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Apparently there's a NASDAQ rule called something like short sale circuit breaker which limits how much a stock can be sold short after a certain drop in price or something like that.

It really makes no sense to me.

Could I get a detailed explanation, maybe with a clear example?

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Summary: The phrase "short sale circuit breaker" rule normally refers to the SEC's recent adoption of a new version of the uptick rule. The new uptick rule triggers a ban on short selling when the stock drops a certain amount. The SEC defines the process like this:

  1. The "circuit breaker" is triggered for a security any day the price declines by 10% or more from the prior day's closing price

  2. The alternative uptick rule, which permits short selling only "if the price of the security is above the current national best bid."1 The rule applies "to short sale orders in that security for the remainder of the day as well as the following day."

In general, the rule applies to all equities.

1) The national best bid is usually the bid price that you see in Level 1 data.

Example: If a stock closed at $100/share on Monday, the "circuit breaker" would be triggered if the stock traded at or below $90/share during Tuesday's session. Short-selling would be disallowed until the start of trading on Thursday unless the short-sell price is above the national best bid, i.e. on an uptick.

Purpose: The stated purpose of this rule is promote market stability and preserve investor confidence by restricting potentially abusive short selling from driving prices farther downward during periods of increased volatility and downward price pressure. Whether or not such rules succeed is a matter of some debate, and the SEC removed similar uptick rules in 2006 because "they modestly reduce liquidity and do not appear necessary to prevent manipulation."

Exceptions: There are a few exceptions to the uptick rule that mainly revolve around when the short sell order was placed or when the securities will be delivered.

  • And why does this rule exist? What is its goal? – temporary_user_name May 29 '13 at 18:11
  • @Aerovistae I updated my answer. The stated purpose of this class of rules is worth mentioning. – John Bensin May 29 '13 at 18:22
  • Does this also apply to selling PUTS that you bought previously, or can you still sell your PUTS? – user13847 Mar 19 '14 at 12:33
  • So if a stock drops 20% in a day, 10% drop is due to "normal" selling ? – Eugen Jun 28 '17 at 21:07

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