Short Sale Restriction

Shorting a stock is a popular trading strategy and an excellent way of making money. But did you know that short-selling stocks isn’t o always permitted? If you are actively trading stocks on the US markets, you are probably familiar with the Short Sale Restriction (SSR) and the alternative “Uptick Rule.”

However, if you are just starting your stock trading journey, even if you favor taking long positions, you will have no choice but to understand what the Short Sale Restrictions are, why they are so important, and how they affect the way you trade stocks.

This guide gives you everything you need to know about the Short Sale Rule and its history, including some well- and less-known facts, to make you better prepared for the day trading world.

What Does a Short Sale Restriction Mean in Stocks Trading

The Short Sale Restriction (SSR), also known as the “Short Sale Rule,” is a trading regulation that has been in place between 1938 and 2007. Its goal was to restrict aggressive short stocks strategies in a down market to prevent pricing manipulation and avoid excessive drops in share prices.

The SSR can be triggered at any time during the day if the instrument drops more than 10% versus the previous day’s close. In a nutshell, once the short sale restriction is activated, traders can’t short the particular stock unless its price starts going up again and reaches a higher price level. Under the rule, traders could place short sales only within an uptick in the share’s price.

The newest version of the SSR rule is called the Alternative Uptick Rule, also known as Rule 201. It was introduced on February 24, 2010, to promote market efficiency and retain investor confidence in the fundamentals of a particular security.

The SSR rule covers all companies listed on US exchanges like the NYSE, Nasdaq, etc. It also generally applies to securities traded over-the-counter (OTC).

The rule exists to slow down the downside momentum of a stock. For example, if a company releases negatively interpreted announcements during market hours, short sellers could push the price significantly lower, making profits from that move. Even with the SSR restriction rule in place, the stock can still fall more than 10% for the day, but at least short sellers can not push the stock significantly lower by short-selling shares on the Bid price (e.g., with a market order).

Still, short-sellers can sell on an uptick (e.g., with a sell-limit order at a price above the best national bid, NBB) even if the share fell more than 10% vs. the previous day close. The rule only prevents selling short on the Bid price.

Investors who hold a long position of a stock that gets affected by the SSR rule can sell the existing position at any time since those investors are not short-sellers.

The Evolution of the Short Sale Rule

The Securities and Exchange Commission first adopted the short-sale restriction during the Great Depression in 1938 “to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling.”

It came in response to a widespread practice at the time in which a group of short sellers would start aggressively shorting stocks to cause panic among their holders. The end goal of these short-sellers was for other investors to start selling actively, causing a price drop. Once they did, the short-sellers could buy the instrument at a discounted price.

Due to the evolution of the US stock market in the early 2000s, the Securities and Exchange Commission started considering whether it should remove the SSR. After a pilot program, it concluded that removing the restrictions would cause no harm to the way market mechanisms worked. In 2007, the SEC lifted the rule, allowing short stock trades to occur on any price movement, no matter whether it was an up or down market.

However, in 2010, the SEC adopted another similar restriction under the name “Alternative Uptick Rule,” intended to prevent traders from exacerbating existing stock drops. Both the old rule from 1938 and the new short-sale rule from 2010 were a response to economic crises in an attempt to reduce market volatility and prevent flash crashes.

How Does the Short Sale Restriction Work Today

The today’s version of the SSR, the “Alternative Uptick Rule” applies to all securities. The short-sale restriction (SSR) will get triggered once the security has dropped by 10% or more from the closing price of the previous day.

If this happens, a short sale order would then only be permitted if the price gets above the current best bid, so an “uptick” in the price of a stock is needed to sell short. If traders attempt to short a stock under the SSR at its bid price, their orders will automatically be routed to the offer/ask price. In that case, the trader will have to wait for more buyers to appear so that one can fill their short sell. This way, the system automatically routes the order correctly by following the SSR rule guidance, and the short-selling order will only be executed if there is an uptick and enough liquidity. Otherwise, the order will not get filled or only get partially filled. A guaranteed fill with a short selling market order is not possible with a short sale-related circuit breaker.

Let’s take a look at an example – assume that the previous day’s close price for the shares of Apple is $100. On the next day, they drop to $85, triggering the short-sale rule. At that point, traders won’t be able to short the stock for nearly two days at the Bid price. Still, short-selling with a limit order at prices above the current national best bid (NBB) remains possible (e.g., limit order at the ask price or between the bid and ask price).

The above example should give you enough context to understand how the SSR works. However, another essential thing to mention is that once triggered, the restriction remains in effect for the entirety of the trading day and the following trading session.

The stock trading rule is imposed by trading centers (e.g., exchanges and trading venues like ECNs) as per the requirements of the SEC.

What Can Trigger the Short Selling Restriction or the Uptick Rule

The SSR or the Uptick Rule, as it is known today, is usually triggered by breaking news or earnings reports.

An example of the former can be a board-level problem or controversy, a black-swan event, a lawsuit, a major advantage for a competitor, or else. Alternatively – any unexpected news might lead traders to consider selling their shares en masse due to expected price drops.

If a company fails to live up to its initial quarterly earnings forecasts, forecasts of market experts, or analyst projections, it can also lead to a number of shareholders short-selling the stock and triggering the SSR.

It is worth noting that the SSR isn’t caused by overnight price changes but only if the prices drop by 10% or more from the previous close at any point while the markets are open.

However, bear in mind that the SSR is at play only for US-listed securities.

Today, the “Uptick Rule” can often be triggered even for blue-chip companies like Tesla. Among the reasons is the increased volatility, as we have seen in 2020 and 2021, aggressive day trading activity, scalping or other predatory activities by traders.

Why is there a Need for Short Sale Restrictions

By default, short selling isn’t controversial. In fact, it can have an overall positive effect on the market, including providing liquidity and enhancing the pricing efficiency throughout the trading day. However, it also leaves room for manipulation in the form of improperly driving down the security price or accelerating a declining market.

The short sale restriction is essential to limit the ways short selling can be abused. The rule helps ensure market transparency and minimize the risk of share price manipulation.

For example, having the SSR in place makes it way more complicated for market participants to cause flash crashes. It also restricts organized price manipulation targeting a particular company. That way, the SSR helps ensure a healthier and more stable market environment.

Without the short-side sell rule, at least in theory, a security’s price can be manipulated to embrace a downward trajectory that could fall far below any realistic market price or even go into the ground.

While many argue that removing the short trade rule had some effect on exacerbating the Global Financial Crisis, which started in 2007, it is more of a question of bad timing rather than actual impact.


What is short selling?

Short selling involves borrowing shares, hoping for their price to drop, and then selling them. After the sale, the short seller buys the same type and quantity of the borrowed shares to return them to the original owner. Short sellers hope they can buy back the stocks later for a lower price than they have sold them for. In modern markets, all this happens automatically.

Can you short a stock under the short selling rule?

Once a stock is under the short selling restriction, also known as Short Sale-Related Circuit Breaker, traders can’t short at the bid price of a stock. Still, it remains possible to short a stock with a limit order above the national bid price (NBB).

How to know whether a stock is under SSR?

First, most trading platforms will alert you whether a particular instrument is under the SSR and for how long. Second, you can check manually on the exchange’s site. Third, you can also check the premarket trading specifics of the instrument to try to anticipate whether the SSR will be triggered and how to trade it.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as,, Business Insider and Forbes.