11232 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 242 

[Release No. 34–61595; File No. S7–08–09] 

RIN 3235–AK35 

Amendments to Regulation SHO 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is adopting 

amendments to Regulation SHO under 

the Securities Exchange Act of 1934 

(‘‘Exchange Act’’). We are adopting a 

short sale-related circuit breaker that, if 

triggered, will impose a restriction on 

the prices at which securities may be 

sold short (‘‘short sale price test’’ or 

‘‘short sale price test restriction’’). 

Specifically, the Rule requires that a 

trading center establish, maintain, and 

enforce written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day. In addition, the Rule requires that 

the trading center establish, maintain, 

and enforce written policies and 

procedures reasonably designed to 

impose this short sale price test 

restriction for the remainder of the day 

and the following day when a national 

best bid for the covered security is 

calculated and disseminated on a 

current and continuing basis by a plan 

processor pursuant to an effective 

national market system plan. We believe 

it is appropriate at this time to adopt a 

short sale-related circuit breaker 

because, when triggered, it will prevent 

short selling, including potentially 

manipulative or abusive short selling, 

from driving down further the price of 

a security that has already experienced 

a significant intra-day price decline, and 

will facilitate the ability of long sellers 

to sell first upon such a decline. This 

approach establishes a narrowly-tailored 

Rule that will target only those 

securities that are experiencing 

significant intra-day price declines. We 

believe that addressing short selling in 

connection with such declines in 

individual securities will help address 

erosion of investor confidence in our 

markets generally. 

In addition, we are amending 

Regulation SHO to provide that a 

broker-dealer may mark certain 

qualifying sell orders ‘‘short exempt.’’ In 

particular, if the broker-dealer chooses 

to rely on its own determination that it 

is submitting the short sale order to the 

trading center at a price that is above the 

current national best bid at the time of 

submission or to rely on an exception 

specified in the Rule, it must mark the 

order as ‘‘short exempt.’’ This ‘‘short 

exempt’’ marking requirement will aid 

surveillance by self-regulatory 

organizations (‘‘SROs’’) and the 

Commission for compliance with the 

provisions of Rule 201 of Regulation 

SHO. 

DATES: Effective Date: May 10, 2010. 

Compliance Date: November 10, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Josephine J. Tao, Assistant Director; 

Victoria Crane, Branch Chief; Katrina 

Wilson, Staff Attorney; and Angela 

Moudy, Staff Attorney, Division of 

Trading and Markets, at (202) 551–5720, 

at the Commission, 100 F Street, NE., 

Washington, DC 20549–6628. 

SUPPLEMENTARY INFORMATION: The 

Commission is amending Rules 200(g) 

and 201 of Regulation SHO [17 CFR 

242.200(g) and 17 CFR 242.201] under 

the Exchange Act. 

Table of Contents 

I. Executive Summary 

II. Background on Short Sale Restrictions 

A. Short Selling and Its Market Impact 

B. History of Short Sale Price Test 

Restrictions in the U.S. 

C. Proposal To Adopt a Short Sale Price 

Test Restriction or Circuit Breaker 

D. Empirical Data Regarding Potential 

Market Impact of Short Sale Price Test 

Restrictions Submitted in Response to 

the Proposal and Re-Opening Release 

III. Discussion of Rule 201 of Regulation SHO 

A. Operation of the Circuit Breaker Plus 

Alternative Uptick Rule 

1. Covered Securities 

2. Pricing Increment 

3. Alternative Uptick Rule 

4. Circuit Breaker Approach Generally 

5. Circuit Breaker Trigger Level and 

Duration 

6. Determination Regarding Securities 

Subject to Rule 201 and Dissemination of 

Such Information 

7. Policies and Procedures Approach 

B. ‘‘Short Exempt’’ Provisions of Rule 201 

1. Broker-Dealer Provision 

2. Seller’s Delay in Delivery 

3. Odd Lot Transactions 

4. Domestic Arbitrage 

5. International Arbitrage 

6. Over-Allotments and Lay-Off Sales 

7. Riskless Principal Transactions 

8. Transactions on a Volume-Weighted 

Average Price Basis 

9. Decision Not To Adopt a Provision That 

a Broker-Dealer May Mark an Order 

‘‘Short Exempt’’ in Connection With 

Bona Fide Market Making Activity 

IV. Order Marking 

V. Exemptive Procedures 

VI. Overseas Transactions 

VII. Rule 201 Implementation Period 

VIII. Decision Not To Implement Rule 201 on 

a Pilot Basis 

IX. Paperwork Reduction Act 

A. Background 

B. Summary 

1. Policies and Procedures Requirement 

Under Rule 201 

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

3. Marking Requirements 

C. Use of Information 

1. Policies and Procedures Requirement 

Under Rule 201 

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

3. Marking Requirements 

D. Respondents 

1. Policies and Procedures Requirement 

Under Rule 201 

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

3. Marking Requirements 

E. Total Annual Reporting and 

Recordkeeping Burdens 

1. Policies and Procedures Requirement 

Under Rule 201 

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

3. Marking Requirements 

F. Collection of Information Is Mandatory 

1. Policies and Procedures Requirements 

2. Marking Requirements 

G. Confidentiality 

1. Policies and Procedures Requirements 

2. Marking Requirements 

H. Record Retention Period 

1. Policies and Procedures Requirements 

2. Marking Requirements 

X. Cost-Benefit Analysis 

A. Benefits 

1. Alternative Uptick Rule 

2. Circuit Breaker Approach 

3. Marking Requirements 

B. Costs 

1. Alternative Uptick Rule 

a. Impact on Market Quality 

b. Implementation and On-going 

Monitoring and Surveillance Costs 

i. Policies and Procedures Requirement 

Under Rule 201 

ii. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

2. Circuit Breaker Approach 

a. Impact on Market Quality 

b. Implementation and On-going 

Monitoring and Surveillance Costs 

3. Implementation Period 

4. Marking Requirements 

XI. Consideration of Burden on Competition 

and Promotion of Efficiency, 

Competition, and Capital Formation 

A. Competition 

1. Market Structure for Trading Centers 

and Broker-Dealers 

2. Discussion of Impacts of Rules 200(g) 

and 201 on Competition 

B. Capital Formation 

C. Efficiency 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11233 

1See infra note 41 and accompanying text. 2NASD is now known as the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’). 3See infra note 43 and accompanying text. 4See Exchange Act Release No. 42037 (Oct. 20, 

1999), 64 FR 57996 (Oct. 28, 1999) (‘‘1999 Concept 

Release’’). 5See Exchange Act Release No. 50104 (July 28, 

2004), 69 FR 48032 (Aug. 6, 2004) (‘‘Pilot Release’’). 6See http://www.sec.gov/about/economic/ 

shopilottrans091506.pdf (the ‘‘Regulation SHO 2006 

Roundtable’’). 

7See http://www.sec.gov/about/economic/ 

shopilot091506/draft_reg_sho_pilot_report.pdf and 

http://www.sec.gov/news/studies/2007/ 

regshopilot020607.pdf. See also infra notes 48 to 62 

and accompanying text (discussing findings of the 

Staff study). 

8See Exchange Act Release No. 59748 (Apr. 10, 

2009), 74 FR 18042, 18043 (Apr. 20, 2009) (the 

‘‘Proposal’’). 

9See id. 

10See Proposal, 74 FR 18042. 

11See Proposal, 74 FR at 18072, 18081, 18082. 

12See id. 

13See Exchange Act Release No. 60509 (Aug. 17, 

2009), 74 FR 42033 (Aug. 20, 2009) (the ‘‘ReOpening Release’’). 

14See Exchange Act Release No. 59855 (May 1, 

2009); Press Release No. 2009–101 (agenda and 

panelists included); Press Release No. 2009–88 

(preliminary agenda included). 

15See http://www.sec.gov/spotlight/shortsales/ 

roundtable050509/shortsalesroundtable050509- 

transcript.txt (unofficial transcript of May 2009 

Roundtable). 

XII. Final Regulatory Flexibility Analysis 

A. Need for and Objectives of the Rule 

B. Significant Issues Raised by Public 

Comment 

C. Small Entities Affected by the Rule 

D. Projected Reporting, Recordkeeping and 

Other Compliance Requirements 

E. Agency Action To Minimize Effect on 

Small Entities 

F. Significant Alternatives 

XIII. Statutory Authority 

XIV. Text of the Amendments to Regulation 

SHO 

I. Executive Summary 

In July 2007, the Commission 

eliminated all short sale price test 

restrictions. Prior to that time, short sale 

price test restrictions included Rule 

10a–1 under the Exchange Act, also 

known as the ‘‘uptick rule’’ or ‘‘tick test’’ 

(‘‘former Rule 10a–1’’), that applied to 

exchange-listed securities,1 and the 

National Association of Securities 

Dealers, Inc.’s (‘‘NASD’’) 2 bid test, Rule 

3350 (‘‘NASD’s former bid test’’), that 

applied to certain Nasdaq securities.3

The Commission’s removal of short sale 

price test restrictions followed a careful, 

deliberative rulemaking process, carried 

out in multiple stages from 1999 

through 2006, and was open to the 

public at every stage. 

The Commission took a number of 

steps as part of that process, including 

seeking extensive public comment and 

conducting a comprehensive staff study 

to assess whether then-current short sale 

price test restrictions were appropriate. 

For example, beginning in 1999, the 

Commission published a concept 

release in which it sought comment 

regarding short sale price test 

regulation, including comment on 

whether to eliminate such regulation.4

In 2004, the Commission initiated a 

year-long pilot (‘‘Pilot’’) to study the 

removal of short sale price tests for 

approximately one-third of the largest 

stocks.5 Short sale data was made 

publicly available during this Pilot to 

allow the public and Commission staff 

(the ‘‘Staff’’) to study the effects of 

eliminating short sale price test 

restrictions. The findings of third party 

researchers were presented and 

discussed in a public Roundtable in 

September 2006.6 In addition, the 

results of the Staff study of the Pilot 

data were made publicly available in 

draft form in September 2006 and in 

final form in February 2007.7

Since then, there has been significant 

market turmoil. Concurrent with the 

development of the subprime mortgage 

crisis and credit crisis in 2007, market 

volatility, including steep price 

declines, particularly in the stocks of 

certain financial services companies, 

increased markedly in the U.S. and in 

every major stock market around the 

world (including markets that continued 

to operate under short sale price test 

restrictions).8 As market conditions 

continued to worsen, investor 

confidence eroded, and the Commission 

received many requests from the public 

to consider imposing restrictions with 

respect to short selling, based in part on 

the belief that such action would help 

restore investor confidence.9

We determined that it was 

appropriate to re-examine the 

appropriateness of short sale price test 

restrictions and seek comment on 

whether to restore any such restrictions. 

Thus, in April 2009 we proposed two 

approaches to restrictions on short 

selling, one that would apply on a 

permanent, market-wide basis and 

another that would apply to a particular 

security upon a significant decline in 

the price of that security (the ‘‘proposed 

circuit breaker approach’’ or ‘‘proposed 

circuit breaker rules’’).10

With respect to the permanent, 

market-wide approach, we proposed 

two alternative price tests. The first 

alternative price test, in many ways 

similar to NASD’s former bid test, 

would be based on the national best bid 

(the ‘‘proposed modified uptick rule’’). 

The second alternative price test, 

similar to former Rule 10a–1, would be 

based on the last sale price (the 

‘‘proposed uptick rule’’). 

With respect to the proposed circuit 

breaker approach, we proposed two 

basic alternatives. First, we proposed a 

circuit breaker rule that, when triggered 

by a significant price decline in a 

particular security, would temporarily 

prohibit any person from selling short 

that security, subject to certain 

exceptions (‘‘proposed circuit breaker 

halt rule’’). Second, we proposed a 

circuit breaker rule that, when triggered 

by a significant price decline in a 

particular security, would trigger a 

temporary short sale price test for that 

security. In connection with this 

alternative, we proposed two short sale 

price tests. One was the modified uptick 

rule—that is, we proposed a circuit 

breaker rule that, when triggered by a 

significant price decline in a particular 

security, would temporarily impose the 

proposed modified uptick rule for that 

security (‘‘proposed circuit breaker 

modified uptick rule’’). The other was 

the uptick rule—that is, we proposed a 

circuit breaker rule that, when triggered 

by a significant market decline in a 

particular security, would temporarily 

impose the proposed uptick rule for that 

security (‘‘proposed circuit breaker 

uptick rule’’). 

In addition, in the Proposal we 

inquired whether a short sale price test 

restriction that would permit short 

selling at a price above the current 

national best bid (the ‘‘alternative uptick 

rule’’), would be preferable to the 

proposed modified uptick rule and the 

proposed uptick rule.11 We sought 

comment regarding the application of 

the alternative uptick rule as a marketwide permanent short sale price test 

restriction or in conjunction with a 

circuit breaker.12 As a supplement to 

our request for comment in the Proposal 

and to help ensure the public had a full 

opportunity to comment on, among 

other things, the alternative uptick rule, 

on August 20, 2009 we re-opened the 

comment period to the Proposal.13 In 

addition, on May 5, 2009, we held a 

Roundtable to Examine Short Sale Price 

Test and Circuit Breaker Restrictions 

(the ‘‘May 2009 Roundtable’’).14

Panelists included representatives of 

public issuers, investors, financial 

services firms, SROs and the academic 

community.15

Although in recent months there has 

been an increase in stability in the 

securities markets, we remain 

concerned that excessive downward 

price pressure on individual securities 

accompanied by the fear of 

unconstrained short selling can 

undermine investor confidence in our 


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11234 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

16We note that investor confidence may include 

a number of different elements, such as investor 

perceptions about fundamental market risk, 

investor optimism about the economy, or investor 

trust in the fairness of financial markets as 

influenced by applicable regulatory protections. 

Although the latter can be directly influenced by 

Commission actions, the Commission does not have 

control over fundamental market risk and economic 

optimism. Thus, as used here, the term ‘‘investor 

confidence’’ refers to investor trust in the fairness 

of financial markets. 

17See Exchange Act Release No. 48709 (Oct. 28, 

2003), 68 FR 62972, 62989 (Nov. 6, 2003) (‘‘2003 

Regulation SHO Proposing Release’’); see also 

Exchange Act Release No. 30772 (June 3, 1992), 57 

FR 24415, 24416 (June 9, 1992) (stating that former 

Rule 10a–1 was ‘‘designed to limit short selling of 

a security in a declining market, by requiring, in 

effect, that each successive lower price be 

established by a long seller’’). 

18Where we use the terms ‘‘market efficiency’’ 

and ‘‘price efficiency’’ in this adopting release we 

are using terms of art as used in the economic 

literature proceeding under the ‘‘efficient markets 

hypothesis,’’ under which financial prices are 

assumed to reflect all available information and 

accordingly adjust quickly to reflect new 

information. See, e.g., Eugene F. Fama, 1991, 

Efficient capital markets: II, Journal of Finance; 46: 

1575–1617; Eugene F. Fama and Kenneth R. French, 

1992, The Cross-Section of Expected Stock Returns, 

Journal of Finance, 47: 427–465. It should be noted 

that economic efficiency and price efficiency are 

not identical with the ordinary sense of the word 

‘‘efficiency.’’ 

19See infra note 36 and accompanying text. 

20See infra Section III.A.5. (discussing the circuit 

breaker trigger level). 

21See, e.g., letter from Mary Lou Von Kaenel, 

Managing Director, Management Consulting, Jordan 

& Jordan, dated June 19, 2009 (‘‘Jordan & Jordan’’); 

letter from John C. Nagel, Managing Director and 

Deputy General Counsel, Citadel Investment Group, 

John Liftin, Managing Director and General 

Counsel, The D.E. Shaw Group, and Mark Silber, 

Executive Vice President, Renaissance 

Technologies, dated June 19, 2009 (‘‘Citadel et al. 

(June 2009)’’); letter from Stuart J. Kaswell, 

Executive Vice President, Managing Director and 

General Counsel, Managed Funds Association, 

dated June 22, 2009 (‘‘MFA (June 2009)’’); letter from 

Ira D. Hammerman, Senior Managing Director and 

General Counsel, Securities Industry and Financial 

Markets Association, dated June 19, 2009 (‘‘SIFMA 

(June 2009)’’); letter from Daniel Mathisson, 

Managing Director, Credit Suisse Securities (USA), 

LLC, dated Sept. 21, 2009 (‘‘Credit Suisse (Sept. 

2009)’’). 

22See infra note 306. 

23See infra note 307. 

24See infra note 309. 

25See infra note 310. 

26See infra note 311. 

markets generally.16 In addition, we are 

concerned about potential future market 

turmoil, including significant increases 

in market volatility and steep price 

declines. Thus, as discussed in more 

detail below, after considering the 

comments, we have determined that it 

is appropriate at this time to adopt in 

Rule 201 a targeted short sale price test 

restriction that will apply the alternative 

uptick rule for the remainder of the day 

and the following day if the price of an 

individual security declines intra-day 

by 10% or more from the prior day’s 

closing price for that security as 

determined by the covered security’s 

listing market. 

By not allowing short sellers to sell at 

or below the current national best bid 

while the circuit breaker is in effect, the 

short sale price test restriction in Rule 

201 will allow long sellers, who will be 

able to sell at the bid, to sell first in a 

declining market for a particular 

security. As the Commission has noted 

previously in connection with short sale 

price test restrictions, a goal of such 

restrictions is to allow long sellers to 

sell first in a declining market.17 A short 

seller that is seeking to profit quickly 

from accelerated, downward market 

moves may find it advantageous to be 

able to short sell at the current national 

best bid. In addition, by making such 

bids accessible only by long sellers 

when a security’s price is undergoing 

significant downward price pressure, 

Rule 201 will help to facilitate and 

maintain stability in the markets and 

help ensure that they function 

efficiently. It will also help restore 

investor confidence during times of 

substantial uncertainty because, once 

the circuit breaker has been triggered for 

a particular security, long sellers will 

have preferred access to bids for the 

security, and the security’s continued 

price decline will more likely be due to 

long selling and the underlying 

fundamentals of the issuer, rather than 

to other factors. 

In addition, combining the alternative 

uptick rule with a circuit breaker will 

strike the appropriate balance between 

our goal of preventing short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security and the need to allow for 

the continued smooth functioning of the 

markets, including the provision of 

liquidity and price efficiency in the 

markets.18 The circuit breaker approach 

of Rule 201 will help benefit the market 

for a particular security by allowing 

participants, when a security is 

undergoing a significant intra-day price 

decline, an opportunity to re-evaluate 

circumstances and respond to volatility 

in that security. We also believe that a 

circuit breaker will better target short 

selling that may be related to potential 

bear raids 19 and other forms of 

manipulation that may be used to 

exacerbate a price decline in a covered 

security. 

At the same time, however, we 

recognize the benefits to the market of 

legitimate short selling, such as the 

provision of liquidity and price 

efficiency. Thus, by imposing a short 

sale price test restriction only when an 

individual security is undergoing 

significant downward price pressure, 

the short sale price test restrictions of 

Rule 201 will apply to a limited number 

of securities, rather than to all securities 

all the time. As discussed in more detail 

below,20 in response to our request for 

comment on an appropriate threshold at 

which to trigger the proposed circuit 

breaker short sale price test restrictions, 

commenters submitted estimates of the 

number of securities that would trigger 

a circuit breaker rule at a 10% 

threshold.21 While commenters’ 

analyses (including the facts and 

assumptions used) and their resulting 

estimates varied,22 commenters’ 

estimates reflect that a 10% circuit 

breaker threshold, on average, should 

affect a limited percentage of covered 

securities.23 Given the variations in the 

facts and assumptions underlying the 

estimates submitted by commenters, the 

Staff also looked at trading data to 

confirm the reasonableness of those 

estimates. The Staff found that, during 

the period covering April 9, 2001 to 

September 30, 2009,24 the price test 

restrictions of Rule 201 would have 

been triggered, on an average day, for 

approximately 4% of covered 

securities.25 The Staff also found that for 

a low volatility period, covering January 

1, 2004 to December 31, 2006, the 10% 

trigger level of Rule 201 would have, on 

an average day, been triggered for 

approximately 1.3% of covered 

securities.26

Thus, Rule 201 is structured so that 

the circuit breaker generally will not be 

triggered for the majority of covered 

securities at any given time and, 

thereby, will not interfere with the 

smooth functioning of the markets for 

those securities, including when prices 

in such securities are undergoing 

minimal downward price pressure or 

are stable or rising. If the short sale price 

test restrictions of Rule 201 apply to a 

covered security it will be because and 

when that security is undergoing 

significant downward price pressure. 

In addition, to help ensure the Rule’s 

workability, we are amending Rule 

200(g) of Regulation SHO, substantially 

as proposed, to provide that, once the 

circuit breaker has been triggered for a 

covered security, if a broker-dealer 

chooses to rely on its own 

determination that it is submitting a 

short sale order to a trading center at a 

price that is above the current national 

best bid at the time of submission or to 

rely on an exception specified in the 

Rule, it must mark the order ‘‘short 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11235 

27We note that, as discussed in more detail 

below, unless a sale order is marked ‘‘short exempt,’’ 

a trading center’s policies and procedures must be 

reasonably designed to prevent the execution or 

display of the order at a price that is less than or 

equal to the current national best bid. 

28See 17 CFR 242.200(a). 

29See, e.g., Exchange Act Release No. 54891 (Dec. 

7, 2006), 71 FR 75068, 75069 (Dec. 13, 2006) (‘‘2006 

Price Test Elimination Proposing Release’’); 2003 

Regulation SHO Proposing Release, 68 FR at 62974. 

In this adopting release, we use the terms ‘‘liquidity 

provider’’ and ‘‘liquidity taker,’’ and correlative 

terms, in their technical sense in the literature of 

market microstructure. See, e.g., Larry Harris, 

Trading and Exchanges: Market Microstructure for 

Practitioners, at 70 (2003) (an introductory textbook 

to the economics of market microstructure). As used 

therein, a liquidity taker is a buyer or seller 

(including a short seller) who submits an order 

designed for immediate execution, such as a market 

order or a marketable limit order, while a liquidity 

provider is a more patient buyer or seller (including 

a short seller) who submits orders that may or may 

not be executed, and thus provides depth to the 

market. This usage differs from the usage of the 

term ‘‘liquidity provider’’ to refer to a bank, central 

bank, or other financial institution or investor who 

provides cash financing or otherwise increases the 

money supply. 

30See id.; see also Exchange Act Release No. 

29278 (June 7, 1991), 56 FR 27280 (June 13, 1991); 

Exchange Act Release No. 50103 (July 28, 2004), 69 

FR 48008, 48009 n.6 (Aug. 6, 2004) (‘‘2004 

Regulation SHO Adopting Release’’); Ekkehart 

Boehmer and J. Julie Wu, Short Selling and the 

Informational Efficiency of Prices, Working Paper, 

Jan. 8, 2009. 

31See, e.g., 2006 Price Test Elimination Proposing 

Release, 71 FR at 75069; 2003 Regulation SHO 

Proposing Release, 68 FR at 62974. 

32See id. 

33See 2006 Price Test Elimination Proposing 

Release, 71 FR at 75069–75070; 2003 Regulation 

SHO Proposing Release, 68 FR at 62974. 

Arbitrageurs also contribute to pricing efficiency by 

utilizing short sales to profit from price disparities 

between a stock and a derivative security, such as 

a convertible security or an option on that stock. 

For example, an arbitrageur may purchase a 

convertible security and sell the underlying stock 

short to profit from a current price differential 

between two economically similar positions. See id. 

34See, e.g., Proposal, 74 FR at 18065 (noting that 

a short selling circuit breaker rule would be 

designed to target only those securities that 

experience rapid severe intra-day price declines 

and, therefore, might help to prevent short selling 

from being used to drive the price of a security 

down or to accelerate the decline in the price of 

those securities). 

35See, e.g., U.S. v. Russo, 74 F.3d 1383, 1392 (2d 

Cir. 1996) (short sales were sufficiently connected 

to the manipulation scheme as to constitute a 

violation of Exchange Act Section 10(b) and Rule 

10b–5); S.E.C. v. Gardiner, 48 S.E.C. Docket 811, 

No. 91 Civ. 2091 (S.D.N.Y. Mar. 27, 1991) (alleged 

manipulation by sales representative by directing or 

inducing customers to sell stock short in order to 

depress its price). 

36Many people blamed ‘‘bear raids’’ for the 1929 

stock market crash and the market’s prolonged 

inability to recover from the crash. See, e.g., Steve 

Thel, $850,000 in Six Minutes—The Mechanics of 

Securities Manipulation, 79 Cornell L. Rev. 219, 

295–296 (1994); Jonathan R. Macey, Mark Mitchell 

& Jeffry Netter, Restrictions on Short Sales: An 

Analysis of the Uptick Rule and its Role in View 

of the October 1987 Stock Market Crash, 74 Cornell 

L. Rev. 799, 801–802 (1989). 

37See 2006 Price Test Elimination Proposing 

Release, 71 FR at 75070; 2003 Regulation SHO 

Proposing Release, 68 FR at 62974. 

38 15 U.S.C. 78j(a). 

39See id.; see also 2006 Price Test Elimination 

Proposing Release, 71 FR at 75068; 2003 Regulation 

SHO Proposing Release, 68 FR at 62973. 

40The study covered two weekly periods, that of 

September 7–13, 1937, and that of October 18–23, 

1937. See Exchange Act Release No. 1548 (Jan. 24, 

1938), 3 FR 213 (Jan. 26, 1938) (‘‘Former Rule 10a– 

1 Adopting Release’’). 

41See id. Former Rule 10a–1 provided that, 

subject to certain exceptions, a listed security could 

be sold short (i) at a price above the price at which 

the immediately preceding sale was effected (plus 

tick), or (ii) at the last sale price if it was higher 

than the last different price (zero plus tick). 

exempt.’’ 27 The short sale price test 

restrictions of Rule 201 generally will 

apply to a small number of securities for 

a limited duration, and will continue to 

permit short selling rather than, for 

example, halting short selling when the 

restrictions are in place. As such, we 

believe that the circumstances under 

which a broker-dealer may need to mark 

a short sale order ‘‘short exempt’’ under 

Rule 201 are limited. 

II. Background on Short Sale 

Restrictions 

Short selling involves a sale of a 

security that the seller does not own or 

a sale that is consummated by the 

delivery of a security borrowed by, or 

for the account of, the seller.28 In order 

to deliver the security to the purchaser, 

the short seller will borrow the security, 

usually from a broker-dealer or an 

institutional investor. Typically, the 

short seller later closes out the position 

by purchasing equivalent securities on 

the open market and returning the 

security to the lender. In general, short 

selling is used to profit from an 

expected downward price movement, to 

provide liquidity in response to 

unanticipated demand, or to hedge the 

risk of an economic long position in the 

same security or in a related security.29

A. Short Selling and Its Market Impact 

Short selling provides the market with 

important benefits, including market 

liquidity and pricing efficiency.30

Market liquidity is often provided 

through short selling by market 

professionals, such as market makers 

(including specialists) and block 

positioners, who offset temporary 

imbalances in the buying and selling 

interest for securities. Short sales 

effected in the market add to the selling 

interest of stock available to purchasers 

and reduce the risk that the price paid 

by investors is artificially high because 

of a temporary imbalance between 

buying and selling interest. Short sellers 

covering their sales also may add to the 

buying interest of stock available to 

sellers.31

Short selling also can contribute to 

the pricing efficiency of the equities 

markets.32 When a short seller 

speculates or hedges against a 

downward movement in a security, his 

transaction is a mirror image of the 

person who purchases the security in 

anticipation that the security’s price 

will rise or to hedge against such an 

increase. Both the purchaser and the 

short seller hope to profit, or hedge 

against loss, by buying the security at 

one price and selling at a higher price. 

The strategies primarily differ in the 

sequence of transactions. Market 

participants who believe a stock is 

overvalued may engage in short sales in 

an attempt to profit from a perceived 

divergence of prices from true economic 

values. Such short sellers add to stock 

pricing efficiency because their 

transactions inform the market of their 

evaluation of future stock price 

performance. This evaluation is 

reflected in the resulting market price of 

the security.33

Although short selling serves useful 

market purposes, it also may be used to 

drive down the price of a security or as 

a tool to accelerate a declining market 

in a security.34 In addition, short selling 

may be used to illegally manipulate 

stock prices.35 One example is the ‘‘bear 

raid’’ where an equity security is sold 

short in an effort to drive down the 

price of the security by creating an 

imbalance of sell-side interest.36 This 

unrestricted short selling could 

exacerbate a declining market in a 

security by increasing pressure from the 

sell-side, eliminating bids, and causing 

a further reduction in the price of a 

security by creating an appearance that 

the security’s price is falling for 

fundamental reasons, when the decline, 

or the speed of the decline, is being 

driven by other factors.37

B. History of Short Sale Price Test 

Restrictions in the U.S. 

Section 10(a) of the Exchange Act 38

gives the Commission plenary authority 

to regulate short sales of securities 

registered on a national securities 

exchange, as necessary or appropriate in 

the public interest or for the protection 

of investors.39 After conducting an 

inquiry into the effects of concentrated 

short selling during the market break of 

1937,40 the Commission adopted former 

Rule 10a–1 in 1938 to restrict short 

selling in a declining market.41

The core provisions of former Rule 

10a–1 remained virtually unchanged for 

almost seventy years. Over the years, 

however, in response to changes in the 

securities markets, including changes in 

trading strategies and systems used in 


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42See, e.g., letter from Larry E. Bergmann, Senior 

Associate Director, Division of Market Regulation, 

SEC, to Andre E. Owens, Schiff Hardin & Waite, 

dated Apr. 23, 2003 (granting exemptive relief from 

former Rule 10a–1 for trades executed through an 

alternative trading system (‘‘ATS’’) that matches 

buying and selling interest among institutional 

investors and broker-dealers at various set times 

during the day). 43See, e.g., Exchange Act Release No. 55245 (Feb. 

5, 2007), 72 FR 6635 (Feb. 12, 2007). Former Rule 

10a–1 applied only to short sale transactions in 

exchange-listed securities. In 1994, the Commission 

granted temporary approval to NASD to apply its 

own short sale rule, known as the ‘‘bid test,’’ on a 

pilot basis that was renewed annually until the 

Commission repealed short sale price tests. NASD’s 

former bid test prohibited short sales in Nasdaq 

Global Market securities (then known as Nasdaq 

National Market securities) at or below the current 

(inside) bid when the current best (inside) bid was 

below the previous best (inside) bid in a security. 

As a result, until the Commission eliminated former 

Rule 10a–1, and prohibited any SRO from having 

a short sale price test in July 2007, Nasdaq Global 

Market securities traded on Nasdaq or the over-thecounter (‘‘OTC’’) market and reported to a NASD 

facility were subject to a bid test. Nasdaq securities 

traded on exchanges other than Nasdaq were not 

subject to any price test. In addition, many thinlytraded securities, such as Nasdaq Capital Market 

securities and securities quoted on the OTC 

Bulletin Board and Pink Sheets, were not subject to 

any price test wherever traded. According to the 

Staff, in 2005, prior to the start of the Pilot, NASD’s 

former bid test applied to approximately 2,800 

securities, while former Rule 10a–1 applied to 

approximately 4,000 securities. 

44 17 CFR 242.202T. 

45See 17 CFR 242.202T; see also 2004 Regulation 

SHO Adopting Release, 69 FR at 48012–48013. 

46See Pilot Release, 69 FR 48032. 

47See id. In the 2004 Regulation SHO Adopting 

Release, we noted that ‘‘the purpose of the [P]ilot 

is to assist the Commission in considering 

alternatives, such as: (1) Eliminating a Commissionmandated price test for an appropriate group of 

securities, which may be all securities; (2) adopting 

a uniform bid test, and any exceptions, with the 

possibility of extending a uniform bid test to 

securities for which there is currently no price test; 

or (3) leaving in place the current price tests.’’ 2004 

Regulation SHO Adopting Release, 69 FR at 48010. 

48See http://www.sec.gov/about/economic/ 

shopilot091506/draft_reg_sho_pilot_report.pdf and 

http://www.sec.gov/news/studies/2007/ 

regshopilot020607.pdf. 

49See Staff’s Summary Pilot Report at 40–47; see 

also id. at 22–24 (discussing the selection of 

securities included in the Pilot and the control 

group). 

50 In the 2004 Regulation SHO Adopting Release, 

the Commission stated its expectation that data on 

trading during the Pilot would be made available 

to the public to encourage independent researchers 

to study the Pilot. See 2004 Regulation SHO 

Adopting Release, 69 FR at 48009, n.9. Accordingly, 

nine SROs began publicly releasing transactional 

short selling data on Jan. 3, 2005. The nine SROs 

at that time were the Amex, ARCA, BSE, CHX, 

NASD, Nasdaq, National Stock Exchange, NYSE 

and Phlx. The SROs agreed to collect and make 

publicly available trading data on each executed 

short sale involving equity securities reported by 

the SRO to a securities information processor 

(‘‘SIP’’). The SROs published the information on a 

monthly basis on their Internet Web sites. 

51See Staff’s Summary Pilot Report at 55–56. 

52On the day the Pilot went into effect, listed 

Pilot securities underperformed listed control group 

securities by approximately 24 basis points. The 

Pilot and control group securities, however, had 

similar returns over the first six months of the Pilot. 

See Staff’s Summary Pilot Report at 8. 

53See Staff’s Summary Pilot Report at 55. 

54This conclusion is based on the result that 

changes in effective spreads were not economically 

significant (less than a basis point) and that the 

changes in the bid and ask depth appear not to 

affect the transaction costs paid by investors. 

Arguably, the changes in bid and ask depth 

appeared to affect the intra-day volatility. However, 

the Staff concluded that overall, the Pilot data did 

not suggest a deleterious impact on market quality 

or liquidity. See Staff’s Summary Pilot Report at 

40–42, 55. 

55See Staff’s Summary Pilot Report at 35. 

56See id. 

57See Karl B. Diether, Kuan Hui Lee and Ingrid 

M. Werner, 2009, It’s SHO Time! Short-Sale PriceTests and Market Quality, Journal of Finance 64:37– 

73; Gordon J. Alexander and Mark A. Peterson, 

2008, The Effect of Price Tests on Trader Behavior 

and Market Quality: An Analysis of Reg. SHO, 

Journal of Financial Markets 11:84–111; J. Julie Wu, 

Uptick Rule, short selling and price efficiency, Aug. 

14, 2006; Lynn Bai, 2008, The Uptick Rule of Short 

Sale Regulation—Can it Alleviate Downward Price 

Pressure from Negative Earnings Shocks? Rutgers 

Business Law Journal 5:1–63. 

58See supra note 6. 

59See id. 

60See J. Julie Wu, Uptick Rule, short selling and 

price efficiency, Aug. 14, 2006. 

the marketplace, the Commission added 

exceptions to former Rule 10a–1 and 

granted numerous written requests for 

relief from the Rule’s restrictions. These 

market changes included 

decimalization, the increased use of 

matching systems that execute trades at 

independently-derived prices during 

random times within specific time 

intervals,42 and the spread of fully 

automated markets. In addition, market 

developments over the years led to the 

application of different price tests to 

securities trading in different markets.43

In July 2004, the Commission adopted 

Rule 202T of Regulation SHO,44 which 

established procedures for the 

Commission to temporarily suspend 

short sale price tests for a prescribed set 

of securities so that the Commission 

could study the effectiveness of these 

tests.45 Pursuant to the process 

established in Rule 202T, the 

Commission issued an order creating 

the Pilot, which temporarily suspended 

the tick test of former Rule 10a–1 and 

any price test of any national securities 

exchange or national securities 

association for short sales of certain 

securities.46 The Pilot was designed to 

assist the Commission in assessing 

whether changes to short sale price test 

regulation were appropriate at that time 

in light of then-current market practices 

and the purposes underlying short sale 

price test regulation.47

The Staff gathered the data made 

public during the Pilot, analyzed the 

data and provided the Commission with 

a summary report on the Pilot (‘‘Staff’s 

Summary Pilot Report’’).48 The Staff’s 

Summary Pilot Report, which was made 

public, examined several aspects of 

market quality including the overall 

effect of then-current price tests on short 

selling, liquidity, volatility and price 

efficiency.49 The Pilot was also designed 

to allow the Commission and members 

of the public to examine whether the 

effects of the then-current short sale 

price tests were similar across stocks.50

As set forth in the Staff’s Summary 

Pilot Report, the Staff found little 

empirical justification at that time for 

maintaining then-current short sale 

price test restrictions, especially for 

actively traded securities. Amongst its 

results, the Staff found that such short 

sale price tests did not have a significant 

impact on daily volatility. However, the 

Staff also found some evidence that the 

short sale price tests dampened intraday volatility for smaller stocks.51

In addition, the Staff found that the 

Pilot data provided limited evidence 

that then-current price test restrictions 

distorted a security’s price.52 The Staff 

also found that the price test restrictions 

resulted in an increase in quote 

depths.53 Realized liquidity levels, 

however, were unaffected by the 

removal of such short sale price test 

restrictions.54 The Pilot data also 

provided evidence that the short sale 

price test restrictions reduced the 

volume of executed short sales to total 

volume and, therefore, acted as a 

constraint on short selling.55 The Staff 

did not find, however, a significant 

difference in short interest positions 

between those securities subject to a 

short sale price test versus those 

securities that were not subject to such 

a test during the Pilot.56

In addition, the Commission 

encouraged outside researchers to 

examine the Pilot data. In response to 

this request, the Commission received 

four completed studies (the ‘‘Academic 

Studies’’) from outside researchers that 

specifically examined the Pilot data.57

The Commission also held the 

Regulation SHO 2006 Roundtable 58 that 

focused on the empirical evidence 

learned from the Pilot data (the Staff’s 

Summary Pilot Report, Academic 

Studies, and Regulation SHO 2006 

Roundtable are referred to collectively 

herein as the ‘‘Pilot Results’’).59 The 

Pilot Results contained a variety of 

observations, which the Commission 

considered in determining whether or 

not to propose removal of then-current 

short sale price test restrictions and 

subsequently whether or not to 

eliminate such restrictions. For 

example, one study concluded that 

former Rule 10a–1 had little or no effect 

on price efficiency.60 Another study 

found no evidence that former Rule 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11237 

61See Lynn Bai, 2008, The Uptick Rule of Short 

Sale Regulation—Can it Alleviate Downward Price 

Pressure from Negative Earnings Shocks? Rutgers 

Business Law Journal 5:1–63. 

62See 2006 Price Test Elimination Proposing 

Release, 71 FR at 75072–75075 (discussing the Pilot 

Results). 

63See Staff’s Summary Pilot Report at 14, 17–22 

(discussing the thirteen studies). 

64See 2006 Price Test Elimination Proposing 

Release, 71 FR 75068. 

65See, e.g., letter from Howard Teitelman, CSO, 

Trillium Trading, dated Feb. 6, 2007; letter from S. 

Kevin An, Deputy General Counsel, E*TRADE, 

dated Feb. 9, 2007 (‘‘E*TRADE (Feb. 2007)’’); letter 

from Carl Giannone, dated Feb. 11, 2007 (‘‘Giannone 

(Feb. 2007)’’); letter from David Schwarz, dated Feb. 

12, 2007; letter from John G. Gaine, President, 

Managed Funds Association, dated Feb. 12, 2007; 

letter from Lisa M. Utasi, Chairman of the Board, 

John C. Giesea, President and CEO, Security Traders 

Association, dated Feb. 12, 2007 (‘‘STA (Feb. 

2007)’’); letter from Gerard S. Citera, Executive 

Director, U.S. Equities, UBS, dated Feb. 14, 2007 

(‘‘UBS (Feb. 2007)’’); letter from Mary Yeager, 

Assistant Secretary, NYSE Euronext, dated Feb. 14, 

2007 (‘‘NYSE Euronext (Feb. 2007)’’); letter from 

James J. Angel, PhD, CFA, Associate Professor of 

Finance, McDonough School of Business, 

Georgetown University, dated Feb. 14, 2007; letter 

from Ira D. Hammerman, Senior Managing Director 

and General Counsel, Securities Industry and 

Financial Markets Association, dated Feb. 16, 2007; 

see also Exchange Act Release No. 55970 (June 28, 

2007), 72 FR 36348, 36350–36351 (July 3, 2007) 

(‘‘2007 Price Test Adopting Release’’) (discussing 

the comment letters). 

66See, e.g., letter from Giannone (Feb. 2007); 

letter from E*TRADE (Feb. 2007); letter from STA 

(Feb. 2007); letter from UBS (Feb. 2007); see also 

2007 Price Test Adopting Release, 72 FR at 36350– 

36351 (discussing the comment letters). 

67See, e.g., letter from Jim Ferguson, dated Dec. 

19, 2006; letter from David Patch, dated Jan. 1, 

2007; letter from David Patch, dated Jan. 12, 2007. 

68See letter from Giannone (Feb. 2007). 

69See id. 

70See letter from NYSE Euronext (Feb. 2007). 

71See 2007 Price Test Adopting Release, 72 FR 

36348. 

72See id. at 36352. 

73See id. 

74See Proposal, 74 FR 18042. 

75See id. at 18049. 

76See id. 

77See Proposal, 74 FR at 18047. 

78See http://www.sec.gov/comments/s7-08-09/ 

s70809.shtml. 

79See, e.g., letter from Daniel Mathisson, 

Managing Director, Credit Suisse Securities (USA), 

LLC, dated June 16, 2009 (‘‘Credit Suisse (June 

2009)’’); letter from Citadel et al. (June 2009); letter 

from Peter Kovac, Chief Operating Officer and 

Financial and Operations Principal, EWT, LLC, 

dated June 19, 2009 (‘‘EWT (June 2009)’’); letter from 

Stephen Schuler, Managing Member, Daniel 

Tierney, Managing Member, Global Electronic 

Trading Company, dated June 19, 2009 (‘‘GETCO 

(June 2009)’’); letter from SIFMA (June 2009); letter 

Continued 

10a–1 negatively impacted price 

discovery.61

Generally, the Pilot Results supported 

removal of the short sale price test 

restrictions that were in effect at that 

time.62 In addition to the Pilot Results, 

thirteen other analyses by SEC staff and 

various third party researchers were 

conducted between 1963 and 2004 

addressing price test restrictions.63

Among these were several studies that 

evaluated short sale price tests during 

times of significant market decline, 

including the market break of May 28, 

1962, the market decline of September 

and October 1976, the market break of 

October 19, 1987, and the Nasdaq 

market decline of 2000–2001. The 

results of these studies were mixed, but 

generally the studies found that former 

Rule 10a–1 did not prevent short sales 

in extreme down markets and did limit 

short selling in up markets, and the 

studies provided additional support for 

the removal of the permanent, marketwide short sale price test restrictions in 

existence at that time. 

In December 2006, the Commission 

proposed to eliminate former Rule 

10a–1 by removing restrictions on the 

execution prices of short sales, as well 

as prohibiting any SRO from having a 

short sale price test.64 The Commission 

received twenty-seven comment letters 

in response to its proposal to eliminate 

former Rule 10a–1 and prohibit any 

SRO from having a short sale price test. 

The comments in response to the 

proposed amendments varied. Most 

commenters (including individual 

traders, an academic, broker-dealers, 

SROs and trade associations) advocated 

removing all short sale price test 

restrictions.65 Generally, these 

commenters believed that short sale 

price test restrictions were no longer 

necessary due to increased market 

transparency and the existence of realtime regulatory surveillance that could 

monitor for and detect any potential 

short sale manipulation.66

Two commenters (both individual 

investors) opposed the proposed 

amendments, noting the need for short 

sale price tests to prevent ‘‘bear raids.’’ 67

One commenter, although generally in 

support of removing all short sale price 

test restrictions, stated the belief that at 

some level unrestricted short selling 

should be collared.68 This commenter 

supported having a 10% circuit breaker 

to prevent panic in the event there is a 

major market collapse.69 The New York 

Stock Exchange (‘‘NYSE’’) also noted its 

concern about unrestricted short selling 

during periods of unusually rapid and 

large market declines. The NYSE stated 

that the effects of an unusually rapid 

and large market decline could not be 

measured or analyzed during the Pilot 

because such decline did not occur 

during the period studied.70

Effective July 3, 2007, the 

Commission eliminated former Rule 

10a–1 and added Rule 201 of Regulation 

SHO, prohibiting any SRO from having 

a short sale price test.71 The 

Commission stated that it determined to 

eliminate all short sale price test 

restrictions after reviewing the 

comments received in response to its 

proposal to eliminate all short sale price 

test restrictions, reviewing the Pilot 

Results, and taking into account the 

market developments that had occurred 

in the securities industry since the 

Commission adopted former Rule 

10a–1 in 1938.72 In addition, the 

Commission stated its belief that the 

amendments would bring increased 

uniformity to short sale regulation, level 

the playing field for market participants, 

and remove an opportunity for 

regulatory arbitrage.73

C. Proposal To Adopt a Short Sale Price 

Test Restriction or Circuit Breaker 

On April 8, 2009, following changes 

in market conditions since the 

elimination of former Rule 10a–1, we 

proposed to re-examine and seek 

comment on whether to impose price 

test restrictions or circuit breaker 

restrictions on short selling.74 In the 

Proposal, we noted that market 

volatility had recently increased 

markedly in the U.S., as well as in every 

major stock market around the world.75

We also noted that although we were 

not aware of specific empirical evidence 

that the elimination of short sale price 

tests contributed to the increased 

volatility in U.S. markets, many 

members of the public associate the 

removal of former Rule 10a–1 with such 

volatility, including steep declines in 

some securities’ prices, and loss of 

investor confidence in our markets.76

Due to the market conditions with 

which we were faced and the resulting 

deterioration in investor confidence, we 

stated in the Proposal that we believed 

it was appropriate to propose amending 

Regulation SHO to add a short sale price 

test or a circuit breaker rule.77

In response to the Proposal and the 

Re-Opening Release, we received over 

4,300 unique comment letters.78 A 

number of commenters stated that they 

do not believe that we should reinstate 

any form of short sale price test 

restriction, whether in the form of a 

short sale price test restriction or a 

circuit breaker rule. For example, a 

number of commenters noted a lack of 

empirical evidence suggesting that such 

restrictions would advance the 

Commission’s goals of restoring investor 

confidence and preventing short selling, 

including potentially abusive or 

manipulative short selling, from driving 

down the market or being used as a tool 

to exacerbate a declining market in a 

security.79 In response to our specific 


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from Kimberly Unger, Executive Director, Security 

Traders Association of New York, Inc., dated June 

18, 2009 (‘‘STANY (June 2009)’’); letter from Karrie 

McMillan, General Counsel, Investment Company 

Institute, dated June 19, 2009 (‘‘ICI (June 2009)’’); 

letter from Megan A. Flaherty, Chief Legal Counsel, 

Wolverine Trading, LLC, dated June 19, 2009 

(‘‘Wolverine’’); letter from Eric Swanson, SVP and 

General Counsel, BATS Exchange, Inc., dated Sept. 

21, 2009 (‘‘BATS (Sept. 2009)’’); letter from Michael 

R. Trocchio, Esq. on behalf of Bingham McCutchen, 

LLP, dated Sept. 30, 2009 (‘‘Bingham McCutchen’’); 

letter from James S. Chanos, Chairman, Coalition of 

Private Investment Companies, dated Sept. 21, 2009 

(‘‘CPIC (Sept. 2009)’’) (citing letter from Credit 

Suisse letter (June 2009)); letter from Luke 

Fichthorn, Managing Member, John Fichthorn, 

Managing Member, Dialectic Capital Management, 

LLC, dated Sept. 21, 2009 (‘‘Dialectic Capital (Sept. 

2009)’’); letter from Eric W. Hess, General Counsel, 

Direct Edge Holdings LLC, dated Sept. 21, 2009 

(‘‘Direct Edge (Sept. 2009)’’); letter from Paul M. 

Russo, Managing Director and Head of U.S. Equity 

Trading, Goldman, Sachs & Co., dated Sept. 21, 

2009 (‘‘Goldman Sachs (Sept. 2009)’’); letter from 

Suhas Daftuar, Managing Director, Hudson River 

Trading LLC, dated Sept. 21, 2009 (‘‘Hudson River 

Trading’’); letter from Leonard J. Amoruso, General 

Counsel, Knight Capital Group, Inc., dated Sept. 22, 

2009 (‘‘Knight Capital (Sept. 2009)’’); letter from 

Richard Chase, Managing Director and General 

Counsel, RBC Capital Markets Corporation, dated 

Sept. 21, 2009 (‘‘RBC (Sept. 2009)’’); letter from Peter 

J. Driscoll, Chairman, John C. Giesea, President and 

CEO, Security Traders Association, dated Sept. 21, 

2009 (‘‘STA (Sept. 2009)’’); letter from Barbara Palk, 

President, TD Asset Management, Inc., dated Sept. 

14, 2009 (‘‘TD Asset Management’’); letter from 

George U. Sauter, Managing Director and Chief 

Investment Officer, The Vanguard Group, Inc., 

dated Sept. 21, 2009 (‘‘Vanguard (Sept. 2009)’’); 

letter from Chris Concannon, Virtu Financial, LLC, 

dated Sept. 21, 2009 (‘‘Virtu Financial’’); letter from 

Stuart J. Kaswell, Executive Vice President, 

Managing Director and General Counsel, Managed 

Funds Association, dated Oct. 1, 2009 (‘‘MFA (Oct. 

2009)’’); letter from Jeffrey S. Davis, Vice President 

and Deputy General Counsel, The Nasdaq OMX 

Group, Inc., dated Oct. 7, 2009 (‘‘Nasdaq OMX 

Group (Oct. 2009)’’). 

80See, e.g., letter from Michael D. Lipkin, Adjunct 

Assistant Professor, Columbia University, dated 

Apr. 9, 2009 (‘‘Prof. Lipkin’’); letter from Eric 

Swanson, SVP and General Counsel, BATS 

Exchange, Inc., dated May 14, 2009 (‘‘BATS (May 

2009)’’); Autore, Billingsley, and Kovacs, Short Sale 

Constraints, Dispersion of Opinion, and Market 

Quality: Evidence from the Short Sale Ban on U.S. 

Financial Stocks (June 19, 2009); letter from 

William J. Brodsky, Chairman and CEO, Edward J. 

Joyce, President and COO, The Chicago Board 

Options Exchange, Inc., dated June 19, 2009 (‘‘CBOE 

(June 2009)’’); letter from James S. Chanos, 

Chairman, Coalition of Private Investment 

Companies, dated June 19, 2009 (‘‘CPIC (June 

2009)’’); letter from STANY (June 2009); letter from 

SIFMA (June 2009); letter from MFA (June 2009); 

letter from ICI (June 2009); letter from Joan 

Hinchman, Executive Director, President and CEO, 

National Society of Compliance Professionals Inc., 

dated June 19, 2009 (‘‘NSCP’’); letter from Mary 

Richardson, Director of Regulatory and Tax 

Department, Alternative Investment Management 

Association, dated June 19, 2009 (‘‘AIMA’’); letter 

from Credit Suisse (June 2009); letter from Rory 

O’Kane, President, TD Professional Execution, Inc, 

dated June 19, 2009 (‘‘T.D. Pro Ex’’); letter from 

Citadel et al. (June 2009); letter from William 

Connell, President and CEO, Allston Trading, LLC, 

dated June 18, 2009 (‘‘Allston Trading (June 2009)’’); 

letter from Wolverine; letter from Roy J. Katzovicz, 

Chief Legal Officer, Pershing Square Capital 

Management L.P., dated June 19, 2009 (‘‘Pershing 

Square’’); letter from GETCO (June 2009); letter from 

Luke Fichthorn, Managing Member, John Fichthorn, 

Managing Member, Dialectic Capital Management, 

LLC, dated June 18, 2009 (‘‘Dialectic Capital (June 

2009)’’); memorandum of a meeting between 

representatives of Credit Suisse and the Office of 

Commissioner Aguilar, dated July 2, 2009, and 

written materials submitted at the meeting (‘‘Credit 

Suisse (July 2009)’’); letter from CPIC (Sept. 2009); 

letter from STA (Sept. 2009); letter from Ira D. 

Hammerman, Senior Managing Director and 

General Counsel, Securities Industry and Financial 

Markets Association, dated Sept. 21, 2009 (‘‘SIFMA 

(Sept. 2009)’’); letter from TD Asset Management; 

letter from Goldman Sachs (Sept. 2009); letter from 

Peter Kovac, Chief Operating Officer and Financial 

and Operations Principal, EWT, LLC, dated Sept. 

