Short Sale Rule

An SEC regulation in effect from 1938 until 2007 forbidding short sales on a stock after a downward tick in its transaction price. In other words, if the price of a stock decreased in the trade immediately prior to a transaction, that transaction is not allowed to be a short sale. Short sales were only permitted after an uptick or a zero-plus tick. This rule was instituted to prevent panic selling in an era when lack of computerization made markets more easily to manipulate. With the increased digitalization of stock markets, this rule was no longer necessary.

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This postscript discusses the SEC's final short sale rule, approved by a vote of 3-2 on February 24, 2010.

Review of the policy debate over short sale regulation during the market crisis

The 2003 SEC short sale rule proposal was broad and instructive.

The 'phantom shares' menace: naked short selling distorts shareholder control

3n) (See Q 7642 for an explanation of short sales, Q 7644 for an explanation of "substantially identical property" for purposes of the short sale rules, and Q 7663 for a definition of options.

Part II: Stocks

Securities partnerships engaging in short sale transactions may be subject to the short sale rules of IRC Sec.

OBRA's impact on securities partnerships

For an explanation of the short sale rules, see Q 7642 to Q 7644.

Part III: Options

1233 short sale rules were added to the IRC in 1950.

Roadblocks to the dividends received deduction

In applying the short sale rules (see Q 7642 to Q 7649) a securities futures contract to acquire property will be treated in a manner similar to the property itself.

Part IV: Futures

If none of the foregoing exceptions or elections applies or has been made, the straddle will generally be taxed under the loss deferral, wash sale, and short sale rules explained below.

Part V: Straddles and other transactions

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