March 12, 2009

People who blame short sellers for the brutal drop in stocks might soon have to find another culprit. Securities and Exchange Commission Chairman Mary Schapiro on Wednesday testified to Congress that the SEC hopes as early as next month to propose for public comment bringing back the "uptick rule."

This Depression-era rule, suspended in 2007, makes it harder for investors who bet the market will fall to execute their trades. Short sellers borrow shares and sell them in hopes the stock falls so they can buy it back at a lower price to replace the borrowed shares, pocketing the price difference. The uptick rule allows traders to sell short only on an uptick — that is, when the last trade in that stock was at a higher price than the previous trade.

The reopening debate over the uptick rule shows how regulators are pushing to overhaul oversight of the financial markets after the system showed how fragile it is. "Panic is easier and faster to incite in trading than the opposite," says Dylan Wetherill, president of ShortSqueeze.com. "The short sellers can really incite fear pretty easily.