Uptick Rule to Bolster Markets

By Jesse Westbrook and Edgar Ortega

March 10 (Bloomberg) -- The U.S. Securities and Exchange Commission may propose within a month that the so-called uptick rule be reinstated, as regulators aim to bolster markets roiled by the worst financial crisis since the Great Depression.

The SEC staff may advise the agency’s five commissioners to vote on the proposal at a public meeting, SEC spokesman John Nester said today in a statement. The agency will solicit comment from market participants before deciding whether to bring back the rule, which bars investors from betting against a stock until it sells at a higher price than the preceding trade.

Lawmakers and companies including Charles Schwab Corp. pressed the SEC to bring back the restriction on short-selling after the Standard & Poor’s 500 Index fell more than 50 percent since it was scrapped in July 2007. House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd today said they support reinstatement.

“Short-selling has a value but it can be abused as well,” Dodd, a Connecticut Democrat, told reporters after a hearing in Washington. “In my view, that’s been contributing to some of the problem” in the financial markets.

SEC Chairman Mary Schapiro said in January during her confirmation hearings that examining the rule is “one of the things that I would be committed to doing very quickly.”

In addition to the uptick rule, the SEC may “consider other measures related to short sales,” Nester said today. The agency didn’t say what other steps might be taken.

Bear Raids

In a short sale, traders borrow stock and sell it, hoping to profit by replacing the shares at a lower price. The uptick rule required traders to wait for a price increase in the stock they wanted to bet against, and prevented so-called bear raids where successive short sales drive prices down.

The SEC eliminated the almost 70-year-old provision after a study in 2007 determined it was no longer relevant in markets dominated by fast-paced electronic trading.

Bringing back the uptick rule would restore investor confidence, Charles Schwab, founder of the San Francisco-based namesake brokerage, said in a December editorial in the Wall Street Journal. The rule “slowed the short-selling process” and limited manipulation of share prices by preventing traders from “piling on,” Schwab said.

Boom-and-Bust

Federal Reserve Chairman Ben S. Bernanke, who has said the SEC should consider bringing back the uptick rule, today urged a sweeping overhaul of ...