Is the Stock Market More Profitable with the Uptick Rule than Without It? Testing the Steady Gain Hypothesis

Abstract

In 2007, the Securities and Exchange Commission (SEC) removed rule 10a-1 of the Securities Exchange Act of 1934 from stock trading. Rule 10a-1, commonly referred to as the “uptick rule,” is a stock trading rule that had been in place since 1938. The uptick rule put price restrictions on short selling in order to protect investors from heavy losses in the stock market. The SEC had conducted an experiment in 2005 to determine the effects of removing the uptick rule, and the results of the SEC experiment had suggested that the stock market would be three times more profitable with the uptick rule than without it. The problem was that this finding had no theory to explain it. In this analysis, another test is made of the expected increase in profitability with the addition of price restrictions on short selling, and it was found that the market could be expected to be 2.5 to 2.66 times more profitable with the uptick rule than without it. The increase in profitability would amount to a gain of over one half of one Trillion dollars per year if the uptick rule were reinstated. The problem with a lack of theory to explain this difference still remains.