In February, as a direct response to the May 6 Flash Crash, a new short selling rule went into effect, the alternative uptick rule. This rule requires that if a stock drops 10 percent from its previous close, then the short selling in that security will only be allowed if the selling occurs above the current best bid for the remainder of that trading day and all of the next day.

The rule is starting to generate some controversy, as more stocks are starting to be affected. The idea of restricting short selling in such draconian fashion has rankled many, who see this as something that will reduce liquidity overall.

The idea behind the rule is that by making it harder to short a stock in a declining market, you can actually insert something of an upward bias, essentially aiding the effort to keep downward pressure from really thumping the market.

As for now, the number of stocks that have been subject to the rule is higher than many expected. A strong downturn--and one might be brewing--could change that.

The rule then might threaten "to disrupt liquidity for an extended period and spill over into exchange-traded funds and derivative arbitrage funds, at a time when the market's 'animal spirits' will already be at a fever pitch," notes the Financial Times. "Thus the concern with the new shorting rule is that it may prove short-sighted, creating a ride into the unknown just as the next white knuckle moment arrives."

One expert tells the paper that he thinks normal shorting should be re-allowed if the stock price recovers rather than extend the restriction for such a long time.

For more:
- here's the article

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