April 18, 2009
When a stock is heavy on short sellers and investors/traders realize this, they sometimes buy the stock to start an upward movement of the stock's price. The buyers have in mind that the short sellers have stop loss orders in place that can be triggered if the stock is run up in price. Therefore, running the stock up in price means eventually those triggers will be struck causing the stock to rally more than the buyers could rally the stock (the short sellers are now becoming buyers). Other events may cause a stock to rally that creates buying from the short sellers. If short selling is restricted in a manner that results in less short sellers, these stop loss orders will not exist meaning there are potentially less buyers if a stock does rally. Investors/traders that are long a stock that is plummeting may be able to get out with a bit more capital if the stock rallies because short sellers whose stop loss orders are triggered send the stock higher than it otherwise could go. It does not make sense to employ the uptick rule since the likely result will be less short sellers and thereby fewer stop loss orders to help rally the stock.