What effect will the uptick rule have on the overall stock market and exchange traded funds (ETFs)?

The Securities and Exchange Commission (SEC) is planning on meeting next month to determine whether or not it will reinstate the uptick rule.  In layman’s terms, this rule limits short selling and generally comes to mind during a bear market.

Additionally, under this rule, the market has to have upward mobility in order to short.  So, in essence, if the market is in a downward spiral, one can not take a short position, states Sara Hansard of Investment News.

Like everything else, there are advocates and opponents of the rule.  The advocates include long-term investors and corporations who believe that short selling contributed to the destabilization of the markets.  Opponents include hedge funds, day traders and riskier investors who believe that short selling is a great opportunity to capitalize on a down market.

From 2004 until 2007, when markets were generally rising, the SEC conducted its own studies. The regulator’s overall opinion was that the uptick rule was not necessary to stabilize markets.

Kevin Grewal contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.