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Updated from 11:04 a.m. EDT


Securities and Exchange Commission

has recommended several short-selling restrictions, including a reinstitution of the so-called uptick rule, to be enacted to help stabilize markets.

The five SEC commissioners voted unanimously to put five different proposed measures, representing two different approaches that would combat abusive short selling, out for a 60-day comment period. One approach would apply on a permanent basis for all securities, while the other would apply only to a particular security during severe market declines.

In the first approach, the commission would restore the old uptick rule or institute a modified version. The latter proposal would require trading centers to establish policies that prevent the short-sale of an order at a price below the prior sale. It is also based on the national best bid, similar to the former


"bid" test.

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During Wednesday's open meeting, one commissioner asked why the original uptick rule could not be restored immediately. One SEC staffer replied that the rule could be put back into place, but that "markets have changed so much, you can't put back the effect" of the old uptick rule.

If either proposal is adopted, it would represent a marketwide, permanent approach to curbing abusive short selling. The SEC also weighed in on three different circuit breakers that would mean a security-specific, temporary resolution.

The first proposed circuit breaker, dubbed a halt rule, would impose a ban on short-selling in a particular security for the day if a stock falls below 10% in a single trading session.

A second proposed circuit breaker, based on the modified uptick rule, would impose a short sale price test based on the national best bid for a security for the remainder of the trading session if a stock falls below 10%.

The third circuit breaker, based on the original uptick rule, would impose a short sale price test based on the last price in a particular security for the remainder of the day if a particular stock falls below 10%.

One fear raised during the debate was the idea that markets could be manipulated by an investor pushing through a small buy order as a way of ensuring that their short position would be allowed. A staffer replied that trades would have to be monitored in order to prevent such market manipulation.

The uptick rule, instituted 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 meant to slow down the short selling process, preventing short sellers from driving the price of a stock lower at a faster clip.

In a short sale, investors borrow stock from a broker, sell it, and then buy it back at a lower price before returning it to the lender. The difference is kept as a profit.

The SEC ended the uptick rule in June 2007 after its analysis showed it did little to prevent the manipulation of shares prices. Of course, many market participants point to the SEC's decision as the catalyst that helped short sellers thrive in 2008.

The argument is that the lack of a rule that required share prices to tick higher before more short sellers could pile in created an environment where shorts accelerated the failures of a number of financial companies, like

Bear Stearns


Lehman Brothers


Washington Mutual


Other financial names, like




Bank of America






Goldman Sachs



Morgan Stanley


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