Investing > What’s SSR When Trading Stocks?

What’s SSR When Trading Stocks?

The short-sale rule is practically unavoidable for any short-seller—the good news is that it's simple and straightforward.

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Updated February 18, 2022

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Don’t you just love it when something gets in your way?

I mean really gets in your way—you find the perfect strategy, wait for the right moment, and suddenly, seemingly out of the blue: a roadblock ceases all momentum. 🚧

At first glance, the short-sale rule looks just like that—an unfair roadblock. And things look like they might be getting even harder for the aspiring and established short-sellers with the SEC’s Gary Gensler embarking on a regulatory spree.

But things aren’t so bleak. While SSR is almost unavoidable for a short seller, it isn’t nearly as obstructive as you might think—as long as you understand it

So, without further ado, let’s get to know the short-sale rule—what it is, how it works, and how you can make sure it never negatively affects you.

What you’ll learn
  • What is SSR in Stocks?
  • Why Was the SSR Rule Brought Back?
  • When is a Stock Put Under SSR?
  • How to Tell if a Stock is Restricted
  • An Example of SSR in Action
  • Is the SSR Good for the Market?
  • How to Trade Stocks Under SSR
  • Conclusion
  • FAQs
  • Get Started with a Stock Broker

What is SSR in Stocks? 📚

The short-sale rule (SSR) is closely connected with the alternative uptick rule—both the old and the alternative one. In a nutshell, the short sale rule ensures that securities that are on a downtick can’t be shorted.

Under the original restriction imposed in 1938 by the SEC and removed in 2007, the conditions were rather simple. If the price of a security were going down, that security couldn’t be shorted until its ticker went up again.

The newer SSR—imposed in 2010 after the crash of 2008—is slightly more complicated. This restriction is triggered if a stock’s price drops by 10% or more from the previous close. Once in effect, it functions like the old rule—it blocks any attempts at short-selling for both the rest of the trading day and the following one.

Both the old and the new short-sale rule were brought about amidst economic crises—the Great Depression and the crash of 2008—in an attempt to reduce market volatility and prevent flash crashes. Basically, since short-sellers profit from future price drops, a stock already on a downtick can appear like a no-brain short target.

Without the short-sale rule, the allure of a security on a downward trajectory could positively drive it into the ground—far below any realistic market price—and cause a lot of trouble down the road.

A Brief Look at Short Selling 🕵️‍♂️

As we’ve briefly mentioned, short selling is a practice where investors and traders bet that a security will lose value in the near future. Generally speaking, this involves borrowing shares and trying to sell them to a third party, only to buy them back later at a cheaper price before returning them to the original lender.

While short-selling is generally considered a valid strategy—unlike naked shorting, its cousin which is downright illegal in most regulated parts of the world—it remains a very controversial practice.

Apart from the general concerns, large short-sellers famously attracted a lot of anger in late 2020 causing the GME short-squeeze that ultimately gave birth to modern meme stocks and turned Robinhood’s unstoppable rise into a rocky road.

On the other hand, despite the often-justified negativity aimed towards shorting, it is important to remember that some of the best and biggest shorts—like Michael Burry’s famous bet against the housing market—were targeted at securities on a major uptick and could have served as an early warning of woes to come if anybody cared enough to pay attention.

Why Was the Old Uptick Rule Removed? 📙

Considering the risks and controversies surrounding stock shorting, and the fact that the DOJ continuously investigates various short-sellers, it is hard to imagine why the SEC thought removing the old uptick rule was a good idea.

However, by the early 2000s, the old SSR was almost 70 years of age which led many to question whether it should be retired. This debate prompted the SEC to test the waters by removing the restriction from a select few stocks in 2004 and—the world didn’t end.

In fact, this removal of the old rule seemingly led to a boost to the already flourishing market as more flexibility with shorting led to an increase in liquidity. This series of events led to the ultimate removal of the rule at the pretty much most inopportune time possible—2007.

Controversies Regarding the Removal of the Old Uptick Rule 🧐

The timing of the implementation of the old short-selling rule, as well as the moment it was removed, makes it very hard to discern the actual effects it had on the market. The initial rule was brought about in 1938 and was followed by the ending of the Great Depression about a year later.

This led many to believe that the SSR was incredibly effective, however, there were many factors at play. This particular regulation was far from the only measure the Roosevelt administration implemented to combat the crisis. Furthermore, World War Two was already one year old in Asia when the short-sale rule was made and would start in Europe in 1939.

While perhaps counterintuitive, the war did wonders for the U.S. economy and industry as the country was unofficially known as the great arsenal of democracy and there is quite a bit of truth in the old saying “the war was won by British intelligence, American steel, and Russian blood.”

