Since securities prices are a function of supply and demand and since investors usually operate in mass, the Securities Exchange Commission has devised a way to prevent short-sellers from feeding sell orders (supply) into a declining market and further eroding prices. SEC Rule 10a-12 requires short sales on securities listed on an exchange to be executed only on a plus-tick or a zero-plus-tick. The plus-tick rule does not currently apply to short sales of over-the-counter stocks.

1. Plus Tick (also known as an up-tick) describes when a securities transaction has taken place at a price higher than the last previous transaction in that security.
2. Zero-Plus Tick describes when a securities transaction has taken place at a price the same as the immediately preceding transaction but higher than the last transaction in that security at a different price.
3. Minus Tick (also known as an downtick) describes when a securities transaction has taken place at a price lower than the last previous transaction in that security.
4. Zero-Minus Tick describes when a securities transaction has taken place at a price the same as the immediately preceding transaction but lower than the last transaction in that security at a different price.

The tick condition that a security is trading in at any given time is indicated on quotation terminals by a + or - next to the symbol. On the consolidated tape (ticker tape), a + next to the price (i.e.: 15 3/4+) indicates a plus tick or zero-plus tick from previous trades.


"Going short against-the-box" is simply establishing a short position in a security that the client has an existing long position in, but does not intend to deliver on the settlement date of the sale. The expression comes from an analogy that the stock being sold short is offset by stock held in a safe deposit box (actually, the securities owned (long) are usually being held by the brokerage firm in street name).

The typical motive for selling short-against-the-box is to insulate for tax purposes an existing long position in a security from any drop in price, since any price movements either up or down equals a zero sum. For example, if an investor has a significant capital gain on a security and wishes to defer that gain for tax purposes into a different period, a short-against-the-box sale could be used to delay realization of the gain until the more favorable tax treatment of the gain is available. A short-term capital gain could be turned into a long-term gain, or a gain could be postponed from one year to the next. Short-against-the-box sell orders are subject to the up-tick rule, since the investor is planning to deliver borrowed stock, even though the intent of the order is to hold onto a gain, not to drive the price down.


For example, an investor has a security position with a basis (purchase cost) of $5,000 that has appreciated to $12,500. It is December 10th and a sale at this time will result in a $7,500 gain in the current tax year. By selling the exact same position short against the box, the gain can easily be deferred into the following tax year. Anytime after January 1st, the positions can be closed, and the gain has been shifted into a different tax year. Current tax law prohibits the use of a short sale against the box to convert a short-term gain into a long-term gain in the same tax year.

To close out a short-against-the-box position, the investor must do one of three things. He must instruct the brokerage firm to offset the long and short positions (known as "flattening out" his positions; or buy back the shares sold short and leave the long position intact; or sell the long shares and leave the short position intact. The decision as to which of these is most advantageous would be made by the investor based on market conditions in effect at the time that the short against the box position is closed out. However, if investor elects to sell the "box" stock and remain short, the SEC rules consider the investor to be starting from a "flat" (not long) position and require that the sale order be marked as short and subject to the up-tick rule.

When an investor does a short sale against-the-box, he must post the usual margin for the short sale and he will be charged interest on any resulting debit balance because the stock is being borrowed from a disinterested third party. This also means that approval must still be obtained from the brokerage firm's stock loan department. Just because the customer is long the security does not mean the stock is available to short. His stock may have been loaned out to another party to short or may be held as margin stock which the brokerage cannot loan out as opposed to excess margin stock, which can be loaned out.

Two more points will help to determine whether or not a short against the box position is advantageous and how long such a position should be carried.

• First, margin interest will be charged on at least the short side, or both sides of the position if the long position isn't fully paid for, thus the margin interest charges add up quickly.
• Second, margin requirements are only necessary on the side with the largest requirement. The actual Reg. T rule states "A short sale 'against-the-box' shall be treated as a long sale for the purpose of computing the equity and the required margin." Proceeds from the short sale may be released to the investor up to the minimum house or exchange maintenance requirement on the long position, which ever is greater.

Short sale orders can be accepted as either market or price limit orders and are one day orders only. Short sales of exchange listed securities can only be executed on a plus-tick (last trade higher than the previous different price) or a zero-plus-tick (last trade the same price as the previous up-tick price). The customer must always indicate to the broker that a particular sale is intended to be short at the time the order is placed. Short sales are only allowed in the accounts of customers who have a signed and approved margin agreement on file with the brokerage firm.

Short sales on exchange traded securities sometimes raise questions from clients as to whether or not an order is "due" an execution. The following will help to explain the procedures involved. Every time that the security up-ticks and becomes eligible for a short sale, all short-at-market orders are placed on the specialist's book as limit sell orders at the current price. This means that the short-at-market is in reality a limit order in line behind all previously entered sell orders at that price.

When a security is trading at a specific price, the short sale orders limited to that price are in line behind the short-at-market orders. If the stock down-ticks before the order executes, the orders to short are removed from the specialist books and put aside until the next up-tick, when the above cycle starts all over again. In other words, all short sale orders are in effect limit orders and as such are constantly getting in line behind the other sell orders. Thus even short at the market orders frequently expire at days end with no execution if the security being sold never trades with significant volume on an uptick after the short sale order is placed.


Whenever a short sale is made, an offsetting purchase must be made at some future date. This fact gives rise to the short squeeze, a situation which occurs when the price of a security begins to rise sharply and investors holding short positions scurry to buy to cover their short positions and limit their losses, or to lock in their gains. Since supply and demand dictates the price of a security, this sudden increase in buying (demand) from short sellers covering their positions leads to even higher prices, frightening even more short sellers into covering their short positions and driving prices still higher.