SEC mulls updated uptick rule: sources

WASHINGTON/NEW YORK (Reuters) - U.S. securities regulators are working on an updated version of the so-called uptick rule to regulate a type of trading blamed for dramatic declines in stocks, three sources familiar with the matter told Reuters on Monday.

Traders work on the floor of the New York Stock Exchange, October 16, 2008. REUTERS/Brendan McDermid

The updated version of the Depression-era rule is expected to account for changes in the market, including the advent of decimalization, which allows stocks to be traded in much smaller increments, the sources said.

Members of the U.S. Securities and Exchange Commission are scheduled to meet April 8 to consider short sale price test proposals. Short sales are those in which investors sell borrowed shares they expect will fall in price in the hope of repaying the loan with cheaper shares and pocketing the price difference.

The uptick rule was adopted after the 1929 stock market crash and only allowed short sales when the last sale price was higher than the previous price. However, the SEC abolished the rule in 2007 after concluding that advances in trading strategies and decimalization rendered it ineffective.

Congress has been pressuring the SEC to reinstate the uptick rule as U.S. markets dropped precipitously over the past year. Last year, the SEC took emergency actions to curb short selling.

In fall of 2008, the SEC imposed a temporary short sale ban on financial services stocks -- a measure supported by big banks but opposed by short sellers, hedge funds and some economists.

The three sources told Reuters that SEC staff were working on updating the uptick rule. Two of the sources said the SEC was considering at least two different types of price test options, along with a range of questions that could lead to yet another type of price test proposal.

The three sources spoke on condition of anonymity because they were not authorized to speak on the SEC’s behalf and because the proposals are still being crafted.

An SEC spokesman had no comment.

The sources also cautioned that the proposal was still in preliminary stages and could change before the April meeting. The proposal must be approved by a majority of the five SEC commissioners before the agency can solicit public comment and move on to the final rule-making stage.

The agency is also examining whether there is a need for a circuit breaker on stocks. In such a scenario, if a stock drops by a certain percentage over a certain period of time, investors would be prohibited from shorting that stock for a specified time frame.

One circuit breaker option includes setting thresholds for individual stocks -- based on a percentage decline -- beyond which “aggressive” shorting would be banned, said one source familiar with the situation.

“There is some political pressure to get something done on the short sale rules so we’re trying to come up with something that would satisfy the political pressure, but also not be too onerous on the market participants,” the source said.

Another source said the SEC is also considering a price test in which investors would only be allowed to short a stock if the bid for the stock was rising.

Editing by Dan Grebler