WASHINGTON (MarketWatch) - Under pressure from lawmakers and financial institutions, the Securities and Exchange Commission on Wednesday approved the release of five different proposals for reinstating the uptick rule, a provision that would limit short selling.

The five SEC proposals, which will be put out for a 60-day public comment period, were approved unanimously by the five-member panel. The proposals vary from reinstating the old rule to creating a new rule that would only apply in severe market conditions.

"The commission is aware of balancing the benefits of its rules and the costs to trading," said SEC Chairwoman Mary Schapiro.

SEC staff said the new rules couldn't be approved for at least three months.

New Rules Coming on Short Selling?

The uptick rule, which was removed in 2007 after 70 years, allowed short sales only if the preceding sale boosted a company's stock price by at least a penny. The uptick rule was designed to make sure short sellers couldn't dominate trading in a stock to drive its price lower.

Short sales allow investors to bet that a share price will go down, by borrowing and selling shares of a company in hopes of buying back the shares at a lower price. The original owner then gets the shares back, and the short-seller pockets the difference in the price as profit.

Short-selling is controversial. Many companies say short sellers spread false rumors to drive prices lower, but short sellers say they provide the necessary counterweight to the boosterism of market bulls.

Some critics say the elimination of the uptick rule was a major factor in the bear market that has seen major stock averages fall 48% since peaking in October 2007, just three months after the rule was abolished. In October 2008, the SEC barred short sales of many financial corporations.

5 proposals

One approach the agency is considering would be to simply reinstate the uptick provision removed in 2007. The SEC is also asking the public to comment on four variations.

Another approach bears a resemblance to old uptick rule, but it would allow short sales only after a potential buyer bid at least a penny more than the company's stock price. This bid test is different than the original uptick rule because it would allow a short sale after a higher bid rather than a higher sale price. For technological and implementation reasons, the SEC staff indicated that it favored this approach over reinstating the old uptick regulation.

Three other proposals, known as "circuit breaker tests," would limit short selling for the duration of one trading day once certain triggers were met. One provision would ban short selling outright in a particular security if there were a 10% decline in its stock price, according to the agency. The ban would be in place for the remainder of the day.

The agency also proposed two other similar "circuit breaker" tests. One would reinstate the uptick rule for a particular security, for the duration of one trading day, if there is a 10% decline in its stock price. With another approach, a stock that experiences a 10% price decline would have a bid-test uptick rule that would only allow a short sale at a price that is above the highest available bid.

Advantages of the bid test approach

Eric Sirri, the outgoing director of the agency's division of trading and markets, told commissioners that the bid test rule would be significantly easier to implement, in part because of technological reasons, than reinstating the uptick rule as it existed until 2007.

"Today's markets are faster, they are more efficient, they are more electronic," Sirri said. "The bid test works better because there is one price that tends to stay constant for a fixed period of time. The uptick is history, it's a price at which the last trade occurred."

Sirri said it is often difficult to accurately determine the last trade: "There is a problem in getting an accurate uptick price to you because you can have hundreds of trades a second and there are several markets combining and aggregating, in a way today that may mean its hard to find the last trade."

Reinstating the uptick rule, as it existed until 2007, could also be technologically difficult to implement. Sirri said the agency removed the uptick rule at the same time as it approved a sweeping technological modernization plan. Sirri said agency staff believes that a bid test would be easier and quicker to apply in today's market.

He added that the three circuit breaker approaches would be easier to implement than any across-the-board uptick rule, and could be approved more quickly.

Some concerns about the proposals

An SEC official said the agency may consider approving a combination of the bid test uptick rule and the provision that would ban short selling in a particular stock for the remainder of the day if the corporation's stock dips 10% or more.

Kathleen Casey, a GOP commissioner, said she supported doing something, but she worried that each of the five measures could have unintended consequences, such as having a negative impact in an "advancing market."

Luis Aguilar, a Democratic commissioner, said he supported the measure but wished it went further. He said any new uptick rule would have the impact of pushing short-sellers from established exchanges into the unregulated markets, such as credit default swaps, or cash-settled equity swaps, which are part of the shadow derivatives market.

"Without comprehensive regulation we could shift activity from regulated to unregulated markets," said Aguilar. "Some market participants will move to swaps or other products that are not subject to SEC review."