What we are trying to say is that the 40s were a time of a general boom for the U.S. both during and after the war, and giving the old uptick rule all the credit for ending the crisis would be imprudent.

Similarly, the partial removal of SSR in 2004 could hardly be regarded as a key factor during the generally bullish first half of the 2000s. Likewise, its complete discontinuation might have contributed to the collapse of 2008 but there were many other factors at play—chief of them the incredibly broken nature of mortgage-based securities which were rampant at that time.

Still, it is hard to argue that the short-sale rule had no tangible benefits, and it is even harder not to see how its removal was very controversial. Apart from the horrendous timing of the removal of the rule, short-selling has been rampant throughout the roaring twenties, and short-sellers have been blamed for the crisis as early as 1930.

Why Was the SSR Rule Brought Back? 📘

Considering that the market stabilized a year after the old SSR rule was put in place, and crashed a year after it was removed, it is no surprise that debates about reinstating it started already in 2008. Still, since there is no real consensus on its effectiveness—and on the actual effects short selling has on the market—the debate was neither quick nor easy.

Ultimately, the SEC decided on introducing a new short-sale rule—also known as the alternative uptick rule—in 2010. This new rule is arguably laxer than the old one as short-selling of stocks that are dropping is still permitted as long as the drop isn’t larger than 10%.

Whatever the actual effects of the short-sale rule, it is more than likely here to stay. The troubles stemming from the rising inflation, and the continued audits into short sellers’ activities by the department of justice are at the very least making its removal politically unfavorable.

Furthermore, its existence doesn’t really appear to be impacting shorting as a whole negatively since short-sellers have made more than $100 billion throughout 2021.

When is a Stock Put Under SSR? 📉

The short-sale rule is triggered when the price of a stock drops by more than 10% from its previous close. This drop can happen at any point during the trading day and the restriction is in effect until the close of the following market day. The SSR can’t be triggered after-hours—the market has to be opened for it to activate on a particular stock.

So, for example, let’s say that the shares of company X close on Monday at $20. Then, on Tuesday they open at $21 but by noon they drop to $18. This shift causes the short-sale rule to trigger and shorting of company X becomes effectively impossible for nearly two days—the restriction is in effect until the closing of the markets on Wednesday.

While the SSR is the SEC’s rule, it is generally enforced by stock brokers.

How to Tell if a Stock is Restricted 👷‍♂️

Since the short sale rule is enforced by brokers, there is little surprise that the easiest way to tell whether it is in effect is by looking at a company page on your platform of choice

Good stock brokers, especially those brokers that are well-suited for short selling, will have this info clearly visible either by giving the shares an SSR tag, a little red symbol indicating the rule is in place, or both.

Alternatively, a number of other sources are available to identify restricted stocks. The Nasdaq website, for example, indicates which stocks are under SSR.

An Example of SSR in Action 👨‍🏫

As you might imagine, the short-sale rule gets triggered rather often especially in periods of increased volatility such as during the initial phases of the covid-19 pandemic. For example, Elon Musk’s Tesla had a very rough week back in February 2020 when the Chinese vice-president announced that car deliveries would suffer delays due to supply-chain issues.

Tesla stock fell by around 17% on Wednesday—February 5th, 2020—triggering the SSR and thus restricting the short selling of shares of the electric car giant. As is the case with the short-sale rule, this restriction was in effect up until the closing of the 6th.

While it is hard to say whether the SSR had a significant impact on the recovery of Tesla shares, the company did close the week up by around 15%, so neither the short sellers, nor the supply issues in China caused Musk too much headache on the market.

Tesla had a rough week in February 2020 culminating with a 17% drop on February 5th.

Another rather famous and, perhaps, more dramatic example of the short-sale rule getting triggered came on the 2nd of February 2021 when GameStop’s shares were protected from shorting after plummeting to around $60 from the January 28th high of almost $350.

After its “to the moon” rise in January 2021, GameStop’s price plummeted which put its shares under SSR—just a few days after Robinhood temporarily implemented trading restrictions.

Depending on whom you ask, this served as both a stabilizing and aggravating factor as it came just a few days after the online broker Robinhood enacted a temporary halt on trading GME shares and other related stocks.

These two examples are rather interesting as they are both very similar and very different. On the one hand, the case with Tesla is arguably a part of the usual stock market inner workings, while the GME SSR came in the middle of a perfect, pretty much unprecedented storm.

On the other, both were heavily driven and influenced by extraordinary external events. GameStop being affected by the tempestuous movements of the crowd on Reddit often more concerned with the destruction of as many hedge funds as possible—rather than the usual motive of making money and securing a comfy retirement.

While supply chain issues that faced Tesla on its troublesome week are far from unheard of in most industries, the fact that it was caused by a global pandemic is, again, rather extraordinary.

