The U.S. Securities and Exchange Commission has proposed about a dozen different restrictions on short sellers in the past few days, including an outright ban for financial stocks, but it hasn’t replaced the primary restriction on short sellers that was in place for most of the century.

The “uptick rule” or “tick test” required short sellers to sell at a price above the last price paid for a stock, or at the price of the stock’s last trade if it was higher than the previous price. The rule had been in effect since 1938, but the SEC removed the rule last year, on July 6, 2007, after saying it was “obsolete.” 

The SEC studied its removal, running a pilot program on 1,000 stocks starting in May 2005 through April 2006, a year when the bull market was just getting going and the Standard & Poor’s 500 index rose about 13 percent on its way to record highs.  Now that the S&P is down more than 14 percent since the beginning of this year,  getting rid of the rule has been blamed for increased volatility, and calls for its return could get louder as the process of market re-regulation gathers pace.

“The SEC did one of the dumb things that has been done to hurt this market, doing away with the uptick rule,” said Don Hodges, president of Hodges Capital Management.  

The uptick rule was removed just as subprime mortgages started their meltdown in August last year, which would have been a great time for investors to get short. They did, and short interest has risen to record highs this year.  

So the remaining question then  is, did the uptick rule really do anything? Check out this chart of nonblock money flow for listed U.S. stocks.

It shows stocks purchased at higher prices (upticks) versus stocks purchased at lower prices (downticks)  for the last two years. That big switch in the middle toward downticks hit around July 6, 2007.

These new short selling restrictions are much more complicated, and haven’t been studied. Maybe it would have been just as easy for the SEC to bring back the uptick rule.

-By Emily Chasan and Mark McSherry

Wall Street’s cheering the Paulson Plan – a multi-billion-dollar taxpayer-funded effort to contain the credit market crisis. But a backdraft is underway in the blogosphere. Strategist-blogger Barry Ritholtz lays it out here in The Big Picture:

We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists.

Comments rolling into Calculated Risk are uniformly negative, with the two presidential candidates coming in for some scorn for supporting the asset relief plan.

A temporary ban on short-selling from the SEC is drawing some arrows as well from Zac Bissonnette in BloggingStocks:

It’s clear why the SEC is now banning it: this isn’t about leveling the playing field or making the market more fair or efficient. This about the SEC using its power to manipulate the market upward.

Some close to the Street were critical of the ramifications too. “Wall Street has discovered a great business where the upside is potentially unlimited, but the downside is ultimately put on the taxpayers’ tab,” Cary Leahey, economist and managing director of Decision Economics told Reuters.