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Imagine a stock went down more than 10% intraday, triggering the short circuit breaker, aka Alternative uptick rule. Short selling is only possible higher than the best bid. But what happens exactly? If I enter a market order, would that mean it would never get filled since it doesnt "ask" for a higher price than bid? What happens if the market order is active, not filled, and the price declines and ticks up, because someone else buys at the ask or the ask increases, can I get filled then?

Secondly, if I use a marketable limit order, would that work? A marketable sell limit has a limit below the bid. It would get filled in a declining market as the spread moves through the limit price, at some point the limit would be above the bid, it would then have a chance to get filled? How likely is that?

Thirdly, bottom line: what is the most commonly tactic used by day traders to sell short during the circuit breaker? And what kind of stats can be provided (how often it works, how much slippage, any statistics help)

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Perhaps this explanation of the Alternate Uptick Rule from Interactive Brokers may answer some of your questions:

Effective November 10, 2010, an amendment to SEC Reg. SHO goes into effect which will place certain restrictions on short selling when a given stock is experiencing significant downward price pressure. This amendment, referred to as the alternative uptick rule (Rule 201) introduces a circuit breaker which takes effect wherever the primary listing market declares that a stock has declined 10% or more from the prior day’s closing price.

Once the circuit breaker has been triggered, a Price Restriction is imposed which prohibits the display or execution of a short sale transaction if the order price is at or below the current national best bid. As a result, short sellers will not be allowed to act as liquidity takers when the Price Restriction applies and can only participate as liquidity providers adding depth to the market. Individuals owning and attempting to sell a security subject to a Price Restriction (i.e., long sellers) are afforded a priority over short sellers in that while they are similarly prohibited from displaying or executing a sale transaction at a price below the current national best bid, they may display or execute orders at the bid. Accordingly, long sellers are allowed to act as liquidity takers.

The Price Restriction will apply to all short sale orders in that security for the remainder of the day as well as the following trading day. Note that while the Price Restriction can only be triggered during regular trading hours, the restriction itself extends beyond regular trading hours on both the first and second days. In addition, there is no limit on the number of consecutive days in which a primary listing market can trigger a Price Restriction. If a stock currently subject to a Price Restriction again declines 10% or more from the prior day’s closing price, the restriction will be re-triggered for the remainder of that day as well as the following trading day.

Rule 201 applies to all National Market System (NMS) securities; that is, stocks listed on a U.S. stock exchange whether traded on an exchange or in the over-the-counter market. It does not apply to stocks which are traded only on the OTCBB and/or PINK nor stocks of U.S. companies which are executed on a non-U.S. exchange.

Example: Assume hypothetical stock XYZ closed yesterday at $10.00 and today reports a trade at $8.99 (down 10.1%) with a NBBO of $8.98 x $9.00. As the stock has declined by greater than 10%, the primary listing market would trigger the circuit breaker, effectively prohibiting the display or execution of a short sale order at $8.98 or less even if the order was a market order or had a limit price below $8.98. The short sale order may only be displayed or executed at $8.99 or higher (assuming the stock trades in one penny increments). A long sale order could only be displayed or executed at $8.98 or higher. This Price Restriction would remain in effect for the remainder of today and tomorrow (assuming no subsequent price declines of 10% or more).

https://ibkr.info/node/1432

  • Thanks, I am aware of the rule and what it prevents. I need to know specific tactics on how to deal with it. My last question is really the key question. – DISC-O Sep 4 '18 at 21:32
  • @DISC-O - If your broker offers it, I would look at an Adaptive Order which sets a price between the bid and ask price with a limit. You don't want to use any kind of market order. There may be some other order algos that can designate a price closer to the bid for the short. There aren't going to be any stats available for this because a stock in decline that has exceeded 10% down can continue to drop a few ticks or it can drop many points before an uptick occurs. No broker is going to provide that depth of trading statistics. – Bob Baerker Sep 4 '18 at 23:39

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