Hey everyone, Ross here from Warrior Trading.
In this video, I’m going to talk about the short sale restriction, also known as SSR. Short sale restriction is a rule that came out in 2010 and it’s also referred as the alternate uptick rule, which means that you can only short a stock on an uptick.
This is kind of an unusual thing when you first think about it. It restricts the ability to short a stock as it’s dropping down. You will note that there is no such thing as a long buy restriction where you can’t buy a stock as it’s going up.
So, this rule that came out in 2010 was designed to prevent downward volatility. It was designed to prevent flash crashes and big drops in the market by making it so if a stock dropped more than 10% versus the previous day’s close.
And that could happen at any time during the day if it drops more than 10% versus the previously days close then at that time short sale restriction would be turned on and if you want to short the stock you could only short it when it’s going up.
So, you can’t basically use a market order, you can get in on a limit order on an uptick.
So, this has the effect of making it very difficult to short a stock that has short sale restriction and because it’s difficult to short, what we’ll sometimes see is that stocks that have been really, really strong for the last few days.
Short Sale Restriction Example
Let’s say yesterday a stock squeezes up from $4 all the way up to $5 all the way up to $6. And then the next day, it opens at let’s say $5.25. So it opens down 10% from the previous day and then the bell rings and it drops to $4.85, now dropping another 10%.
Short sale restriction is turned on, it’s down more than 10% versus the previous day’s close and then it starts to squeeze back up on a red to green move.
Now, as it surges up, traders who are thinking, “Man, I want to short this stock if it hits $6, which is the previous day’s high.”
Well, they can only short it as it’s going up.
They can’t short it as it turns around and that sometimes means there’s going to be an imbalance between buyers and sellers and there will be more buyers and less sellers and short sellers because it’s just not as easy to short the stock.
So, the short sale restriction can sometimes go hand in hand with parabolic moves and really quick squeezes to the upside because the ability to get short is just a little bit more difficult.
When you’re using the light speed trading platform, you’ll see stocks that have short sale restriction will be identified by having a little red symbol. Let me just find here BTAI. This one has the short sale restriction right here, CB.
So, that means this stock would have dropped at some point during the day 10% versus the previous day’s close.
And so, you can see the previous day’s close here looks like was just under $4 and then so it needed to drop 10%.
And today, it hit a high of about $4.95 and then it dropped all the way down to a low of about $4.50 so it effectively dropped more than 10% versus the previous day’s close and then short sale restriction would have been turned on as it squeezed up there that would have allowed it to get a little bit more momentum on this move up because traders who may have wanted to short it up in here and up here could only short on an uptick.
So that means if I wanted to short it by hitting the bid right here at $5.09 I wouldn’t be able to do that. I could put the order but I would only get filled as buyers come in at that price.
So, the short sale restrictions a very interesting rule designed to prevent flash crashes and volatility to the down side.
Again, you won’t see anything like it on the long side. There’s no long buy restriction so it’s sort of one of those institutionalized or systemic ways of preventing down side volatility and also encouraging long side biases in the market. Very interesting.
So, as usual, if you have any questions on this video don’t hesitate to reach out and we’ll talk to you soon.