The uptick rule was a trading regulation that applied to US stock markets to prevent entering a short trade unless the previous trade was an uptick (a trade at a higher price than the preceeding trade). The uptick rule was implemented by the US SEC (Securities and Exchange Commission), to limit the influence that short trades could have on the stock markets (in other words, to keep the US stock markets from declining). The uptick rule was removed on July 6th 2007, so from that date onwards, short trades could be entered at any time regardless of whether the previous trade was an uptick or downtick.
Uptick Rule Requirements
When the uptick rule was in place, a short trade could only be entered after a trade that caused the last price to increase. For example, if there were a sequence of trades at 125.67, 125.66, and 125.65, no short trades could be entered, but if the next trade was at 125.66, short trades could then be entered.
Uptick Rule Controversy
Some traders (primarily buy and hold investors) believe that the uptick rule was a good restriction, and that its removal has caused the US stock markets to trade erratically because of an increase in volatility. This is a flawed theory, that is based upon the belief (or hope) that stock markets should only go up. In reality, the removal of the uptick rule has evened out the volatility, because short trades can now occur at their natural times, instead of all happening at once (i.e. in groups every time there was an uptick).
The uptick rule was just a way of trying to keep the US stock markets up artificially. The European markets have never had an uptick rule (nor anything similar), and these markets have never had a problem with either volatility nor erratic trading. With the removal of the uptick rule, the US stock markets are able to trade according to their natural market dynamics.