21, 2009 (‘‘EWT (Sept. 2009)’’); letter from Charles 

M. Jones, PhD, Robert W. Lear Professor of Finance 

and Economics, Columbia Business School, dated 

Sept. 21, 2009 (‘‘Prof. Jones’’). See also infra Section 

II.D. (discussing the data and studies submitted 

and/or referenced by commenters). 

81See, e.g., letter from MFA (June 2009); letter 

from STANY (June 2009); letter from Credit Suisse 

(June 2009); letter from STA (Sept. 2009) (noting 

that ‘‘[t]he STA believes that long sellers 

deleveraging and anticipating withdrawals and 

redemptions were largely responsible for the 

declines’’). 

82See, e.g., letter from STA (Sept. 2009). 

83See Proposal, 74 FR at 18049. 

84See Staff, Analysis of a short sale price test 

using intraday quote and trade data, Dec. 17, 2008 

(‘‘Staff Analysis (Dec. 17, 2008)’’) at http:// 

www.sec.gov/comments/s7-08-09/s70809-368.pdf. 

85See Staff, Analysis of Short Selling Activity 

during the First Weeks of September, 2008, Dec. 16, 

2008 (‘‘Staff Analysis (Dec. 16, 2008)’’) at http:// 

www.sec.gov/comments/s7-08-09/s70809-369.pdf. 

86See Staff Analysis (Dec. 17, 2008). 

87See Staff Analysis (Dec. 16, 2008). 

88See, e.g., letter from Renee M. Toth, President, 

National Association of Active Investment 

Managers, dated June 12, 2009 (‘‘NAAIM’’); letter 

from NSCP; letter from RBC (Sept. 2009). 

89See, e.g., memorandum of meeting between 

representative of TD Ameritrade and the Office of 

Commissioner Aguilar, dated June 1, 2009, and 

written materials submitted at the meeting (‘‘TD 

Ameritrade’’); letter from RBC (Sept. 2009); letter 

from EWT (Sept. 2009). In addition, one commenter 

submitted preliminary data on the relationship 

between short selling and investor confidence and 

stated that ‘‘[w]hile it is too early to draw 

conclusions from this data, the evidence presented 

below does not suggest that there is a negative 

relationship between short selling activity and 

investor confidence.’’ See letter from Ingrid M. 

Werner, PhD, Martin and Andrew Murrer Professor 

of Finance, Fisher College of Business, The Ohio 

State University, dated June 19, 2009 (‘‘Prof. 

Werner’’). See also infra Section II.D. (discussing 

data submitted and/or referenced by commenters 

regarding investor confidence). 

90See e.g., letter from Jeffrey S. Wecker, CEO, 

Lime Brokerage LLC, dated June 19, 2009 (‘‘Lime 

Brokerage (June 2009)’’) (noting that ‘‘[w]e believe 

there would be significant unintended 

consequences of the proposed restrictions, 

including reduction in overall market liquidity and 

widening of spreads * * *’’); letter from Leonard J. 

Amoruso, General Counsel, Knight Capital Group, 

Inc., dated June 18, 2009 (‘‘Knight Capital (June 

2009)’’); letter from MFA (June 2009); see also infra 

Section II.D. (discussing empirical data regarding 

the potential impact of short sale price test 

restrictions). 

request for empirical data in the 

Proposal, a number of commenters 

submitted data or referenced studies in 

support of their position that a short 

sale price test restriction would not 

have a positive impact on the market.80

In addition, several commenters stated 

they do not believe that short selling 

exacerbated market declines during the 

Fall 2008 financial crisis, and suggested 

that long sale activity was a more 

substantial factor in those declines.81

Other commenters stated that short 

selling is a small segment of the overall 

equity marketplace and active short 

sellers are an even smaller group of 

participants and, therefore, represented 

a de minimus amount of the selling 

pressure that the markets experienced 

recently.82 As support for their 

arguments, commenters referenced, 

among other things, two recent studies 

by the Staff that were also discussed in 

the Proposal.83 In these studies, the Staff 

analyzed the impact that a short sale 

price test might have had during a 

thirteen day period in September 

2008,84 as well as whether and the 

extent to which short selling and long 

selling exerted downward price 

pressure during a volatile period in 

early September 2008.85 The first of 

these studies noted that, although its 

data was limited to historical trade and 

quote data from a period when no short 

sale price test was in place and the 

shape of order book and trading 

sequences might have differed had a 

short sale price test been in place, a 

short sale price test would likely have 

been most restrictive during periods of 

low volatility, with greatest impact on 

short selling in lower priced and more 

active stocks.86 The second study found 

that during periods of price declines, 

the selling pressure was more intense 

from long sellers than from short sellers. 

It also found that, on average, short sale 

volume as a fraction of total volume was 

highest during periods of positive 

returns, noting, however, that it was 

also possible that there were instances 

in which short selling activity peaked 

during periods of extreme negative 

returns.87

Some commenters stated that the 

recent market stability suggests that 

investor confidence has been restored 

and, therefore, short sale price test 

restrictions are not necessary.88 Several 

commenters submitted data or 

referenced studies showing that investor 

confidence has recently improved.89 A 

number of commenters expressed 

concern that any short sale price test 

restriction would carry with it the 

unintended consequences of reduced 

liquidity and widened bid-ask spreads, 

resulting in less efficient pricing in the 

securities markets.90 One commenter 

stated its belief that because short sale 

price test restrictions would weaken and 

erode benefits of short selling such as 


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91See letter from AIMA; see also letter from CPIC 

(June 2009) (stating ‘‘investor confidence will not be 

served in the long term by the adoption of rules that 

the Commission itself has acknowledged have no 

sound empirical basis and may decrease market 

efficiency, limit price discovery, provide less 

protection against upward stock price 

manipulations, increase trading costs, reduce 

liquidity and impose other potential costs on 

investors’’). 

92See e.g., letter from Scott C. Goebel, Senior Vice 

President and General Counsel, Fidelity 

Investments, dated June 22, 2009 (‘‘Fidelity’’); letter 

from MFA (June 2009); letter from Credit Suisse 

(June 2009); letter from EWT (June 2009); letter 

from SIFMA (June 2009); letter from Wolverine; 

letter from T.D. Pro Ex; letter from ICI (June 2009); 

letter from Simon M. Lorne, Chief Legal Officer, 

Martin Z. Schwartz, Chief Compliance Officer, 

Millennium Management LLC, dated June 19, 2009 

(‘‘Millennium’’); letter from Citadel et al. (June 

2009). 

93See e.g., letter from Tim Belloto, dated May 5, 

2009; letter from MFA (June 2009); letter from 

SIFMA (June 2009); letter from Pershing Square; 

letter from Paul M. Russo, Managing Director and 

Head of U.S. Equity Trading, Goldman, Sachs & Co., 

dated June 19, 2009 (‘‘Goldman Sachs (June 2009)’’); 

letter from CBOE (June 2009); letter from Allston 

Trading (June 2009); letter from STANY (June 

2009); letter from Citadel et al. (June 2009); letter 

from STA (Sept. 2009); letter from BATS (Sept. 

2009). 

94See, e.g., letter from Herbert C. Roubidoux, 

dated May 4, 2009; letter from William K. Barnard, 

CEO, Equity Insight, Inc., dated May 4, 2009 

(‘‘Equity Insight’’); letter from Henry J. Judd, CEO, 

Alethium Corp., dated May 6, 2009; letter from John 

Sook, dated May 6, 2009; letter from Boris 

Finkelstein, dated May 7, 2009; letter from John E. 

Detraz, dated May 8, 2009; letter from Joseph 

Giancola, dated May 8, 2009; letter from John W. 

Kozak, Chief Financial Officer, Park National 

Corporation, dated May 19, 2009 (‘‘Park National’’); 

letter from Robert S. Miloszewski, dated June 1, 

2009; letter from Dr. George R. Arends, dated June 

1, 2009; letter from Kent Hendrickson, dated June 

4, 2009; letter from Dennis Nixon, Chairman and 

Chief Executive Officer, International Bancshares 

Corporation, dated June 9, 2009 (‘‘IBC’’); letter from 

Brian P. Hendey, dated June 9, 2009; letter from 

Catherine Mapen, dated June 15, 2009; letter from 

Jeffrey T. Brown, Senior Vice President, Office of 

Legislative and Regulatory Affairs, Charles Schwab 

& Co., Inc., dated June 18, 2009 (‘‘Schwab’’); letter 

from Michael Gitlin, Head of Global Trading, David 

Oestreicher, Chief Legal Counsel, Christopher P. 

Hayes, Sr. Legal Counsel, T. Rowe Price Associates, 

Inc., dated June 18, 2009 (‘‘T. Rowe Price (June 

2009)’’); letter from Michael R. McAlevey, Vice 

President and Chief Corporate, Securities and 

Finance Counsel, General Electric Company, dated 

June 18, 2009 (‘‘GE’’); letter from Janet M. Kissane, 

Senior Vice President, Legal and Corporate 

Secretary, NYSE Euronext, dated June 19, 2009 

(‘‘NYSE Euronext (June 2009)’’); letter from Ronald 

C. Long, Director, Regulatory Affairs, Wells Fargo 

Advisors, dated June 15, 2009 (‘‘Wells Fargo (June 

2009)’’). In addition, prior to the Proposal, a number 

of commenters stated that they believe that 

reinstatement of some form of price test restriction 

would help restore investor confidence. See, e.g., 

letter from Richard F. Vulpi, dated Sept. 24, 2008; 

letter from Maureen Christensen, dated Oct. 9, 

2008; letter from Peter B. Eckle, CEO Associate 

Arrangements, dated Oct. 11, 2008; letter from Joe 

Garrett, dated Oct. 15, 2008; letter from Jenna L. 

Spurrier, dated Oct. 24, 2008; letter from Scotland 

Settle, dated Oct. 27, 2008; letter from Patrick 

McQuaid, dated Oct. 29, 2008; letter from Lynn 

Miller, dated Nov. 13, 2008; letter from David 

Sheridan, dated Nov. 18, 2008; letter from W. 

Romain Spell, dated Nov. 19, 2008; letter from Phil 

Mason, dated Nov. 19, 2008; letter from Jeff Brower, 

dated Nov. 20, 2008; letter from Mike Abraham, 

dated Nov. 20, 2008; letter from Marvin Dingott, 

dated Nov. 20, 2008; letter from Josh Dodson, dated 

Nov. 21, 2008; letter from J. Geddes Parsons, dated 

Nov. 21, 2008; letter from Charles Rudisill, dated 

Nov. 21, 2008; letter from Mike Ryan, dated Nov. 

21, 2008; letter from David B. Campbell and Natalie 

H. Win, dated Nov. 25, 2008; letter from Edward L. 

Yingling, American Bankers Association, dated Dec. 

16, 2008; letter from Robert A. Lee, dated Feb. 10, 

2009; letter from Robert Levine, dated Feb. 17, 

2009; letter from Karl Findorff, dated Feb. 19, 2009; 

letter from Robert Lounsbury, dated Feb. 25, 2009; 

letter from Dr. Bill Daniel, dated Feb. 26, 2009; 

letter from Glenn A. Webster, dated Feb. 26, 2009; 

letter from Arleen Golden, dated Mar. 2, 2009; letter 

from Doug Cameron, dated Mar. 2, 2009; letter from 

Mike Rogers, dated Mar. 3, 2009; letter from George 

A. Flagg, dated Mar. 3, 2009; letter from Kevin 

Girard, dated Mar. 4, 2009; letter from Briggs 

Diuguid, dated Mar. 5, 2009 (‘‘Briggs Diuguid’’); 

letter from Bob Young, dated Mar. 5, 2009; letter 

from Troy Williams, dated Mar. 6, 2009; letter from 

Paul Kent, dated Mar. 7, 2009; letter from Chris 

Baratta, dated Mar. 9, 2009 (‘‘Chris Baratta’’); see 

also letter from Professor Constantine Katsoris, 

Fordham University School of Law, dated Mar. 4, 

2009 (stating that elimination of former Rule 

10a–1 ‘‘hardly generates confidence on the part of 

a true investor who is entrusting his or her life’s 

savings * * * to the current market’’). 

95Letter from NYSE Euronext (June 2009). 

96See, e.g., letter from Phil Koepke, dated May 5, 

2009; letter from Joe Wells, dated May 29, 2009; 

letter from Michael Anderson, dated June 1, 2009 

(noting ‘‘[i]f the SEC fails to act in the best interest 

of all investors, then peopel (sic) like myself, will 

look at other investment alternatives than the Stock 

Market.’’); letter from Anton Kleinschmidt, dated 

June 2, 2009 (noting that he ‘‘will not return to the 

equity markets’’ until he is ‘‘confident that the wide 

range of market predators such as unregulated short 

sellers are being effectively controlled’’). In 

addition, prior to (and as cited in) the Proposal, 

commenters expressed similar concerns regarding a 

lack of price test restrictions. See, e.g., letter from 

Jeff Boyd, dated Feb. 10, 2009; letter from Tim 

Zanni, dated Feb. 19, 2009. 

97See, e.g., letter from Michael Anderson, dated 

June 1, 2009; letter from Carl H. Van Hoozier, Jr., 

dated June 3, 2009; letter from Kevin Adcock, dated 

June 3, 2009 (noting that ‘‘[w]ithout this 

reinstatement the market will never be judged as 

fair, balanced or worth the unfair risks created by 

the SEC removing a tried and tested 70+ year old 

rule’’); letter from Fran Mazenko, dated June 4, 

2009; letter from Daniel H. Owings, dated June 4, 

2009 (noting ‘‘the elimination of the uptick rule 

* * * prevented the small investor from equal 

treatment in the market’’); letter from Kathleen 

Jardine, dated June 4, 2009. In addition, prior to 

(and as cited in) the Proposal, commenters 

expressed similar statements regarding short sale 

price tests aiding small investors. See, e.g., letter 

from Chris Baratta (noting that while price test 

restrictions could not reasonably be expected to 

prevent market downturns, they would, in his 

opinion, ‘‘give the little investor a chance’’ in the 

current conditions); see also letter from Paul D. 

Mendelsohn, President, Windham Financial 

Services, Inc., dated Mar. 6, 2009 (stating that he 

believes former Rule 10a–1 ‘‘protected’’ the markets 

and that ‘‘suspension of the uptick rule has opened 

a security hole into our financial system’’); letter 

from Bob Young, dated Mar. 5, 2009 (suggesting 

that reinstatement of the uptick rule ‘‘will not be a 

quick or total fix, but it will help’’). 

98See, e.g., letter from Grant D. Wieler, dated May 

8, 2009; letter from John J. Piccitto, Managing 

Director, John Piccitto Consulting Ltd., dated May 

7, 2009 (noting that ‘‘[b]ecause the decline of the 

value of a stock can be very steep and very fast 

indeed, the ensuing ‘feeding frenzy’ * * * should 

be addressed by regulators. Slowing the cascade of 

short selling would create both the fact and the 

appearance of regulatory control * * *’’); letter 

from Mucho Balka, Esq., dated May 30, 2009; letter 

from George A. Mitchell, dated June 1, 2009; letter 

from Jason Sturm, dated June 1, 2009; letter from 

Erin Chieffi, dated June 2, 2009; letter from Paul 

Rivett, Vice President and Chief Legal Officer, 

Fairfax Financial Holdings Ltd., dated June 17, 2009 

(‘‘Fairfax Financial’’); letter from GE; letter from 

Michael Lamanna, dated June 17, 2009; letter from 

Stanyarne Burrows, dated June 17, 2009; letter from 

William R. Harker, Senior Vice President, General 

Counsel and Corporate Secretary, Sears Holdings 

Corporation, dated June 19, 2009 (‘‘Sears’’); letter 

from Glen Shipway, dated Sept. 21, 2009 (‘‘Glen 

Shipway (Sept. 2009)’’). In addition, the American 

Bankers Association noted that its members, ‘‘both 

large and small, have told us that short sellers were 

taking advantage of the uptick rule’s absence; that 

their stock prices were experiencing excessive 

downward pressure unrelated to actual conditions 

of the firm. * * *’’ and that its members expressed 

‘‘that measures needed to be taken, including 

reinstating the uptick rule in some format, to reduce 

the avenues for abusive trading practices and to 

restore investor confidence.’’ Letter from Sarah A. 

Miller, Senior Vice President, Center for Securities, 

Trust and Investments, American Bankers 

Association, dated July 1, 2009 (‘‘Amer. Bankers 

Assoc.’’); see also letter from Paul Tudor Jones II, 

Tudor Investment Corporation, dated Oct. 10, 2008 

(stating that he believes that one way to 

‘‘immediately stem the decline’’ in the stock market 

would be to reinstate the uptick rule); letter from 

James F. Kane, Jr., dated Feb. 6, 2009 (stating that 

he believes that reinstating ‘‘the Up-tick Rule will 

Continued 

liquidity, price discovery and the ability 

to manage risk, they would also weaken 

and erode investor confidence.91 Many 

commenters stated that the 

reinstatement of any short sale price test 

restriction would impose significant 

costs on market participants and lead to 

increased transaction costs for 

investors.92 In addition, several 

commenters noted that while the 

Commission is rightly trying to increase 

investor confidence, current short sale 

regulations, including Rule 204 of 

Regulation SHO and Exchange Act Rule 

10b–21, are sufficient to address the 

public’s concerns about potentially 

abusive short selling.93

A significant number of commenters, 

however, continue to urge the 

Commission to reinstate some form of 

short sale price test restriction because 

these commenters believe that such a 

measure will help to restore investor 

confidence.94 One commenter stated 

that ‘‘we believe that a price test could 

have a real impact on investors’ and 

issuers’ confidence in the equities 

market.’’ 95 Some commenters have 

stated that a lack of price test 

restrictions makes them question 

whether they should invest in the stock 

market.96 Other commenters have stated 

that they believe a short sale price test 

will aid small investors.97 In addition, 

some commenters have suggested that 

restricting the prices at which securities 

may be sold short will help address 

steep declines in securities’ prices.98


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go a long way in preventing speculators from 

ganging up on a particular stock and forcing it 

down’’); letter from Briggs Diuguid (stating that 

while short sellers ‘‘make efficient markets,’’ he is 

nonetheless concerned that short selling may be a 

tool of manipulators when short sales are ‘‘piled on’’ 

a particular company). 

99See e.g., letter to Mary Schapiro, Chairman, 

from Kirsten Gillibrand, United States Senator, 

dated June 5, 2009; joint statement of Ted Kaufman, 

United States Senator, and Johnny Isakson, United 

States Senator, dated Sept. 29, 2009. In addition, 

prior to (and as cited in) the Proposal, several 

current and former Members of Congress have 

called for reinstatement of short sale price test 

restrictions. See, e.g., letter to Christopher Cox, 

Chairman, from Hillary Rodham Clinton, former 

United States Senator, dated Sept. 17, 2008; letter 

to Christopher Cox, Chairman, from Bill Sali, 

Member of Congress, dated Oct. 1, 2008; letter to 

Christopher Cox, Chairman, from Peter T. King, 

Member of Congress, dated Oct. 7, 2008; letter to 

Mary Schapiro, Chairman, from Gary L. Ackerman, 

Member of Congress, dated Jan. 27, 2009; letter to 

Mary Schapiro, Chairman, from Rep. Barney Frank 

and other Members of the House Financial Services 

Committee, dated Mar. 11, 2009; Proposal, 74 FR at 

18046–18047 (noting statements by a Member of 

Congress and a former U.S. Senator asking the 

Commission to reinstate former Rule 10a–1 or some 

other form of short sale price test restriction). See 

also letter to Mary Schapiro, Chairman, from 

Carolyn Maloney, Member of Congress and 

Chairman of the Joint Economic Committee, dated 

Mar. 23, 2009. We note, however, that other 

Members of Congress have expressed concerns 

regarding our adopting a short sale price test 

restriction. See, e.g., letter to Mary Schapiro, 

Chairman, from Michael Crapo, United States 

Senator, Jim Bunning, United States Senator, David 

Vitter, United States Senator, Michael Enzi, United 

States Senator, and Mel Martinez, former United 

States Senator, dated June 17, 2009. 

With respect to comments by SRO 

representatives, see, e.g., letter from Janet M. 

Kissane, Senior Vice President, Legal and Corporate 

Secretary, NYSE Euronext, dated Sept. 21, 2009 

(‘‘NYSE Euronext (Sept. 2009)’’); letter from NYSE 

Euronext (June 2009); statement of Larry Leibowitz, 

Group Executive Vice President and Head of Global 

Technology and US Executions, NYSE Euronext, 

dated May 5, 2009 (‘‘NYSE Euronext (May 2009)’’). 

In addition, prior to (and as cited in) the Proposal, 

one senior SRO representative endorsed the 

reinstatement of a short sale price test restriction. 

See Edgar Ortega, Short-Sale Rule Undermined as 

Bernanke Backs Review, Bloomberg News Service, 

Mar. 4, 2009 (noting comments by Duncan 

Niederauer, CEO, The NYSE Euronext Group, Inc., 

that imposing a measure such as former Rule 

10a–1, ‘‘would go a long way to adding confidence’’ 

in our markets). 

100See letter from NYSE Euronext (June 2009). 

101See Proposal, 74 FR at 18047, n.64; see also 

letter from Yavni Bar-Yam, New England Complex 

Systems Institute, dated June 23, 2009 (‘‘Yavni BarYam’’); Dion Harmon and Yaneer Bar-Yam, April 

2009, Technical Report on SEC Uptick Rule 

Proposals, New England Complex Systems 

Institute. 

102See, e.g., letter from NYSE Euronext (June 

2009); letter from Schwab; letter from Richard J. 

Adler, Managing Director, European Investors, Inc., 

dated June 19, 2009 (‘‘European Investors (June 

2009)’’); letter from Richard J. Adler, Managing 

Director, European Investors, dated Sept. 21, 2009 

(‘‘European Investors (Sept. 2009)’’); letter from 

William Furber, High Street Advisors, L.P., dated 

June 18, 2009 (‘‘High Street Advisors’’); letter from 

Park National; letter from IBC; letter from Daniel P. 

Amos, Chairman and CEO, Aflac Incorporated, 

dated June 23, 2009 (‘‘Aflac’’); letter from J. Austin 

Murphy, PhD, Professor of Finance at Oakland 

University, School of Business Administration, 

dated Apr. 9, 2009 (‘‘Prof. Murphy’’); letter from 

Martin B. Napor, dated June 17, 2009 (‘‘Martin 

Napor’’); see also infra Section II.D. (discussing 

empirical data submitted in response to the 

Proposal and the Re-Opening Release). 

103See Proposal, 74 FR at 18047, n.65 (referring 

to an article by George Soros, The Game Changer, 

available at http://www.ft.com/cms/s/0/49b1654aed60-11dd-bd60-0000779fd2ac.html). Similarly, in 

response to the Proposal, commenters raised 

concerns about CDS and short selling. See, e.g., 

letter from Edward D. Herlihy, Theodore A. Levine, 

Wachtell, Lipton, Rosen & Katz, dated June 17, 2009 

(‘‘Wachtell’’); letter from GE. 

104See Proposal, 74 FR at 18047, n.66 and 

accompanying text. 

105See Proposal, 74 FR at 18047–18048. 

106See Exchange Act Release No. 58166 (July 15, 

2008), 73 FR 42379 (July 21, 2008). 

107 15 U.S.C. 78l(k)(2). 

108See July Emergency Order, 73 FR 42379. 

109See id. 

110See Exchange Act Release No. 58592 (Sept. 18, 

2008), 73 FR 55169 (Sept. 24, 2008) (‘‘Short Sale 

Ban Emergency Order’’). 

111See, e.g., July Emergency Order, 73 FR 42379; 

Short Sale Ban Emergency Order 73 FR 55169; 

Exchange Act Release No. 58572 (Sept. 17, 2008), 

73 FR 54875 (Sept. 23, 2008) (‘‘September 

Emergency Order’’). 

112See Short Sale Ban Emergency Order, 73 FR 

55169; September Emergency Order, 73 FR 54875. 

113See id. 

114See September Emergency Order, 73 FR 

54875. 

115See id. In addition, we issued an emergency 

order, and subsequent Interim Final Temporary 

Rule, Rule 10a–3T, to require disclosure of short 

sales and short positions in certain securities. The 

temporary rule expired on August 1, 2009. See 

Some Members of Congress and 

representatives of one SRO have also 

continued to express support for 

reinstatement of price test restrictions.99

One such SRO representative noted that 

over 95% of its issuers who participated 

in a survey believed that the market 

would function better with one of the 

proposed short sale price test 

restrictions.100

As we noted in the Proposal, some 

researchers have also indicated that they 

believe that they have collected data 

that establishes a possible association 

between the recent market downturn 

and the elimination of former Rule 10a– 

1.101 Commenters also submitted data or 

referenced studies they believe support 

the contention that a price test 

restriction would have a positive impact 

on the market.102 In addition, there have 

been reports of significant short selling 

in connection with the use of credit 

default swaps (‘‘CDS’’), particularly in 

the securities of significant financial 

institutions,103 and it has been 

suggested that the interaction between 

and amplifying effects of CDS and short 

selling may be a reason to reinstate a 

short sale price test.104

Further, as we stated in the Proposal, 

questions and comments have been 

raised about the role that short selling, 

and in particular potentially abusive 

short selling, may have had in 

connection with the recent price 

fluctuations and disruption in our 

markets.105 As such, prior to issuing the 

Proposal, in the latter part of 2008, we 

took a number of other short sale-related 

actions aimed at addressing these 

concerns. For example, due to our 

concerns that false rumors spread by 

short sellers regarding financial 

institutions of significance in the U.S. 

may have fueled market volatility in the 

securities of some of these institutions, 

on July 15, 2008, we issued an 

emergency order (‘‘July Emergency 

Order’’) 106 pursuant to section 12(k)(2) 

of the Exchange Act 107 which imposed 

borrowing and delivery requirements on 

short sales of the equity securities of 

certain financial institutions. We noted 

in the July Emergency Order that false 

rumors can lead to a loss of investor 

confidence. Such loss of investor 

confidence can lead to panic selling, 

which may be further exacerbated by 

‘‘naked’’ short selling. As a result, the 

prices of securities may artificially and 

unnecessarily decline well below the 

price level that would have resulted 

from the normal price discovery 

process.108 If significant financial 

institutions are involved, this chain of 

events can threaten disruption of our 

markets.109

Due to our concerns regarding the 

impact of short selling on the prices of 

financial institution securities, on 

September 18, 2008, we issued another 

emergency order prohibiting short 

selling in the publicly traded securities 

of certain financial institutions.110 Our 

concerns, however, were not limited to 

financial institutions, given the 

importance of confidence in our markets 

and the rapid and steep declines in the 

prices of securities that generally we 

were seeing at that time.111 Such rapid 

and steep price declines can give rise to 

questions about the underlying financial 

condition of an institution, which in 

turn can erode confidence, even without 

an underlying fundamental basis.112

This erosion of confidence can impair 

the liquidity and ultimate viability of an 

institution, with potentially broad 

market consequences.113

These concerns resulted in our 

issuance on September 17, 2008 of an 

emergency order under Section 12(k)(2) 

of the Exchange Act, in part targeting 

short selling in all equity securities.114

Pursuant to the September Emergency 

Order we imposed enhanced delivery 

requirements on sales of all equity 

securities under Rule 204T of 

Regulation SHO.115


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Exchange Act Release No 58591 (Sept. 18, 2008) 73 

FR 55175 (Sept. 24, 2008); Exchange Act Release 

No. 58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 17, 

2008). 

116See Exchange Act Release No. 58773 (Oct. 14, 

2008), 73 FR 61706 (Oct. 17, 2008) (‘‘Interim Final 

Temporary Rule 204T’’). 

117See Exchange Act Release No. 56212 (Aug. 7, 

2007), 72 FR 45544 (Aug. 14, 2007) (eliminating the 

‘‘grandfather’’ exception to Regulation SHO’s closeout requirement); September Emergency Order, 73 

FR 54875 (eliminating the options market maker 

exception to Regulation SHO’s close-out 

requirement). Following the issuance of the 

September Emergency Order, we adopted 

amendments making permanent the elimination of 

the options market maker exception. See Exchange 

Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690 

(Oct. 17, 2008) (‘‘Options Market Maker Elimination 

Release’’). 

118See Exchange Act Release No. 58774 (Oct. 14, 

2008), 73 FR 61666 (Oct. 17, 2008); September 

Emergency Order, 73 FR 54875; Exchange Act 

Release No. 57511 (Mar. 17, 2008), 73 FR 15376 

(Mar. 21, 2008). 

119See Memorandum from the Staff Re: Impact of 

Recent SHO Rule Changes on Fails to Deliver, Nov. 

4, 2009 at http://www.sec.gov/spotlight/shortsales/ 

oeamemo110409.pdf (stating, among other things, 

that the average daily number of aggregate fails to 

deliver for all securities decreased from 2.21 billion 

to 0.25 billion for a total decline of 88.5% when 

comparing a pre-Rule to post-Rule period); 

Memorandum from the Staff Re: Impact of Recent 

SHO Rule Changes on Fails to Deliver, Nov. 26, 

2008 at http://www.sec.gov/comments/s7-30-08/ 

s73008–37.pdf; Memorandum from the Staff Re: 

Impact of Recent SHO Rule Changes on Fails to 

Deliver, Mar. 20, 2009 at http://www.sec.gov/ 

comments/s7-30-08/s73008-107.pdf. 120See Exchange Act Release No. 60388 (July 27, 

2009), 74 FR 38266 (July 31, 2009) (‘‘Rule 204 

Adopting Release’’). Rule 204 contained some 

modifications to address commenters’ concerns. See 

id. 121See Proposal, 74 FR at 18048; see also 2007 

Price Test Adopting Release, 72 FR at 36348. 122See, e.g., Proposal, 74 FR at 18048 (noting the 

turbulence in the securities markets at the time we 

issued the Proposal and during the eighteen months 

prior thereto). 123See, e.g., Staff’s Summary Pilot Report at 9. 

124See, e.g., Proposal, 74 FR at 18049. 

125See, e.g., letter from BATS (May 2009); Autore, 

Billingsley, and Kovacs, Short Sale Constraints, 

Dispersion of Opinion, and Market Quality: 

Evidence from the Short Sale Ban on U.S. Financial 

Stocks (June 19, 2009); letter from CBOE (June 

2009); letter from CPIC (June 2009); letter from 

STANY (June 2009); letter from SIFMA (June 2009); 

letter from MFA (June 2009); letter from ICI (June 

2009); letter from NSCP; letter from AIMA; letter 

from Credit Suisse (June 2009); letter from T.D. Pro 

Ex; letter from Citadel et al. (June 2009); letter from 

Allston Trading (June 2009); letter from Knight 

Capital (June 2009); letter from Wolverine; letter 

from Pershing Square; letter from GETCO (June 

2009); letter from Dialectic Capital (June 2009); 

letter from Hudson River Trading; memorandum 

regarding meeting with Credit Suisse (July 2009); 

letter from CPIC (Sept. 2009); letter from STA (Sept. 

2009); letter from SIFMA (Sept. 2009); letter from 

TD Asset Management; letter from Goldman Sachs 

(Sept. 2009); letter from EWT (Sept. 2009); letter 

from Prof. Jones; see also letter from NAAIM; letter 

from Prof. Werner; memorandum regarding meeting 

with TD Ameritrade; letter from Adam V. Reed, 

Julian Price Associate Professor of Finance, 

University of North Carolina at Chapel Hill, dated 

Sept. 21, 2009 (‘‘Prof. Reed’’); letter from RBC (Sept. 

2009); letter from Daniel Mathisson, Managing 

Director, Credit Suisse Securities (USA), LLC, dated 

Mar. 30, 2009 (‘‘Credit Suisse (Mar. 2009)’’); Ana 

Avramovic, What Happened When Traders’ Shorts 

Were Pulled Down?, Credit Suisse Market 

Continued 

Rule 204T, among other things, 

required participants of a registered 

clearing agency to close-out fails to 

deliver resulting from short sales of any 

equity security by purchasing or 

borrowing the security by no later than 

the beginning of trading on the day after 

the fail to deliver occurred. We adopted 

the provisions of the September 

Emergency Order as an Interim Final 

Temporary Rule in October 2008 

because of our continued concern about 

the potentially negative market impact 

of large and persistent fails to deliver.116

Our adoption of Interim Final 

Temporary Rule 204T followed a series 

of other steps aimed at reducing such 

fails to deliver and addressing 

potentially abusive short selling. These 

steps included eliminating the 

‘‘grandfather’’ and options market maker 

exceptions to Regulation SHO’s closeout requirement,117 and proposing and 

subsequently adopting a ‘‘naked’’ short 

selling anti-fraud rule, Rule 10b–21.118

Although we recognize that fails to 

deliver can occur for legitimate reasons, 

we remained concerned about the 

impact of large and persistent fails to 

deliver on market confidence. Results 

from Staff analysis indicate that our 

actions to further reduce fails to deliver 

are having their intended effect. For 

example, these results indicate that fails 

to deliver in all equity securities have 

declined significantly since the 

adoption of Interim Final Temporary 

Rule 204T.119 To help further our goal 

of reducing fails to deliver by 

maintaining the reductions in fails to 

deliver achieved by the adoption of 

Interim Final Temporary Rule 204T, as 

well as other actions taken by the 

Commission, we adopted the substance 

of Interim Final Temporary Rule 204T 

as a permanent rule, Rule 204, in July 

2009.120

Despite the significant decline in fails 

to deliver and the more recent stability 

in the securities markets, concerns 

persist about rapid and steep price 

declines in securities and erosion of 

investor confidence in our markets. 

Thus, we continued to examine whether 

there are other actions that the 

Commission should take, including reevaluating whether a short sale price 

test should be reintroduced or a circuit 

breaker rule should be imposed. 

As we stated in the Proposal, when 

we eliminated all short sale price test 

restrictions in July 2007, we 

acknowledged that circumstances may 

develop that could warrant relief from 

the prohibition in Rule 201 of 

Regulation SHO for a short sale price 

test, including a short sale price test of 

an SRO, to apply to short sales in any 

security.121 Thus, in determining 

whether or not to propose, and now 

adopt, a short sale price test rule or 

circuit breaker rule, we have considered 

the recent turmoil in the financial sector 

and steep declines and extreme 

volatility in securities prices.122

As discussed in this adopting release, 

we remain mindful that short selling 

provides benefits to the market. For 

example, legitimate short selling can 

play an important and constructive 

functional role in the markets, providing 

liquidity and price efficiency. Short 

sellers also play an important role in 

correcting upward stock price 

manipulation.123 Because short sale 

price test restrictions may lessen some 

of these benefits, it is important that any 

short sale price test regulation is 

designed to limit any potentially 

unnecessary impact on legitimate short 

selling. 

Thus, as discussed in detail below, we 

are adopting in Rule 201 a targeted short 

sale price test restriction that will be 

based on the current national best bid 

and that will apply only if the price of 

an individual security declines intraday by 10% or more from that security’s 

prior day’s closing price on the listing 

market for that security. We are also 

amending Rule 200(g) of Regulation 

SHO to address when a broker-dealer 

may need to mark certain sell orders 

‘‘short exempt.’’ 

D. Empirical Data Regarding Potential 

Market Impact of Short Sale Price Test 

Restrictions Submitted in Response to 

the Proposal and Re-Opening Release 

In the Proposal, we requested that 

commenters provide empirical data to 

support their views and arguments with 

respect to the proposed short sale price 

test rules and the proposed circuit 

breaker rules.124 Overall, the 

interpretations and results of the 

analyses submitted were mixed and 

sometimes conflicted with each other. 

In addition, the methods used in the 

empirical analyses submitted ranged 

from simple plots of data points to 

carefully constructed econometrics. The 

Pilot Results, while dated, in our view 

should continue to inform our 

decisionmaking where relevant, and 

none of the empirical studies discussed 

below have given us reason to question 

the rigor or validity of the Pilot Results. 

A number of commenters submitted 

data or referenced studies in support of 

their position that a short sale price test 

restriction would not have a positive 

impact on the market.125 In contrast, 


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Commentary (Sept. 2008) (‘‘Avramovic (Sept. 

2008)’’). 

126See Proposal, 74 FR at 18047, n.64; see also 

letter from Yavni Bar-Yam; Dion Harmon and 

Yaneer Bar-Yam, April 2009, Technical Report on 

SEC Uptick Rule Proposals, New England Complex 

Systems Institute. 

127See, e.g., letter from Jeff Wang, dated May 7, 

2009 (‘‘Jeff Wang’’); letter from NYSE Euronext (June 

2009); letter from Schwab; letter from European 

Investors (June 2009); letter from European 

Investors (Sept. 2009); letter from High Street 

Advisors; letter from Park National; letter from IBC; 

letter from Aflac; letter from GE; letter from Michael 

R. Grupe, Executive Vice President, Research & 

Investor Outreach, National Association of Real 

Estate Investment Trusts, dated June 19, 2009 

(‘‘NAREIT’’); letter from Kurt N. Schacht, Managing 

Director, Linda L. Rittenhouse, Director, Capital 

Markets Policy, CFA Institute Centre for Financial 

Market Integrity, dated Aug. 21, 2009 (‘‘CFA’’); letter 

from Martin Napor. 

128See, e.g., letter from BATS (May 2009); letter 

from AIMA; letter from CBOE (June 2009); letter 

from CPIC (June 2009); letter from Credit Suisse 

(June 2009); letter from GETCO (June 2009); letter 

from ICI (June 2009); letter from NSCP; letter from 

TD Asset Management; letter from T.D. Pro Ex; 

letter from STANY (June 2009); letter from Hudson 

River Trading; letter from Allston Trading (June 

2009); letter from Knight Capital (June 2009); letter 

from Pershing Square; letter from Wolverine; letter 

from Citadel et al. (June 2009) (referencing 

Lawrence E. Harris, Ethan Namvar and Blake 

Phillips, Price Inflation and Wealth Transfer during 

the 2008 SEC Short-Sale Ban, (Apr. 2009)); Matthew 

Clifton and Mark Snape, The Effect of Short-selling 

Restrictions on Liquidity: Evidence from the London 

Stock Exchange (Dec. 19, 2008); Recent Trends in 

Trading Activity, Short Sales and Failed Trades and 

Study on the Impact of the Prohibition on the Short 

Sale of Inter-Listed Financial Sector Issuers by 

Investment Industry Regulatory Organization of 

Canada (IIROC) (February 2009); See Autore, 

Billingsley, and Kovacs, Short Sale Constraints, 

Dispersion of Opinion, and Market Quality: 

Evidence from the Short Sale Ban on U.S. Financial 

Stocks (June 19, 2009); memorandum regarding 

meeting with Credit Suisse (July 2009); see also 

letter from Credit Suisse (Mar. 2009). 

129See id. In addition, several commenters cited 

research showing that short selling may be 

beneficial to price discovery and market efficiency, 

but that did not address the effect of a short sale 

price test restriction on price discovery or market 

efficiency. See letter from CPIC (June 2009) (citing 

Jonathan Karpoff and Xiaoxia Lou, Do Short Sellers 

Detect Overpriced Firms? Evidence from SEC 

Enforcement Actions, Working paper, 2008); letter 

from Goldman Sachs (Sept. 2009) (citing Jonathan 

Karpoff and Xiaoxia Lou, Short Sellers and 

Financial Misconduct, Working paper, 2009); letter 

from Pershing Square (citing Jonathan Karpoff and 

Xiaoxia Lou, Do Short Sellers Detect Overpriced 

Firms? Evidence from SEC Enforcement Actions, 

Working paper, 2008); letter from CPIC (Sept. 2009) 

(citing Jonathan Karpoff and Xiaoxia Lou, Short 

Sellers and Financial Misconduct, Working paper, 

2009). Another commenter submitted a study 

showing that short sellers trade after news stories 

and that short sellers effectively process publicly 

available information. See letter from Prof. Reed. 

While this study uses short selling volume data to 

support its conclusion that short sellers do not 

disproportionately engage in information-based 

manipulation, it does not directly examine the 

impact of a short sale price test restriction, and, 

therefore, has limited utility for purposes of 

evaluating the potential market impact of Rule 201. 

130See, e.g., letter from Patrick M. Byrne, 

Chairman and CEO, Overstock.com, Inc., dated May 

29, 2009 (‘‘Overstock.com (May 2009)’’) (citing 

Robert J. Shapiro and Nam D. Pham, The Impact of 

a Pre-Borrow Requirement for Short Sales on 

Failures-to-Deliver and Market Liquidity, Apr. 2009; 

letter from Brian D. Pardo, Chairman and CEO, Life 

Partners Holding, Inc., dated May 28, 2009 (‘‘Life 

Partners Holding’’) (citing the Pre-Borrow Study). 

131The reason why we cannot interpret a change 

in trading volume as a measure of liquidity can be 

illustrated by the following example: A less liquid 

stock can experience an increase (positive change) 

in trading volume and a more liquid stock can 

experience a decrease in trading volume. Measuring 

liquidity by changes in trading volume will 

mischaracterize the less liquid stock as more liquid 

and the more liquid stock as less liquid. 

132See, e.g., Tarun Chordia, Richard Roll, and 

Avanidhar Subrahmanyam, 2001, Market Liquidity 

and Trading Activity, Journal of Finance, 34: 501– 

530; Joel Hasbrouck and Duane J. Seppi, 2001, 

Common Factors in Prices, Order Flows and 

Liquidity, Journal of Financial Economics, 59: 383– 

411; Yakov Amihud, 2002, Illiquidity and stock 

returns: cross-section and time-series effects, 

Journal of Financial Markets, 5: 31–56. 

133See supra note 128 (referencing, among others, 

empirical evidence cited by commenters as showing 

that short selling contributes to market liquidity). 

134See, e.g., letter from Dialectic Capital (June 

2009); letter from MFA (June 2009); letter from STA 

(Sept. 2009); Avramovic (Sept. 2008). 

135See Avramovic (Sept. 2008); letter from Credit 

Suisse (June 2009). 

and as we noted in the Proposal, some 

commenters have indicated that they 

believe that they have collected data 

that establishes a possible association 

between the recent market downturn 

and the elimination of former Rule 10a– 

1.126 Commenters also submitted data or 

referenced studies in support of the 

contention that a price test restriction 

would have a positive impact on the 

market.127 We summarize below 

findings from these studies and discuss 

our views with respect to the studies. 

Several commenters cited empirical 

evidence showing that short selling 

contributes to market liquidity, price 

discovery, and market efficiency and 

that restrictions on short selling, 

particularly bans on short selling, may 

impede liquidity, price discovery, and 

market efficiency.128 While we agree 

with commenters that short selling 

contributes to market liquidity, price 

discovery and market efficiency and 

while these studies provide relevant 

information with respect to the effects of 

a short selling ban, they do not address 

the effects of a short sale price test 

restriction, or more specifically for 

purposes of Rule 201, a circuit breaker 

that, when triggered, imposes the 

alternative uptick rule.129 In fact, 

because Rule 201 does not impose a ban 

on short selling but instead continues to 

allow short selling (although at a price 

above the national best bid) when the 

short sale price test restriction has been 

triggered, the Rule’s structure will help 

preserve the benefits of short selling. 

Some commenters cited a study (the 

‘‘Pre-Borrow Study’’) which did not find 

a relationship between changes in short 

interest and changes in trading volume, 

and which concluded that ‘‘short sales 

do not have a significant effect on 

market liquidity: Other factors drive 

liquidity.’’ 130 We note, however, that 

the correlation between changes in short 

interest and changes in trading volume 

may not be an accurate measure of the 

impact of short sales on liquidity. 

Economic theory does not tend to 

support using changes in trading 

volume as a measure of liquidity.131

Trading volume itself, as opposed to 

changes in trading volume, is 

considered a measure of liquidity, 

though other measures, such as effective 

spreads and price impact, are 

considered by many to be better 

measures of liquidity and are more 

commonly used for measuring the 

liquidity of equities.132 In addition, 

changes in short interest do not 

necessarily measure the volume of short 

selling. In fact, short interest is a 

‘‘snapshot’’ variable, so the change in 

short interest does not necessarily 

measure correctly the volume of short 

selling, which is what the Pre-Borrow 

Study is trying to examine. Thus, we do 

not believe that the results in the PreBorrow Study cited by commenters 

should be interpreted to suggest that 

short sales are unimportant for liquidity. 

We also note that the Pre-Borrow study 

does not reconcile its results to a large 

body of conflicting evidence, including 

(but not restricted to) analyses in the 

comments mentioned above, showing 

that short selling contributes to market 

liquidity and that restrictions on short 

selling, particularly bans on short 

selling, may impede liquidity.133

Several commenters provided 

analyses showing that short interest 

initially fell immediately after the repeal 

of former Rule 10a–1 and that either 

short interest or short selling volume 

fell for specific stocks over periods 

leading up to the Short Sale Ban 

Emergency Order.134 Overall, these 

analyses show that the negative returns 

of financial securities in the weeks both 

before and during the Short Sale Ban 

Emergency Order are unlikely to be the 

result of short selling activities.135 We 

note that, although these studies create 

some doubt about whether certain price 

declines during that time period were 

caused by short sellers, because the 

analyses provided are specific to the 

Short Sale Ban Emergency Order and to 

a time period during which there was 

significant market turmoil, the analyses 

are less relevant regarding the potential 

impact on returns of the circuit breaker 

approach of Rule 201. 

Several other commenters stated that 

the absence of a short sale price test 

restriction has been detrimental to 


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136See, e.g., letter from Park National; letter from 

GE; letter from Aflac; letter from IBC; letter from Jeff 

Wang; letter from Martin Napor. 

137For example, some of the noted price declines 

coincide with increases in short interest. See letter 

from Aflac; letter from IBC. Other noted price 

changes do not correlate with changes in short 

interest or short selling activity. See letter from 

Dialectic Capital (June 2009); letter from MFA (June 

2009); letter from Peter J. Driscoll, Chairman, John 

C. Giesea, President and CEO, Security Traders 

Association, dated June 19, 2009 (‘‘STA (June 

2009)’’); Avramovic (Sept. 2008). 

138See letter from Citadel et al. (June 2009) (citing 

Ekkehart Boehmer, Charles M. Jones, and Xioayan 

Zhang, Unshackling Short Sellers: The Repeal of the 

Uptick Rule (Nov. 2008)). 

139See Staff’s Summary Pilot Report at 55. 

140See, e.g., letter from NAREIT; letter from High 

Street Advisors; letter from European Investors 

(June 2009); letter from European Investors (Sept. 

2009). 

141See Proposal, 74 FR at 18043. 

142See letter from Prof. Jones; letter from BATS 

(May 2009) (stating that, on its own market during 

May, June, September and October 2008, 12% to 

13% of all executions were short sellers trading at 

a price less than the last execution price). 

143See letter from Prof. Jones (stating that, during 

the period from July 6, 2007 through the end of 

August 2007, an average of 37% of submitted short 

sale orders in NYSE-listed Russell 3000 stocks were 

either market orders or marketable limit orders). 

144See id. 

145See id. 

146See infra Section III.A.5. (discussing the 

circuit breaker trigger level). 

147See supra note 21. 

148See infra note 306. 

149See infra note 307. 

150See infra note 309. 

151See infra note 310. 

152See infra note 311. 

153See, e.g., letter from RBC (Sept. 2009); letter 

from EWT (Sept. 2009); letter from CPIC (June 

2009); see also letter from NAAIM (citing press 

articles as evidence of increased investor 

confidence). 

154Letter from Prof. Werner. 

155See memorandum regarding meeting with TD 

Ameritrade. 

prices and provided information on 

share prices, volume and/or short 

interest that they believe support this 

statement.136 We note that, while some 

of the noted price changes coincide with 

changes in short selling activity, some 

do not.137 Moreover, because these 

studies look at a long horizon (e.g., 

months instead of minutes), it is not 

clear that the evidence provided is 

relevant to support such conclusion. 

Thus, it is difficult to conclude from 

these analyses that the absence of a 

short sale price test restriction and the 

actions of short sellers resulted in issuer 

prices falling below their fundamental 

values. 

One commenter cited a study that 

used intra-day short selling transaction 

data to examine the impact of short 

selling on volatility and found that the 

removal of former Rule 10a–1 did not 

exacerbate volatility.138 We note that, 

while the study analyzed a period prior 

to and after the removal of former Rule 

10a–1, it analyzed only a six-week 

period following the elimination of 

former Rule 10a–1, which may 

minimize the study’s statistical 

significance. We also note that although 

the Staff found, in the Staff’s Summary 

Pilot Report presenting the Staff’s 

analysis of the data made public during 

the Pilot, that short sale price tests in 

effect at that time did not have a 

significant impact on daily volatility, 

the Staff also found some evidence that 

the short sale price tests dampened 

intra-day volatility for smaller stocks.139

In contrast, other commenters 

submitted data showing an increase in 

volatility from July 2007 through 

November 2008 to support the 

conclusion that the absence of a short 

sale price test restriction caused an 

increase in market volatility.140 As 

discussed above and in the Proposal,141

concurrent with the subprime mortgage 

crises and credit crisis in 2007, U.S. 

markets experienced increased volatility 

and steep price declines, particularly in 

the stocks of certain financial issuers. 

We are not aware, however, of any 

empirical evidence that the elimination 

of short sale price test restrictions 

contributed to the increased volatility in 

the U.S. markets. In addition, the data 

showing an increase in volatility since 

the elimination of former Rule 10a–1 

submitted by commenters in response to 

the Proposal does not address the extent 

to which other factors may have 

influenced the increased volatility. 

Moreover, because these studies look at 

a long horizon (e.g., months instead of 

minutes), it is not clear that the 

evidence provided is relevant to support 

such conclusion. Thus, the relationship 

between the elimination of short sale 

price test restrictions and the increased 

volatility remains unclear. 

Several commenters submitted data 

on the percentage of short sales that 

might be affected by a short sale price 

test restriction.142 One commenter 

submitted data indicating that the 

alternative uptick rule, adopted on a 

permanent, market-wide basis, could 

affect up to 37% of short sale orders.143

As acknowledged by this commenter, 

however, this number does not indicate 

how severely the short sellers would be 

affected, how the number might change 

in different market conditions, or 

whether the number would result in 

changes in market quality.144 In 

addition, as acknowledged by the 

commenter, the number also does not 

account for how order submission 

strategies would differ based on the 

alternative uptick rule.145

In addition, as discussed in more 

detail below,146 in response to our 

request for comment on an appropriate 

threshold at which to trigger the 

proposed circuit breaker short sale price 

restrictions, commenters submitted 

estimates of the number of securities 

that would trigger a circuit breaker rule 

at a 10% threshold.147 While 

commenters’ analyses (including the 

facts and assumptions used) and their 

resulting estimates varied,148

commenters’ estimates reflect that a 

10% circuit breaker threshold, on 

average, should affect a limited 

percentage of covered securities.149

Given the variations in the facts and 

assumptions underlying the estimates 

submitted by commenters, the Staff also 

looked at trading data to confirm the 

reasonableness of those estimates. The 

Staff found that, during the period 

covering April 9, 2001 to September 30, 

2009,150 the price test restrictions of 

Rule 201 would have been triggered, on 

an average day, for approximately 4% of 

covered securities.151 The Staff also 

found that for a low volatility period, 

covering January 1, 2004 to December 

31, 2006, the 10% trigger level of Rule 

201 would have, on an average day, 

been triggered for approximately 1.3% 

of covered securities.152 Thus, we 

believe that the short sale price test 

restriction of Rule 201 is structured so 

that generally it will not be triggered for 

the majority of covered securities at any 

given time and, thereby, will not 

interfere with the provision of market 

benefits such as liquidity and price 

efficiency for those securities, including 

when prices in such securities are 

undergoing minimal downward price 

pressure or are stable or rising. 

Several commenters submitted data 

on indexes of investor confidence to 

argue that investor confidence has been 

restored and, therefore, short sale price 

test restrictions are not necessary.153 In 

addition, one commenter submitted 

preliminary data, drawn in part from 

investor confidence indexes, on the 

relationship between short selling and 

investor confidence and stated that 

‘‘[w]hile it is too early to draw 

conclusions from this data, the evidence 

presented * * * does not suggest that 

there is a negative relationship between 

short selling activity and investor 

confidence.’’ 154 Another commenter 

submitted a survey showing that its 

clients put more money into the markets 

between Fall 2008 and Spring 2009 and 

that many of its clients do not believe 

that an overhaul of financial services 

regulation would restore investor 

confidence.155

We also note that some other 

commenters submitted surveys showing 


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156See, e.g., letter from NYSE Euronext (June 

2009); letter from CFA; see also letter from Schwab. 

157Letter from NYSE Euronext (June 2009). 

158See, e.g., letter from Schwab; letter from NYSE 

Euronext (June 2009); letter from CFA. 

