Uptick Rule: Meaningful or Meaningless?

This article was originally published Feb. 26

Market observers are divided as to whether the elimination of the uptick rule was to blame for the stock market's sharp decline, with one side arguing that short sellers drove share prices lower while the other claims those betting on a decline are the scapegoats.

The uptick rule, instituted by the Securities and Exchange Commission following the Great Depression, said that the short selling of stocks could be done only after the price ticked higher above the prior sale. The rule was designed as a guardrail that slowed down the short-selling process, preventing shorts from driving the price of a stock at a faster clip.

In a short sale, an investor borrows stock from a broker, sells it to other investors, and hopes 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. ...