Today Barney Frank, head of the House Financial Services Committee, said that he expects the SEC to restore the “uptick rule” within the next month. The markets and many strategists cheered this move quite strongly as many believe the decision to withdraw the uptick rule in 2007 contributed to the huge losses on Wall Street in the past year.

What exactly is the uptick rule? The uptick rule is specifically used to regulate short-selling in the financial markets. The rule says that someone wishes to sell a stock short must do so only when the price of the equity that they are shorting is higher than the price of the previous trade. The uptick rule was first established in 1934 as Rule 10a-1, but was abolished in July of 2007.

What is the purpose of the uptick rule? The uptick rule was developed with the goal of preventing short sellers of the market from adding to the downward momentum of the price of an individual stock. Put in the most simple terms possible the uptick rule was designed to help mute major market sell offs and prevent short sellers from piling on to stocks that are being crushed by the market.

Will the return of the uptick rule help the current market? I believe the return of the uptick rule is a good sign for the market in the long run, but it certainly isn’t the answer to the economy and its problems. The removal of the uptick rule was likely a miscalculation by the SEC, and the reinstatement of the uptick rule should be seen as a sign of returning a state of calm to the market. Since the market is looking for any kind of calming in the current climate the uptick rule should help things marginally. The uptick rule is no savior, but it is a start!