159See, e.g., memorandum regarding meeting 

with TD Ameritrade. 

160See Proposal, 74 FR 18042. 

161See Proposal, 74 FR at 18072, 18081, 18082. 

162See id. 

163See letter from William Hartley, dated May 8, 

2009; letter from Glen Shipway, dated June 19, 2009 

(‘‘Glen Shipway (June 2009)’’). 

164See letter from BATS (May 2009); letter from 

Johnny Peters, ChFC, dated May 20, 2009; letter 

from Credit Suisse (June 2009); letter from SIFMA 

(June 2009); letter from Goldman Sachs (June 2009); 

letter from NYSE Euronext (June 2009); letter from 

Eric W. Hess, General Counsel, Direct Edge 

Holdings LLC, dated June 23, 2009 (‘‘Direct Edge 

(June 2009)’’). In addition, in connection with the 

May 2009 Roundtable, panelists expressed support 

for the alternative uptick rule. See statement from 

NYSE Euronext (May 2009); opening remarks of 

James J. Angel, Ph.D., CFA, Associate Professor of 

Finance, McDonough School of Business, 

Georgetown University, dated May 5, 2009. We also 

note that prior to the Proposal, four exchanges, 

NYSE Euronext, Nasdaq OMX Group, BATS, and 

National Stock Exchange, submitted a comment 

letter recommending a circuit breaker combined 

with a price test that would allow short selling only 

at an increment above the current national best bid. 

See letter from National Stock Exchange, NYSE 

Euronext, Nasdaq OMX Group, and BATS, dated 

Mar. 24, 2009 (‘‘National Stock Exchange et al.’’). 

NYSE Euronext, in its subsequent comments, stated 

that it supported the proposed modified uptick rule 

applied on a permanent and market-wide basis 

rather than the position expressed in the earlier 

March 24, 2009 letter. See statement from NYSE 

Euronext (May 2009); letter from NYSE Euronext 

(June 2009). 

165See Re-Opening Release, 74 FR 42033. 

166See supra note 14. 

167See supra note 78. 

168Rule 201(b). 

169Consistent with the Proposal, Rule 201(a)(9) 

states that the term ‘‘trading center’’ shall have the 

same meaning as in Rule 600(b)(78). Rule 600(b)(78) 

of Regulation NMS defines a ‘‘trading center’’ as ‘‘a 

national securities exchange or national securities 

association that operates an SRO trading facility, an 

alternative trading system, an exchange market 

maker, an OTC market maker, or any other broker 

or dealer that executes orders internally by trading 

that reinstituting a short sale price test 

restriction would improve investor 

confidence.156 One commenter 

submitted a survey showing that over 

95% of the issuers participating in the 

survey believed that the market would 

function better with a short sale price 

test restriction and stated that this data 

‘‘suggests that a price test would boost 

confidence.’’ 157

While the analyses of investor 

confidence indexes submitted by 

commenters do contain measures of 

investor confidence, we believe that the 

investor confidence indexes cited are 

designed to capture elements of investor 

confidence not directly affected by 

regulatory changes. Investor confidence 

indexes often capture measures of 

systematic risk or optimism about the 

economy, as opposed to measures of 

investor confidence related to regulation 

designed to provide investor 

protections. In addition, in light of the 

surveys that were submitted in support 

of a short sale price test restriction as a 

means to restore investor confidence,158

we do not believe that the surveys 

submitted to argue that a short sale price 

test restriction would not improve 

investor confidence 159 provide strong 

evidence on this point. 

Although in recent months there has 

been an increase in stability in the 

securities markets, we remain 

concerned that excessive downward 

price pressure on individual securities 

accompanied by the fear of 

unconstrained short selling can 

undermine investor confidence in our 

markets generally. Further, we are 

concerned about potential future market 

turmoil, including significant increases 

in market volatility and significant price 

declines, and the impact of any such 

future market turmoil on investor 

confidence. Thus, we believe it is 

appropriate to adopt the targeted short 

sale price test restrictions contained in 

Rule 201. 

In summary, we have reviewed the 

empirical data, analyses and studies 

submitted and carefully considered 

them in connection with our 

determination that it is appropriate at 

this time to adopt in Rule 201 a short 

sale price test restriction combined with 

a circuit breaker approach. 

III. Discussion of Rule 201 of 

Regulation SHO 

In the Proposal, we proposed two 

approaches to restrictions on short 

selling: one that would apply on a 

market-wide and permanent basis and 

one that would apply only to a 

particular security during a significant 

market decline in the price of that 

security (i.e., a circuit breaker 

approach).160 With respect to the 

permanent, market-wide approach, we 

proposed two alternative short sale 

price tests: the proposed modified 

uptick rule, based on the current 

national best bid, and the proposed 

uptick rule, based on the last sale price. 

With respect to the circuit breaker 

approach, we proposed two alternative 

circuit breaker tests: one that would 

temporarily prohibit short selling in a 

particular security when there is a 

significant decline in the price of that 

security and one that would temporarily 

impose either the proposed modified 

uptick rule or the proposed uptick rule 

on short sales in a particular security 

when there is a significant decline in 

the price of that security. 

In addition, in the Proposal we 

inquired whether a short sale price test 

restriction that would permit short 

selling at a price above the current 

national best bid, i.e., the alternative 

uptick rule, would be preferable to the 

proposed modified uptick rule and the 

proposed uptick rule.161 We sought 

comment regarding the application of 

the alternative uptick rule as a marketwide permanent price test restriction or 

in conjunction with a circuit breaker.162

We received two comment letters 

regarding applying the alternative 

uptick rule on a permanent, marketwide basis 163 and seven comment 

letters with respect to applying the 

alternative uptick rule in combination 

with a circuit breaker.164 To allow us to 

further consider the alternative uptick 

rule, on August 20, 2009, we re-opened 

the comment period to the Proposal.165

In addition, on May 5, 2009, we held the 

May 2009 Roundtable 166 at which 

panelists discussed the proposed short 

sale price test restrictions and circuit 

breaker rules. 

As noted above, we received over 

4,300 unique comment letters in 

response to the Proposal and ReOpening Release.167 In discussing the 

provisions of Rule 201, we highlight and 

address below the main issues, 

concerns, and suggestions raised by 

commenters. 

A. Operation of the Circuit Breaker Plus 

Alternative Uptick Rule 

We are adopting in Rule 201 a circuit 

breaker approach combined with the 

alternative uptick rule. Specifically, 

Rule 201(b)(1) provides that ‘‘[a] trading 

center shall establish, maintain, and 

enforce written policies and procedures 

reasonably designed to: (i) Prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day; and (ii) Impose the requirements of 

paragraph (b)(1)(i) of this section for the 

remainder of the day and the following 

day when a national best bid for the 

covered security is calculated and 

disseminated on a current and 

continuing basis by a plan processor 

pursuant to an effective national market 

system plan.’’ 168

Thus, Rule 201 will require a trading 

center 169 to have policies and 


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as principal or crossing orders as agent.’’ See 17 CFR 

242.600(b)(78). The definition encompasses all 

entities that may execute short sale orders. Thus, 

Rule 201 will apply to any entity that executes short 

sale orders. 

170Any such execution or display will also need 

to be in compliance with applicable rules regarding 

minimum pricing increments. See 17 CFR 242.612. 

See also infra Section III.A.2. 

171See Rule 201(a)(1). 

172 17 CFR 242.600(b)(47). 

173 17 CFR 242.600(b)(46). 

174We note that there may be securities that are 

listed on a national securities exchange but that are 

not NMS stocks because they do not meet the 

definition of ‘‘NMS stock.’’ Thus, these securities 

will not be subject to the short sale price test 

restrictions of Rule 201. 

175See letter from Peter J. Chepucavage, General 

Counsel, Plexus Consulting LLC, The International 

Association of Small Broker Dealers and Advisors, 

dated Apr. 21, 2009; letter from R. Cromwell 

Coulson, Chief Executive Officer, Pink OTC 

Markets, Inc., dated May 26, 2009 (‘‘Pink OTC’’); 

letter from STANY (June 2009); letter from Michael 

L. Crowl, Managing Director and Global General 

Counsel, Barclays Global Investors, dated June 19, 

2009 (‘‘Barclays (June 2009)’’). 

176See letter from Pink OTC. 

177See letter from Pink OTC; letter from STANY 

(June 2009). 

178Letter from Pink OTC. 

179See letter from Pink OTC; letter from Alan F. 

Eisenberg, Executive Vice President, Emerging 

Companies and Business Development, 

Biotechnology Industry Organization, dated June 

29, 2009 (‘‘BIO’’). BIO requested that biotechnology 

companies, many of which BIO stated are emerging 

companies that are ‘‘very dependent on capital, 

including using the public markets as a source of 

financing,’’ be covered by any short sale price test 

restriction. Letter from BIO. We also note that one 

commenter requested that the Commission adopt a 

short sale price test or circuit breaker halt 

restriction specifically applicable to financial sector 

stocks. See letter from IBC. However, another 

commenter stated, ‘‘Restrictions on short selling in 

only the issues of financial services providers is 

perhaps the least valuable of all the ideas to be 

discussed during the short sale debate.’’ See letter 

from STA (June 2009). Another commenter noted 

that it is not possible to anticipate which industry 

sectors may be impacted by potentially 

manipulative short selling in the future. See letter 

from T. Rowe Price (June 2009). Given the lack of 

a widespread call for industry specific short selling 

restrictions, and the additional complexities that an 

industry specific restriction would raise, such as 

identifying and defining the industry or sector to be 

covered, we have determined not to apply an 

industry specific short selling restriction at this 

time. 

180Letter from STANY (June 2009). 

181Letter from T. Rowe Price (June 2009). 

182See letter from Pink OTC; letter from STANY 

(June 2009). 

183See, e.g., letter from Wells Fargo (June 2009); 

letter from T. Rowe Price (June 2009); letter from 

STA (June 2009); letter from Credit Suisse (Sept. 

2009). 

184See letter from Pink OTC; letter from T. Rowe 

Price (June 2009). 

185See letter from T. Rowe Price (June 2009). 

186Letter from STA (June 2009). 

187As noted above, former Rule 10a–1 also did 

not apply to non-exchange listed securities quoted 

on the OTC Bulletin Board or elsewhere in the OTC 

market. See supra note 43. 

procedures reasonably designed to 

prevent it from executing or displaying 

any short sale order, absent an 

exception, at a price that is equal to or 

below the national best bid if the price 

of that security decreases by 10% or 

more from the security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day.170 As 

discussed in more detail below, we 

believe that such a Rule will help 

prevent short sellers from using short 

selling as a tool to exacerbate a 

declining market in a security. 

1. Covered Securities 

Consistent with the proposed 

permanent, market-wide short sale price 

test restrictions and proposed circuit 

breaker rules, Rule 201 will apply to any 

‘‘covered security.’’ As proposed and as 

adopted, Rule 201 defines ‘‘covered 

security’’ to mean any ‘‘NMS stock’’ as 

defined under Rule 600(b)(47) of 

Regulation NMS.171 Rule 600(b)(47) of 

Regulation NMS defines an ‘‘NMS stock’’ 

as ‘‘any NMS security other than an 

option.’’ 172 Rule 600(b)(46) of 

Regulation NMS defines an ‘‘NMS 

security’’ as ‘‘any security or class of 

securities for which transaction reports 

are collected, processed, and made 

available pursuant to an effective 

transaction reporting plan, or an 

effective national market system plan 

for reporting transactions in listed 

options.’’ 173 Thus, Rule 201 will apply 

to any security or class of securities, 

except options, for which transaction 

reports are collected, processed, and 

made available pursuant to an effective 

transaction reporting plan. As a result, 

Rule 201 generally will cover all 

securities, except options, listed on a 

national securities exchange whether 

traded on an exchange or in the OTC 

market.174 As discussed further below, 

it will not include non-NMS stocks 

quoted on the OTC Bulletin Board or 

elsewhere in the OTC market. 

In response to our requests for 

comment, some commenters stated that 

any short sale price test adopted by the 

Commission for NMS stocks should also 

apply to non-NMS stocks quoted on the 

OTC Bulletin Board or elsewhere in the 

OTC market.175 One commenter 

indicated that failure to apply a short 

sale price test restriction applicable to 

NMS stocks to non-NMS stocks quoted 

on the OTC Bulletin Board or elsewhere 

in the OTC market would cause 

investors to have inappropriately 

negative views about the OTC market 

and the firms whose securities are 

quoted there.176 This commenter and 

another commenter also stated that not 

including non-NMS stocks quoted on 

the OTC Bulletin Board or elsewhere in 

the OTC market in a short sale price test 

restriction could have a negative impact 

on the ability of firms whose securities 

are quoted OTC to raise capital.177

Commenters noted that many issuers of 

securities that are quoted OTC are 

‘‘small, emerging growth companies,’’ 178

that may have a particular need to raise 

capital in the equity markets.179 One 

commenter noted that ‘‘less liquid stocks 

and the stock of less capitalized firms 

that trade in the OTC markets are in 

need of as much, if not more, protection 

from manipulative behavior than NMS 

stocks’’180 while another stated that 

‘‘OTC Bulletin Board and Pink Sheet 

securities would appear to be prime 

targets for manipulative shorting 

practices.’’181 Commenters also noted 

that applying a price test rule uniformly 

to NMS stocks and to non-NMS stocks 

quoted on the OTC Bulletin Board or 

elsewhere in the OTC market could 

reduce the costs of such a rule because 

market participants would need only 

one set of programs and systems 

designed to ensure compliance with the 

rule, rather than different programs and 

systems for securities covered by the 

rule and securities not covered by the 

rule.182

Several commenters, however, 

expressed support for the application of 

a price test only to NMS stocks.183

Several commenters noted that the 

current national best bid and offer are 

not currently collected, consolidated 

and disseminated for non-NMS stocks 

quoted on the OTC Bulletin Board or 

elsewhere in the OTC market.184

Further, although one commenter 

indicated that the Commission should 

plan to phase in application of a price 

test rule to non-NMS stocks quoted on 

the OTC Bulletin Board or elsewhere in 

the OTC market,185 another commenter 

expressed concerns that the OTC market 

is not ‘‘robust enough to withstand’’ 

such regulation.186

At this time, we are not applying Rule 

201 to non-NMS stocks quoted on the 

OTC Bulletin Board or elsewhere in the 

OTC market because a national best bid 

and offer currently is not required to be 

collected, consolidated, and 

disseminated for such securities.187

Rule 201 is based on the current 

national best bid and its implementation 

requires that the national best bid is 

collected, consolidated and 

disseminated to market participants. 

Although several commenters indicated 

that it would be possible for non-NMS 

stocks quoted on the OTC Bulletin 

Board or elsewhere in the OTC market 

to join or create a national plan for 

disseminating consolidated national 


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188See, e.g., letter from Pink OTC; letter from 

STANY (June 2009); letter from T. Rowe Price (June 

2009). The comment letter from Pink OTC indicates 

that it ‘‘would be willing to join the current Tape 

C UTP network or work with FINRA to create an 

OTC/UTP Plan including the best bid and offer 

prices for securities quoted on OTCBB and our Pink 

Quote Inter-Dealer Quotation System.’’ Letter from 

Pink OTC. 

189See infra Section VII. (discussing 

implementation time) and Sections X.B.1.b. and 

X.B.2.b. (discussing implementation costs). 

190See, e.g., letter from Gregory Bloom, dated 

Apr. 10, 2009; letter from Peter J. Driscoll, 

Chairman, John C. Giesea, President and CEO, 

Security Traders Association, dated Apr. 16, 2009 

(‘‘STA (Apr. 2009)’’); letter from Jeffrey D. Morgan, 

President and CEO, National Investor Relations 

Institute, dated May 29, 2009 (‘‘NIRI’’); letter from 

Douglas Engmann, President, Engmann Options, 

Inc., dated June 1, 2009 (‘‘Engmann Options’’); letter 

from Dale W.R. Rosenthal, Assistant Professor of 

Finance, College of Business Administration, 

University of Illinois at Chicago, dated June 2, 2009 

(‘‘Prof. Rosenthal’’); letter from Leslie Seff, 

President, Matthew B. Management, Inc., dated 

June 5, 2009 (‘‘Matthew B. Management’’); letter 

from Patrick J. Healy, Issuer Advisory Group, dated 

June 30, 2009 (‘‘IAG’’); letter from Barclays (June 

2009); letter from Jesse J. Greene, Jr., Vice President, 

Financial Management and Chief Financial Risk 

Officer, International Business Machines 

Corporation, dated June 19, 2009 (‘‘IBM’’); letter 

from Katherine Tew Darras, General Counsel, 

Americas, International Swaps and Derivatives 

Association, Inc., dated June 19, 2009 (‘‘ISDA’’); 

letter from STA (June 2009); letter from George U. 

Sauter, Managing Director and Chief Investment 

Officer, The Vanguard Group, Inc., dated June 19, 

2009 (‘‘Vanguard (June 2009)’’); letter from GE; letter 

from Knight Capital (June 2009); letter from 

Wachtell; letter from Keith F. Higgins, Chair, 

Committee on Federal Regulation of Securities, 

American Bar Association, dated July 8, 2009 

(‘‘Amer. Bar Assoc. (July 2009)’’); letter from Jeffrey 

S. Wecker, CEO, Lime Brokerage LLC, dated Sept. 

21, 2009 (‘‘Lime Brokerage (Sept. 2009)’’); letter from 

Jonathan E. Johnson III, President, Overstock.com, 

dated Sept. 24, 2009 (‘‘Overstock.com (Sept. 2009)’’); 

letter from Kevin Holley, dated Sept. 29, 2009 

(‘‘Kevin Holley’’); see also letter from Eric W. Hess, 

General Counsel, Direct Edge Holdings LLC, dated 

Mar. 30, 2009 (‘‘Direct Edge (Mar. 2009)’’). 

191See, e.g., letter from Prof. Rosenthal; letter 

from STA (Apr. 2009); letter from Overstock.com 

(Sept. 2009); letter from Lime Brokerage (Sept. 

2009). 

192See, e.g., letter from Matthew B. Management; 

letter from Prof. Rosenthal; letter from Barclays 

(June 2009); letter from STA (June 2009); letter from 

Vanguard (June 2009); letter from Lime Brokerage 

(Sept. 2009). 

193See, e.g., letter from IAG; letter from ISDA; 

letter from STA (June 2009); letter from Wachtell; 

letter from Matthew B. Management; letter from 

James L. Rothenberg, dated Sept. 20, 2009 (‘‘James 

Rothenberg’’). 

194See, e.g., letter from IAG; letter from GE; letter 

from Wachtell; see also letter from Direct Edge 

(Mar. 2009). 

195See letter from Barclays (June 2009); letter 

from GE; letter from NIRI; letter from Amer. Bar 

Assoc. (July 2009). Two commenters stated that the 

Commission should seek authority from Congress to 

regulate derivative securities where authority is 

currently lacking. See letter from GE; letter from 

NIRI. 

196See Proposal, 74 FR at 18071, 18078. 

197When Nasdaq became a national securities 

exchange in 2006, absent an exemption from former 

Rule 10a–1, all Nasdaq securities would have been 

subject to former Rule 10a–1. The Commission 

provided Nasdaq with an exemption from the 

application of the provisions of former Rule 10a– 

1 to securities traded on Nasdaq because the Pilot 

was already in progress, and the Commission 

believed it was necessary and appropriate to 

maintain the status quo for short sale price tests 

during the Pilot and to ensure that market 

participants would not be burdened with costs 

associated with implementing a price test that 

might be temporary. See Exchange Act Release No. 

53128 (Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006) 

(order approving application of Nasdaq for 

registration as a national securities exchange); see 

also letter from James A. Brigagliano Acting 

Associate Director, Division of Market Regulation, 

SEC, to Marc Menchel, Executive Vice President 

and General Counsel, NASD, Inc., dated June 26, 

2006. 

198See Proposal, 74 FR at 18050–18051. 

199The three joint-industry plans are (1) the 

Consolidated Tape Association Plan (‘‘CTA Plan’’), 

which disseminates transaction information for 

securities primarily listed on an exchange other 

than Nasdaq, (2) the Consolidated Quotation Plan 

best bid information for such stocks,188

we are concerned that this would be a 

significant undertaking that would add 

greatly to the implementation time and 

cost of Rule 201, particularly in light of 

comments that the implementation 

process may be complex even for those 

securities for which the national best 

bid is currently collected, consolidated, 

and disseminated.189

We recognize commenters’ concerns, 

however, regarding not applying Rule 

201 to non-NMS stocks quoted on the 

OTC Bulletin Board or elsewhere in the 

OTC market. Thus, at a later time, we 

may reconsider whether applying Rule 

201 to non-NMS stocks quoted on the 

OTC Bulletin Board or elsewhere in the 

OTC market may be appropriate. 

In response to our requests for 

comment, a number of commenters 

expressed concerns about the 

application of a short sale price test to 

equity securities without also 

addressing derivative securities.190

Several commenters indicated that the 

ability of market participants to create 

‘‘synthetic’’ short positions that are the 

economic equivalent of a short sale 

through the use of derivative securities 

would undermine the effectiveness of a 

short sale price test 191 and/or result in 

an increased use of derivative products 

to create ‘‘synthetic’’ short positions.192

Some commenters indicated that the 

Commission should apply some sort of 

restriction to derivative securities with 

respect to ‘‘synthetic’’ short sales,193

while others suggested that the 

Commission should require disclosure 

of ‘‘synthetic’’ short positions created 

with derivative securities.194 Several 

commenters noted concerns with 

respect to practical difficulties related to 

addressing derivative securities and 

short selling issues, and that the 

Commission may not have the necessary 

legislative authority to address certain 

areas.195

As indicated in the Proposal and our 

requests for comment,196 we recognize 

that the ability to obtain a short position 

through the use of derivative products 

such as options, futures, contracts for 

differences, warrants, CDS or other 

swaps (so-called ‘‘synthetic short sales’’) 

or other instruments (such as inverse 

leveraged exchange traded funds) may 

undermine our goals for adopting short 

sale price test restrictions. We are also 

concerned that synthetic short positions 

may increase as a result of the adoption 

of Rule 201. Rule 201, however, like 

former Rule 10a–1 and NASD’s former 

bid test, which also did not apply to 

derivative securities, is formulated with 

the specific structure of the equity 

markets in mind and not for the 

substantially different market structure 

applicable to many derivatives 

securities. In addition, we believe that 

applying a Rule 201-type rule to 

derivatives securities would 

significantly complicate the 

implementation process. Thus, we have 

determined at this time not to modify 

the definition of ‘‘covered security’’ from 

that proposed and, therefore, the scope 

of securities to which Rule 201 will 

apply. 

We note, however, that short sales in 

the equity markets to hedge derivatives 

transactions are subject to Rule 201. In 

addition, because we are concerned that 

the ability to create a short position 

through the use of derivative securities 

may undermine the goals of short sale 

price test restrictions, we may 

reconsider, at a later time, whether 

additional regulation of derivative 

securities and the use of ‘‘synthetic’’ 

short positions may be appropriate. 

The securities covered by Rule 201 

will overlap with the securities covered 

by former Rule 10a–1. Former Rule 10a– 

1 applied to securities registered on, or 

admitted to unlisted trading privileges 

on, a national securities exchange, if 

trades of the security were reported 

pursuant to an effective transaction 

reporting plan and information 

regarding such trades was made 

available in accordance with such plan 

on a real-time basis to vendors of market 

transaction information. All securities 

that would have been subject to former 

Rule 10a–1 will also be subject to Rule 

201. In addition, certain securities, i.e., 

securities traded on Nasdaq prior to its 

regulation as an exchange, that were not 

subject to former Rule 10a–1 will be 

subject to Rule 201.197

As we discussed in the Proposal,198

market information for NMS stocks, 

including quotes, is disseminated 

pursuant to three different national 

market system plans.199 The national 


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(‘‘CQ Plan’’), which disseminates consolidated 

quotation information for securities primarily listed 

on an exchange other than Nasdaq, and (3) the 

Nasdaq UTP Plan, which disseminates consolidated 

transaction and quotation information for securities 

primarily listed on Nasdaq. 

200Rule 603(b) of Regulation NMS provides that 

every national securities exchange on which an 

NMS stock is traded and national securities 

association shall act jointly pursuant to one or more 

effective national market system plans to 

disseminate consolidated information, including a 

national best bid and national best offer, for NMS 

stocks. See 17 CFR 242.603(b). 

201These networks can be categorized as follows: 

(1) Network A—securities primarily listed on the 

NYSE; (2) Network B—securities listed on 

exchanges other than the NYSE and Nasdaq; and (3) 

Network C—securities primarily listed on Nasdaq. 

202See Exchange Act Release No. 51808 (June 9, 

2005), 70 FR 37496, 37503 (June 29, 2005) 

(‘‘Regulation NMS Adopting Release’’). 

203See infra Section III.A.7. 

204See Proposal, 74 FR at 18050, n.99, 101 

(referencing 17 CFR 242.612). 

205See, e.g., letter from Franco A. Mortarotti, 

Managing Director, Zermatt Capital Management, 

dated Apr. 10, 2009 (‘‘Zermatt’’); letter from Neal E. 

Schear, President, Schear Capital, Inc., dated Apr. 

28, 2009 (‘‘Schear’’); letter from Dale T. Forte, dated 

Apr. 14, 2009; letter from Arthur Colman, dated 

May 4, 2009; letter from Joseph Leegan, dated Mar. 

25, 2009; letter from John H. Happke, dated May 7, 

2009; letter from Louis G. Marozsan, Jr., dated May 

8, 2009; letter from S. Buford Scott, Chairman, 

Walter S. Robertson, III, President and CEO, John 

Sherman, Jr., Past President and CEO, William P. 

Schubmehl, Past President and CEO, Scott & 

Stringfellow LLC, dated May 14, 2009 (‘‘Scott & 

Stringfellow’’); letter from Martin Napor; letter from 

Michael Sigmon, Chairman, Sigmon Wealth 

Management, dated June 10, 2009 (‘‘Sigmon Wealth 

Management (June 2009)’’); letter from Christopher 

Ailman, Chief Investment Officer, California State 

Teachers’ Retirement System, dated June 17, 2009; 

letter from IBM; letter from Stan Ryckman, dated 

June 19, 2009. 

206See, e.g., letter from Citadel et al. (June 2009); 

letter from SIFMA (June 2009); letter from STA 

(June 2009)); see also letter from Credit Suisse (Mar. 

2009). 

207See Staff Analysis (Dec. 17, 2008). 

208See, e.g., letter from Citadel et al. (June 2009); 

letter from STA (June 2009). 

209 17 CFR 242.612. See letter from NYSE 

Euronext (Sept. 2009). 

210See letter from Howard Meyerson, General 

Counsel, Liquidnet, Inc., dated June 18, 2009 

(‘‘Liquidnet’’). 

211See letter from Alec Hanson, dated Sept. 19, 

2009. 

212As noted above, any execution or display of 

a short sale order must be in compliance with 

applicable rules of Regulation NMS regarding 

minimum pricing increments. See supra note 204 

and accompanying text. 

213See Rule 201(b). 

securities exchanges and FINRA 

participate in these joint-industry plans 

(‘‘Plans’’).200 The Plans establish three 

separate networks to disseminate market 

information for NMS stocks.201 These 

networks are designed to ensure that, 

among other things, consolidated bids 

from the various trading centers that 

trade NMS stocks are continually 

collected and disseminated on a realtime basis, in a single stream of 

information. Thus, all market 

participants will have access to the 

consolidated bids for all the securities 

that will be subject to Rule 201.202 As 

discussed in further detail below, 

however, we note that the national best 

bid can change rapidly and repeatedly 

and potentially there might be latencies 

in obtaining data regarding the national 

best bid.203

2. Pricing Increment 

Rule 201(b) provides that a trading 

center shall establish, maintain, and 

enforce written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day. In Rule 201 we have determined 

not to specify at what price a trading 

center may execute or display a short 

sale order of a covered security 

provided it is not at a price that is less 

than or equal to the current national 

best bid. As we stated in the Proposal, 

however, any such execution or display 

must be in compliance with applicable 

rules regarding minimum pricing 

increments.204

In the Proposal and Re-Opening 

Release, we did not propose a specific 

increment above the national best bid or 

last sale price at which short selling 

would be permissible. In response to 

our requests for comment regarding 

pricing increments, however, a number 

of commenters stated that any 

increment should be greater than one 

cent in order to make a price test more 

restrictive or effective or to address 

decimal pricing concerns.205 Several 

commenters noted, however, that the 

higher the increment, the more 

restrictive such an increment could be 

on short selling and, if high enough, 

could even be tantamount to a ban on 

short selling.206 A study by the Staff 

found that even moderate changes in 

bid increments can have a big impact on 

the constraints imposed on short selling 

activity and that, for practical purposes, 

high bid increments, such as five or ten 

cents, might be equivalent to a ban on 

short selling in some stocks, especially 

during periods when prices are not 

changing rapidly.207

Several commenters supported an 

increment of one trading unit, or one 

cent,208 while another commenter 

suggested that the increment should be 

consistent with the minimum pricing 

increments specified in Rule 612 of 

Regulation NMS.209 One commenter 

stated that the Commission should not 

specify a minimum increment and 

should permit trades to be executed at 

the mid-point between the best bid and 

best offer, even if the price were less 

than one cent above the best bid.210

Another commenter expressed concerns 

that a short sale price test might 

advantage subpenny executions if, for 

example, certain trading venues were 

permitted to comply with the test by 

executing transactions at less than one 

cent above the national best bid.211

After considering the comments, we 

have determined at this time to not 

specify in Rule 201 a particular 

increment above the national best bid at 

which a covered security may be sold 

short. We believe that the goals we are 

seeking to advance by adopting Rule 

201 will be achieved by requiring that 

when a covered security becomes 

subject to the short sale price test 

restrictions of Rule 201, all short selling 

must be at a price above the current 

national best bid. As discussed above, a 

goal of Rule 201 is to help prevent short 

selling from being used as a tool to 

exacerbate a declining market in a 

security. Thus, the price test restriction 

of Rule 201 does not permit short selling 

at or below the current national best bid. 

In addition to achieving this goal, 

however, we also recognize the need to 

minimize market disruption as well as 

the need for the price test restriction in 

Rule 201 to not be unduly restrictive. 

We believe that restricting short selling 

to a price above the current national bid 

for a particular security when the circuit 

breaker has been triggered for that 

security, without specifying at what 

price such short sales may occur, will 

best achieve these goals.212

3. Alternative Uptick Rule 

We have determined to adopt in Rule 

201(b) the alternative uptick rule such 

that when triggered, short selling will be 

permitted only at a price above the 

current national best bid. Specifically, 

Rule 201(b) will require a trading center 

to establish, maintain, and enforce 

written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day.213 As noted above, we have 

determined to adopt in Rule 201(b) a 

circuit breaker trigger combined with 


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214See Proposal, 74 FR 18042; Re-Opening 

Release, 74 FR 42033. 

215See, e.g., letter from William E. McDonnell, Jr., 

Chief Compliance Officer, Atherton Lane Advisers, 

LLC, dated Sept. 9, 2009 (‘‘Atherton Lane’’); letter 

from Michael J. Simon, Secretary, International 

Securities Exchange LLC, dated Sept. 21, 2009 (‘‘ISE 

(Sept. 2009)’’); letter from John Nagel, Managing 

Director and Deputy General Counsel, Citadel 

Investment Group, LLC, John Liftin, Managing 

Director and General Counsel, The D.E. Shaw 

Group, Mark Silber, Executive Vice President, 

Renaissance Technologies, dated Sept. 21, 2009 

(‘‘Citadel et al. (Sept. 2009)’’); letter from Bingham 

McCutchen; letter from Vanguard (Sept. 2009); 

letter from STA (Sept. 2009). 

216See, e.g., letter from Karrie McMillan, General 

Counsel, Investment Company Institute, dated Sept. 

21, 2009 (‘‘ICI (Sept. 2009)’’); letter from CPIC (Sept. 

2009); letter from STA (Sept. 2009); letter from 

Kimberly Unger, Executive Director, Security 

Traders Association of New York, Inc., dated Sept. 

21, 2009 (‘‘STANY (Sept. 2009)’’); letter from RBC 

(Sept. 2009); letter from EWT (Sept. 2009); letter 

from MFA (Oct. 2009); letter from Knight Capital 

(Sept. 2009). 

217See, e.g., letter from John Gilmartin, Co-CEO 

and Ben Londergan, Co-CEO, Group One Trading, 

L.P., dated Sept. 14, 2009 (‘‘Group One Trading 

(Sept. 2009)’’); letter from STANY (Sept. 2009); 

letter from Glen Shipway (Sept. 2009); letter from 

Michael L. Crowl, Managing Director, Global 

General Counsel, Barclays Global Investors, dated 

Sept. 21, 2009 (‘‘Barclays (Sept 2009)’’); letter from 

Knight Capital (Sept. 2009); letter from MFA (Oct. 

2009). 

218See, e.g., letter from ISE (Sept. 2009); letter 

from ICI (Sept. 2009). 

219See, e g., infra note 242 and accompanying 

text (discussing automated trade matching systems). 

220See, e.g., the Pilot Results. 

221See infra Section X.B.1.a. (discussing the 

impact of Rule 201 on market liquidity and price 

efficiency). 

222See, e.g., letter from Direct Edge (Sept. 2009); 

letter from BATS (Sept. 2009); letter from Ronald 

C. Long, Director, Regulatory Affairs, Wells Fargo 

Advisors, dated Sept. 17, 2009 (‘‘Wells Fargo (Sept. 

2009)’’); see also letter from SIFMA (Sept. 2009) 

(stating that a circuit breaker coupled with the 

alternative uptick rule ‘‘would limit instances where 

a security is the subject of severe downward 

pressure’’); letter from Hudson River Trading 

(expressing support for the alternative uptick rule 

in conjunction with a circuit breaker as opposed to 

other proposed price tests in conjunction with a 

circuit breaker). 

223See letter from BATS (Sept. 2009); letter from 

Wells Fargo (Sept. 2009); letter from Glen Shipway 

(Sept. 2009). 

224Letter from Michael Gitlin, Head of Global 

Trading, David Oestreicher, Chief Legal Counsel, 

Christopher P. Hayes, Sr. Legal Counsel, T. Rowe 

Price Associates, Inc., dated Sept. 21, 2009 (‘‘T. 

Rowe Price (Sept. 2009)’’). 

225Letter from Glen Shipway (Sept. 2009). 

226Letter from Virtu Financial. 

227As noted by some commenters, there may be 

situations in which a short seller could get 

immediate execution, such as where an order is 

executed in a facility that provides executions at the 

mid-point of the national best bid and offer. See, 

e.g., letter from ISE (Sept. 2009); see also letter from 

BATS (Sept. 2009). 

the alternative uptick rule. Thus, while 

this Section III.A.3. focuses on the 

alternative uptick rule in the context of 

comments received about the different 

price tests that we proposed, the 

alternative uptick rule operates in 

conjunction with the circuit breaker 

approach and should not be considered 

as an isolated provision. 

In the Proposal and the Re-Opening 

Release, we sought comment on three 

alternative types of short sale price test 

restrictions that could be applied on a 

permanent, market-wide basis or in 

combination with a circuit breaker: the 

proposed uptick rule, the proposed 

modified uptick rule, and the alternative 

uptick rule.214 The alternative uptick 

rule is similar to the proposed modified 

uptick rule in that it will use the current 

national best bid, rather than the last 

sale price, as a reference point for short 

sale orders. Unlike the proposed 

modified uptick rule and the proposed 

uptick rule, the alternative uptick rule 

will not allow short selling at the 

current national best bid or last sale 

price. Instead, the alternative uptick 

rule will only permit short selling at an 

increment above the current national 

best bid, unless an applicable exception 

applies. 

In response to the Proposal and the 

Re-Opening Release, we received a 

number of comment letters supporting 

and opposing the alternative uptick 

rule. Those that opposed the alternative 

uptick rule stated, among other things, 

that because it will allow short selling 

only at a price above the current 

national best bid or last sale price, 

rather than at the current national best 

bid or last sale price, it will be more 

disruptive to the market than the 

proposed modified uptick rule or 

proposed uptick rule.215 Some 

commenters stated that the alternative 

uptick rule will decrease liquidity, 

widen bid-ask spreads, decrease pricing 

efficiency, create inefficiencies in the 

routing and execution of short sale 

orders, increase intra-day volatility, and 

result in higher costs to investors.216

Some commenters expressed concerns 

that the alternative uptick rule will 

exacerbate downward price movements 

because market participants may 

perceive the presence of short limit 

orders as a negative view of a security, 

causing buyers to withdraw their 

bids.217 Other commenters stated that, 

although easier to implement, the 

alternative uptick rule would have a 

more disruptive effect on the market 

than the proposed modified uptick rule 

or the proposed uptick rule.218

The alternative uptick rule, like 

former Rule 10a–1 and the proposed 

uptick rule and proposed modified 

uptick rule, when triggered will affect 

all short selling, including some 

legitimate short selling, as well as 

abusive or manipulative short selling. 

The alternative uptick rule is by 

definition more restrictive than the 

proposed modified uptick rule, but 

differences between the operation of the 

proposed uptick rule and the alternative 

uptick rule mean that one approach or 

the other would be more restrictive in 

particular circumstances.219 The 

empirical evidence regarding former 

Rule 10a–1 tends to demonstrate that it 

did not have a negative effect on market 

liquidity and price efficiency.220 We 

similarly believe that the alternative 

uptick rule will have a minimal, if any, 

negative effect on market liquidity or 

price efficiency.221

In contrast to those commenters 

opposed to the alternative uptick rule, 

several commenters expressed support 

for the alternative uptick rule, stating 

that the alternative uptick rule is 

preferable to the proposed modified 

uptick rule or the proposed uptick rule 

because it will eliminate sequencing 

issues, will be easier and less costly to 

implement, will be more effective in 

decreasing price pressure on a 

security,222 and will reduce the ability 

of market participants to use short 

selling as a market manipulation tool.223

Some commenters stated that because 

the alternative uptick rule will most 

effectively prevent short selling from 

proactively driving the price of a 

security lower, it will also be the most 

effective of the proposed short sale price 

test restrictions at achieving the 

Commission’s goal of helping to restore 

investor confidence.224 In discussing the 

alternative uptick rule, one commenter 

stated that ‘‘[n]ot only does it faithfully 

replicate the old uptick rule it improves 

upon it by making each and every short 

sale a liquidity providing 

transaction.’’ 225 Another commenter, in 

supporting the alternative uptick rule, 

stated that it will ‘‘likely be more 

restrictive on short selling than the 

original Rule 10a–1 ‘uptick rule’.’’ 226

We have determined to adopt the 

alternative uptick rule in combination 

with a circuit breaker because we 

believe the alternative uptick rule will 

be more effective at meeting our goals 

than the other proposed rules. Because 

the alternative uptick rule, when 

triggered, will generally permit short 

selling only at a price above the current 

national best bid, the alternative uptick 

rule will not allow short sales to get 

immediate execution at the bid.227 In 

other words, short sellers will not be 

permitted to act as liquidity takers when 

the alternative uptick rule applies, but 

will participate, if at all, as liquidity 

providers (unless an exception applies), 

adding depth to the market. Put another 

way, short sale orders will be executed 

only when purchasers arrive willing to 


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228See supra note 17. 

229See Proposal, 74 FR at 18050, 18053, 18059, 

18061, 18065, 18069; see also Securities and 

Exchange Commission, Special Study of Securities 

Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., at 

251 (1963). 

230See, e.g., letter from Lime Brokerage (Sept. 

2009); see also letter from Lime Brokerage (June 

2009) (stating that ‘‘[i]mplementing a ‘‘cooling off’’ 

period after a steep decline in a given security’s 

price will give market participants a chance to 

absorb the situation and possibly reassess their 

desire to continue short selling’’); letter from Credit 

Suisse (June 2009); letter from T.D. Pro Ex. 

231See, e.g., letter from SIFMA (June 2009); letter 

from Credit Suisse (June 2009); letter from 

Liquidnet; letter from Manisha Kimmel, Executive 

Director, Financial Information Forum, dated June 

19, 2009 (‘‘FIF (June 2009)’’); letter from Lime 

Brokerage (Sept. 2009). Some commenters also 

stated that they believe that the proposed circuit 

breaker halt rule would be effective at preventing 

bear raids, reducing volatility in the market, and 

helpful in restoring investor confidence. See, e.g., 

letter from Matthew Samelson, Principal, Woodbine 

Associates, dated May 15, 2009 (‘‘Woodbine’’); letter 

from Credit Suisse (June 2009); letter from IBC; 

letter from Sigmon Wealth Management (June 

2009); letter from Wachtell. 

232See, e.g., letter from BATS (May 2009); letter 

from Citadel et al. (June 2009); letter from Direct 

Edge (June 2009); letter from Wolverine; letter from 

Amer. Bankers Assoc. Other commenters viewed 

the proposed circuit breaker halt rule as too 

restrictive. See, e.g., letter from BATS (May 2009); 

letter from Direct Edge (June 2009). Some 

commenters argued that the proposed circuit 

breaker halt rule could harm investor confidence, 

by reducing volume and increasing bid-ask spreads 

during the effective period of the halt. See, e.g., 

letter from ICI (June 2009); letter from Amer. 

Bankers Assoc.; letter from Citadel et al. (June 

2009). Other commenters expressed opposition to 

the concept of short sale halts and bans as a general 

matter, perceiving such actions as harmful to the 

markets, citing prior regulatory halts and short sale 

bans as evidence. See, e.g., letter from Josh Galper, 

Managing Principal, Finadium LLC, dated Apr. 13, 

2009 (‘‘Finadium); letter from Barclays (June 2009); 

letter from Citadel et al. (June 2009); letter from 

Dialectic Capital (June 2009); letter from Knight 

Capital (June 2009); letter from MFA (June 2009). 

233See supra note 29 (discussing the terms 

‘‘liquidity provider’’ and ‘‘liquidity taker’’). 

234Too much investor confidence may also be 

detrimental to investors because it can lead to 

investors making inappropriate decisions. Investor 

over-confidence, however, is less likely during 

times of crisis. See, e.g., Brad M. Barber and 

Terrance Odean, 2000, Trading is Hazardous to 

Your Wealth: The Common Stock Investment 

Performance of Individual Investors, Journal of 

Finance, 55: 773–806. 

235See Proposal, 74 FR at 18053. In response to 

our requests for comment in the Proposal and the 

Re-Opening Release, a number of commenters to the 

Proposal and Re-Opening Release expressed 

support for a price test restriction based on the 

national best bid rather than the last sale price, 

stating that it would be more suitable to today’s 

markets. See, e.g., letter from BATS (May 2009); 

letter from SIFMA (June 2009); letter from NYSE 

Euronext (June 2009); letter from Goldman Sachs 

(June 2009); letter from Direct Edge (June 2009); 

letter from GE; letter from Bingham McCutchen; 

letter from Citadel et al. (June 2009); letter from 

Amer. Bar Assoc. (July 2009); letter from Barry 

Friedman, Llewellyn Jones, and Derrick Kaiser, 

Founding Members, Qtrade Capital Partners LLC, 

dated Sept. 21, 2009 (‘‘Qtrade’’); letter from MFA 

(Oct. 2009). We also note supporting statements 

made by Larry Leibowitz, Group Executive Vice 

President at NYSE Euronext, at our May 5, 2009 

Roundtable, stating that the proposed uptick rule 

would be ineffective in today’s market ‘‘due to 

improper price sequencing caused by permitted 

reporting delays and the potential for 

manipulation.’’ Statement of NYSE Euronext (May 

2009). Available at: http://www.sec.gov/comments/ 

4-581/4581-86.pdf. 

We note, however, that a number of commenters 

offered support for a price test restriction based on 

the last sale price. See, e.g., letter from Zermatt; 

letter from Bruce Lueck, Managing Partner, Zephyr 

Unicorn Funds, dated Apr. 10, 2009; letter from 

Walter Cruttenden, Cruttenden Partners, dated Apr. 

14, 2009; letter from Larry Chlebina, President, 

Chlebina Capital Management, LLC, dated Apr. 15, 

2009 (‘‘Chlebina (Apr. 2009)’’); letter from Chad 

McCurdy, Managing Partner, Marlin Capital 

Partners, dated Apr. 20, 2009; letter from David 

Wagner, CEO, Active Investment Management, LLC, 

dated Apr. 22, 2009; letter from Bradley Kelly, 

President, Magnum Opus Financial, dated Apr. 29, 

2009; letter from Equity Insight; letter from Tony 

Wyan, CEO, Tony Wyan and Company, dated May 

5, 2009; letter from Aaron Shafter, President, Great 

Continued 

buy at prices above the national best 

bid. In addition, by not allowing short 

sellers to sell at the current national best 

bid, the alternative uptick rule will 

generally allow long sellers, by selling at 

the bid, to sell first and, thereby, take 

liquidity in a declining market for a 

security. As the Commission has noted 

previously in connection with short sale 

price test restrictions, a goal of such 

restrictions is to allow long sellers to 

sell first in a declining market.228 A 

short seller that is seeking to profit 

quickly from market moves may find it 

advantageous to be able to short sell at 

the current national best bid. By placing 

long sellers ahead of short sellers in the 

execution queue under certain 

circumstances, Rule 201 will help 

promote capital formation, since 

investors should be more willing to hold 

long positions if they know that they 

may have a preferred position over short 

sellers when they wish to sell. 

In addition, by making bids accessible 

only by long sellers when a security’s 

price is undergoing significant 

downward price pressure, Rule 201 will 

help to facilitate and maintain stability 

in the markets and help ensure that they 

function efficiently. It will also help 

restore investor confidence during times 

of substantial uncertainty because, once 

the circuit breaker has been triggered for 

a particular security, long sellers will 

have preferred access to bids for the 

security, and the security’s continued 

price decline will more likely be due to 

long selling and the underlying 

fundamentals of the issuer, rather than 

to other factors. 

As we stated in the Proposal, short 

sale price test restrictions, whether a 

permanent, market-wide restriction or 

in combination with a circuit breaker, 

might help prevent short sellers from 

accelerating a declining market by 

exhausting all remaining bids at one 

price level, and causing successively 

lower prices to be established by long 

sellers.229 Because the alternative uptick 

rule will only permit short selling at a 

price above the current national best 

bid, unless an exception applies, we 

believe it will be more effective than the 

proposed uptick rule or the proposed 

modified uptick rule at helping to 

prevent short selling, including 

potentially abusive or manipulative 

short selling, from being used as a tool 

to exacerbate a decline in the price of 

a security by exhausting all remaining 

bids at one price level. 

A number of commenters favored the 

proposed circuit breaker halt rule, 

stating, among other things, that they 

believe it would be the least disruptive 

of the proposed rules with respect to 

market functioning, while still 

achieving the Commission’s underlying 

goals,230 and would be the easiest of the 

proposed rules to implement.231 We are 

concerned, however, that, as expressed 

by other commenters, the proposed 

circuit breaker halt rule could harm the 

market by preventing short sellers from 

being able to provide benefits such as 

liquidity and price efficiency to the 

impacted security during the duration of 

the halt or that it could harm investor 

confidence.232 We note that in severe 

conditions, stocks tend to be less liquid. 

Thus, as a rule that permits short selling 

only at a price above the national best 

bid, the alternative uptick rule will 

require that during the period of time 

when a covered security is subject to the 

rule, short sellers in the security must 

act as liquidity providers, not liquidity 

takers, in that security.233 In addition, 

by restricting the ability of short sellers 

to take liquidity when a covered 

security is undergoing significant price 

pressure, it will allow long sellers to 

access available liquidity by being able 

to sell at the current national best bid. 

This, in turn, may result in an increase 

in investor confidence during times of 

crisis as long sellers will have preferred 

access to bids for a security because 

when the circuit breaker has been 

triggered for a covered security, Rule 

201 generally will allow only long 

sellers to sell at the bid.234

We have also determined to adopt the 

alternative uptick rule because, unlike 

the proposed uptick rule, it will be 

based on the current national best bid 

rather than the last sale price. As we 

stated in the Proposal, we believe that 

a short sale price test based on the 

national best bid is more suitable to 

today’s markets than a short sale price 

test based on the last sale price.235


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11250 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

Mountain Capital Management, LLC, dated May 5, 

2009; letter from Richard Casey, Chairman and 

CEO, Casey Securities, LLC, dated May 8, 2009; 

letter from Scott & Stringfellow; letter from Donald 

Rembert Sr., President, Rembert Pendelton and 

Jackson, dated May 28, 2009; letter from Sigmon 

Wealth Management (June 2009); letter from Sears. 

236See, e.g., 17 CFR 242.602. 

237See, e.g., Exchange Act Release No. 43085 

(July 28, 2000), 65 FR 47918, 47924–47925 (Aug. 4, 

2000). 

238See id. at 47925. 

239See id. 

240See 17 CFR 242.611. 

241NASD’s former bid test referenced the national 

best bid and was designed to help prevent short 

selling at or below the current national best bid in 

a declining market. See supra note 43 (discussing 

NASD’s former bid test). 

242See, e.g., supra note 42; letter from James A. 

Brigagliano, Acting Associate Director, Division of 

Market Regulation, SEC, to Alan J. Reed, Jr., First 

Vice President and Director of Compliance, Instinet 

Group, LLC, dated June 15, 2006 (granting Instinet 

modified exemptive relief from Rule 10a–1 for 

certain transactions executed through Instinet’s 

Intra-day Crossing System). 

243See letter from Liquidnet; letter from GE. 

244See letter from Liquidnet. 

245See Re-Opening Release, 74 FR at 42034. 

246See, e.g., letter from BATS (Sept. 2009); letter 

from Credit Suisse (Sept. 2009); letter from John 

McCarthy, General Counsel, Global Electronic 

Trading Company, dated Sept. 21, 2009 (‘‘GETCO 

(Sept. 2009)’’); letter from Hudson River Trading. 

Some commenters, however, expressed 

disagreement that a price test restriction that will 

require sequencing of bids or last sale prices is not 

technologically feasible. See, e.g., letter from 

Bingham McCutchen; letter from ISE (Sept. 2009); 

letter from EWT (Sept. 2009); letter from Vincent 

Florack and Steve Crutchfield, Matlock Capital LLC, 

dated Sept. 18, 2009 (‘‘Matlock Capital (Sept. 

2009)’’); letter from Gary E. Shugrue, President, 

Ascendant Capital Partners, dated May 11, 2009 

(‘‘Ascendant Capital’’); letter from Robert P. Porter, 

President, Paladin Investment LLC, dated May 8, 

2009 (‘‘Paladin Investment’’). 

247See Proposal, 74 FR at 18044–18045 

(discussing the history of short sale price test 

restrictions). 

248See Rule 201(e). 

249See letter from Wells Fargo (June 2009). 

Although we recognize that a quotation 

proposes a transaction, whereas the last 

trade price reflects an actual trade, we 

note that pursuant to Commission and 

SRO rules, quotations for all covered 

securities must be firm.236 By requiring 

that quotations be firm, the Commission 

intended to ensure that quotations 

provide reliable information to the 

marketplace to assist broker-dealers in 

satisfying their best execution 

obligations to their customers and to 

assist customers in making informed 

investment decisions.237 Moreover, 

quotation information has significant 

value to the marketplace because it 

reflects the various factors affecting the 

market, including current levels of 

buying and selling interest.238 Both 

retail and institutional investors rely on 

quotation information to understand the 

market forces at work at a given time 

and to assist in the formulation of 

investment strategies.239

Further, we believe that bids generally 

are a more accurate reflection of current 

prices for a security because changes in 

bids are more accurately timed than 

transactions. Transactions may be 

reported within a 90 second window, 

which can easily result in ‘‘stale’’ 

reports. Even transactions that are 

executed and reported automatically 

may be out of sequence if they occur in 

different trading centers, which can 

detract from the accuracy and reliability 

of the last sale. For example, trade 

reporting for covered securities can 

involve multiple trading centers 

reporting trades in the same stock from 

different locations using different means 

of reporting. Thus, for those covered 

securities for which a significant 

amount of trading occurs manually, or 

in multiple trading centers, a price test 

based on the national best bid will be a 

more accurate and effective means of 

regulating short selling than a test based 

on the last sale price because the 

manner in which trades are reported 

may create up-ticks and down-ticks that 

may not accurately reflect actual price 

movements in the security for the 

purpose of a test based on the last sale 

price. 

