If you’ve been trading stocks for a while, you’ve probably heard the term SSR or "Short Sale Restriction" which is often referred to as the Uptick Rule. In this post we will explore the pros and cons of the SSR and learn how to identify when it is in effect.
What is the Short Sale Restriction (SSR)
SSR stands for Short Sale Rule or Short Sale Restriction. This restriction prevents traders from shorting at market (bid price) when the SSR is in effect. This is usually done to prevent a large number of short sellers from driving down the stock price of a company, which could cause panic in the market and destabilize the financial system.
History of the Short Sale Restriction
The short sale restriction is a rule the SEC implemented in 2010 (after previously enforcing a similar short sell restriction in 1937, that was then lifted in 2007), the function being to prevent bears from pushing the market down at will (hitting the bid).
This was a strategy the SEC came up with to prevent traders from further driving down the shares of stocks that are already in a sharp decline.
What Triggers the SSR in Stocks
The SSR is triggered when a stock falls 10% from its previous close. At any point in the day if a stock hits that 10% threshold the Uptick Rule is activated and prevents traders from shorting at the bid price for that day (and the following trading day).
This means if a trader wants to short the stock, they will have to short on the ask/offer side and wait for an "uptick" in the stock to get filled.
If you attempt to to short at the bid price when the SSR is enabled, your order will automatically be routed to the offer/ask price until a buyer fills your short order.
How SSR Affects the Way a Stock Trades
Since the SSR effectively prevents shorts from driving the price down by hitting the bid to enter into a short position, the only way a stock with SSR can drop is from traders with long positions selling shares at the bid / market price.
This means that there often will be more buyers in the stock with SSR than sellers (since short sellers need to buy to exit their positions).
It can be more difficult to short and get targets on a stock that has the SSR enabled, as there will be no short sellers driving the price lower with market orders.
How to Tell if a Stock Has the SSR Enabled
If a stock drops 10% from its previous close, the SSR will be enabled for that trading day and the following trading day.
Most brokerage platforms have the SSR listed on the level 2 montage window of a stock that has the SSR enabled. Alternatively, you can search the ticker symbol on the NASDQ website to see if that particular stock has the SSR enabled.
Pros and Cons of Short Selling Restriction
The Short Sale Restriction has many cons as you might imagine, whether not being able to get a fill on one of your short trades, or getting horrible fills trying to short a move lower in the stock, but there are a few pros that arise from the rule.
Knowing a stock has SSR triggered could imply that to catch a move to the short side traders might chase the stock and get filled at prices so low that they would all panic if it reclaimed a key resistance level, in this fact alone we know opportunity can exist on the long side if the right factors align for a setup to squeeze out shorts and use their covers, in addition to new buyers, as fuel for a big trade.
How do I know if a Stock Has the Short Sell Restriction or SSR
With most trading platforms, you will see a little "SSR" message on the top of the level 2 montage window on a stock that has the short sell restriction enabled.
If any stock is down more than 10% from its previous days close the short sale restriction will be enabled for the rest of that trading day and the following trading day.
Alternatively, you can search the ticker symbol on the NASDAQ website or view the current list of stocks that have the SSR enabled.
Keep an open-mind and open-bias on stocks that have the short sale restriction.
Stocks can still go down with SSR, and they can still go up as well. Whatever hindrances SSR provides, can also bring opportunity.
As traders we must play the cards we are dealt (if we decide to play at all), so always manage risk, and be flexible. Whether SSR works for you or against you, it will ultimately be up to you and the system you trade. Opportunity in the market is in surplus to those who can find it and take advantage of great risk/reward, and high-probabilistic setups.