The biggest lesson here, apart from just seeing a real-life example of the rule in effect, is for those seeking to spot a coming triggering of the short-sale rule—just like the mosaic theory proposes, you’ll have to look closely at both the internal factors of the market, and often seemingly unrelated external comings and goings.

Is the SSR Good for the Market? 🤔

The actual value of the short-sale rule is arguably a not-hot-enough debated topic and it is closely tied to the wider conversation about shorting. There are experts on both sides of the fence—some see short selling as an invaluable part of the ecosystem, while others view it as the bane of everything good about the stock market.

For example, David Crook of Tail Wind Advisory and Management argues that short selling provides both liquidity and price corrections for the market. This point could be followed-up by saying that the SSR stifles these benefits of shorting at pivotal points—providing a lifeline to overpriced stocks as they become unavailable to short sellers and alluring to investors seeking a longer position, or some other form of a bet.

On the other hand, billionaire Leon Cooper has gone on record strongly arguing not only in favor of the SSR but bringing back the old uptick rule. He views the old rule—which didn’t allow for short selling during even the smallest of drops—as probably the single most effective way for stabilizing the market.

The advantages of the short-sale rule seem to outweigh the drawbacks. The main benefits of shorting don’t appear to be stifled by the restriction—for example, short sellers pointed big time at the tech bubble that appears to have formed by heavily betting against Kathie Wood’s ARKK Etf.

Additionally, as we’ve seen in recent years, regular people are becoming an ever-larger presence on the market and they appear to mostly be anti-shorting. While this may appear trivial at first glance, we mustn’t forget that the behavior of investors and traders is a big factor for the relative volatility and stability of stocks.

It is far from unimaginable that any move against short sale restrictions would be irritaning to many and could lead to more gigantic short squeezes—which could lead to tectonic shifts on the market and near-unprecedented volatility. Considering that some believe that we are already facing an overflowing superbubble, this outcome is far, far from desirable.

How to Trade Stocks Under SSR 🏗

The most straightforward way of avoiding the short-sale rule is to avoid short selling itself. This doesn’t necessarily mean that only people holding long positions are spared. Since short selling is mostly done with borrowed shares, stock ownership generally exempts you from the restriction—meaning that even day traders can quickly close a position that is going belly-up.

On the other hand, you can technically short stocks protected under the short-sale rule by paying a price above the current best bid. This option is, however, very unattractive and generally counterintuitive. Keep in mind though that if you are dealing with a particularly volatile stock, the SEC might allow trades at a volume-weighted average price.

This exemption has its own set of complications and is thus unavailable with most brokers.

Conclusion 🏁

Ultimately, the biggest take-away about the short-sale rule is that it is pretty much unavoidable and here to stay. Unfortunately, there is no ultimate verdict on its value, but one thing is for certain—it is highly unlikely it will ever throw a major wrench into your plans.

If you are dabbling in short selling, you will have ideally picked your target before it went on a downtick—and if you haven’t, you just have to be mindful about the SSR’s existence and implementation lest your order ends up being filled at an awful price.

SSR in Stocks: FAQs

  • What is SSR for Stocks?

    The short-sale rule (SSR) is a restriction on short selling that is triggered if the price of a stock drops by more than 10% from the previous close. It makes shorting that stock effectively impossible until the end of the next market day.

  • Who Enforces SSR?

    The short-sale rule (SSR) is generally enforced by stock brokers under the authority of the SEC. This means that whenever you are trading, you will see an indication with your broker if SSR has been triggered for certain shares.

  • How do you Trade Stocks Under SSR?

    Generally speaking, as long as you aren’t attempting to short stock under the short-sale rule (SSR) you shouldn’t run into any trouble. Since short selling is mostly done with borrowed shares, stock ownership pretty much guarantees you’ll be able to sell even if SSR is in effect. If you are holding a long position, SSR should be a non-factor.

  • Why Does Short Selling Get Restricted?

    Short selling has been restricted twice by two different short-sale rules—during the Great Depression and after the crash of 2008. These restrictions were and are imposed due to a belief that short selling greatly increases the volatility of the market and has the potential to lead to disastrous flash crashes.

  • How Long Does SSR Last?

    The short-sale rule lasts from the moment it was triggered by a price drop of more than 10% from the previous day until the closing of the next market day. If it has been triggered on a Monday, it remains in effect until the opening of the market on Wednesday. If it has been triggered on a Friday, it will still be in place during Monday’s open hours.

  • Is SSR Triggered by Overnight Price Changes?

    The short-sale rule (SSR) isn’t triggered by overnight price changes. This means that a drop of 15, 20, or any other percentage while the markets are closed will not cause it to be put in place as long as the drop is followed by a sufficient recovery. However, SSR will be triggered as soon as the prices drop by 10% or more from the previous close at any point while the markets are open.

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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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