We also note that the national best bid 

is nearly always a protected bid for the 

trade-through rule of Rule 611 of 

Regulation NMS,240 with which every 

trading center must comply. Because 

trading centers’ execution procedures 

must incorporate protected bids, they 

will also usually include the national 

best bid. Market participants will also 

be familiar with using the current 

national best bid as a reference point 

because NASD’s former bid test, which 

was in existence from 1994 to mid-2007, 

was based on the current national best 

bid.241

In addition, another advantage of the 

alternative uptick rule is that it 

accommodates trading systems and 

strategies used in the marketplace today, 

such as the automated trade matching 

systems that offer price improvement 

based on the national best bid and offer. 

These passive pricing systems often 

effect trades at an independentlyderived price, such as at the mid-point 

of the bid-offer spread. Such pricing 

would often not satisfy the tick test of 

former Rule 10a–1 because matches 

could potentially occur at a price below 

the last reported sale price. Thus, we 

provided a limited exception from 

former Rule 10a–1 for these trading 

systems.242 In response to the Proposal 

and Re-Opening Release, commenters 

noted that a short sale price test 

restriction based on the current national 

best bid is preferable to a restriction 

based on the last sale price because it 

would not impede mid-point and 

similar derived price trading.243 One 

such commenter noted that mid-point 

trading is beneficial to the markets 

because it provides price improvement 

to both sides of the trade.244 The short 

sale price test restrictions of Rule 201 

will accommodate matching systems 

that execute trades at an independentlyderived price because such systems are 

designed so that matches occur above 

the current national best bid. 

We have also determined to adopt the 

alternative uptick rule rather than the 

proposed uptick rule or the proposed 

modified uptick rule because it will not 

require monitoring of the sequence of 

bids or last sale prices (i.e., whether the 

current national best bid or last sale 

price is above or below the previous 

national best bid or last sale price) and, 

therefore, will likely be easier to 

implement and monitor. As we noted in 

the Re-Opening Release, commenters 

had stated that the alternative uptick 

rule would likely be easier to monitor, 

could likely be implemented more 

quickly and with less cost, and would 

be easier to program into trading and 

surveillance systems than the proposed 

modified uptick rule or the proposed 

uptick rule because it would not require 

bid sequencing.245 In response to the 

Re-Opening Release, several 

commenters made similar statements in 

comparing the alternative uptick rule to 

the proposed modified uptick rule and 

proposed uptick rule.246

The requirements of Rule 201 will 

also not result in the type of disparate 

short sale regulation that existed under 

former Rule 10a–1.247 Rule 201 will 

apply a uniform rule to trades in the 

same securities that can occur in 

multiple, dispersed, and diverse 

markets. To further this goal of having 

a uniform short sale price test, 

consistent with the Proposal, subsection 

(e) of Rule 201 provides that no SRO 

shall have any rule that is not in 

conformity with, or conflicts with, Rule 

201.248 One of the reasons for the 

elimination of former Rule 10a–1 and 

the prohibition on any SRO from having 

a short sale price test in July 2007 was 

that the application of short sale price 

tests had become disjointed, with 

different price tests applying to the 

same securities trading in different 

markets. One commenter noted that a 

rule that does not cover all market 

centers would result in an unlevel 

playing field,249 while another stated 

that the Commission should not adopt 

a rule that would create an opportunity 


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250See letter from STA (June 2009). 

251See id. 

252See Rule 201(b). 

253See Proposal, 74 FR 18042. 

254See id. 

255See Re-Opening Release, 74 FR 42033. 

256See, e.g., statement of Justin Schack, Vice 

President, Market Structure Analysis, Rosenblatt 

Securities, Inc., at SEC Roundtable on Short Selling 

(May 5, 2009) (‘‘Rosenblatt Securities’’); letter from 

Richard T. Chase, Managing Director and General 

Counsel, RBC Capital Markets Corporation, dated 

June 19, 2009 (‘‘RBC (June 2009)’’); letter from 

Michael J. Simon, Secretary, International 

Securities Exchange LLC, dated June 19, 2009 (‘‘ISE 

(June 2009)’’); memorandum of a meeting between 

representatives of Penson Worldwide, Inc., and the 

Division of Trading and Markets, dated July 21, 

2009, and written materials submitted at the 

meeting (‘‘Penson’’); letter from Direct Edge (June 

2009); letter from BATS (May 2009); letter from 

SIFMA (June 2009); letter from MFA (June 2009); 

letter from ICI (June 2009); letter from Barclays 

(June 2009); letter from Vanguard (June 2009); letter 

from Goldman Sachs (June 2009); letter from Credit 

Suisse (June 2009); letter from Dialectic Capital 

(June 2009); letter from Allston Trading (June 2009); 

letter from Knight Capital (June 2009); letter from 

GETCO (June 2009); letter from Citadel et al. (June 

2009); letter from William Connell, President and 

CEO, Allston Trading, LLC, dated Sept. 21, 2009 

(‘‘Allston Trading (Sept. 2009)’’); letter from GETCO 

(Sept. 2009); letter from Dialectic Capital (Sept. 

2009); letter from Credit Suisse (Sept. 2009); letter 

from ICI (Sept. 2009); letter from Citadel et al. (Sept. 

2009); letter from Direct Edge (Sept. 2009); letter 

from RBC (Sept. 2009); letter from Goldman Sachs 

(Sept. 2009); letter from BATS (Sept. 2009); letter 

from SIFMA (Sept. 2009); letter from MFA (Oct. 

2009); letter from AIMA; letter from IAG; letter from 

Fidelity; letter from T.D. Pro Ex; letter from 

Finadium; letter from Matthew B. Management; 

letter from Millennium; letter from Liquidnet; letter 

from Qtrade; letter from Hudson River Trading; 

letter from Virtu Financial; see also letter from 

Credit Suisse (Mar. 2009). 

257See letter from Citadel et al. (Sept. 2009). 

258See id. 

259Letter from Nasdaq OMX Group (Oct. 2009); 

see also letter from Goldman Sachs (June 2009); 

letter from MFA (June 2009); letter from BATS 

(Sept. 2009); letter from Credit Suisse (Sept. 2009); 

letter from Virtu Financial. 

260Letter from Hudson River Trading; see also 

letter from MFA (June 2009). 

261See, e.g., letter from Direct Edge (Sept. 2009); 

letter from Credit Suisse (Sept. 2009). 

262See letter from Virtu Financial. 

263See letter from SIFMA (June 2009). 

264See, e.g., letter from Glen Shipway (June 

2009); letter from T. Rowe Price (Sept. 2009); letter 

from NYSE Euronext (Sept. 2009); letter from EWT 

(Sept. 2009). 

265Letter from NYSE Euronext (Sept. 2009). 

266 Id. 

267 Id.; see also letter from Amer. Bankers Assoc. 

(referencing the ‘‘stigmatizing effect’’ on stocks 

subject to a circuit breaker); letter from T. Rowe 

Price (Sept. 2009) (expressing support for the 

alternative uptick rule that would apply on a 

permanent, market-wide basis). 

for regulatory arbitrage.250 For this same 

reason, this commenter supported a 

prohibition on any SRO having a rule 

that is not in conformity with or 

conflicts with Rule 201.251 We believe 

that a uniform rule will reduce 

compliance and surveillance costs 

because systems and surveillance 

mechanisms will have to be 

programmed to consider a single price 

test based on the national best bid, 

rather than different tests for different 

markets. In addition, a uniform test will 

reduce opportunities for regulatory 

arbitrage. Accordingly, under Rule 201, 

all covered securities, wherever traded, 

will be subject to one short sale price 

test, the alternative uptick rule. 

4. Circuit Breaker Approach Generally 

Under Rule 201(b), the alterative 

uptick rule will apply only if the price 

of a covered security has declined by 

10% or more from the covered security’s 

closing price as determined by the 

listing market for the covered security as 

of the end of regular trading hours on 

the prior day.252 In the Proposal, we 

proposed a permanent, market-wide 

approach to short sale price test 

restrictions that would result in the 

proposed uptick rule or proposed 

modified uptick rule applying to all 

covered securities all the time.253 We 

also proposed a circuit breaker 

approach, either as an addition or an 

alternative to a permanent, market-wide 

approach, which would temporarily 

result in either a halt on short selling in 

a specific security or the proposed 

modified uptick rule or the proposed 

uptick rule applying to a specific 

security if there was a significant 

decline in the price of that security.254

In addition, in the Re-Opening Release, 

we stated that the alternative uptick rule 

could be implemented market-wide or 

in combination with a short selling 

circuit breaker.255

A number of commenters stated that 

if we determined to adopt a short sale 

price test restriction, it should be in 

combination with a circuit breaker 

rather than on a permanent, marketwide basis.256 For example, one 

commenter urged us to adopt a circuit 

breaker approach because it would be 

more narrowly-tailored to address our 

concerns about the effects of short 

selling in a market subject to a 

significant downturn.257 This 

commenter noted that in such a market, 

circuit breakers likely would be 

triggered for a large number of 

securities.258 Another commenter stated 

that a circuit breaker is preferable 

because it ‘‘permits normal market 

activity while a stock is trading in a 

natural range and short selling is more 

likely to benefit the market (by, for 

example, increasing price discovery and 

liquidity). Conversely, a Circuit Breaker 

will restrict short selling when prices 

begin to decline substantially and short 

selling becomes more likely to be 

abusive and potentially harmful.’’ 259

One commenter stated that ‘‘[a] circuit 

breaker would better target situations 

that could result from * * * potential 

bear raids and other forms of 

manipulation that may be used to drive 

down or accelerate the decline in the 

price of a stock.’’ 260

Other commenters stated that 

implementing price test restrictions on 

a permanent, market-wide basis, rather 

than in combination with a circuit 

breaker, would substantially diminish 

the benefits that short sellers bring to 

the markets.261 One commenter stated 

that a price test restriction should be 

adopted with a circuit breaker because 

prior empirical studies did not 

necessarily include times of severe 

market events.262 One commenter stated 

that a circuit breaker approach was 

preferable because it would be easier to 

implement than a permanent, marketwide rule.263

Other commenters were not 

supportive of a circuit breaker 

approach.264 One such commenter 

stated that a permanent, market-wide 

price test restriction would be preferable 

to a circuit breaker approach because it 

is ‘‘more predictable for market 

participants and issuers alike, would 

raise fewer implementation 

complexities, and is less likely to have 

a ‘magnet effect’ on the pricing of a 

security as it approaches a circuit 

breaker trigger point.’’ 265 This 

commenter stated that a circuit breaker 

is ‘‘unlikely to be perceived as a timely 

or effective remedy against abusive 

short selling, since restrictions would 

only take effect after there had already 

been a significant intraday price decline 

in a security.’’ 266 Further, this 

commenter stated that ‘‘[c]ircuit breakers 

may also undermine investor 

confidence because they introduce an 

element of uncertainty in the pricing of 

securities: At a certain point, the price 

of a declining security would begin to 

reflect not the fundamental value of the 

security, but rather the likelihood that a 

security will trigger the circuit breaker. 

This ‘magnet effect’ could undermine 

investor confidence, resulting in less 

buying interest in securities nearing the 

circuit breaker if there is a perception 

that professional traders could use 

sophisticated pricing models to profit 

from this anomaly while public 

investors, lacking access to such tools, 

could not.’’ 267

Another commenter stated that it 

believes that a circuit breaker approach 

is unworkable because it ‘‘may 

exacerbate market dislocations by 

suddenly and unexpectedly altering the 

regulatory regime and liquidity 


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11252 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

268Letter from EWT (Sept. 2009). 

269Letter from Atherton Lane. 

270 Id. 

271Letter from NYSE Euronext (June 2009). 

272See Exchange Act Release No. 39846 (Apr. 9, 

1998), 63 FR 18477 (Apr. 15, 1998) (order approving 

proposals by Amex, BSE, CHX, NASD, NYSE, and 

Phlx) (‘‘1998 Release’’). 

273See supra Section II.C. (discussing investor 

confidence); see also Proposal, 74 FR at 18046– 

18049. 

274See letter from NYSE Euronext (Sept. 2009). 

275See 1998 Release, 63 FR 18477. 

276See Proposal, 74 FR at 18067, n.252 (noting a 

letter from Peter Brown, dated Dec. 12, 2008). 

277See, e.g., 1998 Release, 63 FR 18477; see also 

Proposal, 74 FR at 18067. 

278 In addition, as discussed above, based on the 

empirical evidence regarding former Rule 10a–1 

that tends to demonstrate that it did not have an 

effect on market liquidity and price efficiency, we 

similarly believe that the alternative uptick rule 

will have a minimal, if any, effect on market 

liquidity or price efficiency. See supra note 220 and 

accompanying text. 

characteristics of a particular security, 

precisely when it is under duress.’’ 268

One commenter stated that it did not 

support a circuit breaker approach 

because it ‘‘would still allow abusive 

short sellers to drive down the price of 

a stock at least 10% on any given day 

even before the circuit breaker would 

kick in.’’ 269 This commenter also stated 

that it was concerned that during 

periods of extreme volatility, ‘‘circuit 

breakers could potentially impact far too 

many stocks on any given day and 

damage the benefits of short selling.’’ 270

Another commenter stated that it did 

not support a circuit breaker approach 

because, among other things, it would 

add ‘‘an additional element of trading 

risk that could result in a decrease in 

certain market participant’s [sic] 

willingness to supply liquidity in 

securities perceived to be potentially 

subject to triggering of a circuit 

breaker.’’ 271

In line with the Commission’s 

position that market impediments 

should be minimized, we believe the 

short selling circuit breaker approach of 

Rule 201 will benefit the market as a 

narrowly-tailored response to severe 

circumstances.272 As discussed above, 

due to the changes in market conditions 

and erosion of investor confidence that 

occurred recently, investors have 

become increasingly concerned about 

sudden and excessive declines in prices 

that appear to be unrelated to issuer 

fundamentals.273 We believe that a 

circuit breaker that is triggered by a 

significant intra-day decline in price of 

an individual security is a targeted 

response to address these concerns. 

Although a permanent, market-wide 

approach that would apply to all 

covered securities all the time may, as 

one commenter stated,274 provide an 

element of predictability, we believe 

that the circuit breaker approach of Rule 

201 is appropriate because it provides a 

balance between achieving our goals for 

adopting a short sale price test 

restriction and limiting impediments to 

the normal operations of the market. 

As noted above, some commenters 

expressed concerns regarding the 

effectiveness and workability of a circuit 

breaker approach because the price test 

restriction will apply only after there 

has already been a significant intra-day 

price decline in a security, and because 

it may exacerbate market dislocations 

when a security is under duress. The 

Commission has previously noted that 

circuit breakers may benefit the market 

by allowing participants an opportunity 

to re-evaluate circumstances and 

respond to volatility.275 Unlike a price 

test restriction that would apply on a 

permanent, market-wide basis, Rule 201 

will restrict short selling for an 

individual covered security for a 

specified period of time. As we stated in 

the Proposal, in discussing a short 

selling circuit breaker, one commenter 

noted that such a measure could address 

the issue of ‘‘bear raids’’ while limiting 

the market impact that may arise from 

other forms of short sale price test 

restrictions.276 In addition, although we 

agree that a circuit breaker combined 

with a halt on short selling may cause 

or exacerbate market dislocations, we do 

not believe that the circuit breaker 

approach of Rule 201 will have the same 

impact because it will continue to allow 

short selling, although at a price above 

the national best bid, even when the 

price test restriction is in effect. Further, 

to the extent that the circuit breaker 

approach results in market dislocations, 

we believe any such dislocations are 

justified by the benefits provided by the 

Rule. 

We have designed the alternative 

uptick rule implemented through a 

circuit breaker to strike the appropriate 

balance between our goal of preventing 

potential short sale abuse and the need 

to limit impediments to the normal 

operations of the market. The 

Commission has long held the view that 

circuit breakers may help restore 

investor confidence during times of 

substantial uncertainty.277 We believe 

that the requirements of Rule 201 will 

produce similar benefits. By imposing 

the alternative uptick rule once a 

security’s price is experiencing a 

significant intra-day price decline, the 

short selling circuit breaker rule in Rule 

201(b) is designed to target only those 

securities that experience such declines 

and, therefore, will help to prevent short 

selling from being used as a tool to 

exacerbate a declining market in a 

security. This approach establishes a 

narrowly-tailored Rule that will target 

only those securities experiencing such 

a decline. We believe that addressing 

short selling in connection with such a 

decline in an individual security will 

help restore investor confidence in the 

markets generally. 

As discussed above, short selling is an 

important tool in price discovery and 

the provision of liquidity to the market, 

and we recognize that imposition of a 

short selling circuit breaker that when 

triggered imposes the alternative uptick 

rule could restrict otherwise legitimate 

short selling activity during periods of 

significant volatility. To the extent that 

the alternative uptick rule may 

negatively impact the ability of short 

sellers to provide liquidity to the 

markets and contribute to price 

efficiency, we believe any such negative 

impact is justified by the benefits 

provided by the Rule in preventing 

short selling, including potentially 

manipulative or abusive short selling, 

from driving down further the price of 

a security that has already experienced 

a significant intra-day price decline. 

In addition, we believe that any such 

negative impact will be limited both in 

duration and reach. First, the circuit 

breaker will apply for a limited period 

of time, that is, through the end of the 

day on which it is triggered and the 

following day. Second, because the 

restrictions of Rule 201 will apply only 

when the price of a covered security has 

experienced a significant intra-day price 

decline, the circuit breaker approach of 

Rule 201 will preserve the potential 

benefits of short selling, such as the 

provision of liquidity and price 

efficiency, for those securities for which 

prices are undergoing minimal 

downward pressure, or are stable or 

rising.278 To the extent that the markets 

are experiencing periods of extreme 

volatility, we expect that the circuit 

breaker will be triggered for more 

securities than during periods of low 

volatility. We believe this is an 

appropriate result of Rule 201 because 

it is designed to impose restrictions on 

short selling when individual securities 

are undergoing significant intra-day 

price declines. Because Rule 201 does 

not impose a halt on short selling, 

however, short selling will be possible 

even when the circuit breaker has been 

triggered, although it will be limited to 

a price above the current national best 

bid. A circuit breaker approach will also 

allow regulatory, supervisory and 

compliance resources to focus on, and 

address, those situations where a 


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279See letter from Nasdaq OMX Group (Oct. 

2009); letter from SIFMA (Sept. 2009). 

280See, e.g., Proposal, 74 FR at 18067. 

281See, e.g., letter from Vincent Florack and Steve 

Crutchfield, Matlock Capital LLC, dated May 26, 

2009 (‘‘Matlock Capital (May 2009)’’); letter from 

Schwab; letter from Lime Brokerage (June 2009); 

letter from STA (June 2009); letter from Glen 

Shipway (June 2009); letter from NYSE Euronext 

(June 2009); letter from Wolverine; letter from 

Direct Edge (June 2009); letter from Amer. Bankers 

Assoc.; letter from NYSE Euronext (Sept. 2009); see 

also letter from SIFMA (June 2009) (indicating that 

an ‘‘on/off’’ circuit breaker trigger could dampen any 

magnet effect); letter from Direct Edge (Mar. 2009). 

282See letter from STA (June 2009); letter from 

Wolverine. 

283See letter from BATS (May 2009); letter from 

Credit Suisse (June 2009); letter from Credit Suisse 

(Sept. 2009); letter from Hudson River Trading; 

letter from Virtu Financial; see also letter from 

Credit Suisse (Mar. 2009). 

284See letter from Credit Suisse (June 2009); letter 

from Credit Suisse (Sept. 2009); see also letter from 

Credit Suisse (Mar. 2009); letter from Nasdaq OMX 

Group (Oct. 2009). 

285See, e.g., letter from Credit Suisse (June 2009); 

see also David Abad and Roberto Pascual, On the 

Magnet Effect of Price Limits, European Financial 

Management, 13:833–852 (2007) (studying the 

Spanish stock exchange); Chan et al., Price limit 

performance: Evidence from transactions data and 

the limit order book, Journal of Empirical Finance, 

12: 269–290 (2005) (studying the Kuala Lumpur 

Stock Exchange); Anthony D. Hall and Paul 

Korfman, Limits to linear price behavior: Futures 

prices regulated by limits, Journal of Futures 

Markets, 21:463–488 (2001) (studying five 

agriculture futures contracts); Henk Berkman and 

Onno Steenbeek, The influence of daily price limits 

on trading in Nikkei futures, Journal of Futures 

Markets, 18:265–279 (1998) (studying futures 

contracts on the Osaka Securities Exchange); 

Marcelle Arak and Richard E. Cook, Do daily price 

limits act as magnets? The case of treasury bond 

futures, Journal of Financial Services Research, 

12:5–20 (1997) (studying treasury bond futures). 

286See Proposal, 74 FR at 18066. 

287See id. 

288 ‘‘Regular trading hours’’ is defined in Rule 201 

to have the same meaning as in Rule 600(b)(64) of 

Regulation NMS. See Rule 201(a)(7). Rule 

600(b)(64) provides that ‘‘Regular trading hours 

means the time between 9:30 a.m. and 4:00 p.m. 

Eastern Time, or such other time as is set forth in 

the procedures established pursuant to 

§ 242.605(a)(2).’’ 17 CFR 242.600(b)(64). 

289See Proposal, 74 FR at 18066. 

290Rule 201(b). We note that if the price of a 

covered security declines intra-day by at least 10% 

on a day on which the security is already subject 

to the short sale price test restriction of Rule 201, 

the restriction will be re-triggered and, therefore, 

will continue in effect for the remainder of that day 

and the following day. For example, if on Monday, 

the price of XYZ security declines intra-day by at 

least 10%, XYZ security will be subject to the 

alternative uptick rule for the remainder of Monday 

and for the following day, Tuesday. If then on 

Tuesday, the price of XYZ security again declines 

intra-day by at least 10%, the circuit breaker will 

be re-triggered for that security such that the 

alternative uptick rule will apply for the following 

day, i.e., Wednesday, as well as for the remainder 

of the day on Tuesday. 

291See Proposal, 74 FR at 18066, 18069. 

292See Proposal, 74 FR at 18065–18066. To 

protect investors and the markets, the Commission 

has approved proposals to restrict or halt trading if 

key market indexes fall by specified amounts. 

Currently, all stock exchanges and FINRA have 

rules or policies to implement coordinated circuit 

breaker halts. See 1998 Release, 63 FR 18477; see 

also NYSE Rule 80B. The circuit breaker procedures 

call for cross-market trading halts when the Dow 

Jones Industrial Average (‘‘DJIA’’) declines by 10%, 

20%, and 30% from the previous day’s closing 

value. See, e.g., BATS Exchange Rule 11.18. The 

options markets also have rules applying circuit 

breakers. See Amex Rule 950 (applying Amex Rule 

117, Trading Halts Due to Extraordinary Market 

Volatility, to options transactions); CBOE Rule 6.3B; 

ISE Rule 703; NYSE Arca Options Rule 7.5; and 

Phlx Rule 133. The futures exchanges that trade 

index futures contracts have adopted circuit breaker 

halt procedures in conjunction with their price 

limit rules for index products. See, e.g., CME Rule 

35102.I. The CME will implement a trading halt on 

S&P 500 Index futures contracts if a NYSE Rule 80B 

trading halt is imposed in the primary securities 

market. Trading of S&P 500 Index futures contracts 

will resume upon lifting of the NYSE Rule 80B 

trading halt. Finally, security futures products are 

required to have cross-market circuit breaker 

regulatory halt procedures in place. See Exchange 

Act Release No. 45956 (May 17, 2002), 67 FR 36740 

(May 24, 2002). 

293See Proposal, 74 FR at 18066. 

specific security is experiencing 

significant downward price pressure.279

As we stated in the Proposal, we 

understand that there are concerns 

about a potential ‘‘magnet effect’’ that 

could arise as an unintended 

consequence of a circuit breaker that 

imposes a short selling price test 

restriction.280 This ‘‘magnet effect’’ 

could result in short sellers driving 

down the price of an equity security in 

a rush to execute short sales before the 

circuit breaker is triggered. We are also 

concerned about short selling demand 

building until the circuit breaker is 

lifted. In response to our requests for 

comments, several commenters stated 

that a short sale circuit breaker could 

exacerbate downward pressure on 

stocks as their value reached the 

threshold level.281 Commenters also 

discussed the possibility that short 

selling demand could be built up until 

the short selling restriction is lifted.282

Other commenters, however, discounted 

the possibility or impact of a ‘‘magnet 

effect,’’ 283 including some commenters 

who cited empirical studies that 

question whether a circuit breaker 

would result in artificial pressure on the 

price of individual securities.284

After considering the comments, 

including studies cited by commenters, 

we do not believe that the evidence is 

clear regarding a ‘‘magnet effect.’’ In fact, 

many academic studies that have 

analyzed circuit breakers in other 

contexts found no evidence of such 

trading patterns.285 We recognize, 

however, that some of these studies 

were conducted in markets dissimilar 

from the highly automated markets 

currently existing in the United States 

and, therefore, that limits their utility in 

this context. Overall, however, the most 

relevant studies fail to demonstrate a 

magnet effect and we believe that 

adopting the circuit breaker approach 

best serves our goals. 

5. Circuit Breaker Trigger Level and 

Duration 

In the Proposal, we proposed that if 

the price of a covered security declined 

by at least 10% from the prior day’s 

closing price for that covered security, 

as measured by the closing price of the 

covered security on the consolidated 

system, then all short selling in the 

covered security would be subject to a 

halt or a price test restriction for the 

remainder of the trading day.286 To 

avoid market disruption that might 

occur if a circuit breaker were triggered 

late in the trading day, the circuit 

breaker rules, as proposed, would not 

have been triggered if the specified 

market decline threshold was reached in 

a covered security within thirty minutes 

of the end of regular trading hours.287

In Rule 201(b), we are adopting a 10% 

trigger level measured from the closing 

price determined by the covered 

security’s listing market as of the end of 

regular trading hours on the prior 

day.288 This differs from the Proposal, 

under which the price decline would 

have been measured from the covered 

security’s last price reported in the 

consolidated system during regular 

trading hours on the prior day.289 In 

addition, we are modifying the 

proposed duration of the price test 

restriction once the circuit breaker is 

triggered. Under Rule 201(b), as 

adopted, once the circuit breaker has 

been triggered, the price test restriction 

will remain in place for the remainder 

of the day and for the following day.290

In addition, as discussed in more detail 

below, because the price test restriction 

will remain in place for the remainder 

of the day and for the following day, we 

are not adopting in Rule 201 a provision 

that the short sale price test restriction 

of the Rule will not be triggered if the 

10% trigger level is reached in a covered 

security within thirty minutes of the 

end of regular trading hours. 

In the Proposal, we noted our 

preliminary belief that a 10% decline in 

a security’s price from the prior day’s 

closing price would be an appropriate 

level at which to trigger the proposed 

circuit breaker rules.291 We also noted 

that a 10% threshold would be 

consistent with current SRO rules that 

restrict or halt trading if key market 

indexes fall by specified amounts (‘‘SRO 

Circuit Breakers’’) 292 and had been 

recommended by certain 

commenters.293 The Commission 

solicited comment on whether a 10% 

decline from the prior day’s closing 

price would be an appropriate threshold 


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11254 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

294See Proposal, 74 FR at 18066, 18069, 18070. 

295See Proposal, 74 FR at 18079, 18081. 

296See, e.g., letter from BATS (May 2009); letter 

from Allston Trading (June 2009); letter from IBC. 

297See letter from Direct Edge (June 2009). 

298See letter from James J. Angel, Ph.D., CFA, 

Associate Professor of Finance, McDonough School 

of Business, Georgetown University, dated Sept. 21, 

2009 (‘‘Prof. Angel (Sept. 2009)’’). 

299See, e.g., letter from MFA (June 2009); letter 

from Goldman Sachs (June 2009); letter from ISDA; 

letter from ISE (June 2009); letter from SIFMA (June 

2009); letter from Citadel et al. (June 2009); letter 

from Dialectic Capital (Sept. 2009); letter from 

Goldman Sachs (Sept. 2009); letter from ISE (Sept. 

2009); letter from SIFMA (Sept. 2009); letter from 

Virtu Financial; letter from Nasdaq OMX Group 

(Oct. 2009). 

300See, e.g., letter from MFA (June 2009); letter 

from ISDA; letter from ISE (June 2009); letter from 

Virtu Financial; letter from Jordan & Jordan; letter 

from Credit Suisse (June 2009). 

301See, e.g., letter from MFA (June 2009); letter 

from Citadel et al. (June 2009); letter from Goldman 

Sachs (June 2009); letter from ISDA; letter from ISE 

(June 2009); letter from SIFMA (June 2009); letter 

from Dialectic Capital (Sept. 2009); letter from 

SIFMA (Sept. 2009); letter from Virtu Financial. 

302See, e.g., letter from Barclays (June 2009); 

letter from ISDA; letter from SIFMA (June 2009); 

letter from SIFMA (Sept. 2009). 

303See letter from Direct Edge (June 2009); letter 

from Barclays (June 2009); letter from Goldman 

Sachs (June 2009); letter from Lime Brokerage (June 

2009); letter from Direct Edge (Sept. 2009); letter 

from Goldman Sachs (Sept. 2009). 

304See letter from ISE (Sept. 2009). 

305See, e.g., letter from Jordan & Jordan; letter 

from Citadel et al. (June 2009); letter from MFA 

(June 2009); letter from SIFMA (June 2009); letter 

from Credit Suisse (Sept. 2009). 

306See, e.g., letter from Jordan & Jordan 

(providing estimated percentages of exchange listed 

stocks impacted by a 10% circuit breaker threshold 

on sample days); letter from MFA (June 2009) 

(providing the average daily number and percentage 

of Russell 3000 stocks impacted by a 10% circuit 

breaker threshold over a ten year period); letter 

from Credit Suisse (Sept. 2009) (providing the 

number of times, by month, a circuit breaker with 

a 10% threshold would have been triggered for S&P 

500 stocks and for Russell 2000 stocks); letter from 

SIFMA (June 2009) (referencing two member firms’ 

estimates, one that provided the average number of 

stocks out of 4,800 NMS common stocks that would 

have triggered the 10% threshold during roughly 

the first half of 2009 and another that measured the 

average number of Russell 3000 stocks per day that 

declined by 10% from their opening price from 

November 2008 to March 2009). 

307See, e.g., letter from MFA (June 2009) 

(reflecting that approximately 5% of Russell 3000 

stocks would have been impacted at any one time 

by a circuit breaker with a 10% threshold during 

the period of October 1998 to September 2008); 

letter from SIFMA (June 2009) (reflecting that 

approximately 3% of Russell 3000 stocks trading 

above $10 and 16.5% of Russell 3000 stocks trading 

below $10 would have been impacted by a 10% 

threshold measured from the security’s opening 

price during the period of November 2008 through 

March 2009); but cf letter from Jordan & Jordan. We 

note that the sample of days in the data reflected 

in the letter from Jordan & Jordan is not 

representative of typical trading. 

308Letter from SIFMA (June 2009). 

309This time period constitutes the period after 

full implementation of decimal increments. 

310The Staff estimates that on the average day 

during this period, approximately 6.0% of stocks 

would have been impacted by the Rule, which is 

comprised of 3.4% of stocks that would have 

triggered the circuit breaker on a given day, plus an 

additional 2.6% of stocks that would have been 

affected as a result of having triggered the circuit 

breaker on the previous day. We note that the actual 

percentage of stocks affected by the Rule in the 

future could be different from the historical average, 

particularly under different market conditions. In 

particular, the percentage of stocks affected by the 

Rule is likely to be higher under crisis conditions. 

For example, the Staff estimates that on October 10, 

2008 approximately 68.1% of stocks would have 

traded under a short sale price test during part or 

all of the day while on November 24, 2006 

approximately 0.6% of stocks would have traded 

under a short sale price test during part or all of 

the day. The S&P 500 Index was down nearly 15% 

on October 10, 2008 from the closing price two days 

earlier while the S&P 500 Index was nearly flat on 

November 24, 2006 from the closing price two days 

earlier. The estimates are calculated based on data 

from CRSP US Stock Database ©2009 Center for 

Research in Security Prices (CRSP), The University 

of Chicago Booth School of Business. 

311The period from 2004 to 2006 exhibited low 

daily volatility as measured by the S&P 500 Index. 

The estimates are calculated based on data from 

CRSP US Stock Database ©2009 Center for Research 

in Security Prices (CRSP), The University of 

Chicago Booth School of Business. 

at which to trigger the proposed circuit 

breaker short sale price restrictions.294

We noted that the threshold level would 

affect the balance of the costs and 

benefits of the Rule; a low trigger level 

could result in more securities being 

subject to the proposed short sale price 

test restrictions, or subject to them more 

frequently, and a high trigger level 

could result in securities facing more 

significant declines before the benefits 

of the short sale price test restrictions 

applied.295

In response to our request for 

comment, several commenters 

expressed support for a 10% trigger 

level.296 One commenter did not 

specifically object to the 10% threshold, 

but stated that 10% should be the 

minimum trigger level considered.297

One commenter expressed support for a 

lower, 5% trigger level.298

Several commenters expressed 

support for a trigger level higher than 

10%.299 Several of these commenters 

stated that a circuit breaker threshold of 

10% would be too narrow or 

restrictive.300 Other commenters 

indicated that a circuit breaker should 

only be triggered in extraordinary 

circumstances and asked that we 

consider a trigger level higher than 10% 

due to concerns that a 10% trigger level 

would capture ‘‘normal’’ trading 

activity.301 Several commenters 

indicated that a higher trigger level 

would be particularly important for 

lower priced securities because a 10% 

trigger level would likely be reached 

frequently even in the absence of 

abnormal activity for such securities.302

Other commenters indicated that, in 

addition to price, the trigger level 

should factor in other characteristics of 

individual securities, such as volume 

and volatility.303 One commenter stated 

that a higher trigger level would be 

especially important for a circuit 

breaker in conjunction with the 

alternative uptick rule because the 

alternative uptick rule is more 

restrictive than the other proposed price 

tests.304

In addition, several commenters 

submitted estimates of the number of 

securities that would trigger a circuit 

breaker rule at a 10% threshold.305

While commenters’ analyses (including 

the facts and assumptions used) and 

their resulting estimates varied,306

commenters’ estimates reflect that a 

10% circuit breaker threshold, on 

average, should affect only a limited 

percentage of covered securities.307 For 

example, one commenter submitted an 

estimate that slightly more than 5% of 

a universe of 4,800 NMS common stocks 

would have ‘‘tripped the 10% threshold 

on average each day’’ during roughly the 

first half of 2009.308 In determining that 

a 10% threshold is appropriate, we 

considered other thresholds and the 

data presented by commenters regarding 

the numbers of securities that they 

believed would be subject to a short sale 

price test restriction at those different 

thresholds. Given the variations in the 

facts and assumptions underlying the 

estimates submitted by commenters, the 

Staff also looked at trading data to 

confirm the reasonableness of those 

estimates. The Staff found that, over the 

period covering April 9, 2001 to 

September 30, 2009,309 the 10% trigger 

level of Rule 201 would have, on an 

average day, been triggered for 

approximately 4% of covered 

securities.310 The Staff also found that 

for a low volatility period, covering 

January 1, 2004 to December 31, 2006, 

the 10% trigger level of Rule 201 would 

have, on an average day, been triggered 

for approximately 1.3% of covered 

securities.311

After considering the comments, we 

believe that a 10% decline in a 

security’s price, as measured from the 

security’s closing price on the prior day, 

is an appropriate level at which to 

trigger a circuit breaker. As discussed in 

the Proposal, the circuit breaker short 

sale price test restrictions were designed 

to target a security experiencing a 

significant intra-day price decline, 

where the concerns about the potential 

harmful effects of short selling would be 

greatest. In this way, they would be 

tailored to help prevent short selling, 

including potentially abusive or 

manipulative short selling, from being 

used as a tool to exacerbate the 

declining market in those securities 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11255 

312See, e.g., Proposal, 74 FR at 18065, 18069. 

313See, e.g., Proposal, 74 FR at 18065, 18069; see 

also Proposal, 74 FR at 18104 (‘‘By targeting only 

those securities that experience severe intraday 

declines, all three proposed circuit breaker rules 

would be narrowly tailored so that most stocks 

would not fall under any new short sale 

restrictions.’’). 

314See supra notes 305 to 311 (discussing the 

limited number of securities that would, on an 

average day, trigger a circuit breaker with a 10% 

threshold). 

315See Staff’s Summary Pilot Report at 55–56, 81. 

316See Proposal, 74 FR at 18066, 18079. 

317See, e.g., letter from SIFMA (June 2009). 

318See, e.g., letter from Citadel et al. (June 2009); 

letter from GETCO (June 2009); letter from Goldman 

Sachs (June 2009); letter from Lime Brokerage (June 

2009); letter from SIFMA (June 2009); letter from 

Credit Suisse (June 2009); letter from Credit Suisse 

(Sept. 2009); letter from Hudson River Trading; 

letter from Virtu Financial; see also letter from 

CBOE (June 2009) (stating that the opening price 

would take into account after hours news and avoid 

disorderly openings, particularly on options 

settlement dates). 

319See, e.g., letter from Knight Capital (June 

2009); letter from Citadel et al. (June. 2009); letter 

from GETCO (June 2009); letter from Goldman 

Sachs (June 2009); letter from Lime Brokerage (June 

2009); letter from SIFMA (June 2009); letter from 

Credit Suisse (June 2009); letter from Credit Suisse 

(Sept. 2009); letter from Goldman Sachs (Sept. 

2009); letter from Hudson River Trading. 320See letter from Virtu Financial. 321See, e.g., letter from Goldman Sachs (June 

2009); letter from SIFMA (June 2009). 

322See letter from SIFMA (June 2009). 

323See, e.g., letter from IBC; letter from Nasdaq 

OMX Group (Oct. 2009). 

324See letter from SIFMA (June 2009); see also 

letter from Glen Shipway (June 2009) (noting that 

basing the trigger level on the previous day’s 

closing price ‘‘certainly would be a price 

mechanism easier to track and to comprehend by 

market participants’’). 

325See Rule 201(b)(3); see also infra Section 

III.A.6. Rule 201(a)(6) provides that ‘‘[t]he term plan 

processor shall have the same meaning as in 

§ 242.600(b)(55).’’ Rule 600(b)(55) of Regulation 

NMS states: ‘‘Plan processor means any selfregulatory organization or securities information 

processor acting as an exclusive processor in 

connection with the development, implementation 

and/or operation of any facility contemplated by an 

effective national market system plan.’’ The single 

plan processors are ‘‘exclusive processors’’ as 

defined under Section 3(a)(22) of the Exchange Act. 

17 CFR 242.600(b)(55). See 15 U.S.C. 78c(a)(22). 

experiencing a significant intra-day 

decline and, thereby, help stabilize the 

market in those securities and help 

address concerns about the erosion in 

investor confidence.312 At the same 

time, we explained, the proposed circuit 

breaker price test restrictions would not 

impact trading in the majority of 

securities, and so would preserve the 

benefits of legitimate short selling, such 

as the provision of liquidity and price 

efficiency, in those securities.313

Although we recognize commenters’ 

concerns that a 10% trigger level may 

capture some ‘‘normal’’ trading activity, 

commenters’ estimates and the Staff’s 

analysis show that a 10% circuit breaker 

threshold generally should affect only a 

limited percentage of covered securities. 

This supports the conclusion that Rule 

201 provides a tailored approach that 

reaches a limited subset of covered 

securities that are experiencing a 

significant intra-day price decline, 

while generally not restricting short 

selling in the majority of covered 

securities. Thus, by including a 10% 

trigger level in Rule 201, the Rule will 

not interfere with trading in the majority 

of securities most of the time, including 

when prices in such securities are 

undergoing minimal downward price 

pressure or are stable or rising. In 

addition, we note that a circuit breaker 

approach is more targeted than applying 

a short sale price test restriction on a 

permanent, market-wide basis, and that 

any circuit breaker approach needs to 

have a line drawn. 

Further, we are concerned that setting 

a trigger level higher than 10% would 

undermine our goals of helping to 

prevent short selling from being used as 

a tool to exacerbate a price decline in a 

particular security and of increasing 

investor confidence because so few 

securities would, on average, trigger a 

threshold higher than 10%.314 The 10% 

threshold for a circuit breaker that, 

when triggered, results in all short 

selling in a covered security being 

subject to the alternative uptick rule 

strikes a balance between the need to 

restrict short selling in moments of 

significant intra-day price declines in a 

covered security and the market 

participant’s expectation that its short 

selling strategy will normally be 

available in an efficient and open 

marketplace. Thus, we have determined 

that a 10% trigger level strikes the right 

balance among our goals of facilitating 

the smooth functioning of the markets, 

preserving investor confidence, and 

preventing abusive market practices. 

Although we recognize commenters’ 

concerns that a 10% trigger level may be 

reached more frequently for lower 

priced securities, at this time we have 

determined not to set a higher trigger 

level for lower priced securities, or to 

base the trigger on other characteristics 

of a security. Varying the trigger level 

according to characteristics of 

individual securities would complicate 

and increase costs with respect to 

implementation of, compliance with, 

and regulatory oversight of, Rule 201. 

Moreover, contrary to the concerns of 

commenters, we believe that having a 

trigger level that is reached more 

frequently for lower priced stocks may 

be beneficial. As stated in the Staff’s 

Summary Pilot Report, during the Pilot, 

the Staff found some evidence that short 

sale price tests dampened intra-day 

volatility in the smallest market 

capitalization stocks, which tend to 

have lower share prices than larger 

market capitalization stocks.315 Thus, a 

trigger level that is reached more 

frequently for lower priced stocks may 

impose the alternative uptick rule in 

those situations where it is more likely 

to dampen volatility and achieve our 

goals in adopting short sale price test 

restrictions. 

In response to our request for 

comment,316 some commenters asked 

that we clarify how to determine the 

official price from which to measure a 

price decline and to designate from 

where that price will come.317 In 

addition, a number of commenters 

expressed concerns that measuring the 

trigger level from the prior day’s closing 

price for a security would result in a 

short selling restriction being applied as 

the result of a price change caused by 

the overnight release of material news or 

other significant events outside of 

trading hours.318 Several commenters 

asked that the percentage decline be 

measured from the covered security’s 

opening price rather than the prior day’s 

closing price.319 One commenter 

specified that the opening price should 

be the official opening price distributed 

by a SIP,320 while other commenters 

stated that it should be the opening 

price on the covered security’s primary 

market.321 One commenter stated that 

the opening print should not be 

included in the measurement of the 

trigger level.322 Other commenters, 

however, supported our proposal to 

measure the decline from the previous 

day’s closing price.323 One commenter 

noted that measuring the trigger level 

from the previous day’s closing price 

might be easier to implement in 

connection with a policies and 

procedures approach.324

As discussed in more detail in Section 

III.A.6. below, Rule 201(b)(3) provides 

that the listing market for each covered 

security must determine whether a 

covered security’s price has declined by 

10% or more such that it is subject to 

the short sale price test restrictions of 

Rule 201 and such information must be 

disseminated to the trading centers via 

the applicable single plan processor.325

As set forth in Rule 201(b)(1), we have 

determined that it is appropriate to 

measure the price decline from the 

covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day. In the 

proposed circuit breaker rules, we 

proposed that the decline in a covered 

security’s price would be measured 

from the security’s last price as reported 

in the consolidated system during 


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326See Proposal, 74 FR at 18110–18113. 

327See, e.g., NYSE Rule 116.40; NYSE Rule 

123C(3). 

328See letter from SIFMA (June 2009). 

329See letter from RBC (June 2009); see also letter 

from Credit Suisse (Mar. 2009). 

330See, e.g., letter from Direct Edge (June 2009) 

(stating that the circuit breaker should be limited 

in duration to the end of the trading day with 

respect to the proposed circuit breaker halt rule); 

letter from AIMA; letter from Goldman Sachs (June 

2009). 

331See, e.g., letter from AIMA; see also letter from 

Direct Edge (June 2009) (opposing a circuit breaker 

duration beyond one trading day specifically with 

respect to a circuit breaker triggering a short selling 

halt); letter from Barclays (June 2009); letter from 

Goldman Sachs (June 2009). 

332See letter from Barclays (June 2009); letter 

from Citadel et al. (June 2009); letter from SIFMA 

(June 2009); see also letter from Jordan & Jordan 

(providing data regarding the extent to which 

securities with an ‘‘on/off’’ trigger recovered by the 

end of trading). 

333Letter from Goldman Sachs (June 2009). 

334See letter from Barclays (June 2009); letter 

from SIFMA (June 2009). 335See letter from SIFMA (June 2009). 336See letter from Barclays (June 2009). 337See letter from Citadel et al. (June 2009). 338See letter from Barclays (June 2009); letter 

from Citadel et al. (June 2009). 339See, e.g., letter from Jibralta Merrill, dated May 

5, 2009; letter from Arthur Porcari, dated May 11, 

2009; letter from IBC; letter from STA (June 2009). 340See letter from Wells Fargo (Sept. 2009); letter 

from STA (Sept. 2009); letter from Glen Shipway 

(Sept. 2009); letter from BATS (Sept. 2009). 

regular trading hours on the prior 

day.326 After considering the comments, 

we believe that the closing price as 

determined by the covered security’s 

listing market as of the end of regular 

trading hours on the prior day will 

provide a more accurate price from 

which to measure a decline in price 

than the last price reported in the 

consolidated system. We believe that 

the last price reported in the 

consolidated system is more likely to 

reflect an anomalous trade, e.g., a trade 

that is not consistent with the current 

market due to, for example, the 90 

second reporting window, or an 

uncorrected error. Listing markets 

generally have in place specific 

procedures designed to ensure the 

accuracy and reliability of their closing 

prices.327 Thus, we believe it is 

appropriate to use the more accurate 

closing price as determined by the 

covered security’s listing market rather 

than the last price reported in the 

consolidated system. 

We also believe that the price decline 

in a covered security under Rule 

201(b)(1)(i) should be measured from 

the covered security’s closing price 

reported on the prior day rather than 

from each day’s opening price for the 

covered security because the closing 

price provides a clearly discernible 

price and time from which to measure 

the decline. The closing price of a 

covered security will be known by or 

shortly after the end of regular trading 

hours such that the listing markets will 

have a price on the following day from 

which to determine if a covered security 

is subject to the short sale price test 

restrictions of Rule 201. An opening 

price, on the other hand, is established 

only if there is opening interest for a 

security, which, for thinly traded 

securities, may present issues. In 

addition, as noted by one commenter, 

we believe that measuring the price 

decline from the closing price on the 

prior day is preferable because it should 

be easier to implement than a 

requirement to measure the decline 

from the covered security’s opening 

price.328 For example, should any 

uncertainties in price occur, using the 

closing price as a measurement will 

provide time to resolve any such 

uncertainties before the requirements of 

Rule 201 will potentially apply. If the 

Rule required that the decline must be 

measured from the opening price, any 

uncertainties would have to be resolved 

in real time, so that if a 10% or more 

price decline were to occur, the short 

sale price test restrictions of Rule 201 

could be applied that day in accordance 

with the Rule. 

As noted above, under Rule 201(b), 

once the circuit breaker has been 

triggered, the price test restriction will 

remain in place for the remainder of the 

day and for the following day. This 

requirement differs from the proposed 

circuit breaker rules that would have 

applied a short selling halt or short sale 

price test restriction for the remainder of 

the day only. 

In response to our request for 

comment on the duration of the 

proposed circuit breaker rules, 

comments were mixed. For example, 

one commenter suggested that the 

Commission should consider extending 

the duration of the short selling 

restriction through the close of trading 

on the trading day following the 

triggering of the circuit breaker to allow 

sufficient time to achieve the 

Commission’s intended purpose of 

‘‘halting or slowing a price decline in a 

security.’’ 329 Some commenters 

supported the proposed period for the 

circuit breaker of the remainder of the 

trading day 330 for various reasons, 

including that the limited duration 

would mitigate the potential adverse 

impact of a short selling restriction.331

In addition, several commenters 

supported a circuit breaker with a 

duration of less than the remainder of 

the trading day.332

One commenter, however, stated that 

the circuit breaker should not be in 

effect for multiple days, but also that it 

should not be in effect for a matter of 

hours because ‘‘frequent changes in the 

status of a security would create more 

disruption.’’ 333 Several commenters 

who supported a circuit breaker with a 

duration of less than the remainder of 

the trading day stated that the circuit 

breaker should be lifted if the security’s 

price has recovered and the price 

decline is less than 10% before the end 

of the trading day.334 These commenters 

stated, among other things, that such a 

recovery may be a common 

occurrence 335 and that lifting the circuit 

breaker would take into account the 

resilience of the markets.336 Another 

commenter stated that the circuit 

breaker should only be in effect long 

enough to re-establish equilibrium 

between buying and selling interests 

and further noted that the duration of 

the circuit breaker should depend on 

the time of day when the threshold is 

triggered.337

Some commenters supported the 

Commission’s proposal that a circuit 

breaker would not be triggered if the 

10% trigger level were reached in a 

covered security within thirty minutes 

of the end of regular trading hours.338

Other commenters, however, stated that 

the last thirty minutes of the day has 

become the most volatile part of the day 

and that this is exactly the time that a 

rule that would slow short selling and 

reduce volatility would be most 

needed.339

After considering the comments, we 

believe it is appropriate to apply the 

alternative uptick rule, when triggered, 

for the remainder of the day and the day 

following the day on which the circuit 

breaker is triggered. We believe that a 

circuit breaker that is in effect for the 

remainder of the day and the following 

day will have the advantage of being 

more effective at preventing short 

selling from being used as a tool to 

exacerbate a security’s decline in price. 

As we, and several commenters, have 

noted, because the alternative uptick 

rule will permit short selling only at a 

price above the current national best 

bid, it will likely be the most effective 

of the proposed price tests at preventing 

short selling from driving down further 

a security’s price or from exacerbating a 

price decline.340 A circuit breaker that 

will impose a short selling restriction 

for only the remainder of the trading 

day, or as some commenters suggested, 

for less than the remainder of the 

trading day, may not allow sufficient 

time for the short selling restriction to 

have its desired effect. To the extent that 

short selling is causing or contributing 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11257 

341See supra note 333 and accompanying text. 

342See supra note 275 and accompanying text. 

343See Proposal, 74 FR at 18066. 

344See Rule 201(b). 

345See Proposal, 74 FR at 18060, 18064–18065. 

346See supra note 199 and accompanying text. 

See also 17 CFR 242.603(b). Rule 603 of Regulation 

NMS requires that every national securities 

exchange on which an NMS stock is traded and 

national securities association shall act jointly 

pursuant to one or more effective national market 

system plans to disseminate consolidated 

information, including a national best bid and 

national best offer, on quotations for and 

transactions in NMS stocks. 

347See http://www.nyxdata.com/cta. 

348See http://www.utpdata.com/docs/ 

UTP_PlanAmendment.pdf. 

349See, e.g., Proposal, 74 FR at 18060. 

350Letter from Credit Suisse (Sept. 2009); see also 

letter from SIFMA (June 2009); letter from Goldman 

Sachs (June 2009); letter from T. Rowe Price (June 

2009). 

351See, e.g., letter from Michael Sigmon, 

Chairman, Sigmon Wealth Management, dated Apr. 

14, 2009; letter from IBC. 

352We note that currently, the period during 

which the current national best bid is collected, 

calculated and disseminated can vary depending on 

whether a participant in the particular national 

market system governing quote consolidation for a 

security has decided to pay the consolidator to 

extend the hours of the calculation of the bid. 

353See Proposal, 74 FR at 18078. 

to downward price pressure, a longer 

duration will provide additional time 

during which the security will be 

subject to reduced downward price 

pressure from short selling. In addition, 

we note that the circuit breaker could be 

triggered at any point during regular 

trading hours. Further, as noted by one 

commenter, we are concerned that if the 

circuit breaker is triggered late in the 

day, such that it would be in effect for 

only a short period of time, this would 

in fact create more disruption rather 

than achieving our goals with respect to 

short sale price test restrictions for that 

security.341 By applying the short sale 

price test restriction for the day 

following the day on which it is 

triggered, the time period will help 

ensure that there is not unnecessary 

disruption caused by the triggering of 

the circuit breaker. 

As discussed above, the Commission 

has previously noted that circuit 

breakers may benefit the market by 

allowing participants an opportunity to 

re-evaluate circumstances and respond 

to volatility.342 We believe that 

imposing a short selling restriction for 

the remainder of the day and the 

following day will help ensure that 

market participants have a reasonable 

opportunity to become aware of, and 

respond to, a significant decline in a 

security’s price, and will provide 

sufficient time to re-establish market 

efficiency in the individual security. 

