slowed down the short selling process, preventing short sellers from driving the price of a stock lower at a faster clip.

In a short sale, an investor borrows stock from a broker, sells it, and tries to buy it back at a lower price later before returning it to the original lender. The difference in the transactions is kept as a profit.