Uptick Rule, explained?

[zyzzyva57]

In "Uptick Rule for Dummies" style, would you please explain this rule that Master Cramer nightly rails for re-instating

I have, of course, "Googled" it, but I still don't understand it

"Dumb" it down for me

[XOM]

It's a bit like watching someone leg sweep a politician and putting him flat on his back and then letting him get back to his feet before you attack him, it would be nice to just start kicking him in the head repeatedly, but the uptick rule prevents you from doing so and taking advantage of an easy set up.

[Wookie]

It's a bit like watching someone leg sweep a politician and putting him flat on his back and then letting him get back to his feet before you attack him, it would be nice to just start kicking him in the head repeatedly, but the uptick rule prevents you from doing so and taking advantage of an easy set up.

I trust what you just described here is the FREEDOM of expression and the restriction they are trying to apply to it.

Kick the MOFU! :biggrin:

[LongArm]

It's a bit like watching someone leg sweep a politician and putting him flat on his back and then letting him get back to his feet before you attack him, it would be nice to just start kicking him in the head repeatedly, but the uptick rule prevents you from doing so and taking advantage of an easy set up.
Haha, great analogy.

[zyzzyva57]

I understand your analogy, so let's move it to the next stop: how do the professional Shorters do this with a stock?

Wikipedia says: "The uptick rule is a securities trading rule used to regulate short selling in financial markets. The rule mandates, subject to certain exceptions, that, when sold, a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected or at the last sale price if it is higher than the last different price...

I cannot follow this definition

Sorry to be so pushy on this, but this Uptick Rule seems to affect us ordinary stock market participants:thefinger:

[XOM]

I think your overthinking this Z; all it means is that the price must go up at least 1 tick before you can enter a short position. So, I would theorize that if I was going to short a large quantity of shares but no uptick in site; I'd buy a few shares above market value, problem solved if my short order is next in line...place it early I'd guess. This might be an oversimplification but I think it would be the basic premise on how a "professional shorter" would accomplish his/her goal. Jmo

[aiki14]

I understand your analogy, so let's move it to the next stop: how do the professional Shorters do this with a stock?

Wikipedia says: "The uptick rule is a securities trading rule used to regulate short selling in financial markets. The rule mandates, subject to certain exceptions, that, when sold, a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected or at the last sale price if it is higher than the last different price...

I cannot follow this definition

Sorry to be so pushy on this, but this Uptick Rule seems to affect us ordinary stock market participants:thefinger:

What it means is that when you place your order with your broker to short a stock, the broker must wait til a price is printed above the previous price. So if the price on XYZ is 100.00 when you put in your order and the next sale is 100.10 that's where you'll be executed. But if the next sale is 99.90 you won't.
Here's a look at a tape, each trade is a tick (hence the term "ticker Tape")
1) 100 XYZ @ 100.00
2) 100 XYZ @ 100.10
3) 100 XYZ @ 100.00
4) 100 XYZ @ 99.90
5) 100 XYZ @ 99.80
6) 100 XYZ @ 99.70
7) 100 XYZ @ 99.80
8) 100 XYZ @ 99.90

If you place your order as 1 is executed your short will be at 100.10
If you place your order as 2 is executed your short will be at 7 or 99.80 since this is the next time the price "ticks" up.

The theory is that somebody must be betting the price will go up if the price ticks up, therefore it slows the down spiral. When they removed the uptick rule they argued that this was antiquated thinking and the market would take care of itself. There is still debate as to whether the change is the major cause of the volatility we have seen since it was changed, or if it is simply market forces at work.
I believe it was a mistake to change the rule, but I will admit that's a bull position.

Hope that's of some value.

[zyzzyva57]

Yea, I know I am over-thinking this

Never had really gotten into shorting a stock, I guess my question now is this:

From Wikipedia Typically, the short-seller will "borrow" or "rent" the securities to be sold, and later repurchase identical securities for return to the lender. If the security price falls, the short-seller profits from having sold the borrowed securities for more than he later pays for them.

So, with this rule: I short Widget at $10 and to short again I will have to wait for the price at $10.01+

Who keeps track of this? If I do this through Broker A, how does Broker B know I am doing it again

[XOM]

Not quite; you short xyz @ $10 maybe the price falls to $8 before any upticks, so then at $8.01 you can short again, of course you wanted to short again $10 but the uptick rule prevented that, so do you want to risk going short after a 20% drop?

[madcowdisease]

Who keeps track of this?

Evidently, nobody! That is what all the stink regarding naked shorting is about. The excess supply created by shorting stock that traders do not possess nor the broker has located to borrow.

[Runswithscissors]

Yea, I know I am over-thinking this

Never had really gotten into shorting a stock, I guess my question now is this:

From Wikipedia Typically, the short-seller will "borrow" or "rent" the securities to be sold, and later repurchase identical securities for return to the lender. If the security price falls, the short-seller profits from having sold the borrowed securities for more than he later pays for them.

So, with this rule: I short Widget at $10 and to short again I will have to wait for the price at $10.01+

Who keeps track of this? If I do this through Broker A, how does Broker B know I am doing it again


I think you're mixing the uptick rule with the basic premise of shorting.

Say you short Widget at $10 and sell short 100 shares.(you don't own the shares but borrow them as your wiki def says)

The price of Widget now drops to $2 and you want to take your profits.

You can then buy to cover at $2 and pay back your broker netting you a profit of $8 a share.

You must have a margin account to short sell which brings in it own set of risk. If the stock you're selling short goes up you will have to buy to cover at higher price then you sold, and that could be a big loss if it goes way up.