Although, for the reasons discussed 

above, we believe it is necessary to 

impose the short sale price test 

restriction of Rule 201 for longer than 

the remainder of the day, we do not 

believe it is appropriate to extend the 

duration beyond the time period 

specified in Rule 201 because we 

believe that the duration specified in 

Rule 201 strikes the appropriate balance 

between achieving our goals in adopting 

Rule 201 and not causing unnecessary 

market disruption. 

In the Proposal, we stated that to 

avoid market disruption that may occur 

if a circuit breaker is triggered late in the 

trading day, the proposed circuit 

breaker rules would not be triggered if 

the specified market decline threshold 

is reached in a covered security within 

thirty minutes of the end of regular 

trading hours.343 As noted above, 

because the short sale price test 

restriction of Rule 201 will remain in 

place for the remainder of the day and 

the following day, we have determined 

not to include a provision in Rule 201 

stating that the Rule’s restrictions will 

not be triggered if the 10% trigger level 

is reached in a covered security within 

thirty minutes of the end of regular 

trading hours. We believe it is 

appropriate to apply Rule 201 during 

the last thirty minutes of regular trading 

hours because, due to potential 

volatility during this period, it is a time 

period when a covered security’s price 

may experience a significant decline. 

Consistent with the Proposal, we have 

determined to apply the price test 

restriction, if triggered, during periods 

when the national best bid is calculated 

and disseminated on a current and 

continuing basis by a plan processor.344

As discussed above and as we discussed 

in the Proposal,345 market information 

for quotes in covered securities is 

disseminated pursuant to two different 

national market system plans, the CQ 

Plan and Nasdaq UTP Plan.346

Quotation information is made available 

pursuant to the CQ Plan between 9 a.m. 

and 6:30 p.m. ET, while one or more 

participants is open for trading. In 

addition, quotation information is made 

available pursuant to the CQ Plan 

during any other period in which any 

one or more participants wish to furnish 

quotation information to the Plan.347

Quotation information is made available 

by the Nasdaq UTP Plan between 9:30 

a.m. and 4 p.m. ET. The Nasdaq UTP 

Plan also collects, processes, and 

disseminates quotation information 

between 4 a.m. and 9:30 a.m. ET, and 

after 4 p.m. when any participant is 

open for trading, until 8 p.m. ET.348

During the time periods in which these 

Plans do not operate, real-time quote 

information is not collected, calculated 

and disseminated. 

In response to our request for 

comment,349 one commenter stated that 

any price test restriction should be 

applied during regular trading hours 

only because the period when the 

current national best bid is calculated, 

collected and disseminated ‘‘can vary 

depending on whether a participant in 

the particular national market system 

governing quote consolidation for a 

security decides to pay the consolidator 

to extend the hours of the calculation of 

the bid.’’ 350 In contrast, other 

commenters stated that the proposed 

price test restrictions should apply at all 

times during after-hours trading.351

Because the short sale price test 

restrictions of Rule 201 are based on the 

current national best bid, we believe 

that the restrictions should apply at all 

times when the current national best bid 

is collected, calculated and 

disseminated even though this period 

can vary depending on whether a 

participant in the particular national 

market system governing quote 

consolidation for a security decides to 

pay the consolidator to extend the hours 

of the calculation of the bid.352 Thus, 

the price test restrictions of Rule 201 

will apply at times when quotation 

information and, therefore, the national 

best bid, is collected, processed, and 

disseminated pursuant to a national 

market system plan. We note, however, 

that at a later time we may reconsider 

whether any changes to Rule 201 would 

be necessary to also apply the Rule to 

short selling during times when the 

national best bid is not collected, 

calculated and disseminated, in light of 

any new information on short selling 

activity during these times. 

6. Determination Regarding Securities 

Subject to Rule 201 and Dissemination 

of Such Information 

In the Proposal, we requested 

comment regarding who should be 

responsible for monitoring the price 

declines of individual securities to 

determine if they trigger the short 

selling circuit breaker, such as brokerdealers or SROs, how such information 

should be disseminated to the market, 

and who should be responsible for 

disseminating the information.353 In 

response to our request for comment, 

some commenters stated that if we were 

to adopt a circuit breaker rule, securities 

subject to the Rule should be tracked 

and disseminated by the SIP for the 

covered security in question, noting that 

SIPs currently track and disseminate 


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354See, e.g., letter from Virtu Financial (also 

stating that the SIPs would add a flag to their data 

feeds that would announce when the circuit breaker 

is in effect). 

355See letter from NYSE Euronext (Sept. 2009); 

see also letter from SIFMA (June 2009) (stating that 

some of its member firms ‘‘believe that exchangecontrolled SIPs should monitor prices and 

disseminate information flags when a security is in 

short sale mode * * *’’). 

356See letter from NYSE Euronext (Sept. 2009). 

357See, e.g., letter from Direct Edge (June 2009); 

letter from Liquidnet; letter from FIF (June 2009); 

letter from Manisha Kimmel, Executive Director, 

Financial Information Forum, dated Sept. 23, 2009 

(‘‘FIF (Sept. 2009)’’). 

358Letter from RBC (June 2009). 

359 Id. 

360See letter from Liquidnet. 

361See Rule 201(b)(3). 

362Rule 201(a)(2). Rule 201(a)(2) provides that 

‘‘[t]he term effective transaction reporting plan for 

a covered security shall have the same meaning as 

in § 242.600(b)(22).’’ Rule 201(a)(2). 

363See supra note 199 (discussing the jointindustry plans). 

364We note that although the definition of a 

‘‘listing market’’ in the CTA Plan and Nasdaq UTP 

Plan is similar, the Plans differ with respect to how 

they treat dually listed securities. The CTA Plan 

states that ‘‘the ‘listing market’ for any Eligible 

Security shall be that exchange Participant on 

which the Eligible Security is listed. If an Eligible 

Security is dually listed, ‘listing market’ shall be 

that exchange Participant on which the Eligible 

Security was originally listed.’’ The Nasdaq UTP 

Plan states that ‘‘ ‘Listing Market’ for an Eligible 

Security means the Participant’s Market on which 

the Eligible Security is listed. If an Eligible Security 

is dually listed, Listing Market shall mean the 

Participant’s Market on which the Eligible Security 

is listed that also has the highest number of the 

average of the reported transactions and reported 

share volume for the preceding 12-month period. 

The Listing Market for dually-listed Eligible 

Securities shall be determined at the beginning of 

each calendar quarter.’’ Although there are 

differences between how each of the Plans 

determines the listing market for dually listed 

securities, we do not believe this difference will 

impact the rule operationally because participants 

are already familiar with determining the applicable 

listing market for a covered security. 

365See, e.g., Nasdaq Rule 4120 (relating to trading 

halts in Nasdaq-listed securities); NYSE Rule 123D 

(relating to delayed openings and trading halts in 

NYSE-listed securities). 

366See supra note 353 and accompanying text. 

367See, e.g., letter from Direct Edge (June 2009); 

letter from FIF (June 2009); letter from Liquidnet; 

letter from RBC (June 2009); letter from SIFMA 

(June 2009); letter from FIF (Sept. 2009); letter from 

NYSE Euronext (Sept. 2009); letter from Virtu 

Financial. 

368Rule 603(b) of Regulation NMS provides that 

‘‘Every national securities exchange on which an 

NMS stock is traded and national securities 

association shall act jointly pursuant to one or more 

effective national market system plans to 

disseminate consolidated information, including a 

national best bid and national best offer, on 

quotations for and transactions in NMS stocks. 

Such plan or plans shall provide for the 

dissemination of all consolidated information for an 

individual NMS stock through a single plan 

processor.’’ 17 CFR 242.603(b). 

369See Rule 201(b)(3); 17 CFR 242.603(b). 

percentage moves 354 and that such a 

role would be consistent with the 

responsibilities of a SIP to collect, 

process, distribute and publish 

information with respect to transactions 

in, or quotations for, any security for 

which it acts as a SIP on a current and 

continuing basis.355 One commenter 

stated that it would be inappropriate to 

allow each market to perform its own 

calculation or to impose the 

responsibility on a particular market 

due to the importance of ensuring that 

triggering of a circuit breaker is 

communicated to all markets and 

market participants on a fair, impartial 

and timely basis.356 Other commenters 

stated that the listing market for a 

covered security should communicate 

the triggering of the circuit breaker to 

the SIP for the covered security, which 

would then redistribute such 

information to the market.357 Another 

commenter stated that the exchanges 

should be required to develop and 

maintain ‘‘a centralized real-time list of 

all securities subject to the circuit 

breaker price test.’’ 358 This commenter 

stated that it believes this centralization 

‘‘would ensure consistent treatment of 

orders and help reduce the costs of 

compliance for market participants.’’ 359

One commenter stated that as an 

alternative to the listing market 

notifying the SIP for a covered security 

when the circuit breaker has been 

triggered, trading centers could arrange 

to receive this information directly from 

the listing market.360

After considering the comments, we 

have determined that the listing market 

for each covered security must 

determine whether that covered security 

is subject to Rule 201.361 Rule 201(a)(3) 

defines the term ‘‘listing market’’ to have 

the same meaning as the term ‘‘listing 

market’’ as defined in the effective 

transaction reporting plan for the 

covered security.362 Because the 

definition of ‘‘listing market’’ is a 

currently-used definition, we believe 

users of the Rule will not have difficulty 

identifying for a security which entity is 

its listing market. 

Currently, there are two effective 

transaction reporting plans, the CTA 

Plan, which disseminates transaction 

information for securities primarily 

listed on an exchange other than 

Nasdaq, and the Nasdaq UTP Plan, 

which disseminates consolidated 

transaction and quotation information 

for securities primarily listed on 

Nasdaq.363 Each of these Plans includes 

a definition of ‘‘listing market,’’ which 

definitions we are incorporating by 

reference into Rule 201. We have 

determined to incorporate by reference 

into Rule 201 the definition of ‘‘listing 

market,’’ as that term is defined in the 

CTA Plan and the Nasdaq UTP Plan,364

to provide the markets with uniformity 

with respect to decisions regarding 

trading restrictions for individual NMS 

stocks because the listing markets are 

already familiar with making 

determinations regarding, and imposing 

trading restrictions on, individual NMS 

stocks. For example, listing markets 

already have rules or policies in place 

to coordinate trading suspensions or 

halts in individual NMS stocks.365

In addition, requiring the listing 

market for a covered security to 

determine whether the security has 

become subject to the short sale price 

test restrictions of Rule 201 will help 

ensure consistency for each covered 

security with respect to such 

determinations as only the listing 

market for that covered security will be 

making the determination. In addition, 

we believe that listing markets will be 

in the best position to respond to 

anomalous or unforeseeable events that 

may impact a covered security’s price, 

such as an erroneous trade, because the 

listing markets generally have in place 

specific procedures designed to address 

such events. 

As discussed above, in response to 

our request for comment,366 some 

commenters provided comments 

regarding how information that a 

covered security has become subject to 

the short sale price test restrictions of 

Rule 201 should be disseminated to the 

markets.367 In order that all market 

participants receive information 

regarding when a security has become 

subject to Rule 201 on a fair, impartial 

and timely basis, after considering the 

comments we have determined to 

provide in Rule 201(b)(3) that once the 

listing market has determined that a 

security has become subject to the 

requirements of Rule 201, the listing 

market shall immediately notify the 

single plan processor responsible for 

consolidation of information for the 

covered security in accordance with 

Rule 603(b) of Regulation NMS 368 of the 

fact that a covered security has become 

subject to the short sale price test 

restriction of Rule 201. The plan 

processor must then disseminate this 

information.369

As discussed above, the CTA Plan 

disseminates transaction information for 

securities primarily listed on an 

exchange other than Nasdaq and the 

Nasdaq UTP Plan disseminates 

consolidated transaction and quotation 

information for securities primarily 

listed on Nasdaq. In accordance with 

Rule 603(b) of Regulation NMS, these 

plans, together with the CQ Plan, 

provide for the dissemination of all 

consolidated information for individual 


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370See letter from FIF (June 2009). 

371See Proposal, 74 FR at 18049. 

372See Rule 201(b)(1)(i). 

373See Rule 201(b)(1)(ii). 

374See, e.g., letter from SIFMA (June, 2009); letter 

from Goldman Sachs (June 2009); letter from NYSE 

Euronext (June 2009); letter from T. Rowe Price 

(June 2009); letter from RBC (June 2009); letter from 

Schwab; letter from BATS (Sept. 2009); letter from 

SIFMA (Sept. 2009); letter from Credit Suisse (Sept. 

2009); letter from Virtu Financial; letter from 

Goldman Sachs (Sept. 2009); letter from NYSE 

Euronext (Sept. 2009); letter from Qtrade; letter 

from Citadel et al. (Sept. 2009); letter from MFA 

(Oct. 2009). 

375Letter from Citadel et al. (Sept. 2009); see also 

letter from AIMA. 

376Letter from Virtu Financial; see also letter 

from MFA (Oct. 2009) (stating that it believes that 

‘‘implementation concerns would be minimized if 

executing market centers (or any broker using an 

intermarket sweep order) surveil for compliance as 

they could leverage existing architecture developed 

to comply with the order protection rule in Reg. 

NMS (Rule 611)’’). 

377See, e.g., letter from GE; letter from Wachtell; 

letter from Amer. Bankers Assoc. 

378See letter from GE; see also letter from 

Wachtell. 

379Letter from Wells Fargo (Sept. 2009). 

380See, e.g., letter from Amer. Bankers Assoc. We 

note that this commenter also expressed support for 

a policies and procedures requirement for trading 

centers. 

381See, e.g., letter from Sigmon Wealth 

Management (June 2009); letter from James V. Kelly, 

President, Kelly Capital Management, LLC, dated 

June 2, 2009 (‘‘Kelly Capital’’); letter from Larry 

Chlebina, President, Ryan Stine, VP Portfolio 

Strategist, Chlebina Capital Management, LLC, 

dated May 29, 2009. 

382See, e.g., letter from Theresa Kinley, dated 

May 14, 2009; see also letter from James 

Rothenberg. 

NMS stocks through a single plan 

processor. The single plan processors 

currently receive information from 

listing markets regarding trading 

restrictions (i.e., Regulatory Halts as 

defined in those plans) on individual 

securities and disseminate such 

information. Thus, the requirements of 

Rule 201(b)(3) are similar to existing 

obligations on plan processors pursuant 

to the requirements of Regulation NMS, 

the CTA and CQ Plans and the Nasdaq 

UTP Plan. 

We recognize that the requirements of 

Rule 201(b)(3) may require changes to 

systems currently supported by the 

single plan processors.370 Thus, in 

considering the appropriate 

implementation period for Rule 201, we 

have factored into our considerations 

time to allow the single plan processors 

to determine any changes to their 

systems requirements and to make any 

necessary changes. 

7. Policies and Procedures Approach 

In the Proposal, we stated that the 

proposed price test restrictions could be 

applied in combination with a policies 

and procedures approach, a prohibition 

approach, or a combination thereof.371

We have determined to adopt a policies 

and procedures approach in Rule 

201(b). Rule 201(b) will require trading 

centers to establish, maintain, and 

enforce written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of the 

security decreases by 10% or more from 

the covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day.372 In 

addition, such policies and procedures 

must be reasonably designed to impose 

the short sale price test restriction in 

Rule 201(b)(1) for the remainder of the 

day on which it is triggered and on the 

following day when a national best bid 

for the covered security is calculated 

and disseminated on a current and 

continuing basis by a plan processor 

pursuant to an effective national market 

system plan.373

Several commenters stated that any 

short sale price test restriction should be 

implemented through a policies and 

procedures approach.374 One such 

commenter stated that a policies and 

procedures approach ‘‘would help 

promote compliance by all affected 

parties, distribute compliance and 

monitoring responsibility, allow 

flexibility to address inadvertent 

violations (thus likely resulting in fewer 

cancellations and trade breaks), and 

conserve the enforcement resources of 

agencies and other self-regulatory 

organizations.’’ 375 Another commenter 

noted the ‘‘smooth implementation’’ and 

‘‘successful operation’’ of Regulation 

NMS, which also uses a policies and 

procedures approach, and stated that a 

policies and procedures approach for 

Rule 201 will ‘‘allow for a smoother 

transition into full implementation as 

well as a more flexible rule where 

triggers based on circuit breakers are 

being contemplated.’’ 376

Some commenters stated that any 

short sale price test restriction should be 

implemented with a policies and 

procedures approach as well as a 

straight prohibition approach.377 In 

supporting this combination approach, 

one such commenter noted that a 

policies and procedures approach 

would be consistent with Regulation 

NMS, permit trading centers the 

flexibility to tailor such policies and 

procedures to their particular markets, 

and permit broker-dealers to manage 

their order flow. At the same time, this 

commenter stated that a prohibition 

approach would be familiar to market 

participants and will give the 

Commission direct enforcement 

authority over violations.378

In contrast, some commenters stated 

that a short sale price test restriction, if 

adopted, should be implemented with a 

straight prohibition approach only. For 

example, one commenter stated that a 

straight prohibition approach is 

preferable because ‘‘[v]ariations in 

policies and procedures would lead 

some to believe certain market 

participants are less vigilant than 

others.’’ 379 Another said a straight 

prohibition approach would be easier 

for market participants to implement 

and understand.380 In addition, several 

commenters expressed support for a 

rule that would ‘‘prohibit’’ short selling 

on a down-bid (or down-tick) 381 or 

expressed that they did not support a 

policies and procedures approach.382

We recognize some commenters’ 

preference that a short sale price test 

restriction be adopted with a straight 

prohibition approach or in combination 

with a straight prohibition approach 

because it is the approach taken under 

former Rule 10a–1 and, therefore, is 

familiar to market participants. Further, 

some commenters noted there can be 

variations in policies and procedures. 

As discussed in more detail below, 

however, we have determined to adopt 

in Rule 201(b)(1) a policies and 

procedures approach rather than a 

straight prohibition approach (or a 

combination thereof) because this 

alternative is similar to the policies and 

procedures approach under Regulation 

NMS and, therefore, market participants 

are familiar with a policies and 

procedures approach and can build on 

such policies and procedures in 

implementing Rule 201. In addition, a 

policies and procedures approach 

provides flexibility to trading centers 

and their customers in managing order 

flow because it allows trading centers, 

together with their customers, to 

determine how to handle orders that are 

not immediately executable or 

displayable by the trading center 

because the order is impermissibly 

priced. This flexibility potentially 

allows for the more efficient functioning 

of the securities markets than a rule that 

applies a straight prohibition approach. 

In addition, we note that the 

Commission and SROs will carefully 

monitor whether trading centers’ 

policies and procedures are reasonably 

designed to prevent short selling in 

violation of Rule 201. To the extent that 

a trading center’s policies and 

procedures permit any execution or 

display of a short sale order not in 

accordance with the requirements of the 


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11260 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

383For example, if a trading center receives a 

short sale order priced at $47.00 when the current 

national best bid in the security is $47.00, the 

trading center could re-price the order at the 

permissible offer price of $47.01, and display the 

order for execution at this new limit price. 

384See Rule 201(b)(1)(iii)(A). 

385See Proposal, 74 FR at 18051. 

386See 17 CFR 242.602(b)(2). We note that to the 

extent that a short sale order is un-displayed, Rule 

201 will prevent the trading center from executing 

the order unless at the time of execution, the 

execution price complies with the Rule. 

387We note that such a conflict between the 

Quote Rule and Rule 201 should be relatively 

infrequent. If a displayed order to sell shares is at 

a price that is less than or equal to the national best 

bid, this would result in a crossed or locked market. 

In accordance with Rule 610(d) of Regulation NMS, 

each national securities exchange and national 

securities association must establish, maintain, and 

enforce written rules that require its members 

reasonably to avoid: Displaying quotations that lock 

or cross any protected quotation in an NMS stock, 

displaying manual quotations that lock or cross any 

quotation in an NMS stock disseminated pursuant 

to an effective national market system plan; are 

reasonably designed to assure reconciliation of 

locked or crossed quotations in an NMS stock; and 

prohibit its members from engaging in a pattern or 

practice of displaying quotations that lock or cross 

any protected quotation, or other quotation, in an 

NMS stock, unless an exception in such rules 

applies. See 17 CFR 242.610(d). 

388See, e.g., letter from Citadel et al. (Sept. 2009) 

(noting that a policies and procedures approach is 

favorable to a strict prohibition approach in that it 

‘‘would help promote compliance’’ and ‘‘address 

inadvertent violations’’ of Rule 201). 

389Letter from STA (June 2009). 

Rule, such trading center’s policies and 

procedures may not be reasonable and 

could subject the trading center to 

enforcement action. Further, any 

conduct by trading centers, or other 

market participants, that facilitates short 

sales in violation of Rule 201 could also 

lead to liability for aiding and abetting 

or causing a violation of Regulation 

SHO, as well as potential liability under 

the anti-fraud and anti-manipulation 

provisions of the Federal securities 

laws, including sections 9(a), 10(b), and 

15(c) of the Exchange Act, and Rule 

10b–5 thereunder. 

Under Rule 201(b)(1), a trading center 

will be required to have written policies 

and procedures reasonably designed to 

prevent the execution or display of short 

sale orders at a price that is less than or 

equal to the current national best bid 

when the price of a covered security 

decreases by 10% or more from the 

covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day. In 

addition, such policies and procedures 

must be reasonably designed to impose 

the short sale price test restriction of 

Rule 201(b)(1)(i) for the remainder of the 

day and the following day. Thus, a 

trading center’s policies and procedures 

must require that a trading center be 

able to determine when a covered 

security is subject to the short sale price 

test restriction of Rule 201. As discussed 

above, due to the importance of 

ensuring that the triggering of the 

requirements of Rule 201 is 

communicated to all market participants 

on a fair, impartial and timely basis, we 

believe it is appropriate for the listing 

market for the covered security to 

determine whether that security is 

subject to the requirements of Rule 201 

and, if it is, for such information to be 

disseminated to the market by the single 

plan processor. Thus, a trading center’s 

policies and procedures must be 

reasonably designed so that the trading 

center is able to obtain such information 

from the single plan processor if the 

covered security becomes subject to the 

Rule’s requirements. 

Upon receipt of a short sale order for 

a covered security that is subject to the 

Rule’s requirements, a trading center’s 

policies and procedures must ensure 

that the trading center is able to 

determine whether or not the short sale 

order can be executed or displayed in 

accordance with the provisions of Rule 

201(b)(1). If the order is marketable at a 

permissible price, the trading center 

may present the order for immediate 

execution or, if not immediately 

marketable, hold it for execution later at 

its specified price. 

Rule 201(b)(1) permits a trading 

center to display an order provided it is 

permissibly priced at the time the 

trading center displays the order. If an 

order is impermissibly priced, the 

trading center could, in accordance with 

policies and procedures reasonably 

designed to prevent the execution or 

display of a short sale order at a price 

that is less than or equal to the current 

national best bid, re-price the order 

upwards to the lowest permissible price 

and hold it for later execution at its new 

price or better.383 As quoted prices 

change, in accordance with Rule 

201(b)(1), a trading center may 

repeatedly re-price and display an order 

at the lowest permissible price down to 

the order’s original limit order price (or, 

if a market order, until the order is 

filled). 

In addition, paragraph (b)(1)(iii)(A) of 

Rule 201 requires a trading center’s 

policies and procedures to be 

reasonably designed to permit a trading 

center to execute a displayed short sale 

order at a price that is less than or equal 

to the current national best bid provided 

that, at the time the order was initially 

displayed by the trading center it was 

permissibly priced, i.e., not at a price 

that was less than or equal to the thencurrent national best bid.384 As 

discussed in the Proposal, this 

exception for properly displayed short 

sale orders will help avoid a conflict 

between Rule 201 and the ‘‘Quote Rule’’ 

under Rule 602 of Regulation NMS.385

The Quote Rule requires that, subject to 

certain exceptions, the broker-dealer 

responsible for communicating a 

quotation shall be obligated to execute 

any order to buy or sell presented to 

him, other than an odd lot order, at a 

price at least as favorable to such buyer 

or seller as the responsible brokerdealer’s published bid or published 

offer in any amount up to his published 

quotation size.386 Thus, pursuant to this 

exception, a trading center will be able 

to comply with the ‘‘firm quote’’ 

requirement of Rule 602 of Regulation 

NMS by executing a presented order to 

buy against its displayed offer to sell as 

long as the displayed offer to sell was 

permissibly priced under Rule 201 at 

the time it was first displayed, even if 

the execution of the transaction will be 

at a price that is less than or equal to 

the current national best bid at the time 

of execution.387

Because a trading center can re-price 

and display a previously impermissibly 

priced short sale order, the policies and 

procedures approach of Rule 201, as 

noted by one commenter,388 potentially 

allows for the more efficient functioning 

of the markets than a rule that applies 

a straight prohibition approach. Another 

commenter noted that while a 

prohibition approach could provide 

‘‘bright lines’’ as to the acceptability of 

trades, such an approach would result 

in an ‘‘inordinate number’’ of trades 

being cancelled by trading centers.389

Because trading centers will not have to 

reject or cancel impermissibly priced 

orders unless instructed to do so by the 

trading center’s customer submitting the 

short sale order, we believe that the 

policies and procedures approach of 

Rule 201 will provide more flexibility to 

trading centers and their customers and 

result in more efficient markets. We 

recognize, however, that some trading 

centers might not want to re-price an 

impermissibly priced short sale order. 

Thus, re-pricing is not a requirement 

under Rule 201. 

In addition, as noted by commenters, 

Rule 201 will provide trading centers 

and their customers with flexibility in 

determining how to handle orders that 

are not immediately executable or 

displayable by the trading center 

because the order is impermissibly 

priced. For example, trading centers can 

offer their customers various order types 

regarding the handling of impermissibly 

priced orders such that a trading center 

can either reject an impermissibly 

priced order or re-price the order 


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390See Rule 201(b)(2). 

391See letter from Wolverine. 

392See Regulation NMS Adopting Release, 70 FR 

37496; see also 17 CFR 242.611. 

393See id. 

394See Proposal, 74 FR at 18051–18052. 

395See, e.g., letter from Amer. Bankers Assoc.; 

letter from Schwab; letter from Credit Suisse (Sept. 

2009); letter from GE; letter from Goldman Sachs 

(June 2009); letter from NYSE Euronext (June 2009); 

letter from SIFMA (June 2009); letter from T. Rowe 

Price (June 2009); letter from Virtu Financial 

(noting familiarity with the policies and procedures 

approach of Regulation NMS should reduce the 

implementation costs of Rule 201). 

396See Proposal, 74 FR at 18052. 

397See Rule 201(b)(1)(iii)(B); see also infra 

Section III.B. (discussing short sale orders marked 

‘‘short exempt’’). 

398See infra Section III.B.; see also Rules 201(c) 

and 201(d) 

399See Proposal, 74 FR at 18052. 

400See letter from Jordan & Jordan. 

401See letter from STA (June 2009). We note that 

to the extent that a trading center is lax with respect 

to its supervision regarding Rule 201, such trading 

center could be subject to enforcement action. In 

addition, the Commission and SROs will monitor 

whether trading centers adequately monitor their 

compliance with Rule 201 as part of their 

examinations. 

402See Proposal, 74 FR at 18052. 

403See, e.g., letter from Glen Shipway (Sept. 

2009); see also letter from Credit Suisse (June 2009); 

letter from FIF (June 2009); letter from Goldman 

Sachs (June 2009); letter from Lime Brokerage (June 

2009); letter from RBC (June 2009); letter from 

SIFMA (June 2009); letter from Direct Edge (June 

2009); letter from BATS (Sept. 2009); letter from 

Credit Suisse (Sept. 2009); letter from Lime 

Brokerage (Sept. 2009); letter from Qtrade. 

404See, e.g., letter from FIF (June 2009); letter 

from RBC (June 2009); letter from NYSE Euronext 

(Sept. 2009). 

405See, e.g., letter from FIF (June 2009); letter 

from NYSE Euronext (Sept. 2009); see also letter 

from Direct Edge (June 2009). 

406Letter from RBC (June 2009). 

407Letter from FIF (June 2009). 

upwards to the lowest permissible price 

until the order is filled. 

As proposed and as adopted, Rule 

201(b)(2) requires trading centers to 

regularly surveil to ascertain the 

effectiveness of the policies and 

procedures required by Rule 201(b)(1) 

and to take prompt action to remedy 

deficiencies in such policies and 

procedures.390 As one commenter 

noted, this provision places trading 

centers in the position of determining 

whether an execution complies with the 

requirements of Rule 201(b)(1).391 Thus, 

short sale orders executed or displayed 

at impermissible prices will require the 

trading center that executed or 

displayed the short sales to take prompt 

action to remedy any deficiencies. 

The policies and procedures 

requirements of Rule 201(b)(1) are 

similar to those set forth under 

Regulation NMS.392 In accordance with 

Regulation NMS, trading centers must 

have in place written policies and 

procedures in connection with that 

Regulation’s Order Protection Rule.393

Thus, as we stated in the Proposal, 

trading centers are already familiar with 

establishing, maintaining, and enforcing 

trading-related policies and procedures, 

including programming their trading 

systems in accordance with such 

policies and procedures.394 Several 

commenters agreed with the 

Commission’s view that this familiarity 

should reduce the implementation time 

and costs of the Rule on trading 

centers.395

As discussed in the Proposal,396

similar to the requirements under 

Regulation NMS in connection with the 

Order Protection Rule, at a minimum, a 

trading center’s policies and procedures 

must enable a trading center to monitor, 

on a real-time basis, the national best 

bid, so as to determine the price at 

which the trading center may execute or 

display a short sale order. In addition, 

as proposed, a trading center must have 

policies and procedures reasonably 

designed to permit the execution or 

display of a short sale order of a covered 

security marked ‘‘short exempt’’ without 

regard to whether the order is at a price 

that is less than or equal to the current 

national best bid.397 A trading center’s 

policies and procedures will not, 

however, have to include mechanisms 

to determine on which provision a 

broker-dealer is relying in marking an 

order ‘‘short exempt’’ in accordance with 

paragraph (c) or (d) of Rule 201.398 We 

note that we did not receive comments 

that specifically discussed a trading 

center’s policies and procedures with 

respect to the monitoring, on a real-time 

basis, of the national best bid, or its 

policies and procedures related to 

orders marked ‘‘short exempt.’’ 

As discussed in the Proposal,399 a 

trading center must also take such steps 

as will be necessary to enable it to 

enforce its policies and procedures 

effectively. For example, trading centers 

may establish policies and procedures 

that include regular exception reports to 

evaluate their trading practices. If a 

trading center’s policies and procedures 

include exception reports, any such 

reports will need to be examined by the 

trading center to affirm that a trading 

center’s policies and procedures have 

been followed by its personnel and 

properly coded into its automated 

systems and, if not, promptly identify 

the reasons and take remedial action. In 

addition, we note that one commenter 

stated, and we agree, that as a means for 

developing an effective set of policies 

and procedures for compliance with the 

provisions of Rule 201, trading centers 

should conduct ‘‘regular post-trade 

analysis.’’ 400 Another commenter stated 

that significant oversight of policies and 

procedures is necessary to prevent 

trades from being directed toward 

venues that become known for lax 

supervision regarding compliance with 

Rule 201.401

To help ensure compliance with Rule 

201, as discussed in the Proposal,402

trading centers may also have policies 

and procedures that will enable a 

trading center to have a record 

identifying the current national best bid 

at the time of execution or display of a 

short sale order. Such ‘‘snapshots’’ of the 

market will aid SROs in evaluating a 

trading center’s written policies and 

procedures and compliance with Rule 

201. In addition, such snapshots will 

aid trading centers in verifying that a 

short sale order was priced in 

accordance with the provisions of 

proposed Rule 201(b)(1) if bid 

‘‘flickering,’’ i.e., rapid and repeated 

changes in the current national best bid 

during the period between identification 

of the current national best bid and the 

execution or display of the short sale 

order, creates confusion regarding 

whether or not the short sale order was 

executed or displayed at a permissible 

price. Snapshots of the market at the 

time of execution or display of an order 

will also aid trading centers in dealing 

with time lags in receiving data 

regarding the national best bid from 

different data sources. A trading center’s 

policies and procedures will be required 

to address latencies in obtaining data 

regarding the national best bid. In 

addition, to the extent such latencies 

occur, a trading center’s policies and 

procedures will need to implement 

reasonable steps to monitor such 

latencies on a continuing basis and take 

appropriate steps to address a problem 

should one develop. 

Some commenters requested 

clarification regarding whether, in 

determining the current national best 

bid, trading centers and/or brokerdealers, as applicable, may rely on the 

current national best bid as 

disseminated by proprietary feeds as 

well as the current national best bid 

disseminated by SIPs.403 In addition, 

several commenters indicated that 

trading centers and/or broker-dealers 

should be required to rely on one source 

of the national best bid,404 such as the 

current national best bid disseminated 

by SIPs.405 One commenter stated that 

‘‘[s]uch centralization would ensure 

consistent treatment of orders,’’ 406 and 

another commenter stated that it would 

‘‘eliminate redundant effort across 

broker-dealers and maintain uniformity 

across exchanges.’’ 407 Other 


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408Letter from Direct Edge (June 2009). 409Letter from Lime Brokerage (June 2009); see 

also letter from Lime Brokerage (Sept. 2009). 410Letter from Credit Suisse (June 2009). 

411See infra Section X.B.1.b.i. and Section 

X.B.1.b.ii. (discussing the potential impact of not 

mandating receipt of the current national best bid 

from one particular data feed on the 

implementation costs of Rule 201). 

412See Rule 201(b)(2). 

413We note that Rule 611(a)(2) of Regulation NMS 

contains a similar provision for trading centers. See 

17 CFR 242.611(a)(2). 

414See, e.g., Proposal, 74 FR at 18107, 18111. 

415See, e.g., Proposal, 74 FR at 18108, 18111– 

18112. We note that we proposed provisions 

relating to when a broker-dealer may mark a sale 

order as ‘‘short exempt.’’ In discussing the ‘‘short 

exempt’’ marking provisions in paragraphs (c) and 

(d) of Rule 201, we set forth below how and why 

the provisions, as adopted, differ from the 

provisions as set forth in the proposed circuit 

breaker with modified uptick rule because that rule 

most closely resembles Rule 201, as adopted. To 

that end, we note that the circumstances under 

which a sale order may be marked as ‘‘short exempt’’ 

are contained in paragraphs (c) and (d) of Rule 201, 

as adopted, whereas such circumstances were 

contained in paragraphs (d) and (e) of the proposed 

circuit breaker with modified uptick rule. 

416See Rule 201(b)(1)(iii)(B). 

417See Rule 201(c); 201(d). 

418See Proposal, 74 FR at 18054 (discussing how 

the ‘‘short exempt’’ marking provisions of the 

proposed modified uptick rule would parallel 

exceptions to former Rule 10a–1 and exemptive 

relief granted pursuant to that rule). 

419See Proposal, 74 FR at 18054–18059. 

420See, e.g., letter from SIFMA (Sept. 2009); letter 

from NYSE Euronext (Sept. 2009); letter from EWT 

(Sept. 2009); letter from GETCO (Sept. 2009). 

421See, e.g., letter from SIFMA (June 2009); letter 

from NYSE Euronext (June 2009). 

422See, e.g., letter from NYSE Euronext (June 

2009). 

423See, e.g., letter from SIFMA (June 2009); letter 

from RBC (June 2009); letter from Goldman Sachs 

(June 2009). We note that where a broker-dealer is 

commenters, however, questioned 

whether a unitary data feed would be 

beneficial, stating that ‘‘[e]ven utilizing 

a unitary data feed would be 

problematic, however, given the 

‘flickering’ that occurs,’’ 408 and that 

latencies in the receipt of data by market 

participants is of concern, ‘‘even if they 

are working with the same SIP or 

exchange feed.’’ 409 Another commenter 

noted concerns with respect to market 

disruption as a result of a single 

mandated data feed, stating that ‘‘the 

entire market could be disrupted 

significantly by a single point of failure 

at the aggregator.’’ 410

We recognize commenters’ concerns 

regarding the potential impact that 

receiving national best bid information 

from different data feeds might have on 

the application of Rule 201, including 

latencies that may occur in receiving 

such information from different data 

feeds.411 We do not believe, however, 

that it is appropriate to mandate that the 

receipt of the current national best bid 

must be from any one particular data 

feed because a policies and procedures 

approach that provides for a ‘‘snapshot’’ 

of the applicable current national best 

bid will allow trading centers to deal 

with time lags in receiving data 

regarding the national best bid from 

different data sources. Thus, Rule 201 

does not require modifications to how 

data feeds are currently received. 

As discussed in the Proposal, trading 

centers will be required to conduct 

regular surveillance of their policies and 

procedures under Rule 201. 

Specifically, Rule 201(b)(2) provides 

that a trading center must regularly 

surveil to ascertain the effectiveness of 

the policies and procedures required 

under the Rule and must take prompt 

action to remedy deficiencies in such 

policies and procedures.412 This 

provision will reinforce the requirement 

of Rule 201(b)(1) to maintain and 

enforce policies and procedures by 

explicitly assigning an affirmative 

responsibility to trading centers to 

surveil to ascertain the effectiveness of 

their policies and procedures.413 Thus, 

under the Rule, trading centers may not 

merely establish policies and 

procedures that may be reasonable 

when created and assume that such 

policies and procedures will continue to 

satisfy the requirements of Rule 201(b). 

Rather, trading centers will be required 

to regularly assess the continuing 

effectiveness of their policies and 

procedures and take prompt action 

when needed to remedy deficiencies. In 

particular, trading centers will need to 

engage in regular and periodic 

surveillance to determine whether 

executions or displays of short sale 

orders on impermissible bids are 

occurring without an applicable 

exception and whether the trading 

center has failed to implement and 

maintain policies and procedures that 

would have reasonably prevented such 

impermissible executions or displays of 

short sale orders. We note that, although 

discussed in the Proposal, we did not 

receive comments that specifically 

addressed the requirement that trading 

centers must conduct regular 

surveillance of their policies and 

procedures under Rule 201. 

B. ‘‘Short Exempt’’ Provisions of Rule 

201 

In the Proposal, we proposed that a 

trading center’s policies and procedures 

must be reasonably designed to permit 

the execution or display of a short sale 

order of a covered security marked 

‘‘short exempt’’ without regard to 

whether the order otherwise met the 

short sale price test restrictions.414 In 

addition, we included provisions in the 

Proposal that set out circumstances 

under which a broker-dealer could mark 

a sale order as ‘‘short exempt.’’ 415

After considering the comments and 

consistent with the Proposal, we have 

determined to include in Rule 

201(b)(1)(iii)(B) a requirement that a 

trading center’s policies and procedures 

must be reasonably designed to permit 

the execution or display of a short sale 

order of a covered security marked 

‘‘short exempt’’ without regard to 

whether the order is at a price that is 

less than or equal to the current national 

best bid.416 We have also determined to 

include in Rule 201(c) and (d) 

provisions that specify the 

circumstances under which a brokerdealer may mark certain sale orders as 

‘‘short exempt’’ so that a trading center 

may execute or display such orders 

without regard to whether they are 

priced in accordance with the 

requirements of Rule 201(b).417 The 

provisions contained in paragraphs (c) 

and (d) of Rule 201 are designed to 

promote the workability of the Rule, 

while at the same time furthering the 

Commission’s goals. 

The provisions contained in 

paragraph (d) of Rule 201 parallel 

exceptions to former Rule 10a–1 and 

exemptive relief granted pursuant to 

that rule.418 These exceptions and 

exemptions from former Rule 10a–1 had 

been in place for several years. As we 

noted in the Proposal, we believe that 

the rationales underlying these 

exceptions and exemptions from former 

Rule 10a–1 still hold true today.419

Moreover, due to the limited scope of 

these exceptions and exemptions, we do 

not believe that including them will 

undermine the Commission’s goals for 

adopting Rule 201. To the extent that 

commenters addressed our inclusion of 

these exceptions and exemptions, we 

discuss such comments below. 

A number of commenters stated that 

if we were to adopt a form of short sale 

price test restriction, it should include 

exceptions beyond those that we 

proposed in the Proposal and ReOpening Release, particularly if we were 

to adopt a short sale price test 

restriction based on the alternative 

uptick rule.420 Some commenters stated 

that the exceptions included in the 

Proposal and the Re-Opening Release 

were insufficient, stating that broader 

and/or additional exceptions would be 

necessary to, among other things, 

provide stability and liquidity to the 

market 421 and so as not to impair price 

discovery.422 For example, commenters 

requested exceptions for activity 

excepted from, or necessary to comply 

with, Regulation NMS.423 Commenters 


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routing an inter-market sweep order (‘‘ISO’’) solely 

to facilitate its execution of a customer’s long sale 

in compliance with Rule 611, such ISOs may be 

marked as ‘‘short exempt.’’ This will allow the 

destination trading centers to execute the orders 

against better-priced protected quotations without 

regard to the short sale price test restrictions of Rule 

201. Such ISOs must not be marked as ‘‘long.’’ 

424See, e.g., letter from SIFMA (June 2009); letter 

from NYSE Euronext (June 2009); letter from MFA 

(June 2009); letter from RBC (June 2009); letter from 

ICI (June 2009); letter from Citadel et al. (June 

2009); letter from Credit Suisse (June 2009); letter 

from ISDA; letter from NYSE Euronext (Sept. 2009); 

letter from Direct Edge (Sept. 2009); letter from 

Knight Capital (Sept. 2009); letter from Virtu 

Financial; letter from EWT (Sept. 2009). 

425See, e.g., letter from SIFMA (June 2009); see 

also letter from ISDA. 

426See, e.g., letter from SIFMA (June 2009). 

427See, e.g., letter from MFA (June 2009). 

428See, e.g., letter from MFA (June 2009); letter 

from Credit Suisse (June 2009); letter from ISDA; 

letter from John K. Robinson, General Counsel, P. 

Schoenfeld Asset Management LP, dated July 2, 

2009 (‘‘P. Schoenfeld Asset Management’’). 

429See, e.g., letter from SIFMA (June 2009); letter 

from RBC (June 2009). 

430See, e.g., letter from SIFMA (June 2009). 

431See, e.g., letter from RBC (June 2009); letter 

from Goldman Sachs (June 2009); letter from 

Goldman Sachs (Sept. 2009). 

432See, e.g., letter from SIFMA (June 2009); letter 

from RBC (June 2009); letter from Credit Suisse 

(June 2009); letter from EWT (Sept. 2009); letter 

from Goldman Sachs (June 2009); letter from 

Goldman Sachs (Sept. 2009). We also note that 

some commenters stated that we should include a 

marking error exception in connection with any 

short sale price test restriction we adopt. See, e.g., 

letter from RBC (June 2009); letter from SIFMA 

(June 2009). In connection with the proposed uptick 

rule, we proposed an exception for any sale by a 

broker-dealer of a covered security for an account 

in which it has no interest, pursuant to an order 

marked ‘‘long.’’ See Proposal, 74 FR at 18109. This 

exception would have applied where a brokerdealer effects a sale of an order marked ‘‘long’’ by 

another broker-dealer, but the order was mismarked such that it should have been marked as a 

short sale order. We do not believe that a similar 

exception is necessary under Rule 201 because Rule 

201, unlike the proposed uptick rule, is based on 

a policies and procedures approach rather than a 

straight prohibition approach. Thus, if a trading 

center’s written policies and procedures are 

reasonably designed to prevent the execution or 

display of a short sale order of a covered security 

at a price that is less than or equal to the current 

national best bid, it is unlikely that such trading 

center’s participation in any violation of the Rule 

due to a mis-marking by a broker-dealer could be 

knowing or reckless. See Proposal, 74 FR at 18063. 

As we stated in the Proposal, knowledge may be 

inferred where a broker-dealer has previously 

accepted orders marked ‘‘long’’ from the same 

counterparty that required borrowed shares for 

delivery or that resulted in a ‘‘fail to deliver.’’ See 

Proposal, 74 FR at 18063 n.212; see also 2004 

Regulation SHO Adopting Release, 69 FR at 48019, 

n.111 (stating that ‘‘[i]t may be unreasonable for a 

broker-dealer to treat a sale as long where orders 

marked ‘long’ from the same customer repeatedly 

require borrowed shares for delivery or result in 

‘fails to deliver.’ A broker-dealer also may not treat 

a sale as long if the broker-dealer knows or has 

reason to know that the customer borrowed shares 

being sold.’’). 

433See, e.g., letter from SIFMA (June 2009); letter 

from NYSE Euronext (June 2009); letter from Knight 

Capital (June 2009); letter from EWT (June 2009); 

letter from STANY (June 2009); letter from Credit 

Suisse (June 2009); letter from CBOE (June 2009); 

letter from RBC (June 2009); letter from Citadel et 

al. (June 2009); letter from NYSE Euronext (Sept. 

2009); letter from Direct Edge (Sept. 2009); letter 

from Virtu Financial; letter from EWT (Sept. 2009); 

letter from Credit Suisse (Sept. 2009). Some 

commenters also asked for an exception for, or 

clarification that, a short sale price test restriction 

would not apply to short sales pursuant to all 

options assignments and exercises. See, e.g., letter 

from SIFMA (June 2009); letter from CBOE (June 

2009); letter from Boston Options Exchange, 

Chicago Board Options Exchange, International 

Securities Exchange, Nasdaq Options Market, 

Nasdaq OMX PHLX, NYSE Amex, NYSE Arca and 

The Options Clearing Corporation, dated June 22, 

2009 (‘‘Boston Options Exchange et al. (June 

2009)’’); letter from RBC (June 2009). We note that 

because short sales pursuant to options exercises 

and assignments (whether or not automatic) are 

unrelated to the current national best bid, Rule 201 

does not apply to such sales. 

434See, e.g., letter from Paladin Investment; letter 

from Douglas M. Branson, W. Edward Sell Professor 

of Business Law, University of Pittsburgh School of 

Law, dated June 10, 2009 (‘‘Prof. Branson’’); letter 

from Wells Fargo (June 2009); letter from CPIC (June 

2009); letter from IAG; letter from IBC; letter from 

Jordan & Jordan; letter from Kelly Capital; letter 

from Lime Brokerage (June 2009); letter from 

Millennium; letter from Hudson River Trading; 

letter from Lime Brokerage (Sept. 2009); letter from 

Glen Shipway (Sept. 2009); letter from Qtrade. 

435See, e.g., letter from Paladin Investment; letter 

from Prof. Branson; letter from CPIC (June 2009); 

letter from Wells Fargo (June 2009); letter from IBC 

(June 2009); letter from Jordan & Jordan; letter from 

Lime Brokerage (June 2009); letter from 

Millennium. 

436Letter from Prof. Branson. 

437Letter from CPIC (June 2009). 

438See, e.g., letter from ICI (June 2009). 

439See letter from ICI (June 2009). 

440Letter from ICI (June 2009). 

also requested an exception for 

exchange traded funds (‘‘ETFs’’) and 

similar broad-based indices and baskets 

of stocks.424 Some commenters 

requested exceptions for short sales in 

connection with the facilitation of 

capital raising transactions, through 

stock issuances and convertible 

instruments, by issuers and selling 

shareholders.425 In connection with 

convertible instruments, commenters 

stated that there needs to be an 

exception from any short sale price test 

restriction to allow investors purchasing 

a convertible instrument to hedge their 

long exposure.426 Other exceptions 

requested relate to automated electronic 

buy-side trading,427 bona fide hedging 

generally,428 ‘‘exchange for physicals’’ 

transactions,429 index expirations,430

and market on open 431 and market on 

close orders.432

In addition, as discussed in more 

detail in Section III.B.9. below, 

commenters requested an exception for 

short sales by market makers engaged in 

bona fide market making activities, 

including market makers in OTC and 

listed derivatives, options, convertibles 

and ETFs, and block positioners.433

Several commenters, however, stated 

that the Commission should be cautious 

of adopting numerous exceptions and 

discussed problems that may arise from 

adopting a short sale price test 

restriction with many or complex 

exceptions, such as additional 

implementation difficulties, greater 

compliance costs, lack of uniformity 

that may cause unfair application of the 

rule, increased opportunities for gaming 

and abuse, and, overall, a less effective 

rule that only applies to a limited 

numbers of short sales.434 Commenters 

stated that a short sale price test 

restriction with numerous exceptions 

will create loopholes and a rule that is 

easy to circumvent, thus resulting in a 

rule that applies to little trading activity 

and fails to serve the purpose for which 

it was adopted.435 One commenter 

stated that emphasis should first be 

placed on ‘‘a sales price restriction on 

short sales, its possible effects on 

helping restore a measure of price 

continuity, and its possible deleterious 

effects on informational efficiency 

* * * with exceptions to be evolved as 

time goes by and as the industry 

petitions for them.’’ 436 Another 

commenter noted that a short sale price 

test restriction with many exceptions 

will impose additional burdens on the 

Commission’s inspection staff, which 

will be tasked with ‘‘retracing 

transactions to discern which were 

eligible for exceptions, which were not, 

and if any were disguised.’’ 437

In addition, one commenter noted 

that the exceptions that accompany any 

price test restriction will be driven by 

the approach adopted.438 This 

commenter noted that a permanent, 

market-wide approach may necessitate 

more exceptions than one triggered by a 

temporary circuit breaker.439 This 

commenter further noted that ‘‘a circuit 

breaker short sale ban may necessitate 

more or different exceptions than a 

circuit breaker that still permits short 

selling to occur.’’ 440

Although, as noted above, 

commenters requested a variety of 

exceptions in addition to those set forth 

in the Proposal, at this time, we have 

determined to include in Rule 201(c) 

and (d) only the ‘‘short exempt’’ marking 

provisions that we proposed. We believe 

that these limited provisions will help 

ensure the smooth functioning of the 

markets while at the same time not 

undermining our goals for adopting 

Rule 201. 

In addition, we note that a number of 

commenters that discussed the need for 

additional and/or broader exceptions 

referenced the absence of some of the 

requested exceptions during the Short 


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441See supra Section II.C. (discussing the Short 

Sale Ban Emergency Order). 442See, e.g., letter from SIFMA (June 2009); letter 

from RBC (June 2009); letter from CPIC (June 2009); 

letter from Goldman Sachs (June 2009); letter from 

MFA (June 2009). 443See, e.g., letter from RBC (June 2009) 

(attaching and discussing letter from Philip Taylor 

and Scott DeCanio, Directors, RBC Capital Markets 

Corp., dated Sept. 25, 2008); letter from CPIC (June 

2009); letter from Goldman Sachs (June 2009); letter 

from SIFMA (June 2009); letter from MFA (June 

2009). 444See, e.g., letter from MFA (June 2009). 445See supra Section III.A.5. (discussing analyses 

regarding the number of securities that will trigger 

the circuit breaker on an average day). 

446See, e.g., letter from Racquel L. Russell, Esq., 

Branch Chief, Office of Trading Practices and 

Processing, Division of Market Regulation, to 

George T. Simon, Esq., Foley & Lardner LLP, dated 

June 21, 2006; letter from James A. Brigagliano, 

Assistant Director, Division of Market Regulation, to 

Claire P. McGrath, Vice President and Special 

Counsel, Amex, dated Aug. 17, 2001. We note that 

each of the approvals for relief under former Rule 

10a–1 was conditioned on the ETF meeting certain 

enumerated conditions, either specific to certain 

products or included as part of a broader ‘‘class 

exemption.’’ 

447See, e.g., Investment Company Institute, 2009 

Investment Company Fact Book, (49 ed.); National 

Stock Exchange, NSX Annouces Record January 

ETF Trading Volume Surpasses $2.2 Trillion, News 

& Views, Feb. 14, 2008 available at http:// 

www.nsx.com/content/news/story/90. 

448See, e.g., letter from Robert E. Koza, dated May 

4, 2009; letter from Robert W. Angove, President, 

Santiam Mountain Investment, dated May 5, 2009; 

letter from David Tarrell, dated May 6, 2009; letter 

from Mitchel Schlesinger, Principal, FBB Capital 

Partners, dated May 8, 2009; letter from Paladin 

Investment; letter from Shelby Frisch, dated May 

15, 2009; letter from Robert Cannataro, dated June 

5, 2009; letter from High Street Advisors; letter from 

European Investors (June 2009); letter from 

Ascendant Capital; letter from Kelly Capital; letter 

from European Investors (Sept. 2009); letter from 

NAREIT. 

449See Rule 201(c). 

450We have also made technical modifications to 

Rule 201(c) to reflect that it is the broker-dealer 

submitting the order that must also mark the order 

as ‘‘short exempt’’ and to reflect the difference in 

operation of the alternative uptick rule from the 

proposed circuit breaker with modified uptick rule. 

451See Rule 201(c). 

452See Proposal, 74 FR at 18073–18074. 

