The Bull

Sunday 24

June, 2018 1:07 PM



Forex question

What is the uptick rule, and how does it affect forex trading?

What is the uptick rule, and how does it affect forex trading? Ross Bauer

US regulators revoked the “uptick rule” on the 6th July 2007.

Previously the uptick rule, which was implemented in the 1930s following the US stock market crash, was designed to ensure it was more difficult to short sell stock.

Under the so called uptick rule, a short sale may only take place if the market price moves up to the price at which the sale is being offered or at a price of the stock’s last trade if it was higher than the previous price.

The Australian equity market still has a number of restrictions on short selling, however in practice many of these restrictions may be avoided through securities lending.

The forex market by contrast has never had any uptick restrictions.

Unlike equities, a currency pair is not a single instrument. Currency trades are undertaken in pairs. You are buying one currency and simultaneously selling another at all other times. This renders it pointless to restrict the shorting of one position as it is explicitly one side of any freely floated currency transaction.

If a trader believes that the Australian Dollar will rise against the U.S Dollar, that trader can go long (buy) Australian Dollars and short (sell) the U.S Dollar. If the same trader believed that the U. S Dollar would strengthen against the Australian Dollar they would short the AUD/US dollar currency pair.

Surveys conducted by the Bank of International Settlement indicate an average turnover in excess of USD 3.2 trillion per day. This is at least 30 times larger than the total daily turnover of all US equity markets.

The protection provided by this massive 24 hour liquidity, as well as the opportunity to profit regardless of which way the market is moving will continue to be a major attraction of trading in the forex market.

Ross Bauer


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