Unshackling Short Sellers: The Repeal of the Uptick Rule

On July 6, 2007, the United States Securities and Exchange Commission eliminated the uptick rule and all other short-sale price tests. About 1,000 "pilot stocks" were already exempt from the uptick rule as a result of an SEC pilot program. There are no significant stock price effects when the SEC announces the repeal of the uptick rule. When repeal takes effect, shorting increases markedly in both pilot and non-pilot NYSE stocks, and short-sale orders on average become more aggressive in both affected and unaffected stocks. Repeal causes market liquidity to worsen slightly, and short sellers on average become less contrarian. Compared to the pilot program, complete repeal makes index arbitrage and other program (multiple-stock) shorting strategies easier to implement, and this could explain the post-repeal changes in seemingly unaffected pilot stocks. We find no evidence that repeal of the uptick rule destabilized prices or otherwise contributed to the bout of volatility experienced by U.S. stocks in late July and early August 2007.