453See, e.g., letter from SIFMA (June 2009); letter 

from BATS (May 2009); letter from EWT (Sept. 

2009); letter from Qtrade. 

454See letter from EWT (Sept. 2009). 

455See letter from Lime Brokerage (June 2009). 

Sale Ban Emergency Order 441 and the 

effect on market quality of the Short 

Sale Ban Emergency Order in the 

absence of such exceptions.442 These 

commenters noted the absence from the 

Short Sale Ban Emergency Order of 

exceptions for certain convertible 

arbitrage or hedging activities 443 and for 

automated electronic buy-side 

trading.444 We note, however, that 

unlike the Short Sale Ban Emergency 

Order, which halted all short selling in 

the securities subject to the emergency 

order for its three-week duration, the 

short sale restrictions of Rule 201 will 

apply for a limited duration and will 

only apply to a covered security if such 

security has experienced a significant 

intra-day price decline (of 10% or 

more). Thus, Rule 201 will not impact 

trading in the vast majority of covered 

securities on an average day.445 If a 

covered security becomes subject to the 

short sale price test restrictions of Rule 

201 it will occur because that security’s 

price is experiencing extreme 

downward price pressure and it is these 

securities that Rule 201 is designed to 

address by helping to prevent short 

selling from being used as a tool to 

exacerbate its price decline. If, as 

requested by commenters, we were to 

expand the scope of short selling 

activities that would not be subject to 

Rule 201, we are concerned such 

exceptions could undermine this goal of 

Rule 201. 

In addition, although short selling 

will be restricted if the price of a 

covered security decreases by 10% or 

more, in contrast to securities subject to 

the Short Sale Ban Emergency Order, 

Rule 201 will still permit short selling 

in the covered security even when the 

restriction is in place, although at a 

price above the current national best 

bid. Thus, short sellers engaged in the 

various activities for which commenters 

are requesting additional or expanded 

exceptions will continue to be able to 

sell short even when the price test 

restriction is in effect. In addition, the 

restriction on short selling will be in 

place for a limited duration, that is, the 

remainder of the day on which the 

circuit beaker level is triggered and the 

following day, further reducing the need 

for additional exceptions. 

We also note that with respect to 

ETFs, although under former Rule 

10a–1 the Commission issued limited 

exemptive relief for certain ETFs via 

authority delegated to the Staff, that 

relief was issued on a case-by-case basis 

for a permanent, market-wide short sale 

price test rule.446 Since the elimination 

of former Rule 10a–1, there has been a 

significant growth in ETF trading 

volume and an expansion in different 

structures of ETF products.447

Commenters who opposed an exception 

for these products noted the growth in 

ETF trading volume and new ETF 

products among the reasons not to 

provide an exception for ETFs from any 

short sale price test restriction.448 We do 

not believe that a general ETF exception 

is necessary because the circuit breaker 

approach of Rule 201 will generally 

result in the majority of ETFs not being 

subject to its short sale price test 

restrictions because ETFs are generally 

diversified, whereas single stocks are 

not. If such securities do become subject 

to its restrictions, the restrictions will be 

in place for a limited duration and will 

continue to permit short selling even 

when in place. 

For the reasons discussed above, at 

this time we believe it is appropriate to 

limit the scope and number of 

circumstances under which a brokerdealer may mark a sell order as ‘‘short 

exempt.’’ We recognize, however, the 

concerns raised by commenters and 

note that to help ensure the future 

workability of Rule 201, or for other 

reasons, we may reconsider whether 

certain exceptions or exemptions are 

warranted. 

1. Broker-Dealer Provision 

After the 10% circuit breaker is 

triggered for a covered security, Rule 

201(c) will permit a broker-dealer 

submitting a short sale order for the 

covered security to a trading center to 

mark the order ‘‘short exempt’’ if the 

broker-dealer identifies the order as 

being at a price above the current 

national best bid at the time of 

submission.449 We have modified this 

provision from the Proposal to clarify 

that a broker-dealer may only mark an 

order as ‘‘short exempt’’ after the circuit 

breaker has been triggered for a covered 

security.450 In addition, consistent with 

the Proposal, Rule 201(c) requires any 

broker-dealer relying on this provision 

to establish, maintain, and enforce 

written policies and procedures that are 

reasonably designed to prevent the 

incorrect identification of orders as 

being priced in accordance with the 

requirements of Rule 201(c) and 

requires the broker-dealer regularly to 

surveil to ascertain the effectiveness of 

these policies and procedures, and to 

take prompt action to remedy 

deficiencies.451

As discussed above, in response to 

our request for comment,452 several 

commenters stated that if we were to 

adopt a short sale price test restriction, 

it should include a broker-dealer 

provision.453 One commenter stated that 

the broker-dealer provision is necessary 

to prevent contradictory requirements 

for broker-dealers under Regulation 

NMS and Regulation SHO.454

Other commenters disagreed, stating 

that they do not think that the brokerdealer provision is necessary. One 

commenter pointed to problems that 

may arise from the provision, such as 

increasing the potential for confusion in 

the marketplace, creating an unlevel 

playing field, and penalizing 

participants who have the most efficient 

market data infrastructures.455

Commenters also noted that the brokerdealer provision has the potential to 


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456See letter from STANY (June 2009); letter from 

Lime Brokerage (June 2009); letter from NSCP. 

457Letter from NSCP. 

458See Proposal, 74 FR at 18054–18055. 

459See letter from Lime Brokerage (June 2009). 

460See Rule 201(c). 

461See letter from STA (Sept. 2009). 

462See Rule 201(c)(1). 

463Such policies and procedures should be 

similar to those required for trading centers 

complying with paragraph (b) of Rule 201. 

464We also note that it would be a violation of 

Rule 200(g) to mark a short sale order as ‘‘short 

exempt’’ when a security is not subject to the 

alternative uptick rule. 

465See Rule 201(c)(2). 

466See id. 

467We note that Rule 611(a)(2) of Regulation NMS 

contains a similar surveillance provision. See 17 

CFR 242.611(a)(2). 

greatly increase costs to the industry 

and to adversely impact the ability of 

smaller broker-dealers to compete.456

One commenter stated that, what it 

termed a ‘‘requirement,’’ that brokerdealers maintain ‘‘snapshots,’’ may 

impose significant costs, including costs 

associated with technology, data 

storage, and surveillance and review 

and that the Commission’s cost 

estimates of over $100,000 per brokerdealer ‘‘seem to underestimate the cost 

to large, full service broker-dealers, 

since the volume of orders handled by 

these firms are likely to lead to 

significantly greater technology and 

storage costs alone as well as more 

frequent reviews.’’ 457 We note that, as 

discussed in the Proposal and in more 

detail below, we believe that 

‘‘snapshots’’ of the market could aid 

broker-dealers in complying with Rule 

201(c), but Rule 201 does not ‘‘require’’ 

such snapshots.458

Another commenter expressed the 

belief that a majority of broker-dealer 

participants that service customer 

orders will want to take advantage of the 

provision to remain competitive and to 

ensure that client orders receive the best 

possible execution, which will result in 

many non-trading center participants 

becoming subject to market data 

‘‘snapshotting’’ and other compliancerelated changes.459

After considering the comments, as 

discussed above, we have determined to 

include in Rule 201(c) a provision to 

permit a broker-dealer submitting a 

short sale order for a covered security to 

a trading center after the circuit breaker 

is triggered for a covered security, to 

mark the order ‘‘short exempt’’ if the 

broker-dealer identifies the order as 

being at a price above the current 

national best bid at the time of 

submission.460 Rule 201(c) will provide 

broker-dealers with the option to 

manage their order flow, rather than 

having to always rely on their trading 

centers to manage their order flow on 

their behalf. 

Although we recognize commenters’ 

concerns, including regarding potential 

increased costs to the industry with 

respect to technology, data storage and 

surveillance, we note that most brokerdealers may already have developed 

‘‘snapshot’’ capability in connection 

with Regulation NMS’s Order Protection 

Rule. We also agree that ‘‘snapshot’’ 

capability will require data storage by 

broker-dealers; however, as noted by 

one commenter,461 because the 

alternative uptick rule does not require 

sequencing of the national best bid, the 

data storage requirements under the 

alternative uptick rule are lower than 

they would be under the proposed 

modified uptick rule or the proposed 

uptick rule. In addition, we believe that 

the costs of a policies and procedures 

approach that provides for a snapshot of 

the applicable current national best bid 

of the security are justified because 

snapshot capability will aid brokerdealers in dealing with time lags in 

receiving data regarding the national 

best bid from different data sources and 

facilitate verification of whether a short 

sale order was executed or displayed at 

a permissible price. 

In addition, we note that this 

provision will not undermine our goals 

for short sale regulation because any 

broker-dealer marking an order ‘‘short 

exempt’’ in accordance with this 

provision must have mechanisms in 

place to enable the broker-dealer to 

identify the short sale order as priced in 

accordance with the provisions of Rule 

201(c). In accordance with Rule 

201(c)(1), these mechanisms must 

include written policies and procedures 

reasonably designed to prevent the 

incorrect identification of orders as 

being permissibly priced in accordance 

with the provisions of 201(c).462 Thus, 

although a broker-dealer relying on this 

provision in marking an order ‘‘short 

exempt’’ will not need to identify the 

order as permissibly priced to the 

trading center, it will need to have 

written policies and procedures in place 

reasonably designed to enable it to 

identify that an order was permissibly 

priced at the time of submission of the 

order to a trading center.463 We believe 

these policies and procedures will 

further our goals by helping to ensure 

that short sale orders are not incorrectly 

marked as ‘‘short exempt,’’ and, thereby, 

helping to preclude impermissible short 

sales from being executed when the 

price test restriction has been 

triggered.464

At a minimum, a broker-dealer’s 

policies and procedures must be 

reasonably designed to enable a brokerdealer to monitor, on a real-time basis, 

the national best bid, so as to determine 

the price at which the broker-dealer may 

submit a short sale order to a trading 

center in compliance with the 

provisions of Rule 201(c). To ensure 

compliance with Rule 201(c), a brokerdealer may also have policies and 

procedures that will enable it to have a 

record identifying the current national 

best bid at the time of submission of a 

short sale order. Such ‘‘snapshots’’ of the 

market will also aid SROs in evaluating 

a broker-dealer’s written policies and 

procedures and compliance with Rule 

201(c). In addition, such snapshots will 

aid broker-dealers in verifying that a 

short sale order was priced in 

accordance with the provisions of Rule 

201(c) if bid flickering during the period 

between identification of the current 

national best bid and the submission of 

the short sale order to a trading center 

creates confusion regarding whether or 

not the short sale order was submitted 

at a permissible price. Snapshots of the 

market at the time of submission of an 

order will also aid broker-dealers in 

dealing with time lags in receiving data 

regarding the national best bid from 

different data sources. Under Rule 

201(c)(2), latencies in obtaining data 

regarding the national best bid will need 

to be addressed.465 In addition, to the 

extent such latencies occur, a brokerdealer’s policies and procedures will 

need to implement reasonable steps to 

monitor such latencies on a continuing 

basis and take appropriate steps to 

address a problem should one develop. 

Surveillance will be a required part of 

a broker-dealer’s satisfaction of its legal 

obligations. Rule 201(c)(2) provides that 

a broker-dealer must regularly surveil to 

ascertain the effectiveness of the 

policies and procedures required under 

Rule 201(c)(1) and must take prompt 

action to remedy deficiencies in such 

policies and procedures.466 This 

provision will reinforce the on-going 

maintenance and enforcement 

requirements of Rule 201(c) by 

explicitly assigning an affirmative 

responsibility to broker-dealers to 

surveil to ascertain the effectiveness of 

their policies and procedures.467 Thus, 

under paragraphs (c)(1) and (c)(2) of 

Rule 201, broker-dealers may not merely 

establish policies and procedures that 

may be reasonable when created and 

assume that such policies and 

procedures will continue to satisfy the 

requirements of the Rule. Rather, 

broker-dealers will be required to 

regularly assess the continuing 

effectiveness of their procedures and 


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468See Rule 201(c)(2). 

469We note that we have modified paragraph (d) 

of Rule 201 from that provision as proposed to 

reflect that a broker-dealer may only mark an order 

as ‘‘short exempt’’ pursuant to the provisions in 

paragraph (d) after the circuit breaker has been 

triggered for a covered security. 

470Subsection (e)(1) of former Rule 10a–1 

contained an exception relating to a seller’s delay 

in the delivery of securities. The provision in Rule 

201(d)(1) parallels the exception in former Rule 

10a–1(e)(1). 

471See 17 CFR 242.200(a)–(f) (defining the term 

‘‘deemed to own’’). 

472See Rule 201(d)(1). This provision is also 

consistent with Rule 203(b)(2)(ii) and Rule 204(a)(2) 

of Regulation SHO. Rule 203(b)(2)(ii) provides an 

exception from the ‘‘locate’’ requirement of Rule 

203(b)(1) of Regulation SHO for ‘‘[a]ny sale of a 

security that a person is deemed to own pursuant 

to § 242.200, provided that the broker or dealer has 

been reasonably informed that the person intends 

to deliver such security as soon as all restrictions 

on delivery have been removed * * *’’. Rule 

204(a)(2) provides additional time to close out fails 

to deliver ‘‘[i]f a participant of a registered clearing 

agency has a fail to deliver position at a registered 

clearing agency in any equity security resulting 

from a sale of a security that person is deemed to 

own pursuant to § 242.200 and that such person 

intends to deliver as soon as all restrictions on 

delivery have been removed, the participant shall, 

by no later than the beginning of regular trading 

hours on the thirty-fifth consecutive calendar day 

following the trade date for the transaction, 

immediately close out the fail to deliver position by 

purchasing securities of like kind and quantity.’’ We 

note that to the extent that an exception to 

Regulation SHO’s locate requirement applies to a 

short sale order, such order must be marked ‘‘short’’ 

in accordance with Rule 200(g) of Regulation SHO 

unless the order can be marked ‘‘short exempt’’ 

pursuant to Rule 200(g)(2) of Regulation SHO. 

473See 17 CFR 242.200(g)(1). 

474 17 CFR 230.144. 

475See, e.g., letter from BATS (May 2009); letter 

from SIFMA (June 2009); letter from Jesse D. Hill, 

Director of Regulatory Relations, Office of 

Regulatory Counsel, Edward Jones, dated Sept. 21, 

2009 (‘‘Edward Jones’’); letter from NYSE Euronext 

(Sept. 2009). 

476Such circumstances could include the 

situation where a convertible security, option or 

warrant has been tendered for conversion or 

exchange, but the underlying security is not 

reasonably expected to be received by settlement 

date. See Regulation SHO Adopting Release, 69 FR 

at 48015; see also 17 CFR 242.200(b) (defining when 

a person shall be ‘‘deemed to own’’ a security). In 

addition, we understand that sellers that own 

restricted equity securities that wish to sell such 

securities pursuant to an effective registration 

statement pursuant to Rule 415 under the Securities 

Act of 1933 experience similar types of potential 

settlement delays as those persons selling Rule 144 

securities. Thus sales of such securities pursuant to 

Rule 415 may be marked ‘‘short exempt’’ in 

accordance with Rule 201(d)(1) if the securities 

subject to the sale are outstanding at the time they 

are sold, and the sale occurs after the registration 

statement has become effective. In addition, and as 

noted by one commenter, we understand that sales 

made pursuant to broker-dealer assisted cashless 

exercises of compensatory options to purchase a 

company’s securities may result in potential 

settlement delays that would otherwise require the 

seller to mark such sales ‘‘short’’ pursuant to the 

definition under Rule 200(g) of Regulation SHO. 

Such sales may be marked ‘‘short exempt’’ pursuant 

to Rule 201(d)(1). See Rule 204 Adopting Release, 

74 FR at 38277, n.141; see also 17 CFR 230.415. 

477Rule 201(a)(5) provides that the term ‘‘odd lot’’ 

shall have the same meaning as in 17 CFR 

242.600(b)(49). Rule 600(b)(49) defines an ‘‘odd lot’’ 

as ‘‘an order for the purchase or sale of an NMS 

stock in an amount less than a round lot.’’ 17 CFR 

242.600(b)(49). 

478See Rule 201(d)(2). SRO rules define a ‘‘unit 

of trading’’ or ‘‘normal unit of trading,’’ and the term 

generally means 100 shares, i.e., a round lot. For 

example, FINRA Rule 6320A(a)(7) defines a ‘‘normal 

unit of trading’’ to mean ‘‘100 shares of a security 

unless, with respect to a particular security, FINRA 

determines that a normal unit of trading shall 

constitute other than 100 shares.’’ NYSE Rule 55 

states that ‘‘[t]he unit of trading in stocks shall be 

100 shares, except that in the case of certain stocks 

designated by the Exchange the unit of trading shall 

be such lesser number of shares as may be 

determined by the Exchange, with respect to each 

stock so designated. * * *’’ 

take prompt action when needed to 

remedy deficiencies. In particular, each 

broker-dealer will need to engage in 

regular and periodic surveillance to 

determine whether it is submitting short 

sale orders marked ‘‘short exempt’’ 

without complying with the 

requirements of Rule 201(c) and 

whether the broker-dealer has failed to 

implement and maintain policies and 

procedures that would have reasonably 

prevented such impermissible 

submissions. 

A broker-dealer will also need to take 

such steps as will be necessary to enable 

it to enforce its policies and procedures 

effectively.468 For example, brokerdealers may establish policies and 

procedures that include regular 

exception reports to evaluate their 

trading practices. If a broker-dealer’s 

policies and procedures include 

exception reports, any such reports will 

need to be examined to affirm that a 

broker-dealer’s policies and procedures 

have been followed by its personnel and 

properly coded into its automated 

systems and, if not, promptly identify 

the reasons and take remedial action. 

2. Seller’s Delay in Delivery 469

We are adopting Rule 201(d)(1) 

without modification to provide that a 

broker-dealer may mark an order ‘‘short 

exempt’’ if the broker-dealer has a 

reasonable basis to believe that the 

seller owns the security being sold and 

that the seller intends to deliver the 

security as soon as all restrictions on 

delivery have been removed.470

Specifically, Rule 201(d)(1) provides 

that a broker-dealer may mark a short 

sale order ‘‘short exempt’’ if the brokerdealer has a reasonable basis to believe 

the short sale order of a covered security 

is by a person that is ‘‘deemed to own’’ 

the covered security pursuant to Rule 

200 of Regulation SHO,471 provided that 

the person intends to deliver the 

security as soon as all restrictions on 

delivery have been removed.472

Rule 200(g)(1) of Regulation SHO 

provides that a sale can be marked 

‘‘long’’ only if the seller is deemed to 

own the security being sold and either 

(i) the security is in the broker-dealer’s 

physical possession or control; or (ii) it 

is reasonably expected that the security 

will be in the broker-dealer’s possession 

or control by settlement of the 

transaction.473 Thus, even where a seller 

owns a security, if delivery will be 

delayed, such as in the sale of formerly 

restricted securities pursuant to Rule 

144 of the Securities Act of 1933,474 or 

where a convertible security, option, or 

warrant has been tendered for 

conversion or exchange, but the 

underlying security is not reasonably 

expected to be received by settlement 

date, such sales must be marked ‘‘short.’’ 

As a result, Rule 201(d)(1) is necessary 

to allow for sales of securities that, 

although owned, are subject to the 

provisions of Regulation SHO governing 

short sales due solely to the seller being 

unable to deliver the covered security to 

its broker-dealer prior to settlement 

based on circumstances outside the 

seller’s control. In response to our 

request for comment, commenters that 

specifically addressed this provision 

were supportive of it.475

After considering the comments, we 

believe it is appropriate to adopt Rule 

201(d)(1) as proposed. This provision is 

consistent with the goals of Rule 201 

and with other provisions of Regulation 

SHO related to sales of securities that 

although owned are subject to the 

provisions of Regulation SHO governing 

short sales. Thus, we are adopting Rule 

201(d)(1) such that the provision will 

apply to the sale of any covered 

securities that a seller is deemed to own 

pursuant to Rule 200 of Regulation SHO 

and cannot deliver by settlement date 

based on circumstances outside the 

seller’s control, provided the seller 

intends to deliver the securities as soon 

as all restrictions on delivery have been 

removed.476

3. Odd Lot Transactions 

We are adopting in Rule 201(d)(2), 

without modification, the ability for a 

broker-dealer to mark a short sale order 

as ‘‘short exempt’’ if the broker-dealer 

has a reasonable basis to believe that the 

short sale order is by a market maker to 

offset a customer odd-lot 477 order or to 

liquidate an odd-lot position that 

changes such broker-dealer’s position by 

no more than a unit of trading.478 In 

response to our request for comment, 

commenters that specifically addressed 

this provision were supportive of 


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479See, e.g., letter from BATS (May 2009); letter 

from SIFMA (June 2009); letter from NYSE 

Euronext (Sept. 2009). 

480See Former Rule 10a–1 Adopting Release, 3 

FR 213. 

481The Commission initially adopted three 

exceptions for odd-lot transactions. While the first 

one, excepting all odd-lot transactions, seemed to 

make other odd-lot exceptions unnecessary, the 

1938 adopting release included all three exceptions 

without discussion. See Former Rule 10a–1 

Adopting Release, 3 FR 213. 

482See Exchange Act Release No. 11030 (Sept. 27, 

1974), 39 FR 35570 (Oct. 2, 1974) (‘‘1974 Release’’). 

483Section 3(a)(38) of the Exchange Act defines 

the term ‘‘market maker,’’ and includes specialists. 

See 15 U.S.C. 78c(a)(38). 

484See, e.g., letter from SIFMA (June 2009) 

(stating that the exception should cover convertible 

arbitrage strategies); letter from AIMA (stating that 

the provisions relating to domestic and 

international arbitrage are too narrow in scope, and 

that they should be broadened to include: (1) Bona 

fide strategies and risk management tools that 

provide necessary market liquidity and efficiency, 

and (2) other forms of convertible securities that 

differ from standard American-style convertibles); 

letter from Credit Suisse (June 2009); letter from 

Citadel et al. (June 2009) (stating that the exception 

should be broadened to cover any transaction in 

connection with domestic arbitrage, even if not 

contemporaneous in time); letter from RBC (June 

2009) (stating that the exception should 

accommodate convertible arbitrage strategies as 

well as arbitrage strategies that do not meet the 

contemporaneous requirement of this provision); 

letter from MFA (June 2009) (stating that we should 

broaden the domestic arbitrage provision to include 

‘‘bona fide hedging transactions,’’ such as risk 

arbitrage and statistical arbitrage transactions). 

485See letter from Hudson River Trading; see also 

letter from Liquidnet (expressing concern regarding 

the complexity of the arbitrage and other exceptions 

to a short sale price test restriction and concern that 

the exceptions could result in different rules 

applying to different industry participants). 

486See Exchange Act Release No. 1645 (Apr. 8, 

1938). 

487See 1999 Concept Release, 64 FR 57996. 

488 1999 Concept Release, 64 FR at 58001, n.54 

and accompanying text (discussing the domestic 

arbitrage exception under former Rule 10a–1). See 

also Section 220.6(b) of Regulation T, which states 

that the term ‘‘bona fide arbitrage’’ means: ‘‘(1) A 

purchase or sale of a security in one market together 

with an offsetting sale or purchase of the same 

security in a different market at as nearly the same 

time as practicable for the purpose of taking 

advantage of a difference in prices in the two 

markets; or (2) A purchase of a security which is, 

without restriction other than the payment of 

money, exchangeable or convertible within 90 

calendar days of the purchase into a second security 

together with an offsetting sale of the second 

security at or about the same time, for the purpose 

of taking advantage of a concurrent disparity in the 

prices of the two securities.’’ 12 CFR 220.6(b). See 

also Exchange Act Release No. 15533 (Jan. 29, 

1979), 44 FR 6084 (Jan. 31, 1979) (‘‘1979 Release’’) 

(interpretation concerning the application of 

Exchange Act Section 11(a)(1) to bona fide 

arbitrage). 

inclusion of this provision in any short 

sale price test restriction.479

Under former Rule 10a–1, an 

exception for certain odd-lot 

transactions was created in an effort to 

reduce the burden and inconvenience 

that short sale restrictions would place 

on odd-lot transactions. In 1938, the 

Commission found that odd-lot 

transactions played a very minor role in 

potential manipulation by short 

selling.480 Initially, sales of odd-lots 

were not subject to the restrictions of 

former Rule 10a–1.481 However, the 

Commission became concerned over the 

volume of odd-lot transactions, which 

possibly indicated that the exception 

was being used to circumvent the rule. 

As a result, the exception was changed 

to include the two odd lot exceptions 

described below.482

Former Rule 10a–1(e)(3) contained a 

limited exception that allowed short 

sales by odd-lot dealers registered in the 

security and by third market makers of 

covered securities to fill customer odd 

lot orders. Former Rule 10a–1(e)(4) 

provided an exception under the rule 

for any sale to liquidate an odd-lot 

position by a single round lot sell order 

that changed the broker-dealer’s 

position by no more than a unit of 

trading. 

Rule 201(d)(2), as proposed and 

adopted, generally parallels the 

exceptions in subsections (e)(3) and 

(e)(4) of former Rule 10a–1. In addition, 

however, as proposed, we are extending 

the provision to cover all market makers 

acting in the capacity of an odd-lot 

dealer. When former Rule 10a–1 was 

adopted, odd-lot dealers dealt 

exclusively with odd-lot transactions, 

and were so registered. Today, market 

makers registered in a security typically 

also act as odd-lot dealers of the 

security. Thus, as proposed, we are 

broadening the provision in Rule 

201(d)(2) to all broker-dealers acting as 

‘‘market makers’’ in odd lots.483

We believe that a provision that will 

allow a broker-dealer to mark a short 

sale order ‘‘short exempt’’ if it has a 

reasonable basis to believe that the short 

sale order is by a market maker to offset 

a customer odd-lot order or liquidate an 

odd-lot position that changes such 

broker-dealer’s position by no more than 

a unit of trading, will continue to be of 

utility under Rule 201 and will not be 

in conflict with the goals of the Rule. 

Because odd-lot transactions by 

market makers to facilitate customer 

orders are not of a size that could 

facilitate a downward movement in the 

particular security, we do not believe 

that Rule 201(d)(2) will adversely affect 

the goals of short sale regulation that 

Rule 201 seeks to advance. Thus, we 

believe that a broker-dealer should be 

able to mark such orders ‘‘short exempt’’ 

so that those acting in the capacity of a 

‘‘market maker,’’ with the commensurate 

negative and positive obligations, will 

be able to offset a customer odd-lot 

order and liquidate an odd-lot position 

without a trading center’s policies and 

procedures preventing the execution or 

display of such orders at a price that is 

less than or equal to the current national 

best bid. 

4. Domestic Arbitrage 

We are adopting in Rule 201(d)(3) 

without modification the ability for a 

broker-dealer to mark as ‘‘short exempt’’ 

short sale orders associated with certain 

bona fide domestic arbitrage 

transactions. Although commenters 

generally stated that a domestic 

arbitrage provision should be included 

in any short sale price test restriction, 

some commenters also stated that the 

provision, as proposed, should be 

expanded to cover more trading 

scenarios.484 However, one commenter 

stated that arbitrage activities are not 

unique in contributing to market 

efficiency and any short sale price test 

restriction that the Commission adopts 

should require few, if any, exceptions to 

maintain market quality.485

As discussed above, the short sale 

price test restriction adopted in Rule 

201(b) will apply to a covered security 

only after the security has experienced 

a significant intra-day price decline, 

will remain in place for a limited period 

of time, and will continue to permit 

short selling at a price above the 

national best bid (rather than, for 

example, halting all short selling in that 

security). As such, we do not believe it 

is appropriate at this time to broaden 

the scope of the domestic arbitrage 

provision. Due to the already limited 

scope and applicability of Rule 201, we 

believe that expanding the domestic 

arbitrage provision to cover more 

trading scenarios would undermine our 

goals in adopting Rule 201. Thus, we are 

adopting the provision as proposed. 

Subsection (e)(7) of former Rule 10a– 

1 contained an exception related to 

domestic arbitrage.486 That exception 

applied to bona fide arbitrage 

undertaken to profit from a current 

difference in price between a 

convertible security and the underlying 

common stock.487 The term ‘‘bona fide 

arbitrage’’ describes an activity 

undertaken by market professionals in 

which essentially contemporaneous 

purchases and sales are effected in order 

to lock in a gross profit or spread 

resulting from a current differential in 

pricing of two related securities.488 For 

example, a person may sell short 

securities to profit from a current price 

differential based upon a convertible 

security that entitles him to acquire a 

number of securities equivalent to the 

securities sold short. We continue to 

believe that bona fide arbitrage activities 

are beneficial to the markets because 


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489See 1979 Release, 44 FR 6084. 

490Rule 201(d)(3). 

491See 12 CFR 220.6. 

492See Proposal, 74 FR at 18056. 

493See, e.g., letter from SIFMA (June 2009); letter 

from RBC (June 2009); letter from NYSE Euronext 

(Sept. 2009); letter from STANY (Sept. 2009). 

494See, e.g., letter from RBC (June 2009) (stating 

that the exception should accommodate convertible 

arbitrage strategies as well as arbitrage strategies 

that do not meet the contemporaneous requirement 

of this provision); letter from Credit Suisse (June 

2009); see also supra note 484 (discussing 

comments regarding the domestic arbitrage 

provision). 

495See Exchange Act Release No. 2039 (Mar. 10, 

1939), 4 FR 1209 (Mar. 14, 1939). 

496See id. 

497Rule 201(d)(4). 

498Former Rule 10a–1(e)(8) provided that the 

short sale price test restrictions of that rule shall not 

apply to: ‘‘Any sale of a security registered on, or 

admitted to unlisted trading privileges on, a 

national securities exchange effected for a special 

international arbitrage account for the bona fide 

purpose of profiting [sic] from a current difference 

between the price of such security on a securities 

market not within or subject to the jurisdiction of 

the United States and on a securities market subject 

to the jurisdiction of the United States; provided the 

seller at the time of such sale knows or, by virtue 

of information currently received, has reasonable 

grounds to believe that an offer enabling him to 

cover such sale is then available to him in such 

foreign securities market and intends to accept such 

offer immediately.’’ 

499See supra note 495. 

500See Proposal, 74 FR at 18057. 

they tend to reduce pricing disparities 

between related securities and, thereby, 

promote market efficiency.489

Rule 201(d)(3) parallels the exception 

in former Rule 10a–1(e)(7). Specifically, 

Rule 201(d)(3) provides that a brokerdealer may mark a short sale order of a 

covered security ‘‘short exempt’’ if the 

broker-dealer has a reasonable basis to 

believe that the short sale order is ‘‘for 

a good faith account of a person who 

then owns another security by virtue of 

which he is, or presently will be, 

entitled to acquire an equivalent 

number of securities of the same class 

as the securities sold; provided such 

sale, or the purchase which such sale 

offsets, is effected for the bona fide 

purpose of profiting from a current 

difference between the price of the 

security sold and the security owned 

and that such right of acquisition was 

originally attached to or represented by 

another security or was issued to all the 

holders of any such securities of the 

issuer.’’ 490

The domestic arbitrage exception in 

former Rule 10a–1 was intended to be 

consistent with the arbitrage provision 

of Regulation T.491 Thus, consistent 

with that provision, former Rule 10a– 

1(e)(7) referred to a ‘‘special arbitrage 

account’’ and not a ‘‘good faith 

account.’’ 492 The Federal Reserve Board 

amended Regulation T in 1998 to 

eliminate the ‘‘special arbitrage account’’ 

and to allow the functions formerly 

effected in that account to be effected in 

a ‘‘good faith account.’’ Consistent with 

that language, Rule 201(d)(3) refers to a 

‘‘good faith account.’’ 

Because allowing domestic arbitrage 

at a price that is less than or equal to 

the current national best bid will 

potentially promote market efficiency, 

we have included in Rule 201 a limited 

provision to allow broker-dealers to 

mark short sale orders ‘‘short exempt’’ 

where the broker-dealer has a 

reasonable basis to believe that the 

conditions in proposed Rule 201(d)(3) 

have been met. Thus, Rule 201 is 

designed to permit the execution or 

display of such orders in connection 

with bona fide arbitrage transactions 

involving convertible, exchangeable, 

and other rights to acquire the securities 

sold short, where such rights of 

acquisition were originally attached to, 

or represented by, another security, or 

were issued to all the holders of any 

such class of securities of the issuer. 

5. International Arbitrage 

We are adopting Rule 201(d)(4) 

without modification to allow a brokerdealer to mark as ‘‘short exempt’’ short 

sale orders associated with certain 

international arbitrage transactions. In 

response to our request for comment, 

commenters were generally supportive 

of this provision relating to 

international arbitrage.493 Some 

commenters, however, stated that they 

believe that the provision should be 

expanded to cover more trading 

scenarios.494

As discussed above, the short sale 

price test restriction of Rule 201(b) will 

apply to a covered security only after 

the security has experienced a 

significant intra-day price decline, will 

remain in place for a limited period of 

time, and will continue to permit short 

selling at a price above the current 

national best bid (rather than, for 

example, halting all short selling in that 

security). As such, we do not believe it 

is appropriate at this time to broaden 

the scope of the international arbitrage 

provision. Due to the already limited 

scope and applicability of Rule 201, we 

believe that expanding the scope of the 

international arbitrage provision to 

cover more trading scenarios would 

undermine our goals in adopting Rule 

201 because its scope would be even 

further limited, thereby risking not 

achieving our goals in adopting Rule 

201. Thus, we are adopting the 

provision as proposed. 

Former Rule 10a–1(e)(8) included an 

international arbitrage exception that 

was adopted in 1939.495 In adopting the 

exception, the Commission stated that it 

was necessary to facilitate ‘‘transactions 

which are of a true arbitrage nature, 

namely, transactions in which a 

position is taken on one exchange 

which is to be immediately covered on 

a foreign market.’’ 496 We believe 

likewise that such transactions will 

have utility under Rule 201. As 

discussed above in connection with 

domestic arbitrage, bona fide arbitrage 

transactions promote market efficiency 

because they equalize prices at an 

instant in time in different markets or 

between relatively equivalent securities. 

Rule 201(d)(4) parallels the exception 

contained in former Rule 10a–1(e)(8). 

Specifically, Rule 201(d)(4) provides 

that a broker-dealer may mark a short 

sale order of a covered security ‘‘short 

exempt’’ if the broker-dealer has a 

reasonable basis to believe that the short 

sale order is ‘‘for a good faith account 

and submitted to profit from a current 

price difference between a security on a 

foreign securities market and a security 

on a securities market subject to the 

jurisdiction of the United States, 

provided that the short seller has an 

offer to buy on a foreign market that 

allows the seller to immediately cover 

the short sale at the time it was 

made.’’ 497

In Rule 201(d)(4), we have simplified 

the language of former Rule 10a–1(e)(8) 

to make it more understandable.498 In 

addition, we have changed the reference 

in former Rule 10a–1(e)(8) from a 

‘‘special international arbitrage account’’ 

to a ‘‘good faith account.’’ As discussed 

above in connection with the domestic 

arbitrage provision of Rule 201(d)(3), 

this revision will make the provision 

consistent with the arbitrage provision 

in Regulation T. 

In addition, as proposed, we have 

incorporated language from the 

exception in former Rule 10a–1(e)(12) 

that provided that, for purposes of the 

international arbitrage exception, a 

depository receipt for a security shall be 

deemed to be the same security 

represented by the receipt. This 

language was originally included in the 

Commission’s 1939 release adopting the 

international arbitrage exception, but 

was incorporated separately in former 

Rule 10a–1(e)(12).499 Although we 

requested comment in the Proposal 

regarding whether a depository receipt 

for a security should be deemed to be 

the same security represented by the 

receipt, we did not receive comments 

specific to this request.500 As proposed, 


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501To the extent that the short sale is of a 

depository receipt and the seller intends to 

purchase the same security represented by the 

depository receipt to immediately cover the short 

sale of the depository receipt, the sale may be 

marked ‘‘short exempt’’ provided that the seller 

reasonably believes at the time of the sale that it 

will be able to convert the security to be purchased 

into the depository receipt and deliver the 

depository receipt by settlement date for the sale. 

502We note that the requirement that the 

transaction be ‘‘immediately’’ covered on a foreign 

market requires the foreign market to be open for 

trading at the time of the transaction. See Proposal, 

74 FR at 18057, n.166; see also 2003 Regulation 

SHO Proposing Release, 68 FR at 62986, n.119. 

503See Rule 201(d)(5). 

504See, e.g., letter from BATS (May 2009); letter 

from SIFMA (June 2009); letter from NYSE 

Euronext (Sept. 2009). 

505See, e.g., letter from SIFMA (June 2009). 

506See 1974 Release, 39 FR 35570. 507See, e.g., Exchange Act Release No. 3454 (July 

6, 1946), in which the Commission approved the 

NYSE’s special offering plan, which permitted short 

sales in the form of over-allotments to facilitate 

market stabilization. 508 17 CFR 242.100 et seq. 509See Exchange Act Release No. 58190 (July 18, 

2008), 73 FR 42837 (July 23, 2008) (amending the 

July Emergency Order to include exceptions for 

certain short sales). 

510See Rule 201(d)(6). 

511See, e.g., letter from BATS (May 2009); letter 

from SIFMA (June 2009); letter from Credit Suisse 

(June 2009); letter from NYSE Euronext (Sept. 

2009). 

512See Proposal, 74 FR at 18057–18058. 

513See letter from James A. Brigagliano, Assistant 

Director, Division of Market Regulation, SEC, to Ira 

Hammerman, Senior Vice President and General 

Counsel, Securities Industry Association, dated July 

18, 2005 (‘‘Riskless Principal Letter’’). 

514See id. 

515See id. 

516See id. 

we are incorporating in Rule 201(d)(4) 

the language from the exception in 

former Rule 10a–1(e)(12).501

As with the exception in former Rule 

10a–1(e)(8), Rule 201(d)(4) will apply 

only to bona fide arbitrage transactions. 

Thus, this provision will only be 

applicable if at the time of the short sale 

there is a corresponding offer in a 

foreign securities market, so that the 

immediate covering purchase will have 

the effect of neutralizing the short sale. 

We believe Rule 201(d)(4) is necessary 

to facilitate arbitrage transactions in 

which a position is taken in a security 

in the U.S. market, and which is to be 

immediately covered in a foreign 

market.502 Thus, we do not believe that 

permitting broker-dealers to mark these 

orders ‘‘short exempt’’ will undermine 

our goals for adopting Rule 201, and, as 

described above, we believe facilitating 

or permitting these transactions has 

utility in terms of promoting market and 

pricing efficiency. 

6. Over-Allotments and Lay-Off Sales 

We have determined to adopt without 

modification in Rule 201(d)(5) a 

provision that will permit a brokerdealer to mark as ‘‘short exempt’’ short 

sale orders by underwriters or syndicate 

members participating in a distribution 

in connection with an over-allotment, 

and any short sale orders for purposes 

of lay-off sales by such persons in 

connection with a distribution of 

securities through a rights or standby 

underwriting commitment.503 In 

response to our request for comment, 

commenters were generally supportive 

of inclusion of this provision relating to 

certain syndicate activity.504 Some 

commenters, however, asked that we 

expand this provision beyond overallotment and lay-off sales.505

As discussed above, the short sale 

price test restriction of Rule 201(b) will 

apply to a covered security only after 

the security has experienced a 

significant intra-day price decline, will 

remain in place for a limited period of 

time, and will continue to permit short 

selling at a price above the national best 

bid (rather than, for example, halting all 

short selling in that security). As such, 

we do not believe it is appropriate at 

this time to broaden the scope of the 

provision relating to over-allotment and 

lay-off sales. Due to the already limited 

scope and applicability of Rule 201, we 

believe that expanding the scope of this 

provision to cover other sales effected in 

connection with a distribution would 

undermine our goals in adopting Rule 

201 because it would further limit the 

scope of the Rule, thereby risking not 

achieving our goals in adopting Rule 

201. Thus, we are adopting the 

provision as proposed. In addition, we 

note that we are including a ‘‘short 

exempt’’ marking provision for 

syndicate and lay-off sales in part 

because, as discussed further below, we 

have historically excepted such activity 

from short sale rules. 

Former Rule 10a–1(e)(10) contained 

an exception for over-allotment and layoff sales.506 Although the exception was 

not adopted until 1974, the 

Commission’s approval of the concept 

of excepting over-allotments and lay-off 

sales from short sale rules is longstanding.507 In addition, we note that 

recently we excepted these sales from 

the July Emergency Order, which among 

other things required that short sellers 

borrow or arrange to borrow securities 

prior to effecting a short sale, stating 

that it was not necessary for the Order 

to cover such sales because such activity 

is covered by Regulation M under the 

Exchange Act,508 an anti-manipulation 

rule.509 In accordance with the longstanding Commission position regarding 

these sales, we are including in Rule 

201(d)(5) a provision to permit brokerdealers to mark as ‘‘short exempt’’ short 

sale orders in connection with overallotment and lay-off sales, which 

provision also parallels the exception in 

former Rule 10a–1(e)(10). 

7. Riskless Principal Transactions 

We have determined to adopt without 

modification in Rule 201(d)(6) a 

provision that will permit a brokerdealer to mark as ‘‘short exempt’’ short 

sale orders where broker-dealers are 

facilitating customer buy orders or sell 

orders where the customer is net long, 

and the broker-dealer is net short but is 

effecting the sale as riskless 

principal.510 In response to our request 

for comment, commenters that 

specifically addressed this provision 

supported its inclusion.511

As discussed in the Proposal,512 in 

2005, the Commission, via authority 

delegated to the Staff, granted 

exemptive relief under former Rule 10a– 

1 for any broker-dealer that facilitates a 

customer buy or long sell order on a 

riskless principal basis.513 In granting 

the relief, the Commission noted 

representations made in the letter 

requesting relief that, in the situation 

where the amount of securities that the 

broker-dealer purchases for the 

customer may not be sufficient to give 

the broker-dealer an overall net ‘‘long’’ 

position, former Rule 10a–1 would 

constrain the ability of the broker-dealer 

to fill the customer buy order. Further, 

the Commission noted representations 

in the letter requesting relief that, 

because such short sales would be 

effected only in response to a customer 

buy order, this should vitiate any 

concerns about such sales having a 

depressing impact on the security’s 

price.514

In addition, the Commission noted 

representations made in the letter 

requesting relief that where a brokerdealer is facilitating a customer long 

sale order in a riskless principal 

transaction, because the ultimate seller 

is long the shares being sold, these 

transactions present none of the 

potential abuses that former Rule 10a– 

1 was designed to address.515 The 

Commission also noted representations 

that the application of former Rule 10a– 

1 to riskless principal transactions 

involving a customer long sale can 

inhibit the broker-dealer’s ability to 

provide timely (or any) execution to 

such customer long sale. Specifically, if 

the broker-dealer has a net short 

position, the broker-dealer will be 

restricted from executing its own 

principal trade to complete the first leg 

of the riskless principal transaction.516


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517See id. 

518These conditions are also consistent with the 

definition of ‘‘riskless principal transactions’’ under 

Rule 10b–18 of the Exchange Act. See 17 CFR 

240.10b–18(a)(12). 

519Rule 201(a)(8). In addition to being consistent 

with the conditions in the Riskless Principal Letter 

and Rule 10b–18(a)(12) of the Exchange Act, this 

definition is consistent with the definition of 

‘‘riskless principal’’ in FINRA Rule 6642. See FINRA 

Rule 6642(d). We note that Rule 201(a)(8), as 

adopted, is slightly modified from the definition in 

the Proposal in that we have added language to 

clarify that the term ‘‘same price’’ shall be exclusive 

of any explicitly disclosed markup or markdown, 

commission equivalent, or other fee. This language 

is consistent with the conditions in the Riskless 

Principal Letter and Rule 10b–18(a)(12). It is also 

consistent with FINRA’s trade reporting rules 

which require a riskless principal transaction in 

which both legs are executed at the same price to 

be reported once, in the same manner as an agency 

transaction, exclusive of any markup, markdown, 

commission equivalent, or other fee. See FINRA 

Rule 6380A(d)(3)(B). 

520See Rule 201(d)(6). Due to the modification to 

the definition of ‘‘riskless principal’’ in Rule 

201(a)(8), we have not included in Rule 201(d)(6) 

the proposed language that stated that the purchase 

or sell order must be given the same per-share price 

at which the broker-dealer sold or bought shares to 

satisfy the facilitated order, exclusive of any 

explicitly disclosed markup or markdown, 

commission equivalent or other fee. See also supra 

note 519. 

521See Rule 201(d)(6). We note that we 

determined to adopt, as proposed, in Rule 201(d)(6) 

an explicit requirement that broker-dealers must 

establish policies and procedures for handling such 

transactions to be consistent with the conditions in 

the Riskless Principal Letter and Rule 10b– 

18(a)(12), which also contain such a requirement. 

522See, e.g., letter from SIFMA (June 2009); letter 

from RBC (June 2009); see also letter from Goldman 

Sachs (June 2009); letter from ICI (June 2009) 

(stating that a broadened exception would be 

necessary to facilitate execution of the types of large 

orders executed by institutional investors and that 

such benchmark orders do not raise concerns of 

manipulation or negative market effects that a short 

sale price test restriction would be designed to 

prevent); letter from Credit Suisse (Sept. 2009) 

(positing that the exception should be extended to 

cover any orders executed on a similar formulaic 

basis as VWAP orders). 

523See e.g. letter from Larry E. Bergmann, Senior 

Associate Director, Division of Market Regulation, 

SEC, to Edith Hallahan, Associate General Counsel, 

Phlx, dated Mar. 24, 1999; letter from Larry E. 

Bergmann, Senior Associate Director, Division of 

Market Regulation, SEC, to Soo J. Yim, Wilmer, 

Cutler & Pickering, dated Dec. 7, 2000; letter from 

James Brigagliano, Assistant Director, Division of 

Market Regulation, SEC, to Andre E. Owens, Schiff 

Hardin & Waite, dated Mar. 30, 2001; letter from 

James Brigagliano, Assistant Director, Division of 

Market Regulation, SEC, to Sam Scott Miller, Esq., 

Orrick, Herrington & Sutcliffe LLP, dated May 12, 

2001; letter from James Brigagliano, Assistant 

Director, Division of Market Regulation, SEC, to 

William W. Uchimoto, Esq., Vie Institutional 

Services, dated Feb. 12, 2003. 

524See id. 

525See id. 

526See id. 

Thus, compliance with former Rule 

10a–1 would adversely affect a brokerdealer’s ability to provide best execution 

to a customer order.517

Taken together, Rules 201(a)(8) and 

(d)(6) parallel the conditions for relief in 

the Riskless Principal Letter.518

Consistent with the relief granted in the 

Riskless Principal Letter, we believe that 

including a provision to permit a 

broker-dealer to mark ‘‘short exempt’’ 

short sale orders in connection with 

riskless principal transactions is 

appropriate and will not undermine our 

goals in adopting short sale price test 

regulation. In particular, we note that 

such a provision will facilitate a brokerdealer’s ability to provide best execution 

to customer orders. In addition, such 

provision will apply only where the 

customer is selling long. 

Rule 201(a)(8) defines the term 

‘‘riskless principal’’ to mean ‘‘a 

transaction in which a broker or dealer, 

after having received an order to buy a 

security, purchases the security as 

principal at the same price to satisfy the 

order to buy, exclusive of any explicitly 

disclosed markup or markdown, 

commission equivalent, or other fee, or, 

after having received an order to sell, 

sells the security as principal at the 

same price to satisfy the order to sell, 

exclusive of any explicitly disclosed 

markup or markdown, commission 

equivalent, or other fee.’’ 519

Rule 201(d)(6) provides that a brokerdealer may mark a short sale order 

‘‘short exempt’’ if the broker-dealer has 

a reasonable basis to believe that the 

short sale order is to effect the execution 

of a customer purchase or the execution 

of a customer ‘‘long’’ sale on a riskless 

principal basis.520 In addition, Rule 

201(d)(6) requires the broker-dealer, if it 

marks an order ‘‘short exempt’’ under 

this provision, to have written policies 

and procedures in place to assure that, 

at a minimum: (i) The customer order 

was received prior to the offsetting 

transaction; (ii) the offsetting transaction 

is allocated to a riskless principal or 

customer account within 60 seconds of 

execution; and (iii) that it has 

supervisory systems in place to produce 

records that enable the broker-dealer to 

accurately and readily reconstruct, in a 

time-sequenced manner, all orders on 

which the broker-dealer relies pursuant 

to this provision.521

We believe that Rule 201(d)(6) will 

provide broker-dealers with additional 

flexibility to facilitate customer orders 

and provide best execution. In addition, 

we believe that the conditions set forth 

in Rule 201(d)(6) will provide a 

mechanism for the surveillance of the 

provision’s use by linking it to specific 

incoming orders and executions, and by 

requiring broker-dealers to establish 

procedures for handling such 

transactions. These requirements will 

help ensure that broker-dealers are 

complying with Rule 201(d)(6). 

8. Transactions on a Volume-Weighted 

Average Price Basis 

We have determined to adopt in Rule 

201(d)(7) without modification the 

ability for a broker-dealer to mark as 

‘‘short exempt’’ certain short sale orders 

executed on a volume-weighted average 

price (‘‘VWAP’’) basis. In response to the 

Proposal, commenters to this provision 

were supportive of the provision. Some 

commenters, however, requested that 

we expand this provision to, for 

example, cover all benchmark orders, 

similar to the exception in Rule 611 of 

Regulation NMS.522 As discussed above, 

the short sale price test restriction of 

Rule 201(b) will apply to a covered 

security only after the security has 

experienced a significant intra-day price 

decline, will remain in place for a 

limited period of time, and will 

continue to permit short selling at a 

price above the current national best bid 

(rather than, for example, halting all 

short selling in that security). As such, 

we do not believe it is appropriate at 

this time to broaden the scope of the 

provision relating to transactions on a 

VWAP basis. Due to the already limited 

scope and applicability of Rule 201, we 

believe that expanding the scope of this 

provision to cover other transactions 

would undermine our goals in adopting 

Rule 201 because it would further limit 

the scope of the Rule, thereby risking 

not achieving our goals in adopting Rule 

201. Thus, we are adopting the 

provision as proposed. 

Under former Rule 10a–1, the 

Commission, via authority delegated to 

the Staff, granted limited relief from that 

rule in connection with short sales 

executed on a VWAP basis.523 The relief 

was limited to VWAP transactions that 

are arranged or ‘‘matched’’ before the 

market opens at 9:30 a.m., but are not 

assigned a price until after the close of 

trading when the VWAP value is 

calculated. The Commission granted the 

exemptions based, in part, on the fact 

that these VWAP short sale transactions 

appeared to pose little risk of facilitating 

the type of market effects that former 

Rule 10a–1 was designed to prevent.524

In particular, the Commission noted that 

the pre-opening VWAP short sale 

transactions do not participate in or 

affect the determination of the VWAP 

for a particular security.525 Moreover, 

the Commission stated that all trades 

used to calculate the day’s VWAP 

would continue to be subject to former 

Rule 10a–1.526

Consistent with the relief granted 

under former Rule 10a–1 and with the 

Proposal, we are providing that a 

broker-dealer may mark as ‘‘short 


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527See Rule 201(d)(7). 

528See Rule 201(d)(7); 17 CFR 242.100(b) 

(defining average daily trading volume), 

242.101(c)(1), 242.102(d)(1). 

529See Proposal, 74 FR at 18059. 

530See 1974 Release, 39 FR 35570. Former Rule 

10a–1(a)(1)(i) referenced the last sale price reported 

to an effective transaction reporting plan, but 

former Rule 10a–1(a)(2) also permitted an exchange 

to make an election to use the last sale price 

reported in that exchange market. Certain 

exchanges, such as the NYSE, implemented short 

sale price test rules consistent with former Rule 

10a–1(a)(2). See, e.g., former NYSE Rule 440B. 

531See 1974 Release, 39 FR 35570. 

532We note, however, that NASD’s former bid test 

contained an exception for short sales executed by 

qualified market makers in connection with bona 

fide market making. Although the NASD’s former 

bid test contained an exception for short sales 

executed by qualified market makers in connection 

with bona fide market making activity, we 

understand that market makers relied on the 

exception a small percentage of the time. For 

example, a 1997 study indicates that during a 

sample month in 1997, market maker short sales at 

or below the inside bid accounted for only 2.41% 

of their total share volume. See D. Timothy 

McCormick and Bram Zeigler, The Nasdaq Short 

Sale Rule: Analysis of Market Quality Effects and 

The Market Maker Exemption, NASD Economic 

Research, (August 7, 1997) at 27; see also 2003 

Regulation SHO Proposing Release, 68 FR at 62989. 

