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What Is SSR In Stocks? A Short Sale Restriction Guide For Beginners

Short Sale Restriction Rule

In this post I will be telling you all about the SSR or Short Sale Restriction in stocks, what it is and what its objectives are and importantly how it impacts traders.

 And with all the craziness that can happen in the Financial Market especially with the influx of new investors it’s important to know what SSR is and what the implications of it are for us as traders.

Recent history in the markets such as the swift price movements in 2021 due to the market frenzy created by GameStop and the explosion in price of AMC, means it’s even more crucial to know about the SSR. And that’s why I have decided to write this helpful post. 

Learning and understanding the SSR rule is definitely important to know as a day trader and should be part of your overall knowledge in day trading fundamentals and market movements.

As the SSR rule only affects short selling and not traders taking long positions, let’s first briefly discuss what short selling is to benefit those who are new to the stock market.

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What Does it mean to short in trading?

Shorting in trading means ‘betting’ on the price of a stock to go down and making profit this way. Generally when we invest in a stock or asset we want the price to go up so we can sell at a profit i.e sell at a higher price than we bought at.

But when shorting we aim to benefit when the price goes down. So basically we are ‘betting’ that the price of the stock will go down and profit from the downward price movement. 

It’s a way to make money when you believe a stock is overvalued or will decline in price. How do you make profit from an asset going down in price? I will explain below.

Short selling involves firstly borrowing shares while also guaranteeing that the shares will be returned to the original owner.

Then the shares are sold on the open market. Remember these are borrowed shares that are being sold.

When price drops (as per your prediction) you buy them back at a lower price and of course return them to the original owner you borrowed from.

The difference between the price at which you sold the shares and the price at which you bought them back is your profit.

What Is SSR In Stocks?
Read on below to learn all about the SSR or Short Sale Restriction in stocks, what it is and what its objectives are and importantly how it impacts traders.

What Is SSR In Stocks?

The SSR or Short Sale Restriction rule, also known as the “alternative uptick rule,” is a regulation by the SEC specifically that was brought about to restrict short selling in the stock market when specific conditions are met.  How does it do this? 

Basically with the SSR a trader can only short a stock on an uptick. That’s why it’s also called the alternative uptick rule or by its official name SEC rule 201.

The alternative uptick rule was introduced fairly recently in 2010 and came about to prevent fast crashes and big dropdowns in the market. This also was to prevent down-trend volatility.

Basically what the SRR Rule says is that you can’t short a stock while it’s dropping down. Interesting right? I have not seen any rule that prevents traders from buying a stock while it’s going up.

So if you are trading long then this rule doesn’t affect you at all.

What is SSR and what does it mean for traders?
For traders like you and me it’s important to know the SSR rule and how it works as it affects traders abilities to short a certain stock that falls under the SSR.

How the SSR works in a Stock?

The way the Short Sale Restriction works is simple. The rule will restrict the short sales on a stock. But only if the price of the stock falls by 10% or more from the previous day’s closing price. Once triggered, the SSR remains in effect for the rest of the trading day and the following trading day.

And it works by making it pretty much impossible for a trader or institution to short a stock until the stock price is able to move up or stabilize. This rule applies to any tradable equity securities.

By restricting short selling on downticks and requiring short sales to occur only on upticks or at the current best bid, the SSR aims to slow down the pace of short selling during periods of rapid price declines.

This helps prevent short sellers from adding to the downward pressure on a stock’s price, thereby reducing the likelihood of a further decline in the stock’s price.

Short Sale Restriction Example

As always it’s best to try and understand a concept or idea with an example so let’s look at an example for the SSR.

Let’s say you were trading a stock and the price goes up from $5 all the way to $7. The next day, the stock opens at $6.30. That’s 10% down. And suddenly the price goes down for another 10%. This is where the SRR Rule takes action. Simple, right?

At this point it would be extremely difficult if not impossible to short the stock unless it moved up a bit in price and stabilized, as you can only short a stock on an uptick under the SSR rule.

Implications of the SSR on Traders

For traders like you and me it’s important to know the SSR rule and how it works as it affects traders abilities to short a certain stock that falls under the SSR.

So, it’s important to be aware of a stock that could potentially be flagged under the SSR rule. And not to waste your time planning out a short trade just in case it does get flagged under the SSR and you find that you cannot short the stock and your time would have been wasted.

It’s probably best to avoid stocks that could potentially be flagged under the SSR rule due to sudden price movement to the downside. 

Conclusion on the Rule 201

So now you should have a much better understanding of the SSR rule, what its objectives are and what it aims to achieve as well as how it can affect us as day traders.

And knowing about and understanding the SSR rule is part of the market knowledge a day trader should have and knowledge you can use to profit in your trades. But as always, simplifying your approach to trading technical analysis and indicators is often the best approach from which you can build more complex strategies as you learn and improve.

Information and knowledge are some of the most important things for a trader. And learning about the SSR is just another crucial bit of knowledge you should have and store away in your library of knowledge so that should you come across it when trying to short a stock you will know exactly what it means and the potential restrictions on your short trade. 

Overall it’s not complicated at all to learn and understand and hopefully this post has been useful for breaking it down for you in simple terms.

Related Read: Movies on stock market

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