Updated · Dec 03, 2022
What Is SSR In Stocks? Everything You Need to Know
Updated · Oct 16, 2022
Have you ever wondered how stock traders make all this money? What do you know about the volatility of the market? Do you know which are the most successful trading strategies? Or what is SSR in stocks?
Fret not! Even if you haven’t a clue about any of these, we are here to help you.
This article will shed much-needed light on shorting stocks and the SSR rule.
Are you ready to learn something new? Let’s begin:
What Is SSR In Stocks? Key Details
First, let’s back it up a bit! What is short selling?
Short selling occurs when a trader borrows stocks from the broker only to sell them immediately after that. They do so with the expectation that the stocks’ price will fall shortly after, allowing them to purchase them back for a lower price and keep the difference in their pocket.
Sounds good, right? It must be, as short selling is one of the most popular trading strategies. However, there’s a rule that prevents stocks from trading once they drop by a particular value. This rule is called Short Sale Restriction (SSR), and it’s there to protect companies, stocks, and traders.
The SSR rule has been around since the 1930s. The US Securities and Exchange Commission (SEC) adopted it to prevent shareholders from pooling capital and manipulating shares.
It’s also known as the Alternate Uptick Rule—meaning a trader can short a stock only on an uptick and not when it drops.
In short, it was created to prevent the stocks' downward volatility and flash crashes and stop traders from pushing the share price further down.
SSR activates each time a stock drops by at least 10% compared to the previous day’s closing price. So the traders can only short it once it starts going up. Moreover, once the SSR stock rule is triggered, it can remain active for the whole day or, sometimes, even extend to the following one.
SSR is enforced by brokers and applies to all companies listed on the American exchanges. A good rule for traders, especially the inexperienced ones, as it prevents shorting stock without researching it first.
Basic Rules of SSR
Four rules that are easy to remember. Let’s see what they say:
- The rule triggers with a 10% drop.
- Once it does, it remains active for the day.
- SSR applies to all equities listed on national securities exchanges.
- The trading centers are responsible for its implementation.
So now you know all about SSR triggers. What happens once it activates, though?
First and foremost, traders can’t short the stock while its price drops. Second, restrictions remain active for the rest of the day (or extend to the following day) and protect the stock from shorting. Brokers are responsible for establishing, maintaining, and enforcing written policies and procedures related to SSR.
The current SSR list updates often and applies to all equities listed on NASDAQ or NYSE, regardless they’re traded on an exchange or over-the-counter market.
The rule is crucial for maintaining transparency in the market, especially among the traders who short-sell the stocks. Additionally, short-selling restrictions prevent some traders from creating a flash crash and further manipulating the market, thus keeping others relatively safe.
Once the stock is placed in the SSR, it’s impossible to short it. However, traders may use a limit order, which allows the person to put it in advance. For instance, if the stock under SSR trades at $100, someone can place a sell limit order of $109, which will initiate the short position later.
Examples Of A Short Sale Restriction (SSR)
The SSR uptick rule could trigger depending on internal or external factors of the market. Let’s clear it up with some examples.
A common internal factor is a company publishing poor quarterly earning results. The stock price may then crash, enforcing the rule on American exchanges.
Another example would be a company announcing poor growth due to strong competition. The news could cause a price drop of more than 10%, thus triggering the rule.
The CEO resigning from the position is another internal factor that may cause changes in stock price. Some investors may become doubtful and exit their positions, causing the price to suddenly drop by over 10%. The SSR would be triggered once again.
What about the external factors?
This list is rather longer, containing global political situations, regulations, environmental concerns, and economic factors that can all cause a stock price to drop, triggering the rule and placing a particular stock on the SSR list.
Globally, America is not the only country that enforces such a rule. Denmark, Switzerland, Japan, and Indonesia are among the large number of countries that have introduced some form of SSR.
However, many experts noted that banning short selling during high market volatility actually increases it.
Prohibiting short selling may negatively affect traders and their view on the prices. It can also reduce market liquidity. Finally, a temporary selling ban in one market may increase volatility in another, as investors may try to go around the ban.
What Triggers The Short Sale Restriction?
Breaking news is the usual SSR trigger. Major negative updates about the company (e.g., losing a large amount of money from its account) easily cause prices to drop, which leads to the SSR triggering.
Now that we’ve discussed the rule in length, it’s time to examine its pros and cons. Let’s begin with its advantages:
- Enforces transparency
- Prevents stock price manipulation
- Protects inexperienced traders
- Ensures the stock price remains somewhat stable
No rule comes without its fair share of downsides:
- May increase market volatility
- Can reduce market liquidity
Based on this info, we can conclude that the shortsale rules can benefit all traders by preventing market manipulation. This is probably the reason why so many countries enforce similar laws.
Time for a quick recap of the most important details concerning the SSR rule for stocks.
SSR is based on four fundamental rules—a price drop of 10% or more, the rule lasting a maximum of 48 hours, applies to all equities on national exchanges, and the responsibility for its enforcement goes to brokers.
It’s important to note that SSR improves market transparency and prevents flash sales but may increase volatility, depending on current market conditions.
The Short Sale Restriction is usually present on American exchanges, but many other countries introduced a similar rule to keep the companies and traders protected.
What does SSR in stocks mean?
Short Sale Restriction (SSR) is a rule that triggers every time the price of a particular stock that’s on the short sale restriction list drops by at least 10%. The rule then prevents the traders from shorting the stock as it’s moving downwards and lets them trade it on an uptick.
Is SSR good for stocks?
The restriction is a good tool for preventing short sellers from accumulating more stock at a lower price. Plus, sellers can’t drive the stock price even lower once it's triggered.
How does the SSR rule work?
This rule is effective automatically as soon as the stock price drops by 10% or more compared to the previous day's closing price. It stays active for 24 to 48 hours, preventing the traders from further shorting the stocks by keeping these intact. It’s usually enforced in the US markets, but many other countries have similar rules.
How long does an SSR last in stocks?
Once the rule becomes effective, it will last a minimum of 24 hours, but it can extend to the following day. Learning what SSR is in stocks is crucial, especially if you’re shorting stocks. Refer to our article above to get all the info you need.
Velina describes herself as passionate media savvy and a versatile individual with numerous different interests, most a result of her Media & Communications BA. She has also developed a keen interest in Digital Marketing and Advertising. Her never-ending desire to constantly learn new things and enrich herself and her ultimate dream to go around the globe before 45 are her driving forces.
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