In addition, we note that when the Commission 

approved NASD’s former bid test and the market 

maker exception to the bid test, it noted concerns 

that the market maker exception could create 

opportunities for abusive short selling. See 

Exchange Act Release No. 34277 (June 29, 1994), 59 

FR 34885 (July 7, 1994). See also supra note 43 

(discussing NASD Rule 3350). 

533See Proposal, 74 FR at 18110. Proposed Rule 

201(d)(1) of the proposed circuit breaker halt rule 

provided that the short selling halt would not apply 

to ‘‘[a]ny sale of a covered security by a registered 

market maker, block positioner, or other market 

maker obligated to quote in the over-the-counter 

market, in each case that are selling short a covered 

security as part of bona fide market making in such 

covered security.’’ Id. 

534See id. Proposed Rule 201(d)(4) of the 

proposed circuit breaker halt rule provided that the 

short selling halt would not apply to ‘‘[a]ny sale of 

a covered security by any person that is a market 

maker, including an over-the-counter market maker, 

if the sale is part of a bona fide market making and 

hedging activity related directly to bona fide market 

making in: (i) Derivative securities based on that 

covered security; or (ii) exchange traded funds and 

exchange traded notes of which that covered 

security is a component.’’ Id. 

exempt’’ certain short sale orders 

executed at the VWAP. Rule 201(d)(7) 

differs from the relief granted under 

former Rule 10a–1, however, in that it 

is not limited to VWAP transactions that 

are arranged or ‘‘matched’’ before the 

market opens at 9:30 a.m., or that are 

not assigned a price until after the close 

of trading when the VWAP value is 

calculated. As noted in the Proposal, we 

believe this restriction is not necessary 

because VWAP short sale transactions 

appear to pose little risk of facilitating 

the type of market effects that a short 

sale price test restriction is designed to 

prevent. In addition, in contrast to the 

Proposal, we have not included in Rule 

201 the requirement that no short sale 

orders marked ‘‘short exempt’’ may be 

used to calculate the VWAP. We have 

not incorporated this condition into 

Rule 201(d)(7) because the information 

used to calculate the VWAP will not 

contain information regarding whether 

an order was marked ‘‘short exempt.’’ 

Thus, pursuant to Rule 201(d)(7), a 

broker-dealer may mark a short sale 

order of a covered security ‘‘short 

exempt’’ if the broker-dealer has a 

reasonable basis to believe that the short 

sale order is for the sale of a covered 

security at the VWAP that meets the 

following conditions: 527 (1) The VWAP 

for the covered security is calculated by: 

Calculating the values for every regular 

way trade reported in the consolidated 

system for the security during the 

regular trading session, by multiplying 

each such price by the total number of 

shares traded at that price; compiling an 

aggregate sum of all values; and 

dividing the aggregate sum by the total 

number of reported shares for that day 

in the security; (2) the transactions are 

reported using a special VWAP trade 

modifier; (3) the VWAP matched 

security qualifies as an ‘‘actively-traded 

security’’ (as defined under Rules 

101(c)(1) and 102(d)(1) of Regulation 

M), or where the subject listed security 

is not an ‘‘actively-traded security,’’ the 

proposed short sale transaction will be 

permitted only if it is conducted as part 

of a basket transaction of twenty or more 

securities in which the subject security 

does not comprise more than 5% of the 

value of the basket traded; (4) the 

transaction is not effected for the 

purpose of creating actual, or apparent, 

active trading in or otherwise affecting 

the price of any security; and (5) a 

broker or dealer will act as principal on 

the contra-side to fill customer short 

sale orders only if the broker-dealer’s 

position in the covered security, as 

committed by the broker-dealer during 

the pre-opening period of a trading day 

and aggregated across all of its 

customers who propose to sell short the 

same security on a VWAP basis, does 

not exceed 10% of the covered 

security’s relevant average daily trading 

volume, as defined in Regulation M.528

Except as discussed above, the 

conditions set forth in Rule 201(d)(7) 

parallel the conditions contained in the 

exemptive relief from former Rule 10a– 

1 granted for VWAP short sale 

transactions. We believe that these 

conditions worked well in restricting 

the exemptive relief to situations that 

generally would not raise the harms that 

short sale price tests are designed to 

prevent. We believe they will be 

similarly effective in serving that 

function today and, therefore, we have 

incorporated them into Rule 201(d)(7). 

9. Decision Not To Adopt a Provision 

That a Broker-Dealer May Mark an 

Order ‘‘Short Exempt’’ in Connection 

With Bona Fide Market Making Activity 

As discussed in the Proposal, former 

Rule 10a–1(e)(5) provided a limited 

exception from the restrictions of that 

rule for ‘‘[a]ny sale * * * by a registered 

specialist or registered exchange market 

maker for its own account on any 

exchange with which it is registered for 

such security, or by a third market 

maker for its own account over-thecounter, (i) Effected at a price equal to 

or above the last sale, regular way, 

reported for such security pursuant to 

an effective transaction reporting plan 

* * *. Provided, however, That any 

exchange, by rule, may prohibit its 

registered specialist and registered 

exchange market makers from availing 

themselves of the exemption afforded by 

this paragraph (e)(5) if that exchange 

determines that such action is necessary 

or appropriate in its market in the 

public interest or for the protection of 

investors.’’ 529 Unless prohibited by 

exchange rule, this exception was 

intended to permit registered specialists 

or market makers to protect customer 

orders against transactions in other 

markets in the consolidated system by 

allowing them to sell short at a price 

equal to the last trade price reported to 

the consolidated system, even if that 

sale was on a minus or zero-minus 

tick.530 Although former Rule 10a–1 

included this exception for market 

makers, exchanges adopted rules that 

prohibited their registered specialists 

and market makers from availing 

themselves of this exception.531 In 

addition, former Rule 10a–1 did not 

contain a general exception for short 

selling in connection with bona fide 

market making activities.532

In the Proposal, in connection with 

one proposed rule, the proposed circuit 

breaker halt rule, we included a 

provision that would permit a brokerdealer to mark a short sale order ‘‘short 

exempt’’ in connection with certain 

bona fide market making activities. 

None of the other proposed rules 

contained a ‘‘short exempt’’ marking 

provision with respect to bona fide 

market making activities. In connection 

with the proposed circuit breaker halt 

rule, we included an exception for 

equity and options market makers 

engaged in bona fide market making 

activities.533 We also included in the 

proposed circuit breaker halt rule an 

exception related to bona fide market 

making in derivatives.534


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535See, e.g., roundtable statement of Rosenblatt 

Securities; letter from BATS (May 2009); letter from 

Matlock Capital (May 2009); letter from Pink OTC; 

letter from Direct Edge (June 2009); letter from 

Engmann Options; letter from Prof. Rosenthal; letter 

from Credit Suisse (June 2009); letter from John 

Gilmartin, Co-CEO and Ben Londergan, Co-CEO, 

Group One Trading, L.P., dated June 17, 2009 

(‘‘Group One Trading (June 2009)’’); letter from 

Allston Trading (June 2009); letter from Knight 

Capital (June 2009); letter from STANY (June 2009); 

letter from AIMA; letter from Barclays (June 2009); 

letter from Citadel et al. (June 2009); letter from 

EWT (June 2009); letter from GETCO (June 2009); 

letter from Goldman Sachs (June 2009); letter from 

ICI (June 2009); letter from NYSE Euronext (June 

2009); letter from RBC (June 2009); letter from 

SIFMA (June 2009); letter from STA (June 2009); 

letter from T.D. Pro Ex; letter from Vanguard (June 

2009); letter from Direct Edge (Sept. 2009); letter 

from BATS (Sept. 2009); letter from Credit Suisse 

(Sept. 2009); letter from Group One Trading (Sept. 

2009); letter from Allston Trading (Sept. 2009); 

letter from Knight Capital (Sept. 2009); letter from 

STANY (Sept. 2009); letter from Citadel et al. (Sept. 

2009); letter from EWT (Sept. 2009); letter from 

GETCO (Sept. 2009); letter from Goldman Sachs 

(Sept. 2009); letter from NYSE Euronext (Sept. 

2009); letter from RBC (Sept. 2009); letter from 

SIFMA (Sept. 2009); letter from William J. Brodsky, 

Chairman and CEO, The Chicago Board Options 

Exchange, Inc., dated Sept. 21, 2009 (‘‘CBOE (Sept. 

2009)’’); letter from Edward Jones; letter from Virtu 

Financial. 

536See, e.g., letter from SIFMA (June 2009); letter 

from Knight Capital (June 2009); letter from EWT 

(June 2009); letter from GETCO (June 2009); letter 

from Goldman Sachs (June 2009); letter from EWT 

(Sept. 2009); letter from Virtu Financial; but cf. 

letter from Dr. Jim DeCosta, dated Sept. 14, 2009 

(‘‘Dr. Jim DeCosta’’) (noting that there are currently 

few barriers to entry for market makers and abuse 

can arise from small market makers, who are in 

need of business, being willing to misuse a bona 

fide market maker exemption in exchange for order 

flow). 

537See letter from Bingham McCutchen. 538See, e.g., roundtable statement of Rosenblatt 

Securities; letter from MFA (June 2009); see also 

letter from Credit Suisse (Mar. 2009). 539See, e.g., roundtable statement of Rosenblatt 

Securities; letter from BATS (May 2009); letter from 

Matlock Capital (May 2009); letter from Direct Edge 

(June 2009); letter from Engmann Options; letter 

from Prof. Rosenthal; letter from Credit Suisse (June 

2009); letter from Group One Trading (June 2009); 

letter from STANY (June 2009); letter from John 

Favia, Blue Capital Group LLC, dated June 19, 2009 

(‘‘Blue Capital’’); letter from Goldman Sachs (June 

2009); letter from ISE (June 2009); letter from NYSE 

Euronext (June 2009); letter from RBC (June 2009); 

letter from SIFMA (June 2009); letter from STA 

(June 2009); letter from T.D. Pro Ex; letter from 

Boston Options Exchange et al. (June 2009); letter 

from Direct Edge (Sept. 2009); letter from BATS 

(Sept. 2009); letter from Credit Suisse (Sept. 2009); 

letter from Group One Trading (Sept. 2009); letter 

from Knight Capital (Sept. 2009); letter from 

STANY (Sept. 2009); letter from Goldman Sachs 

(Sept. 2009); letter from ISE (Sept. 2009); letter from 

NYSE Euronext (Sept. 2009); letter from RBC (Sept. 

2009); letter from SIFMA (Sept. 2009); letter from 

Boston Options Exchange, Chicago Board Options 

Exchange, International Securities Exchange, 

Nasdaq Options Market, Nasdaq OMX PHLX, NYSE 

Amex, NYSE Arca and The Options Clearing 

Corporation, dated Sept. 22, 2009 (‘‘Boston Options 

Exchange et al. (Sept. 2009)’’); letter from CBOE 

(Sept. 2009). 540Letter from CBOE (June 2009); see also letter 

from Boston Options Exchange et al. (June 2009); 

letter from ISE (June 2009); letter from Citadel et al. 

(June 2009); letter from STANY (June 2009); letter 

from GETCO (June 2009). 541See letter from Blue Capital; but cf. letter from 

John H. Frazer, Jr., dated May 4, 2009 (‘‘Frazer’’) 

(stating that if options market makers are not 

subject to the short sale price test restriction, then 

‘‘short sellers will simply purchase Puts knowing 

that Options Market Makers will simply sell the 

stock short without restriction.’’). 

542See, e.g., letter from Direct Edge (June 2009); 

letter from Credit Suisse (June 2009); letter from 

STANY (June 2009); letter from Barclays (June 

2009); letter from Goldman Sachs (June 2009); letter 

from ICI (June 2009); letter from NYSE Euronext 

(June 2009); letter from RBC (June 2009); letter from 

SIFMA (June 2009); letter from ISDA; letter from 

Direct Edge (Sept. 2009); letter from Credit Suisse 

(Sept. 2009); letter from STANY (Sept. 2009); letter 

from Goldman Sachs (Sept. 2009); letter from RBC 

(Sept. 2009); letter from SIFMA (Sept. 2009). 

543See letter from Credit Suisse (June 2009); letter 

from RBC (June 2009); letter from SIFMA (June 

2009); letter from SIFMA (Sept. 2009); letter from 

Credit Suisse (Sept. 2009); letter from RBC (Sept. 

2009). 

544See, e.g., letter from Credit Suisse (June 2009); 

letter from SIFMA (June 2009); letter from Credit 

Suisse (Sept. 2009); letter from Direct Edge (Sept. 

2009); letter from SIFMA (Sept. 2009). 

545See, e.g., letter from Credit Suisse (June 2009); 

letter from Allston Trading (June 2009); letter from 

STANY (June 2009); letter from Goldman Sachs 

(June 2009); letter from ICI (June 2009); letter from 

SIFMA (June 2009); letter from SIFMA (Sept. 2009); 

letter from Credit Suisse (Sept. 2009); letter from 

STANY (Sept. 2009); letter from Goldman Sachs 

(Sept. 2009); letter from Direct Edge (Sept. 2009). 

546See, e.g., letter from SIFMA (June 2009); letter 

from RBC (June 2009); letter from CBOE (June 

2009); letter from Boston Options Exchange et al. 

(June 2009); letter from ISE (June 2009); letter from 

Citadel et al. (June 2009); letter from Goldman 

Sachs (June 2009); see also supra Section II.C. 

(discussing the Commission’s emergency orders). 

547See, e.g., letter from SIFMA (June 2009); letter 

from CBOE (June 2009); letter from Boston Options 

Exchange et al. (June 2009); letter from Goldman 

Sachs (June 2009); letter from GETCO (June 2009); 

see also 17 CFR 242.203(b)(2)(iii). 

548See, e.g., letter from Goldman Sachs (June 

2009); letter from Wolverine; letter from Boston 

In response to our decision not to 

provide in the Proposal for most of the 

proposed alternatives that a brokerdealer may mark an order ‘‘short 

exempt’’ in connection with bona fide 

market making activity, we received a 

wide variety of comments both 

supporting and opposing such a 

provision. Many commenters stated that 

any short sale price test restriction 

adopted by the Commission must 

include an exception for market makers 

due to the large amount of liquidity that 

they provide to the markets; although 

comments varied with respect to the 

necessity of such an exception to the 

various proposed price test restrictions 

and circuit breaker rules and to whom 

such an exception should apply.535

Commenters stated that the lack of a 

market maker exception to any short 

sale price test restriction could result in, 

among other things, reduced liquidity, 

increased bid-ask spreads, increased 

volatility, increased barriers to entry for 

new market makers, reduced 

competition among market makers, and 

increased costs to market makers and 

investors.536 Some commenters stated 

that the Commission should consider 

exceptions that would permit high 

frequency traders 537 and other market 

makers to continue to provide the same 

level of liquidity to the markets.538

Some commenters stated that an 

exception for options market makers, in 

particular, would be necessary for any 

short sale price test restriction, citing 

the important role that short selling 

plays in an options market maker’s 

ability to hedge risk and the negative 

impact that a short sale price test 

restriction would have on options 

market quality, liquidity, bid-ask 

spreads, quote size, and investor 

costs.539 One commenter noted that 

although former Rule 10a–1 did not 

contain an options market maker 

exception, the NASD’s former bid test 

contained an exception that ‘‘allowed 

options market makers to provide 

liquidity and depth for listed options by 

allowing them to hedge,’’ but that also 

had ‘‘limited definitions and scope.’’ 540

Another commenter recognized the risk 

of a transference effect resulting from an 

options market maker exception, 

namely that an exception may facilitate 

short selling by buying puts from or 

selling calls to market makers, but stated 

that there was no empirical evidence 

showing that the risk is more than 

theoretical.541

Some commenters stated that a 

market maker exception should include 

market makers in listed and OTC 

derivatives.542 Other commenters stated 

that a market maker exception should 

cover block positioners.543 In addition, 

some commenters stated that a market 

maker exception should include market 

makers in convertibles and warrants.544

Several commenters stated that an 

exception for market makers in ETFs 

should be included in any price test 

restriction adopted by the 

Commission.545

In addition, some commenters stated 

that to not include an exception for 

bona fide market making activities is 

inconsistent with the Commission’s 

short sale-related emergency orders 

issued in mid- to late-2008, which 

included various forms of exceptions for 

bona fide market making activities.546

Commenters also noted that since its 

adoption in 2004, Regulation SHO has 

included an exception for bona fide 

market making activities from the 

‘‘locate’’ requirement of Rule 

203(b)(1).547 Several commenters also 

noted that fails to deliver resulting from 

certain bona fide market making activity 

are provided additional time to be 

closed out under Regulation SHO’s 

close-out requirements.548


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Options Exchange et al. (June 2009); letter from 

GETCO (Sept. 2009); letter from Virtu Financial; 

letter from Nasdaq OMX Group (Oct. 2009); see also 

17 CFR 242.204(a)(3). 

549See letter from Pink OTC; letter from SIFMA 

(June 2009); letter from STA (June 2009); letter from 

SIFMA (Sept. 2009); see also letter from NYSE 

Euronext (June 2009); letter from NYSE Euronext 

(Sept. 2009) (stating that the definition should 

contain some obligation to the market). 

550See letter from CBOE (June 2009); letter from 

GETCO (June 2009). Although GETCO stated that a 

market maker typically should not need an 

exception because the market maker will be able to 

sell short on the offer when providing liquidity, this 

commenter also noted that market makers such as 

GETCO ‘‘often employ market making strategies that 

sometimes include removing liquidity on the bid as 

part of the overall strategy, which may include 

short selling.’’ GETCO stated that such strategies 

result in tighter spreads, more liquidity and 

potentially lower costs to investors. See letter from 

GETCO (June 2009). 

551See letter from Direct Edge (Sept. 2009). 

552Letter from Direct Edge (Sept. 2009). 

553See, e.g., letter from David G. Furr, dated Apr. 

20, 2009; letter from R. Skinner, dated Apr. 21, 

2009; letter from Frazer; letter from IBC; letter from 

Vitus Lask, dated June 20, 2009; letter from Stephen 

R. Porpora, dated Sept. 10, 2009; letter from Hudson 

River Trading; letter from David Furr, dated Nov. 

3, 2009. 

554Letter from Hudson River Trading. 

555See supra note 434. 

556See supra Section III.A.5. (discussing the 

circuit breaker trigger level). 557See, e.g., letter from Jordan & Jordan; letter 

from Citadel et al. (June 2009); letter from MFA 

(June 2009); letter from SIFMA (June 2009); letter 

from Credit Suisse (Sept. 2009). 558See supra notes 305 to 308 and accompanying 

text. 559See supra note 310 and accompanying text. 560See supra note 311 and accompanying text. 561See, e.g., letter from CBOE (June 2009); letter 

from GETCO (June 2009). 562See letter from Direct Edge (Sept. 2009). 

Several commenters, however, 

discussed the importance of limiting a 

market maker exception to bona fide 

market making activity and requested 

that the Commission define the term 

strictly so as to eliminate the possibility 

for gaming.549 Moreover, some 

commenters stated that a market maker 

exception may not be necessary. For 

example, commenters noted that equity 

market makers will usually sell at their 

offer quote, which would not be 

inhibited by any price test restriction.550

One commenter stated that if we were 

to adopt a circuit breaker approach with 

the alternative uptick rule, an equity 

market making exception may not be as 

critical because equity market makers 

generally post their offers one price 

increment above the national best 

bid.551 This commenter stated that ‘‘[i]n 

a market characterized by the kind of 

decline that would trigger a circuit 

breaker, remaining above the [national 

best bid] will tend to be the natural 

norm.’’ 552

Other commenters stated that there 

should not be an exception for market 

makers in any short sale price test 

restriction that the Commission 

adopts.553 One commenter noted that 

the activities of market makers ‘‘are not 

unique in contributing to market 

efficiency; all market participants, 

regardless of trading frequency or 

professional expertise, improve market 

quality by their very participation, 

whether or not their trading activity is 

arbitrage or professional market making 

* * * the Commission’s goal should be 

to implement rules that are sufficiently 

focused and require few, if any, 

exceptions to maintain market 

quality.’’ 554 In addition, as discussed in 

Section III.B. above, several commenters 

cautioned against the Commission 

adopting numerous exceptions and 

discussed problems that may arise from 

adopting a short sale price test 

restriction with many or complex 

exceptions, such as additional 

implementation difficulties, greater 

compliance costs, lack of uniformity 

that may cause unfair application of the 

rule, increased opportunities for gaming 

and abuse, and, overall, a less effective 

rule that only applies to a limited 

number of short sales.555

At this time, we believe that including 

a provision to permit broker-dealers to 

mark as ‘‘short exempt’’ short sale orders 

in connection with market making 

activity in the equity or options markets 

is not necessary and would not advance 

the goals of our adopting a short sale 

price test restriction. We recognize that 

there are distinct differences between 

options market making and market 

making in the equity markets and that 

Rule 201 may impact these markets 

differently. In addition, we recognize 

commenters’ concerns regarding the 

potential negative market impact of not 

including an exception for market 

making activity in the equity or options 

markets. Due to the reasons discussed 

below, however, we believe such 

impact, if any, would be limited. In 

addition, we believe that the potential 

costs of not including exceptions for 

equity and options market makers are 

justified by the benefits provided by the 

Rule in preventing short selling, 

including potentially manipulative or 

abusive short selling, from driving down 

further the price of a security that has 

already experienced a significant intraday price decline. 

We believe that the potential negative 

market impact from not including an 

equity or options market maker 

exception to Rule 201 will be limited, in 

large part, because Rule 201 is a 

narrowly-tailored Rule that will impose 

a short sale price test restriction only if 

the price of a covered security declines 

by 10% or more from the covered 

security’s closing price as determined 

by the listing market for the covered 

security as of the end of regular trading 

hours on the prior day. In addition, once 

triggered, the short sale price test 

restriction will apply for a limited 

period of time—the remainder of the 

day on which the circuit breaker has 

been triggered and the following day. 

Thus, unlike NASD’s former bid test or 

former Rule 10a–1 (which also did not 

include an exception for bona fide 

market making activity), Rule 201 does 

not impose a short sale price test 

restriction that will apply all the time to 

all covered securities. Nor does Rule 

201 impose a halt on short selling. 

Instead, Rule 201 is a targeted Rule that 

will not impact trading in the majority 

of covered securities. As discussed in 

more detail above,556 in response to our 

request for comment on an appropriate 

threshold at which to trigger the 

proposed circuit breaker short sale price 

restrictions, commenters submitted 

estimates of the number of securities 

that would trigger a circuit breaker rule 

at a 10% threshold 557 and the estimates 

reflect that a 10% circuit breaker 

threshold, on average, should result in 

a limited percentage of covered 

securities triggering the threshold.558 In 

addition, following its review of trading 

data, the Staff found that, during the 

period covering April 9, 2001 to 

September 30, 2009, the price test 

restrictions of Rule 201 would have, on 

an average day, been triggered for 

approximately 4% of covered 

securities.559 The Staff also found that 

for a low volatility period, covering 

January 1, 2004 to December 31, 2006, 

the 10% trigger level of Rule 201 would 

have, on an average day, been triggered 

for approximately 1.3% of covered 

securities.560

In addition, we believe that any 

negative market impact due to the lack 

of a bona fide market making exception 

for equity market makers will be 

limited, if any, because as noted by 

some commenters, for the most part, 

equity market makers sell at their offer 

quote.561 Thus, the price test restriction 

of Rule 201, that requires short selling 

at a price above the national best bid 

and only if the circuit breaker has been 

triggered, is consistent with equity 

market making strategies because these 

market makers generally post their offer 

quotes at a price above the national best 

bid.562 In addition, because equity 

market makers typically provide 

liquidity on the opposite side of the 

market, if a covered security is 

experiencing significant downward 

price pressure such that it is subject to 


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563We note that some commenters, in stating that 

a short sale price test restriction should include an 

options market maker exception, provided support 

for their arguments by referencing the impact of the 

Short Sale Ban Emergency Order that halted short 

selling in the securities subject to the emergency 

order, rather than imposing a short sale price test 

restriction that would continue to allow short 

selling while the restriction is in effect. See, e.g., 

letter from CBOE. 

564See supra note 310 and 311 and 

accompanying text. 

565We note that one commenter stated that 

‘‘[options market makers] need immediacy in their 

hedges, which means selling at lower than the 

inside offer quote.’’ See letter from CBOE (June 

2009). Rule 201, if triggered, limits short selling to 

a price above the current national best bid. Thus, 

it does not prevent short selling at a price between 

the current national best bid and offer. 

566We also note that, as discussed in Section 

III.A.1. above, we, as well as some commenters, are 

concerned about the ability to obtain a short 

position through the use of derivative products and 

that synthetic short positions may increase as a 

result of the adoption of a short sale price test 

restriction. We are concerned that inclusion of an 

exception in Rule 201 for short sale hedging 

transactions would make such an increase even 

more likely. See supra Section III.A.1. 

567See, e.g., Ekkehart Boehmer, Charles M. Jones 

and Xiaoyan Zhang, 2009, Shackling Short Sellers: 

The 2008 Shorting Ban. This study on the Short 

Sale Ban Emergency Order found that ‘‘[d]uring the 

shorting ban (19 Sep through 8 Oct), [NYSEexecuted] short sales are 7.72% of overall trading 

volume for stocks on the original ban list, compared 

to 19.32% of overall trading volume over the same 

time interval for the matching set of non-banned 

stocks.’’ The authors of the study attributed the ongoing short sales in the banned stocks to market 

makers selling short as part of their market making 

and hedging activity, as such activity was excepted 

from the Short Sale Ban Emergency Order. See id. 

While short sale volume decreased in the banned 

stocks, based on this study’s results and its 

comparison of ban and non-ban stocks, 

approximately 40% of the short sale trading volume 

would be expected to be exempt short selling. This 

short selling may have occurred as a result of 

market making exceptions. 

568See 17 CFR 242.203(b)(2)(iii). 

569See 17 CFR 242.204(a)(3). 

570See Options Market Maker Elimination 

Release, 73 FR at 61696. In addition, as we stated 

in the Options Market Maker Elimination Release, 

preliminary analysis by the Staff indicated that 

there was a significant increase in fails to deliver 

in threshold securities with options traded on them 

following elimination of the grandfather exception 

to Regulation SHO’s close-out requirement. See id. 

at 61693. 

Rule 201, market makers will tend to be 

buying not selling the security. Thus, 

equity market makers will continue to 

be able to provide liquidity in that 

security. 

Although a number of commenters 

expressed concerns regarding the lack of 

an options market maker exception from 

a price test restriction, we do not believe 

that such an exception under Rule 201 

is necessary because, unlike with a ban 

on short selling, options market makers 

will be able to sell short to hedge their 

positions even when the restriction is in 

place.563 In addition, not all covered 

securities have options traded on them 

(‘‘optionable covered securities’’). As 

discussed above, data provided by 

commenters and Staff analysis indicate 

that, on an average day, a limited 

number of all covered securities would 

trigger a 10% circuit breaker level.564

Thus, an even more limited number of 

optionable covered securities would 

trigger a 10% circuit breaker, thereby 

further reducing the need for an options 

market maker exception to the Rule’s 

requirements. To the extent that an 

optionable covered security is subject to 

Rule 201, we recognize this may result 

in a delay in an options market maker’s 

ability to sell short to hedge a 

position.565 Such delay, and the 

resulting uncertainty options market 

makers may face (including as the price 

of an optionable covered security 

approaches the circuit breaker) 

regarding their ability to obtain 

immediate execution of their short sale 

hedging transactions, may have a 

negative impact on the options markets, 

such as the widening of options quote 

spreads. 

We believe, however, that this 

potential negative market impact and 

any resulting costs to options market 

makers will be limited and are justified 

by the benefits of the Rule. As discussed 

above, we believe these costs will be 

limited because, among other things, 

due to the Rule’s circuit breaker 

approach, the Rule’s restrictions will 

not apply to most optionable covered 

securities most of the time. In addition, 

even when a security is experiencing 

excessive downward price pressure 

such that the short sale price test 

restriction of Rule 201 has been 

triggered for a particular security, we 

expect there will be purchasers in the 

market willing to buy the security at the 

offer or at a price between the current 

national best bid and offer. Thus, for 

securities that are subject to Rule 201, 

there will be buying interest in the 

market that will result in execution of 

short sale hedging transactions. 

We have also determined not to 

include an options market maker 

exception because we are concerned 

about creating an un-level playing field 

between options market makers and 

market makers in other derivatives that 

sell short to hedge their positions in the 

derivative.566 For the reasons discussed 

above and below, we do not believe that 

any market maker exception is 

necessary. 

We are also concerned that the 

inclusion of an exception for equity or 

options market makers may create an 

opportunity for potential misuse. 

Whether from misuse or proper use, if 

a large volume of short selling were 

excepted from the short sale price test 

restrictions of the Rule, such an 

exception could potentially undermine 

our goals for adopting the Rule.567 We 

are also concerned that the inclusion of 

an exception could result in significant 

additional surveillance and compliance 

costs necessary to help to determine 

whether market participants are validly 

claiming the applicable exception and 

to prevent any misuse. In determining 

not to include such an exception, we 

also considered these additional costs. 

Although some commenters noted 

that the NASD’s former bid test 

contained exceptions for equity and 

options market makers, as noted above, 

former Rule 10a–1, which was in place 

for almost seventy years, and applied on 

a permanent, market-wide basis, did not 

contain any such exceptions. We are not 

aware of any negative impact on market 

quality or any significant costs to 

investors arising from the lack of such 

exceptions. In addition, we note that 

although Regulation SHO currently 

contains a limited exception from its 

locate requirement 568 and an additional 

two days to close out fails to deliver 

under its close-out requirement for 

certain market making activity,569 these 

exceptions relate to the ability to obtain 

shares in time to make delivery by 

settlement date rather than to 

downward price pressure and potential 

price manipulation resulting from short 

selling. Thus, although commenters 

noted these exceptions as support for an 

exception from a short sale price test 

restriction, we do not agree that the 

inclusion of such exceptions to 

Regulation SHO’s locate and close-out 

requirements necessitates the inclusion 

of such an exception in Rule 201. 

Moreover, we note that we recently 

eliminated an exception to Regulation 

SHO’s close-out requirement relating to 

fails to deliver resulting from options 

market making activity because, as we 

noted in the Options Market Maker 

Elimination Release, a substantial level 

of fails to deliver continued to persist in 

threshold securities, and it appeared 

that a significant number of the fails 

were as a result of the options market 

maker exception.570 In addition, in 

adopting that amendment, we noted that 

although we acknowledged 

commenters’ concerns regarding the 

potential impact of the elimination of 

the options market maker exception on 

market making risk, quote depths, 

spread widths, and market liquidity, we 

believed that these potential effects 

were justified by the benefits of 

requiring such fails to deliver to be 

closed out within specific time-frames 


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571See id. at 61696. As discussed above and as 

noted by several commenters to the Proposal and 

Re-Opening Release, since the elimination of the 

options market maker exception to Regulation 

SHO’s close-out requirement, among other 

Commission actions, data from the Staff indicates 

there has been a significant reduction in fails to 

deliver. See supra note 119 (discussing the recent 

reduction in fails to deliver). 

572See supra Sections III.A.3. and III.A.4. 

(discussing, among other things, the market impact 

of the alternative uptick rule in combination with 

a circuit breaker approach); see also infra Sections 

X.B.1.a. and X.B.2.a. (discussing the market impact 

of the alternative uptick rule and the circuit breaker 

approach). 

573See supra notes 550, 561, and 562 and 

accompanying text. 

574We note, however, as discussed in more detail 

below, we have instructed the Staff to assess the 

impact of the Rule on the options markets and to 

provide a written assessment of the impact. See 

infra Section VIII. 

575See Proposal, 74 FR at 18082–18083. 

576See 17 CFR 242.200(g). 

577See 2004 Regulation SHO Adopting Release, 

69 FR at 48030. 

578See 2007 Price Test Adopting Release, 72 FR 

36348. 

579 In connection with Rule 200(g), we note that 

we have made one technical modification to Rule 

200(g)(2) from the language in the proposed circuit 

breaker with modified uptick rule. Specifically, we 

have specified the subsections of Rule 201— 

subsections (c) and (d)—that set forth the 

circumstances under which a short sale order may 

be marked ‘‘short exempt.’’ 

580Rule 200(g). 

581See Rule 200(g)(2). 

582See letter from RBC (June 2009); letter from 

NSCP; see also letter from FIF (June 2009). 

583See letter from RBC (June 2009); letter from 

NSCP; letter from FIF (June 2009). 

584See letter from FIF (June 2009). 

585See, e.g., letter from CFA; letter from STA 

(June 2009). 

586See, e.g., letter from STA (June 2009). 

587See id. 

588See id. 

rather than being allowed to persist 

indefinitely.571

Similarly, although we recognize 

commenters’ concerns about the 

potential impact of the lack of an 

options market maker exception or a 

general equity market maker exception 

on market liquidity, volatility, spread 

widths, and investor costs, we believe, 

for the reasons discussed, that these 

potential costs are justified by the 

benefits of requiring that when a 

covered security’s price is undergoing 

significant downward price pressure, 

short selling in the security by market 

makers generally is restricted. Moreover, 

as discussed above, because the short 

sale price test restriction of Rule 201(b) 

will apply to a covered security only 

after the security has experienced a 

significant intra-day price decline, will 

remain in place for a limited period of 

time, and will continue to permit short 

selling at a price above the current 

national best bid (rather than, for 

example, halt all short selling in that 

security) even when the restriction is in 

place, we believe that the negative 

market impact, if any, when the 

restriction is in place, will be limited.572

For the reasons discussed above, 

rather than provide an exception for 

short selling in connection with bona 

fide market making activity, whether in 

the equity or options markets, we have 

determined to limit the extent to which 

market makers will be permitted to sell 

short without restriction under Rule 

201. We note, however, as discussed 

above, Rule 201 permits broker-dealers 

to mark short sale orders as ‘‘short 

exempt’’ in connection with riskless 

principal transactions. We also note that 

under Rule 201, a trading center’s 

policies and procedures will be 

designed to permit the execution or 

display of short sale orders at the offer. 

As discussed above, and as noted by 

some commenters, equity market 

makers typically will sell at their offer 

quote.573 Thus, Rule 201 generally will 

not restrict short selling by equity 

market makers engaged in bona fide 

market making activity. Moreover, in 

connection with both equity and 

options market makers, because most 

covered securities and, to an even 

greater extent, most optionable covered 

securities, will not be subject to the 

short sale price test restriction of Rule 

201, these market makers will be able to 

continue to provide liquidity and hedge 

positions, as applicable, by selling short 

at or below the national best bid in most 

securities most of the time. For all these 

reasons, at this time we do not believe 

it is necessary to provide that a brokerdealer may mark an order ‘‘short 

exempt’’ where the short sale order is in 

connection with bona fide market 

making activity, whether in the equity 

or options markets.574

IV. Order Marking 

In the Proposal, we proposed 

amending Rule 200(g) of Regulation 

SHO to add a ‘‘short exempt’’ marking 

requirement.575 Rule 200(g) of 

Regulation SHO provides that a brokerdealer must mark all sell orders of any 

security as ‘‘long’’ or ‘‘short.’’ 576 As 

initially adopted, Regulation SHO 

included an additional marking 

requirement of ‘‘short exempt’’ 

applicable to short sale orders if the 

seller was ‘‘relying on an exception from 

the tick test of 17 CFR 240.10a–1, or any 

short sale price test of any exchange or 

national securities association.’’ 577 We 

adopted amendments to Rule 200(g) of 

Regulation SHO to remove the ‘‘short 

exempt’’ marking requirement in 

conjunction with our elimination of 

former Rule 10a–1.578

In conjunction with the adoption of 

Rule 201 of Regulation SHO to add a 

short sale circuit breaker rule, we are 

amending Rule 200(g) of Regulation 

SHO, substantially as proposed, to again 

impose a ‘‘short exempt’’ marking 

requirement.579 Specifically, Rule 

200(g), as amended, provides that ‘‘[a] 

broker or dealer must mark all sell 

orders of any equity security as ‘‘long,’’ 

‘‘short,’’ or ‘‘short exempt.’’ 580 In 

addition, Rule 200(g)(2) provides that a 

sale order shall be marked ‘‘short 

exempt’’ only if the provisions of 

paragraph (c) or (d) of Rule 201 are 

met.581

In response to our requests for 

comment, several commenters noted 

that a new ‘‘short exempt’’ marking 

requirement would require adjustments 

to front end systems, that many firms 

have multiple front end systems, and 

that such costs would be multiplied for 

firms with correspondent clearing 

operations because each correspondent 

firm can have its own front end 

system.582 Commenters also stated that 

market participants would need to make 

adjustments to reporting systems, 

including blue sheets, OATS, and OTS 

reporting systems,583 in addition to 

order entry and routing applications.584

In contrast, several commenters 

indicated that requiring broker-dealers 

to mark all sell orders ‘‘long,’’ ‘‘short,’’ or 

‘‘short exempt’’ would provide valuable 

information to the Commission 585 and 

that such information would be worth 

the costs of requiring such marking.586

One commenter indicated that the 

information provided by a ‘‘short 

exempt’’ marking requirement would 

provide the Commission with data on 

the extent to which exceptions are being 

used to circumvent the requirements of 

Rule 201.587 In addition, with respect to 

implementation periods, one 

commenter stated that the ‘‘short 

exempt’’ marking requirement would 

require coding for new fields in order 

records, which should be accomplished 

in approximately three months.588

After considering the comments, we 

have determined to adopt the proposed 

‘‘short exempt’’ marking requirement, 

including the requirement that a sale 

order shall be marked ‘‘short exempt’’ 

only if the provisions of paragraph (c) or 

(d) of Rule 201 are met. The ‘‘short 

exempt’’ marking requirement will 

provide a record that a broker-dealer is 

availing itself of one of the provisions of 

paragraph (c) or (d) of Rule 201. The 

records provided pursuant to the ‘‘short 

exempt’’ marking requirements of Rule 

200(g) will also aid surveillance by 

SROs and the Commission for 


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589See infra Section X.A.3. and Section X.B.4. 

(discussing the benefits and costs of the ‘‘short 

exempt’’ order marking requirement). 

590See Rule 201(f). 

591Letter from STA (June 2009). 

592 Id. 

593See Exchange Act Release No. 27938 (Apr. 23, 

1990), 55 FR 17949 (Apr. 30, 1990) (stating that the 

no-action position exempting certain index 

arbitrage sales from former Rule 10a–1 would not 

apply to an index arbitrage position that was 

established in an offshore transaction unless the 

holder acquired the securities from a seller that 

acted in compliance with former Rule 10a–1 or 

other comparable provision of foreign law). See also 

Exchange Act Release No. 21958 (Apr. 18, 1985), 50 

FR 16302, 16306, n.48 (Apr. 25, 1985) (stating that, 

‘‘Rule 10a–1 does not contain any exemption for 

short sales effected in international markets.’’). The 

question of whether a particular transaction 

negotiated in the U.S. but nominally executed 

abroad by a foreign affiliate is a domestic trade for 

U.S. regulatory purposes was also addressed in the 

Commission’s Order concerning Wunsch Auction 

Systems, Inc. (WASI). The Commission stated its 

belief that ‘‘trades negotiated in the U.S. on a U.S. 

exchange are domestic, not foreign trades. The fact 

that the trade may be time-stamped in London for 

purposes of avoiding rule 390 does not in our view 

affect the obligation of WASI and BT Brokerage to 

maintain a complete record of such trades and 

report them as U.S. trades to U.S. regulatory and 

self-regulatory authorities and, where applicable, to 

U.S. reporting systems.’’ See Exchange Act Release 

No. 28899 (Feb. 20, 1991), 56 FR 8377, 8381 (Feb. 

28, 1991). In what is commonly referred to as the 

‘‘fax market,’’ a U.S. broker-dealer acting as 

principal for its customer negotiates and agrees to 

the terms of a trade in the U.S., but transmits or 

faxes the terms overseas to be ‘‘printed’’ on the 

books of a foreign office. This practice of ‘‘booking’’ 

trades overseas was analyzed in depth in the 

Division of Market Regulation’s Market 2000 

Report. In the Report, the Division estimated that 

at that time approximately seven million shares a 

day in NYSE stocks were faxed overseas, and many 

of these trades were nominally ‘‘executed’’ in the 

London over-the-counter market. See Division of 

Market Regulation, SEC, Market 2000: An 

Examination of Current Equity Market 

Developments (Jan. 1994), Study VII, p. 2. 

594See 2004 Regulation SHO Adopting Release, 

69 FR at 48014, n.54. 

595See Proposal, 74 FR at 18083–18084. 

596Letter from RBC (June 2009). 

597See Proposal, 74 FR at 18042; Re-Opening 

Release, 74 FR at 42036. 

compliance with the provisions of Rule 

201. In addition, under the policies and 

procedures approach required by Rule 

201, the ‘‘short exempt’’ marking 

requirement will indicate to a trading 

center whether it must execute or 

display a short sale order without regard 

to whether the short sale order is at a 

price that is less than or equal to the 

current national best bid. 

We recognize that the ‘‘short exempt’’ 

marking requirement will increase 

implementation and compliance costs, 

including costs related to adjusting 

front-end systems, reporting systems, 

and order entry and routing 

applications.589 We believe, however, 

that these costs are justified by the 

benefit of the information that the ‘‘short 

exempt’’ marking requirement will 

provide. In addition, to allow sufficient 

time to make any necessary systems 

changes, we are providing for a six 

month implementation period for the 

‘‘short exempt’’ marking requirement of 

Rule 200(g) such that market 

participants will have to comply with 

this requirement six months following 

the effective date of these amendments. 

We believe that a six month 

implementation period will provide 

market participants with sufficient time 

in which to modify their systems and 

procedures in order to comply with the 

proposed marking requirements. In 

addition, the six month implementation 

period is consistent with the 

implementation period for Rule 201. 

V. Exemptive Procedures 

Consistent with the provisions 

proposed, Rule 201(f) as adopted 

includes provisions establishing 

procedures for the Commission, upon 

written request or its own motion, to 

grant an exemption from the Rule’s 

provisions, either unconditionally or on 

specified terms and conditions, if the 

Commission determines that such 

exemption is necessary or appropriate 

in the public interest and is consistent 

with the protection of investors.590

Pursuant to this provision, we will 

consider and act upon appropriate 

requests for relief from the provisions of 

Rule 201 and will consider the 

particular facts and circumstances 

relevant to each such request and any 

appropriate conditions to be imposed as 

part of the exemption. 

In response to our request for 

comment, one commenter stated that ‘‘it 

is important for the Commission to have 

detailed procedures for granting 

exemptions,’’ but that exemptions can 

decrease overall compliance with the 

rule by encouraging other market 

participants to tailor their situation to 

qualify for an exemption.591 The 

commenter stated that the Commission 

‘‘must set the bar high for those seeking 

exemptive relief.’’ 592

We have determined to include in 

Rule 201 a provision related to granting 

exemptions from the Rule’s provisions 

in order to provide clear procedures for 

requests and grants of exemptions. As 

stated above, we will consider requests 

for relief and grant exemptions from 

Rule 201 if the Commission determines 

that an exemption is necessary or 

appropriate in the public interest and is 

consistent with the protection of 

investors, taking into account the 

particular facts and circumstances 

relevant to each such request and any 

appropriate conditions to be imposed in 

connection with the exemption. 

VI. Overseas Transactions 

In connection with former Rule 10a– 

1, the Commission consistently took the 

position that the rule applied to trades 

in securities subject to that rule where 

the trade was ‘‘agreed to’’ in the U.S., but 

booked overseas.593 In addition, in the 

2004 Regulation SHO Adopting Release 

we stated that any broker-dealer using 

the United States jurisdictional means 

to effect short sales in securities traded 

in the United States would be subject to 

Regulation SHO, regardless of whether 

the broker-dealer is registered with the 

Commission or relying on an exemption 

from registration.594 For example, a U.S. 

money manager decides to sell a block 

of 500,000 shares in a covered security. 

The money manager negotiates a price 

with a U.S. broker-dealer, who sends the 

order ticket to its foreign trading desk 

for execution. In our view, this trade 

was agreed to in the United States and 

occurred in the United States as much 

as if the trade had been executed by the 

broker-dealer at a U.S. trading desk. 

Consistent with these prior statements, 

we stated in the Proposal that if a short 

sale is agreed to in the United States, it 

must be effected in accordance with the 

requirements of the proposed rules, 

unless otherwise excepted.595

In response to our request for 

comment, one commenter stated that 

‘‘[g]enerally speaking, the Commission 

has taken the position that the 

provisions of Regulation SHO apply to 

transactions in covered securities 

‘agreed to’ in the United States, but sent 

to a foreign market for execution. 

Notwithstanding, there has been ongoing confusion in this area. The 

Commission should use this 

opportunity to clarify the applicability 

of the restrictions (and Regulation SHO 

generally) to transactions in covered 

securities executed on overseas 

markets.’’ 596 Consistent with our prior 

statements, we note that Rule 201 

applies to any short sale effected using 

the United States jurisdictional means, 

regardless of the jurisdiction in which 

the short sale is executed. 

VII. Rule 201 Implementation Period 

In the Proposal and Re-Opening 

Release, we proposed a three-month and 

two-month implementation period, 

respectively, and requested comment 

regarding these implementation 

periods.597 We are adopting in Rule 201 

a six-month implementation period, 

such that trading centers will have to 

comply with Rule 201 six months 

following the effective date of Rule 201. 

We believe that this implementation 

period will provide trading centers, 


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598See, e.g., letter from FIF (Sept. 2009); letter 

from Citadel et al. (Sept. 2009); letter from Credit 

Suisse (Sept. 2009); letter from Direct Edge (Sept. 

2009); letter from EWT (Sept. 2009); letter from 

NYSE Euronext (Sept. 2009); letter from RBC (Sept. 

2009); letter from SIFMA (Sept. 2009); letter from 

MFA (Oct. 2009); letter from Amer. Bankers Assoc.; 

see also letter from NSCP; letter from RBC (June 

2009); letter from STA (June 2009). 

599See, e.g., letter from Credit Suisse (June 2009); 

letter from Credit Suisse (Sept. 2009); letter from 

STA (Sept. 2009); letter from FIF (Sept. 2009). 

600Letter from MFA (Oct. 2009). 

601Letter from Goldman Sachs (Sept. 2009). 

602See, e.g., letter from Credit Suisse (Sept. 2009); 

letter from Nasdaq OMX Group (Oct. 2009). 

603See, e.g., letter from Citadel et al. (Sept. 2009); 

letter from NYSE Euronext (Sept. 2009); letter from 

RBC (Sept. 2009); letter from SIFMA (Sept. 2009). 

604See, e.g., letter from NSCP; letter from RBC 

(June 2009). 

605See letter from Direct Edge (Sept. 2009) 

(stating that adopting the alternative uptick rule 

with a circuit breaker would add approximately 

four to six weeks to the development process); letter 

from NYSE Euronext (Sept. 2009). 

606See letter from Goldman Sachs (Sept. 2009); 

letter from FIF (Sept. 2009). 

607We note that, in effect, market participants 

will have approximately eight months from 

publication in the Federal Register to implement 

Rule 201. Rule 201 will not become effective until 

sixty days following publication in the Federal 

Register and the Compliance Date for Rule 201 is 

six months following the Rule’s Effective Date. 

608See supra Section III.B. (discussing the ‘‘short 

exempt’’ marking provisions of Rule 201) and supra 

Section IV. (discussing the ‘‘short exempt’’ marking 

requirement of Rule 200(g)). 

609See 2004 Regulation SHO Adopting Release, 

69 FR 48008. 

610See 2007 Price Test Adopting Release, 72 FR 

36348. 

611See letter from Josephine J. Tao, Assistant 

Director, Division of Market Regulation, SEC, to Ira 

Hammerman, Senior Managing Director and 

General Counsel, Securities Industry and Financial 

Markets Association, dated July 2, 2007. 

612See, e.g., Proposal, 74 FR at 18071. 

613See, e.g., letter from BATS (May 2009); letter 

from IAG; letter from BIO; letter from James J. 

Angel, PhD, CFA, Associate Professor of Finance, 

McDonough School of Business, Georgetown 

University, dated June 19, 2009 (‘‘Prof. Angel (June 

2009)’’); letter from Barclays (June 2009); letter from 

Citadel et al. (June 2009); letter from EWT (June 

2009); letter from NSCP; letter from RBC (June 

2009); letter from STA (June 2009); letter from 

NYSE Euronext (June 2009); letter from Knight 

Capital (June 2009); letter from STANY (June 2009); 

letter from T. Rowe Price (June 2009); letter from 

Credit Suisse (June 2009); memorandum regarding 

meeting with Penson; letter from CFA; letter from 

Knight Capital (Sept. 2009); letter from Prof. Angel 

(Sept. 2009); letter from Dialectic Capital (Sept. 

2009); letter from Direct Edge (Sept. 2009); letter 

from EWT (Sept. 2009); letter from NYSE Euronext 

(Sept. 2009); letter from Qtrade; letter from RBC 

(Sept. 2009); letter from STANY (Sept. 2009); letter 

from Virtu Financial. 

broker-dealers and other market 

participants with sufficient time in 

which to modify their systems, policies 

and procedures in order to comply with 

the requirements of Rule 201. 

In response to our request for 

comment, commenters indicated that a 

circuit breaker rule triggering the 

alternative uptick rule will require an 

implementation period of between three 

and twelve months.598 Several 

commenters noted that because the 

alternative uptick rule, unlike the other 

proposed price tests, would not require 

sequencing of bids or last sale prices, 

the alternative uptick rule could be 

implemented more quickly than the 

other proposed price tests and could be 

implemented within three to six 

months.599 One commenter noted that 

implementation concerns with respect 

to a short sale price test restriction 

could be minimized, provided that 

trading centers ‘‘could leverage existing 

architecture developed to comply with 

the Order Protection Rule in Reg NMS 

(Rule 611).’’ 600 Another commenter 

noted that implementation of a circuit 

breaker triggering the alternative uptick 

rule would be easier to implement, 

‘‘provided that the Commission permits 

firms to leverage the numerous systems 

changes made to facilitate compliance 

with Regulation NMS (including the use 

of internal market data rather than 

consolidated data supplied by the 

industry plans).’’ 601 Other commenters 

noted that adopting the alternative 

uptick rule in conjunction with a circuit 

breaker, rather than as a permanent, 

market-wide rule, would not add 

significantly to the implementation time 

required.602

Several commenters, however, did not 

agree that the absence of a sequencing 

requirement would shorten the 

implementation time required for the 

alternative uptick rule.603 In addition, 

several commenters did not agree that 

previous implementation of Regulation 

NMS might allow for quicker 

implementation of a price test.604 Other 

commenters stated that adopting the 

alternative uptick rule in conjunction 

with a circuit breaker would add to the 

implementation time.605 Some 

commenters expressed concerns that 

allowing for certain exceptions could 

affect the implementation time.606

We believe that a six month 

implementation period is 

appropriate.607 This implementation 

period, which is longer than the 

implementation periods proposed in the 

Proposal and the Re-opening Release, 

takes into consideration commenters’ 

concerns that implementation of a price 

test could be complex. We do not 

believe that a longer implementation 

time is warranted because Rule 201 will 

not require monitoring of the sequence 

of bids or last sale prices, unlike other 

proposed price tests, and because Rule 

201 will require the implementation of 

policies and procedures similar to those 

required for trading centers under 

Regulation NMS. In addition, market 

participants will be able to leverage the 

numerous systems changes made and 

current architecture developed to 

facilitate compliance with Regulation 

NMS. These factors should reduce 

implementation time. 

In addition, we believe the six month 

implementation period will allow 

sufficient time to address any 

complexities implementing the circuit 

breaker and the ‘‘short exempt’’ order 

marking requirement.608 We note that 

broker-dealers are already familiar with 

and have experience implementing a 

‘‘short exempt’’ marking requirement as 

Regulation SHO, as originally adopted, 

included such a requirement.609 The 

‘‘short exempt’’ marking requirement 

was eliminated together with the 

elimination of all short sale price test 

restrictions in July 2007.610 In addition, 

we note that broker-dealers were able to 

make significant systems changes to deprogram the ‘‘short exempt’’ marking 

requirement from their systems in less 

than 90 days from the compliance date 

for elimination of the requirement.611

Thus, we believe that a six month 

implementation period should be 

sufficient. 

We also believe that a six month 

implementation period is appropriate 

for any systems changes that must be 

made by listing markets and single plan 

processors to comply with Rule 201. As 

discussed above, the single plan 

processors currently receive information 

from listing markets regarding trading 

restrictions (i.e. Regulatory Halts as 

defined in those plans) on individual 

securities and disseminate such 

information. Thus, the requirements of 

Rule 201(b)(3) are similar to existing 

obligations on plan processors pursuant 

to the requirements of Regulation NMS, 

the CTA and CQ Plans and the Nasdaq 

UTP Plan. Due to this similarity, we 

believe that a six month implementation 

period is appropriate. 

VIII. Decision Not To Implement Rule 

201 on a Pilot Basis 

In the Proposal, we requested 

comment regarding whether, before 

determining whether to adopt a short 

sale price test restriction or circuit 

breaker rule on a permanent basis, we 

should adopt a rule that would apply on 

a pilot basis to specified securities.612 In 

response to our request for comment, a 

number of commenters stated that any 

price test restriction should be adopted 

on a pilot basis.613 A number of 

commenters indicated that a pilot study 

should be conducted prior to adoption 

of a price test on a permanent basis in 

order to gather empirical evidence on 

the effectiveness and/or market impact 


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614See, e.g., letter from BATS (May 2009); letter 

from BIO; letter from Prof. Angel (June 2009); letter 

from Credit Suisse (June 2009); letter from Knight 

Capital (June 2009); letter from NSCP; letter from 

RBC (June 2009); letter from STANY (June 2009); 

memorandum regarding meeting with Penson; letter 

from CFA; letter from Prof. Angel (Sept. 2009); 

letter from Dialectic Capital (Sept. 2009); letter from 

Direct Edge (Sept. 2009); letter from EWT (Sept. 

2009); letter from Knight Capital (Sept. 2009); letter 

from Qtrade; letter from RBC (Sept. 2009); letter 

from STANY (Sept. 2009); see also letter from Park 

National (stating that a review of a price test based 

on the national best bid should be conducted six 

months after implementation to ensure 

effectiveness). We also note that a number of 

commenters indicated that the Commission should 

gather empirical evidence through further study, 

though not necessarily in the form of a pilot study, 

prior to adopting a price test. See, e.g., letter from 

BATS (May 2009); letter from Citadel et al. (June 

2009); letter from Dialectic Capital (June 2009); 

letter from Geoffrey F. Foisie, Investments Manager, 

Shawbrook, dated June 16, 2009; letter from Amer. 

Bar Assoc. (July 2009); letter from Jeffrey W. Rubin, 

Chair, Committee on Federal Regulation of 

Securities, American Bar Association, dated Sept. 

30, 2009 (‘‘Amer. Bar Assoc. (Sept. 2009)’’); letter 

from Goldman Sachs (Sept. 2009). 

615See, e.g., letter from Credit Suisse (June 2009); 

letter from STA (June 2009). 

616See letter from Citadel et al. (June 2009). 

617See letter from NYSE Euronext (June 2009). 

618See letter from Virtu Financial. 

619See letter from STANY (Sept. 2009). 

620See, e.g., letter from T. Rowe Price (June 2009); 

letter from Direct Edge (Sept. 2009); see also letter 

from Wells Fargo (June 2009) (noting that additional 

study regarding an exception for bona fide market 

making activity would be needed if the Commission 

adopted a circuit breaker rule). 

621See letter from BATS (May 2009); letter from 

STA (June 2009). 

622See, e.g., letter from Amer. Bankers Assoc.; 

letter from SIFMA (June 2009); letter from IBC. 623See, e.g., letter from Amer. Bankers Assoc.; 

letter from NYSE Euronext (June 2009); letter from 

SIFMA (June 2009); letter from STA (June 2009). 

624See, e.g., letter from Amer. Bankers Assoc.; 

letter from SIFMA (June 2009). 

625See letter from IBC. 

626See, e.g., letter from SIFMA (June 2009); letter 

from Dialectic Capital (June 2009). One commenter 

also cited easier removal of the price test restriction 

as an argument for a pilot study. See letter from 

STANY (June 2009). 

627See letter from STA (June 2009). We note that 

a number of commenters expressed concerns 

regarding the implementation costs of a price test. 

See infra Sections X.B.1.b. and X.B.2.b. (discussing 

implementation costs). 628 44 U.S.C. 3501 et seq. 

of a price test.614 Some commenters 

stated that adopting a price test on a 

pilot basis only would limit any 

negative market impact to the subset of 

securities subject to the price test.615

Another commenter stated that a pilot 

study would allow the Commission to 

gather data on the effects of a price test 

as compared to a control group not 

subject to a price test.616 One 

commenter noted that a pilot study 

would allow the Commission to observe 

the effects of a price test under current 

market conditions,617 while another 

stated that the Commission should 

study a price test in the context of 

severe market conditions.618 Another 

commenter stated that a pilot study is 

particularly important for the alternative 

uptick rule because it has not been in 

effect in the market previously and 

would be more restrictive than other 

proposed price tests.619 Other 

commenters noted that a pilot study 

could provide data regarding the impact 

or need for various exceptions to a price 

test.620 Several commenters indicated 

that pilot study data should be made 

publicly available to permit third parties 

to analyze the results of the pilot 

study.621

In contrast, several commenters stated 

that the Commission should not adopt 

a price test restriction on a pilot 

basis.622 Several of these commenters 

expressed concerns regarding the costs 

to implement a price test on a pilot 

basis,623 with some stating that such 

costs would outweigh the benefits of a 

pilot study.624 One commenter stated 

that a price test should be implemented 

as soon as possible, without a pilot 

study, because a pilot study would 

produce little or no benefit.625 Several 

commenters expressed support for a 

‘‘sunset’’ provision allowing the 

Commission to more easily remove a 

price test restriction if it was 

determined that the restriction was not 

meeting the Commission’s goals or was 

harming the market.626

We have determined not to adopt 

Rule 201 on a pilot basis. We believe 

that adopting the rule on a temporary 

pilot basis and/or only for a subset of 

securities will not advance the goals of 

our adopting Rule 201. For example, 

one goal in adopting Rule 201 is to 

address erosion of investor confidence 

in our markets. We believe that adopting 

Rule 201 on a pilot basis, such that the 

Rule would apply for the duration of the 

pilot only, could undermine this goal 

because, among other things, investors 

would know that the Rule is in place for 

a limited period of time rather than on 

a permanent basis and, therefore, may 

believe that any benefits that result from 

the Rule could be temporary. 

In addition, we note that unlike the 

Pilot, which removed then-existing 

short sale price test restrictions for a 

subset of securities, undertaking a pilot 

study in connection with Rule 201 

would require market participants to 

undertake as much time, effort and 

expense as full implementation of the 

new rule. As noted by one commenter, 

the implementation cost would be the 

same whether the Rule is adopted on a 

pilot or a permanent basis.627 We also 

do not believe a ‘‘sunset’’ provision 

would advance our goal of restoring 

investor confidence because, as with a 

pilot, investors would know that the 

Rule is in place for a limited period of 

time rather than on a permanent basis 

and, therefore, may believe that any 

benefits that result from the Rule could 

be temporary. 

We encourage researchers, however, 

to provide the Commission with their 

own empirical analyses regarding the 

impact of the Rule on the options 

markets, and on market quality in 

general. We will, moreover, carefully 

monitor the operation of the Rule to 

assess its impact and effectiveness, 

including the Rule’s impact on market 

quality, to determine whether any 

modifications to the Rule are warranted. 

In addition, we have instructed the Staff 

to assess the impact of the Rule on the 

options markets and to provide us with 

a written report of their assessment 

within the shortest time practicable for 

completing a meaningful study, which 

we expect, in any event, will not exceed 

two years from the Compliance Date. 

To the extent that we determine at 

any time that any of the current 

parameters of Rule 201, such as the 

exceptions to the Rule, the 10% trigger 

level, the duration of the price test 

restriction if triggered, the basing of the 

trigger level on the prior day’s closing 

price as determined by the covered 

security’s listing market, or changed 

market conditions, result in Rule 201 

not adequately addressing our concerns 

or meeting our goals in adopting Rule 

201, we will consider whether to amend 

Rule 201, or grant relief thereunder, as 

appropriate at that time. 

IX. Paperwork Reduction Act 

A. Background 

Certain provisions of the amendments 

to Regulation SHO contain new 

‘‘collection of information’’ requirements 

within the meaning of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’).628 We 

submitted the collection of information 

to the Office of Management and Budget 

(‘‘OMB’’) for review and approval in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid OMB control number. 

The title for the collection of 

information is ‘‘Rules 201 and 200(g)’’ 

and the OMB control number for the 

collection of information is 3235–0651. 

We are adopting amendments to Rules 

201 and 200(g) of Regulation SHO under 

the Exchange Act. The amendments to 

Rule 201 impose a short sale-related 

circuit breaker that, if triggered, will 

impose a short sale price test restriction 

on a particular security for a limited 


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629Rule 201(b). See also supra Section III.A.7. 

(discussing the policies and procedures approach). 

630 Id. 

631See Rules 200(g) and 200(g)(2); see also supra 

Section IV. (discussing the amendments to Rule 

200(g)). 

632Rule 201(b). See also supra Section III.A.7. 

(discussing the policies and procedures approach). 

633 Id. 

634Rule 200(g)(2). The broker-dealer marking the 

order ‘‘short exempt’’ will have responsibility for 

being able to identify on which provision of Rule 

201 it was relying in marking the order ‘‘short 

exempt.’’ 

635This provision will reinforce the on-going 

maintenance and enforcement requirements of Rule 

201(b)(1) by explicitly assigning an affirmative 

responsibility to trading centers to surveil to 

ascertain the effectiveness of their policies and 

procedures. See Rule 201(b)(2). We note that Rule 

611(a)(2) of Regulation NMS contains a similar 

provision for trading centers. See 17 CFR 

242.611(a)(2). 

636See Rule 201(c). As a result, a trading center’s 

policies and procedures will need to be reasonably 

designed to permit the execution or display of such 

orders without regard to whether the order is at a 

price that is less than or equal to the current 

national best bid. See Rule 201(b)(1)(iii). 

637See Rules 201(c)(1) and 201(c)(2). 

638See Rule 201(d)(6). As a result, a trading 

center’s policies and procedures will need to be 

reasonably designed to permit the execution or 

display of such orders without regard to whether 

the order is at a price that is less than or equal to 

the current national best bid. See Rule 201(b)(1)(iii). 

period of time. Specifically, Rule 201 

requires that a trading center establish, 

maintain, and enforce written policies 

and procedures reasonably designed to 

prevent the execution or display of a 

short sale order of a covered security at 

a price that is less than or equal to the 

current national best bid if the price of 

that covered security decreases by 10% 

or more from the covered security’s 

closing price as determined by the 

listing market for the covered security as 

of the end of regular trading hours on 

the prior day.629 In addition, the Rule 

requires that the trading center 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to impose this short sale price 

test restriction for the remainder of the 

day and the following day when a 

national best bid for the covered 

security is calculated and disseminated 

on a current and continuing basis by a 

plan processor pursuant to an effective 

national market system plan.630 In 

addition, we are adopting amendments 

to Rule 200(g) of Regulation SHO to 

provide that a broker-dealer may mark 

certain qualifying sell orders ‘‘short 

exempt.’’ In particular, if the brokerdealer chooses to rely on its own 

determination that it is submitting the 

short sale order to the trading center at 

a price that is above the current national 

best bid at the time of submission or to 

rely on an exception specified in the 

Rule, it must mark the order as ‘‘short 

exempt.’’ 631

B. Summary 

As detailed below, several provisions 

under the amendments to Regulation 

SHO impose a new ‘‘collection of 

information’’ within the meaning of the 

PRA. 

1. Policies and Procedures Requirement 

Under Rule 201 

Rule 201 imposes a new ‘‘collection of 

information’’ within the meaning of the 

PRA. Rule 201 requires that a trading 

center establish, maintain, and enforce 

written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day.632 In addition, the Rule requires 

that the trading center establish, 

maintain, and enforce written policies 

and procedures reasonably designed to 

impose this short sale price test 

restriction for the remainder of the day 

and the following day when a national 

best bid for the covered security is 

calculated and disseminated on a 

current and continuing basis by a plan 

processor pursuant to an effective 

national market system plan. Thus, a 

trading center’s policies and procedures 

must be reasonably designed to permit 

the trading center to be able to obtain 

information from the single plan 

processor regarding whether a covered 

security is subject to the short sale price 

test restriction of Rule 201; if the 

covered security is subject to the short 

sale price test restriction of Rule 201, to 

determine whether or not the short sale 

order is priced in accordance with the 

provisions of Rule 201(b); and to 

recognize when an order is marked 

‘‘short exempt’’ such that the trading 

center’s policies and procedures do not 

prevent the execution or display of such 

orders at a price that is less than or 

equal to the current national best bid, 

even if the covered security is subject to 

the short sale price test restriction of 

Rule 201.633

At a minimum, a trading center’s 

policies and procedures must enable a 

trading center to monitor, on a real-time 

basis, the national best bid, so as to 

determine the price at which the trading 

center may execute or display a short 

sale order. As mentioned above, a 

trading center must have policies and 

procedures reasonably designed to 

permit the execution or display of a 

short sale order of a covered security 

marked ‘‘short exempt’’ without regard 

to whether the order is at a price that 

is less than or equal to the current 

national best bid.634

A trading center must also take such 

steps as will be necessary to enable it to 

enforce its policies and procedures 

effectively. A trading center must 

regularly surveil to ascertain the 

effectiveness of the policies and 

procedures required under the Rule and 

must take prompt action to remedy 

deficiencies in such policies and 

procedures.635 The nature and extent of 

the policies and procedures that a 

trading center must establish to comply 

with these requirements will depend 

upon the type, size, and nature of the 

trading center. 

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

Rule 201 contains a broker-dealer 

provision that requires a new ‘‘collection 

of information’’ under the PRA. Rule 

201(c) permits a broker-dealer 

submitting a short sale order for the 

covered security to a trading center to 

mark the order ‘‘short exempt’’ if the 

broker-dealer identifies the order as 

being at a price above the current 

national best bid at the time of 

submission.636 This provision requires a 

new collection of information in that a 

broker-dealer marking an order ‘‘short 

exempt’’ under Rule 201(c) must 

identify a short sale order as priced in 

accordance with the requirements of 

Rule 201(c); establish, maintain, and 

enforce written policies and procedures 

reasonably designed to prevent the 

incorrect identification of orders as 

being priced in accordance with the 

requirements of Rule 201(c); regularly 

surveil to ascertain the effectiveness of 

these policies and procedures, and to 

take prompt action to remedy 

deficiencies.637

Rule 201 also contains a riskless 

principal provision that requires a new 

‘‘collection of information’’ under the 

PRA. Specifically, Rule 201(d)(6) 

permits a broker-dealer to mark as ‘‘short 

exempt’’ short sale orders where brokerdealers are facilitating customer buy 

orders or sell orders where the customer 

is net long, and the broker-dealer is net 

short but is effecting the sale as riskless 

principal, provided certain conditions 

are satisfied.638 This provision requires 

a new collection of information in that 

it requires a broker-dealer marking an 

order ‘‘short exempt’’ under this 

provision to have written policies and 

procedures in place to assure that, at a 


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639See Rule 201(d)(6). 

640 17 CFR 242.200(g). 

641See Rule 200(g); see also supra Section IV. 

(discussing the amendments to Rule 200(g)). 

642See Rule 200(g)(2). 

643See Rule 201(b). 

644See Rule 201(c). 

645See Rule 201(d)(6). 

646See Rule 200(g); see also supra Section IV. 

(discussing the amendments to Rule 200(g)). 

647See Rule 200(g)(2). 

648See Rule 201(b). 

649See Rule 201(a)(9); see also 17 CFR 

242.600(b)(78). 

650Currently, there are 10 national securities 

exchanges (BX, BATS, CBOE, CHX, ISE, Nasdaq, 

NSX, NYSE, NYSE Amex, and NYSE Arca) that 

operate an SRO trading facility for covered 

securities and thus will be subject to the Rule. The 

Proposal indicated that one national securities 

association (FINRA) would also be subject to the 

Rule. See Proposal, 74 FR at 18086, n.334. However, 

FINRA operates an SRO display-only facility for 

covered securities, rather than an SRO trading 

facility, and thus is not subject to the Rule. 

651This number includes the approximately 357 

firms that were registered equity market makers or 

specialists at year-end 2008 (this number was 

derived from annual FOCUS reports and discussion 

with SRO staff), as well as the 50 ATSs that operate 

trading systems that trade covered securities. The 

Commission believes it is reasonable to estimate 

that in general, firms that are block positioners— 

i.e., firms that are in the business of executing 

orders internally—are the same firms that are 

registered market makers (for instance, they may be 

registered as a market maker in one or more Nasdaq 

stocks and carry on a block positioner business in 

exchange-listed stocks), especially given the 

amount of capital necessary to carry on such a 

business. 

minimum: (i) The customer order was 

received prior to the offsetting 

transaction; (ii) the offsetting transaction 

is allocated to a riskless principal or 

customer account within 60 seconds of 

execution; and (iii) that it has 

supervisory systems in place to produce 

records that enable the broker-dealer to 

accurately and readily reconstruct, in a 

time-sequenced manner, all orders on 

which the broker-dealer relies pursuant 

to this provision.639

3. Marking Requirements 

While the current marking 

requirements in Rule 200(g) of 

Regulation SHO, which require brokerdealers to mark all sell orders of any 

equity security as either ‘‘long’’ or 

‘‘short,’’ 640 remain in effect, the 

amendments to Rule 200(g) add a new 

marking requirement of ‘‘short 

exempt.’’ 641 In particular, if the brokerdealer chooses to rely on its own 

determination that it is submitting the 

short sale order to the trading center at 

a price that is above the current national 

best bid at the time of submission or to 

rely on an exception specified in the 

Rule, it must mark the order as ‘‘short 

exempt.’’ 642 The new ‘‘short exempt’’ 

marking requirements impose a new 

collection of information. 

C. Use of Information 

1. Policies and Procedures Requirement 

Under Rule 201 

The information collected under Rule 

201’s written policies and procedure 

requirement 643 will help ensure that the 

trading center does not execute or 

display any impermissibly priced short 

sale orders, unless an order is marked 

‘‘short exempt,’’ in accordance with the 

Rule’s requirements. This written 

policies and procedures requirement 

will also provide trading centers with 

flexibility in determining how to 

comply with the requirements of Rule 

201. The information collected also will 

aid the Commission and SROs that 

regulate trading centers in monitoring 

compliance with the Rule’s 

requirements. In addition, it will aid 

trading centers and broker-dealers in 

complying with the Rule’s 

requirements. 

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

The broker-dealer provision in Rule 

201(c) permits a broker-dealer 

submitting a short sale order for the 

covered security to a trading center to 

mark the order ‘‘short exempt’’ if the 

broker-dealer identifies the order as 

being at a price above the current 

national best bid at the time of 

submission.644 This provision includes 

a policies and procedures requirement 

that is designed to help prevent 

incorrect identification of orders for 

purposes of Rule 201(c)’s broker-dealer 

provision. The information collected 

will also enable the Commission and 

SROs to examine for compliance with 

the requirements of the exception. 

Moreover, the information collected 

under the written policies and 

procedures requirement in the riskless 

principal exception in Rule 201(d)(6) 645

will help assure that broker-dealers 

comply with the requirements of this 

provision. The information collected 

will also enable the Commission and 

SROs to examine for compliance with 

the requirements of the exception. 

3. Marking Requirements 

The amendments to Rule 200(g) add 

a new marking requirement of ‘‘short 

exempt.’’ 646 In particular, if the brokerdealer chooses to rely on its own 

determination that it is submitting the 

short sale order to the trading center at 

a price that is above the current national 

best bid at the time of submission or to 

rely on an exception specified in the 

Rule, it must mark the order as ‘‘short 

exempt.’’ 647 The purpose of the 

information collected is to enable the 

Commission and SROs to monitor 

whether a person entering a sell order 

covered by Rule 201 is acting in 

accordance with one of the provisions 

contained in paragraph (c) or (d) of the 

Rule. In particular, the ‘‘short exempt’’ 

marking requirement will provide a 

record that will aid in surveillance for 

compliance with the provisions of Rule 

201. It also will provide an indication to 

a trading center regarding whether or 

not it must execute or display a short 

sale order in accordance with the Rule’s 

provisions. In addition, it will help a 

trading center determine whether its 

policies and procedures are reasonable 

and whether its surveillance is effective. 

D. Respondents 

As discussed below, the Commission 

has considered each of the following 

respondents for the purposes of 

calculating the reporting burdens under 

the amendments to Rules 200(g) and 201 

of Regulation SHO. 

1. Policies and Procedures Requirement 

Under Rule 201 

Rule 201 requires each trading center 

to establish, maintain, and enforce 

written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid during the period 

when the circuit breaker is in effect, 

unless an exception applies.648 A 

‘‘trading center’’ is defined as ‘‘a national 

securities exchange or national 

securities association that operates an 

SRO trading facility, an alternative 

trading system, an exchange market 

maker, an OTC market maker, or any 

other broker or dealer that executes 

orders internally by trading as principal 

or crossing orders as agent.’’ 649 Because 

Rule 201 applies to any trading center 

that executes or displays a short sale 

order in a covered security, the Rule 

applies to 10 registered national 

securities exchanges that trade covered 

securities (or ‘‘SRO trading centers’’),650

and approximately 407 broker-dealers 

(including ATSs) registered with the 

Commission (or ‘‘non-SRO trading 

centers’’).651


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652This number is based on a review of 2008 

FOCUS Report filings reflecting registered brokerdealers, including introducing broker-dealers. This 

number does not include broker-dealers that are 

delinquent on FOCUS Report filings. 

653 Id. 

654See Rule 201(b)(1). 

655See Proposal, 74 FR at 18087. 656See Proposal, 74 FR at 18088; Re-Opening 

Release, 74 FR at 42036. 657Letter from Wolverine. Wolverine provided an 

estimate of $500,000 per firm for implementation 

costs, which it applied to both non-SRO trading 

centers and other registered broker-dealers. 

658Letter from EWT (Sept. 2009). 

659See, e.g., letter from RBC (June 2009); letter 

from STANY (June 2009); letter from CPIC (June 

2009); letter from EWT (Sept. 2009); letter from RBC 

(Sept. 2009). We received time estimates only with 

respect to the Commission’s proposed 

implementation time and did not receive comments 

regarding estimated PRA burden hours. See supra 

Section VII. (discussing comments on 

implementation time). 

660We received comments expressing concerns 

about the implementation and on-going monitoring 

and compliance costs of a short sale price test 

restriction that were not specific to the alternative 

uptick rule. See, e.g., letter from RBC (June 2009); 

letter from STANY (June 2009); letter from CPIC 

(June 2009); letter from Wolverine. 

661See, e.g., letter from BATS (May 2009); letter 

from Michael L. Crowl, Managing Director, Global 

General Counsel, Barclays Global Investors, dated 

Sept. 21, 2009 (‘‘Barclays (Sept. 2009)’’); letter from 

BATS (Sept. 2009); letter from GETCO (Sept. 2009); 

letter from ICI (Sept. 2009); letter from Glen 

Shipway (Sept. 2009); letter from STA (Sept. 2009). 

In addition, several commenters acknowledged that 

implementation of the alternative uptick rule will 

likely be less costly, without referencing the 

sequencing issue. See, e.g., letter from Atherton 

Lane; letter from STANY (Sept. 2009). 

662See, e.g., letter from Credit Suisse (June 2009); 

letter from Goldman Sachs (June 2009); letter from 

SIFMA (June 2009); letter from Glen Shipway (Sept. 

2009); letter from SIFMA (Sept. 2009). In addition, 

one commenter acknowledged that implementation 

of the alternative uptick rule will likely be easier, 

without referencing the sequencing issue. See letter 

from Allston Trading (Sept. 2009). 

663See, e.g., letter from BATS (May 2009); letter 

from Goldman Sachs (June 2009); letter from Glen 

Shipway (Sept. 2009); letter from ICI (Sept. 2009); 

see also letter from National Stock Exchange et al. 

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

The collection of information required 

in connection with the broker-dealer 

provision in Rule 201(c) and in 

connection with the riskless principal 

provision in Rule 201(d)(6) applies to all 

registered brokers-dealers submitting 

short sale orders in reliance on these 

provisions. While not all broker-dealers 

likely will enter sell orders in securities 

covered by the amendments to Rules 

200(g) and 201 in a manner that will 

subject them to this collection of 

information, we estimate, for purposes 

of the PRA, that all of the approximately 

5,178 652 registered broker-dealers will 

do so. 

3. Marking Requirements 

The collection of information that is 

required pursuant to the ‘‘short exempt’’ 

marking requirements of Rule 200(g) 

applies to all registered brokers-dealers 

submitting short sale orders marked 

‘‘short exempt’’ in accordance with the 

provisions contained in paragraph (c) or 

(d) of Rule 201. While not all brokerdealers likely will enter sell orders in 

securities covered by the amendments 

to Rules 200(g) and 201 in a manner that 

will subject them to this collection of 

information, we estimate, for purposes 

of the PRA, that all of the approximately 

5,178 653 registered broker-dealers will 

do so. 

E. Total Annual Reporting and 

Recordkeeping Burdens 

1. Policies and Procedures Requirement 

Under Rule 201 

Rule 201 requires each trading center 

to establish, maintain, and enforce 

written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid during the period 

when the circuit breaker is in effect.654

Thus, trading centers must develop 

written policies and procedures 

reasonably designed to permit the 

trading center to be able to obtain 

information from the single plan 

processor regarding whether a covered 

security is subject to the short sale price 

test restriction of Rule 201; if the 

covered security is subject to the short 

sale price test restriction of Rule 201, to 

determine whether or not the short sale 

order is priced in accordance with the 

provisions of Rule 201(b); and to 

recognize when an order is marked 

‘‘short exempt’’ such that the trading 

center’s policies and procedures do not 

prevent the execution or display of such 

orders at a price that is less than or 

equal to the current national best bid, 

even if the covered security is subject to 

the short sale price test restriction of 

Rule 201. 

In the Proposal, we provided 

estimates of the reporting and 

recordkeeping burdens for trading 

centers under the proposed short sale 

price test restrictions, both on a 

permanent, market-wide basis and in 

conjunction with a circuit breaker.655

We also requested comment, in the 

Proposal and the Re-Opening Release, as 

to whether the proposed burden 

estimates were appropriate or whether 

such estimates should be increased or 

reduced, and if so, for which entities 

and by how much.656

One commenter provided a cost 

estimate, including costs for 

‘‘development man-hours’’ of $500,000 

per firm for implementation of a new 

short sale price test restriction by 

trading centers, either on a permanent, 

market-wide basis, or in conjunction 

with a circuit breaker.657 One 

commenter stated that a new short sale 

price test restriction would involve 

‘‘significant implementation costs’’ and 

‘‘the generation and retention of 

voluminous compliance reports’’ but did 

not provide a specific estimate of the 

cost or hours that would be involved.658

Several commenters expressed general 

concerns regarding the time and cost 

that would be imposed for 

implementation and on-going 

monitoring and surveillance of a new 

short sale price test restriction, 

including a policies and procedures 

requirement, but did not provide 

specific estimates of such time and 

cost.659

We considered these comments in 

reviewing the burden estimates for 

trading centers that we proposed with 

respect to the collection of information 

requirements in Rule 201. We believe 

that the cost and time required for 

implementation of Rule 201 will be 

lower than some commenters’ stated 

estimates 660 because we believe that the 

implementation and on-going 

monitoring and surveillance costs of the 

alternative uptick rule will be lower 

than the implementation and on-going 

monitoring and surveillance costs that 

would be associated with adoption of 

the proposed modified uptick rule or 

the proposed uptick rule. Unlike the 

proposed modified uptick rule and the 

proposed uptick rule, which would 

have required sequencing of the 

national best bid or last sale price (i.e., 

whether the current national best bid or 

last sale price is above or below the 

previous national best bid or last sale 

price), the alternative uptick rule 

references only the current national best 

bid. 

A number of commenters stated that 

because the alternative uptick rule 

would not require monitoring of the 

sequence of bids or last sale prices, 

implementing the alternative uptick rule 

would be less costly 661 or easier than 

implementing the proposed modified 

uptick rule or the proposed uptick 

rule.662 In addition, several commenters 

stated that the alternative uptick rule 

would be easier to program into trading 

and surveillance systems than the 

proposed modified uptick rule or the 

proposed uptick rule.663 Another 

commenter stated, with respect to the 

alternative uptick rule, that ‘‘actual 

implementation costs in terms of time 

and capital expenditure would be 


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664Letter from BATS (Sept. 2009). 

665See, e.g., letter from Matlock Capital (Sept. 

2009); letter from NYSE Euronext (Sept. 2009); 

letter from RBC (Sept. 2009); letter from Knight 

Capital (Sept. 2009). 

666See, e.g., letter from NYSE Euronext (Sept. 

2009) (stating that implementation of the alternative 

uptick rule would be more difficult on the basis that 

the alternative uptick rule would be paired with a 

circuit breaker and attributing implementation 

difficulties to the circuit breaker approach, not the 

alternative uptick rule); letter from RBC (Sept. 2009) 

(expressing concern about the implementation cost 

of any short sale price test restriction in general). 

667See, e.g., letter from Knight Capital (Sept. 

2009) (characterizing a potential increase in 

friction, confusion, or inefficiency in the market as 

an implementation difficulty that may arise from 

the alternative uptick rule). 

668See letter from Matlock Capital (Sept. 2009). 

669See, e.g., letter from Matlock Capital (Sept. 

2009); letter from ISE (Sept. 2009); letter from 

Bingham McCutchen. 

670See Regulation NMS Adopting Release, 70 FR 

37496; see also Proposal, 74 FR at 18087. 

671See, e.g., letter from EWT (Sept. 2009); letter 

from MFA (Oct. 2009). 

672See, e.g., letter from FIF (June 2009); letter 

from NSCP; letter from RBC (June 2009). 

673Letter from FIF (June 2009); see also letter 

from RBC (June 2009). 

674See letter from NSCP; letter from RBC (June 

2009). 

675See Proposal, 74 FR at 18087. 

676See, e.g., letter from T. Rowe Price (June 2009); 

letter from Glen Shipway (June 2009); see also letter 

from STANY (June 2009) (stating that costs savings 

of a circuit breaker approach would be reduced if 

the circuit breaker triggered a short sale price test 

restriction); letter from NYSE Euronext (Sept. 2009) 

(stating that ‘‘a circuit breaker approach raises 

significant implementation complexities’’); letter 

from SIFMA (June 2009) (including a survey 

reflecting implementation costs of a circuit breaker 

triggering a short sale price test based on the 

national best bid). We note that one commenter 

indicated that adoption of a circuit breaker 

approach would add approximately four to six 

weeks to the implementation time of the alternative 

uptick rule. See letter from Direct Edge (Sept. 2009); 

see also supra Section VII. (discussing comments on 

implementation time). 

677See Proposal, 74 FR at 18087. 

678Letter from Nasdaq OMX Group (Oct. 2009). 

679Letter from Credit Suisse (Sept. 2009). 

680See, e.g., letter from STA (June 2009). 

681See letter from Glen Shipway (June 2009). 

negligible when compared to those 

involved in implementing either the 

uptick rule or modified uptick rule.’’ 664

Several commenters indicated that 

implementation of the alternative uptick 

rule would not be easier or less costly 

than implementation of the proposed 

modified uptick rule or the proposed 

uptick rule.665 However, we note that 

some of these commenters presented 

concerns that were not directly related 

to the alternative uptick rule 666 or to 

implementation costs or difficulties.667

Additionally, one commenter did not 

provide the reasoning for its belief that 

the alternative uptick rule would not be 

easier or less costly to implement.668

Several commenters indicated that 

their belief that other commenters’ 

estimates regarding the difficulty or 

costs of implementing and monitoring 

the proposed modified uptick rule and 

the proposed uptick rule were 

exaggerated.669 We recognize that some 

commenters’ estimates of the costs of 

the proposed modified uptick rule or 

the proposed uptick rule may have been 

conservative. We also believe that 

because the alternative uptick rule does 

not include a sequencing requirement, 

the implementation and on-going 

monitoring and surveillance costs of the 

alternative uptick rule will be less than 

such costs would be with respect to the 

other proposed short sale price test 

restrictions. 

In addition, as noted in the Proposal, 

while we have based our burden 

estimates, in part, on the burden 

estimates provided in connection with 

the adoption of Regulation NMS,670 we 

believe that these estimates may be on 

the high end because trading centers 

have already had to establish policies 

and procedures in connection with that 

Regulation’s Order Protection Rule, 

which could help form the basis for the 

policies and procedures for Rule 201. 

Several commenters agreed, stating that 

previous experience with the policies 

and procedures required under 

Regulation NMS might reduce the 

implementation and on-going 

monitoring and compliance burdens on 

trading centers.671 In contrast, some 

commenters indicated that the 

Commission overstated the benefit of 

such previous experience,672 because, 

for example, ‘‘systems re-written and 

architected for Reg NMS * * * did not 

include any short sale restrictions,’’ 673

or because such systems will require 

modifications in order to be used in the 

context of a short sale price test 

restriction.674 However, we considered 

these issues when considering the 

impact of previous experience with the 

policies and procedures requirement of 

Regulation NMS’s Order Protection 

Rule. We continue to believe that 

because most trading centers already 

have in place systems and written 

policies and procedures to comply with 

Regulation NMS’s Order Protection 

Rule, most trading centers will already 

be already familiar with establishing, 

maintaining, and enforcing tradingrelated policies and procedures, which 

will mitigate the burden of 

implementation of the policies and 

procedures requirement under Rule 201. 

We realize, however, that the exact 

nature and extent of the policies and 

procedures that a trading center is 

required to establish likely will vary 

depending upon the type, size, and 

nature of the trading center. Thus, our 

estimates take into account different 

types of trading centers and we realize 

that these estimates may be on the lowend for some trading centers while they 

may be on the high-end for other trading 

centers. 

We considered whether our estimates 

of the burdens associated with the 

collection of information requirements 

for trading centers with respect to the 

proposed modified uptick rule included 

in the Proposal 675 would change under 

the circuit breaker approach of Rule 

201, but, as discussed below, concluded 

that these estimates continue to 

represent reasonable estimates under 

the circuit breaker approach in 

combination with the alternative uptick 

rule. 

Despite some commenters’ concerns 

regarding the implementation costs of a 

circuit breaker rule,676 we believe that 

the circuit breaker approach will result 

in largely the same implementation 

costs as we estimated would be incurred 

if we adopted a permanent, market-wide 

short sale price test restriction.677 As 

one commenter stated ‘‘[o]nce the price 

test is in place, there is minimal 

incremental effort required to add a 

Circuit Breaker that controls the 

application of the price test.’’ 678

Similarly, another commenter stated 

that ‘‘[t]he additional coding required to 

implement a circuit breaker is minimal 

***’’ 679 We believe that there will be 

only minimal, if any, implementation 

costs for a circuit breaker approach in 

addition to the costs we estimated 

previously for the implementation of a 

permanent, market-wide short sale price 

test rule because trading centers would 

need to establish written policies and 

procedures to implement the short sale 

price test restriction regardless of 

whether the short sale price test 

restriction is adopted on a permanent, 

market-wide basis or, in the case of Rule 

201, adopted in conjunction with a 

circuit breaker. Several other 

commenters agreed, stating that the 

costs of the circuit breaker approach 

would be similar to, or only 

incrementally higher than, the costs of 

a permanent, market-wide approach.680

In addition, with respect to on-going 

monitoring and surveillance costs of the 

circuit breaker approach, we recognize, 

as noted by one commenter,681 that 

trading centers will need to 

continuously monitor whether a 

security is subject to the provisions of 

Rule 201 and that there will be costs 

associated with such monitoring. 

However, we believe that these costs 

will be offset because, under the circuit 

breaker approach, the alternative uptick 

rule is time limited and will only apply 


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682Letter from Nasdaq OMX Group (Oct. 2009); 

see also letter from SIFMA (Sept. 2009). 

683See supra note 292. 

684See, e.g., FINRA Rule 6120; see also Proposal, 

74 FR at 18065–18066 (discussing the background 

on circuit breakers). 

685See Proposal, 74 FR at 18087. 

686The Proposal indicated that there were 

approximately 372 non-SRO trading centers, 

including approximately 325 firms that were 

registered equity market makers or specialists at 

year-end 2007 (this number was derived from 

annual FOCUS reports and discussion with SRO 

staff), as well as 47 ATSs that operate trading 

systems that trade NMS stocks. See Proposal, 74 FR 

at 18086. We now estimate that there are 

approximately 407 non-SRO trading centers, 

including approximately 357 firms that were 

registered equity market makers or specialists at 

year-end 2008 (this number was derived from 

annual FOCUS reports and discussion with SRO 

staff), as well as 50 ATSs that operate trading 

systems that trade covered securities. See supra 

note 651. We also note that the number of SRO 

trading centers has changed from 11 in the Proposal 

to 10. See supra note 650. 

687For purposes of this adopting release, we are 

basing our estimates on the burden hour estimates 

provided in connection with the adoption of 

Regulation NMS because the policies and 

procedures developed in connection with that 

Regulation’s Order Protection Rule are in many 

ways similar to what a trading center will need to 

do to comply with Rule 201. See Regulation NMS 

Adopting Release, 70 FR 37496; see also Proposal, 

74 FR at 18087. We note, however, that these 

estimates may be on the high end because trading 

centers have already had to establish similar 

policies and procedures to comply with Regulation 

NMS. 

688Based on experience and estimates provided 

in connection with Regulation NMS, we anticipate 

that of the 220 hours we estimate will be spent to 

establish the required policies and procedures, 70 

hours will be spent by legal personnel, 105 hours 

will be spent by compliance personnel, 20 hours 

will be spent by information technology personnel 

and 25 hours will be spent by business operations 

personnel of the SRO trading center. 

689For purposes of this adopting release, we are 

basing our estimates on the burden hour estimates 

provided in connection with the adoption of 

Regulation NMS because the policies and 

procedures developed in connection with that 

Regulation’s Order Protection Rule are in many 

ways similar to what a trading center will need to 

do to comply with the Rule 201. See Regulation 

NMS Adopting Release, 70 FR 37496; see also 

Proposal, 74 FR at 18087. We note, however, that 

these estimates may be on the high end because 

trading centers have already had to establish similar 

policies and procedures to comply with Regulation 

NMS. 

690Based on experience and the estimates 

provided in connection with Regulation NMS, we 

anticipate that of the 160 hours we estimate will be 

spent to establish policies and procedures, 37 hours 

will be spent by legal personnel, 77 hours will be 

spent by compliance personnel, 23 hours will be 

spent by information technology personnel and 23 

hours will be spent by business operations 

personnel of the non-SRO trading center. 

691As discussed above, we base our burden 

estimate of 50 hours of outsourced legal time on the 

burden estimate used for Regulation NMS because 

the policies and procedures developed in 

connection with that Regulation’s Order Protection 

Rule are in many ways similar to what a trading 

center will need to do to comply with Rule 201. See 

Regulation NMS Adopting Release, 70 FR 37496; 

see also Proposal, 74 FR at 18087. 

692The estimated 2,200 burden hours necessary 

for SRO trading centers to establish policies and 

procedures are calculated by multiplying 10 times 

220 hours (10 × 220 hours = 2,200 hours). 

693The estimated 65,120 burden hours necessary 

for non-SRO trading centers to establish policies 

and procedures are calculated by multiplying 407 

times 160 hours (407 × 160 hours = 65,120 hours). 

694See Rule 201(b). 

695This figure was calculated as follows: (50 legal 

hours × $400 × 10 SRO trading centers) + (50 legal 

hours × $400 × 407 non-SRO trading centers) = 

$8,340,000. Based on industry sources, we estimate 

that the average hourly rate for outsourced legal 

services in the securities industry is $400. 

696This figure was calculated as follows: (2 legal 

hours × 12 months) + (3 compliance hours × 12 

months) = 60 hours annually per respondent. As 

discussed above, this burden estimate of 60 hours 

is based on experience and what was estimated for 

Regulation NMS to ensure that written policies and 

procedures were up-to-date and remained in 

compliance. See Regulation NMS Adopting Release, 

70 FR 37496; see also Proposal, 74 FR at 18087. 

on a stock-by-stock basis, which will 

reduce our previously estimated costs 

for on-going monitoring and 

surveillance. This is because trading 

centers only need to monitor and surveil 

for compliance with the alternative 

uptick rule during the limited period of 

time that the circuit breaker is in effect 

with respect to a specific security. As 

such, the circuit breaker approach will 

allow regulatory, supervisory and 

compliance resources to focus on, and 

to address, those situations where a 

specific security is experiencing 

significant downward price pressure. As 

noted by one commenter, a circuit 

breaker ‘‘is particularly efficient in 

stable and rising markets because it 

avoids imposing continuous monitoring 

and compliance costs where there is 

little or no corresponding risk of abusive 

short selling.’’ 682

Further, although, under the circuit 

breaker approach, market participants 

will need to monitor whether a stock is 

subject to Rule 201, we believe that 

familiarity with a circuit breaker 

approach may help mitigate such 

compliance costs. As discussed in the 

Proposal, currently, all stock exchanges 

and FINRA have rules or policies to 

implement coordinated circuit breaker 

halts.683 Moreover, SROs have rules or 

policies in place to coordinate 

individual security trading halts 

corresponding to significant news 

events.684

On balance, we believe that the 

estimates of the burdens associated with 

the collection of information 

requirements for trading centers 

included in the Proposal 685 are 

appropriate with respect to Rule 201. 

Thus, our estimates have not changed 

from the Proposal, except to the extent 

that total burden estimates have 

changed because we have updated the 

estimated number of trading centers.686

Although the exact nature and extent 

of the policies and procedures that a 

trading center must establish likely will 

vary depending upon the nature of the 

trading center (e.g., SRO vs. non-SRO, 

full service broker-dealer vs. market 

maker), we estimate that it initially will, 

on average, take an SRO trading center 

approximately 220 hours 687 of legal, 

compliance, information technology and 

business operations personnel time,688

and a non-SRO trading center 

approximately 160 hours 689 of legal, 

compliance, information technology and 

business operations personnel time,690

to develop the required policies and 

procedures. 

In addition to these estimates (of 220 

hours for SRO respondents and 160 

hours for non-SRO respondents), we 

expect that SRO and non-SRO 

respondents will incur one-time 

external costs for outsourced legal 

services. While we recognize that the 

amount of legal outsourcing utilized to 

help establish written policies and 

procedures may vary widely from entity 

to entity, we estimate that on average, 

each trading center will outsource 50 

hours of legal time in order to establish 

policies and procedures in accordance 

with the amendments.691

We estimate that there will be an 

initial one-time burden of, on average, 

220 (not including the outsourced 50 

hours of legal time) burden hours per 

SRO trading center or 2,200 hours,692

and, on average, 160 (not including the 

outsourced 50 hours of legal time) 

burden hours per non-SRO trading 

center or 65,120 hours,693 for a total of 

67,320 burden hours to establish the 

required written policies and 

procedures.694 We estimate a cost of, on 

average, approximately $8,340,000 for 

both SRO and non-SRO trading centers 

resulting from outsourced legal work.695

Once a trading center has established 

the required written policies and 

procedures, we estimate that, on 

average, it will take an SRO and nonSRO trading center each approximately 

two hours per month of on-going 

internal legal time and three hours of 

on-going internal compliance time to 

ensure that its written policies and 

procedures are up-to-date and remain in 

compliance with the amendments to 

Rule 201, or a total of 60 hours annually 

per respondent.696 In addition, we 

estimate that, on average, it will take an 

SRO and non-SRO trading center each 

approximately 16 hours per month of 

on-going compliance time, 8 hours per 

month of on-going information 

technology time, and 4 hours per month 

of on-going legal time associated with 

on-going monitoring and surveillance 

for and enforcement of trading in 


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697This figure was calculated as follows: (16 

compliance hours × 12 months) + (8 information 

technology hours × 12 months) + (4 legal hours × 

12 months) = 336 hours annually per respondent. 

As discussed above, this burden estimate of 336 

hours is based on experience and what was 

estimated for Regulation NMS regarding similarly 

required on-going monitoring and surveillance for 

and enforcement of trading in compliance with that 

regulation’s policies and procedures requirement. 

698See Rule 201(c). 

699This will include the requirement that brokerdealers regularly surveil to ascertain the 

effectiveness of their policies and procedures and 

take prompt remedial steps. This provision is 

intended to reinforce the on-going maintenance and 

enforcement requirements of the provision 

contained in Rule 201(c)(1) by explicitly assigning 

an affirmative responsibility to broker-dealers to 

surveil to ascertain the effectiveness of their 

policies and procedures. See Rule 201(c)(2). 

700See Rule 201(d)(6). 

701See Proposal, 74 FR at 18088–18089. 702See Proposal, 74 FR at 18089; Re-Opening 

Release, 74 FR at 42036. 

703See supra Section IX.E.1. (discussing reporting 

and recordkeeping burdens for trading centers). 

704Letter from Wolverine. Wolverine provided an 

estimate of $500,000 per firm for implementation 

costs, which it applied to both non-SRO trading 

centers and other registered broker-dealers. 

705Letter from EWT (Sept. 2009). EWT also did 

not specify whether this comment on our estimated 

annual reporting and recordkeeping burdens with 

respect to provisions of the proposed rules that 

would require a new ‘‘collection of information’’ 

was specific to the provisions applicable to trading 

centers or to the provisions applicable to brokerdealers. 

706See, e.g., supra note 659. These commenters’ 

concerns regarding implementation costs either 

were expressed with respect to market participants 

generally or included references to obligations that 

would be imposed on, or changes that would have 

to be made by, broker-dealers. 

707See, e.g., letter from Credit Suisse (June 2009); 

letter from FIF (June 2009); letter from Lime 

Brokerage (June 2009); letter from NSCP; letter from 

STANY (June 2009); letter from EWT (Sept. 2009). 708See, e.g., letter from Credit Suisse (June 2009); 

letter from NSCP; letter from T.D. Pro Ex. We 

received time estimates on the Commission’s 

proposed implementation time, but did not receive 

comments with respect to the estimated PRA 

burden hours. See supra Section VII. (discussing 

comments on implementation time). 

709We received comments expressing concerns 

about the implementation and on-going monitoring 

and compliance costs to broker-dealers of a short 

sale price test restriction that were not specific to 

the alternative uptick rule. See, e.g., letter from 

Credit Suisse (June 2009); letter from RBC (June 

2009); letter from STANY (June 2009); letter from 

CPIC (June 2009); letter from Wolverine; letter from 

T.D. Pro Ex; letter from FIF (June 2009); letter from 

Lime Brokerage (June 2009); letter from NSCP. 

710We also note that it is possible that some 

smaller broker-dealers that determine to rely on the 

broker-dealer provision may determine that it is 

cost-effective for them to outsource certain 

functions necessary to comply with Rule 201(c) to 

larger broker-dealers, rather than performing such 

functions in house, to remain competitive in the 

market. This may help mitigate costs associated 

with implementing and complying with Rule 

201(c). Additionally, they may decide to purchase 

order management software from technology firms. 

Order management software providers may 

integrate changes imposed by Rules 200(g) and 201 

into their products, thereby providing another costeffective way for smaller broker-dealers to comply 

with the requirement of Rule 201(c). 

compliance with Rule 201, or a total of 

336 hours annually per respondent.697

2. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

To rely on the broker-dealer provision 

of Rule 201(c), a broker-dealer marking 

a short sale order in a covered security 

‘‘short exempt’’ under Rule 201(c) must 

identify the order as being at a price 

above the current national best bid at 

the time of submission to the trading 

center and must establish, maintain, and 

enforce written policies and procedures 

that are reasonably designed to prevent 

the incorrect identification of orders as 

being submitted to the trading center at 

a permissible price.698 At a minimum, 

the broker-dealer’s policies and 

procedures must be reasonably designed 

to enable a broker-dealer to monitor, on 

a real-time basis, the national best bid 

so as to determine the price at which the 

broker-dealer may submit a short sale 

order to a trading center in compliance 

with the requirements of Rule 201(c). In 

addition, a broker-dealer must take such 

steps as necessary to enable it to enforce 

its policies and procedures 

effectively.699

To rely on the riskless principal 

provision under Rule 201(d)(6) a brokerdealer must have written policies and 

procedures in place to assure that, at a 

minimum: (i) The customer order was 

received prior to the offsetting 

transaction; (ii) the offsetting transaction 

is allocated to a riskless principal or 

customer account within 60 seconds of 

execution; and (iii) that it has 

supervisory systems in place to produce 

records that enable the broker-dealer to 

accurately and readily reconstruct, in a 

time-sequenced manner, all orders on 

which the broker-dealer relies pursuant 

to this provision.700

In the Proposal, we provided 

estimates of the reporting and 

recordkeeping burdens for brokerdealers to implement, monitor and 

surveil on an on-going basis the policies 

and procedures required to rely on the 

broker-dealer provision of Rule 201(c) or 

the riskless principal provision under 

Rule 201(d)(6).701 We also requested 

comment, in the Proposal and the ReOpening Release, as to whether the 

proposed burden estimates were 

appropriate or whether such estimates 

should be increased or reduced, and if 

so, for which entities and by how 

much.702 The following discussion of 

comments on the proposed burden 

estimates for broker-dealers includes 

comments that were discussed above 

with respect to the burden estimates for 

trading centers 703 because, in some 

cases, commenters provided comments 

and estimates on the costs of 

establishing and monitoring policies 

and procedures under the proposed 

short sale price tests without 

distinguishing between costs that would 

be applicable to trading centers as 

opposed to broker-dealers. 

One commenter provided a cost 

estimate, including costs for 

‘‘development man-hours’’ of $500,000 

per firm for implementation of Rule 201 

by broker-dealers.704 One commenter 

stated that a new short sale price test 

restriction would involve ‘‘significant 

implementation costs’’ and ‘‘the 

generation and retention of voluminous 

compliance reports’’ but did not provide 

a specific estimate of the cost or hours 

that would be involved.705 Several 

commenters expressed general concerns 

regarding the time and cost that would 

be imposed on market participants for 

implementation and on-going 

monitoring and surveillance of a new 

short sale price test restriction, 

including a policies and procedures 

requirement but did not provide specific 

estimates of such time and cost.706

In addition, several commenters noted 

that implementation and on-going 

monitoring and surveillance of the 

requirements of the broker-dealer 

provision would impose significant 

costs on broker-dealers, but did not 

provide an estimate of such costs.707

Several commenters stated that the costs 

of the broker-dealer provision could be 

particularly burdensome for smaller 

broker-dealers, but did not provide a 

time or cost estimate of such burdens.708

We considered these comments in 

reviewing the burden estimates for 

broker-dealers that we proposed with 

respect to the collection of information 

requirements in Rule 201. We believe 

that the cost and time required for 

implementation and on-going 

monitoring and surveillance of the 

policies and procedures required to rely 

on the broker-dealer provision of Rule 

201(c) will be lower than some 

commenters’ stated estimates 709

because the alternative uptick rule 

references only the current national best 

bid, unlike the proposed modified 

uptick rule and the proposed uptick 

rule, which would have required 

sequencing of the national best bid or 

last sale price.710 Because the 

alternative uptick rule does not require 

sequencing of the national best bid, we 

believe that the policies and procedures 

required in order to rely on the brokerdealer provision under the alternative 

uptick rule, which are similar to those 

required for non-SRO trading centers in 

complying with paragraph (b) of Rule 

201, will be easier and less costly to 


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711See supra notes 660 to 669 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs). 

712Letter from Credit Suisse (June 2009). 

713See, e.g., letter from Citadel et al. (Sept. 2009); 

letter from EWT (Sept. 2009); letter from Lime 

Brokerage (Sept. 2009). 

714Letter from Citadel et al. (Sept. 2009). 

715See Rule 201(b)(1)(iii). 

716See supra note 670. 

717See, e.g., letter from EWT (Sept. 2009); letter 

from MFA (Oct. 2009). 

718See, e.g., letter from FIF (June 2009); letter 

from NSCP; letter from RBC (June 2009). 

719Letter from FIF (June 2009); see also letter 

from RBC (June 2009). 

720See letter from NSCP; letter from RBC (June 

2009). 

721See Proposal, 74 FR at 18088–18089. 

722See supra Section IX.E.1. (discussing 

estimated burdens of the collection of information 

requirements applicable to trading centers under 

Rule 201). 

723See supra note 676. 

724See Proposal, 74 FR at 18088. 

725See, e.g., letter from Nasdaq OMX Group (Oct. 

2009); letter from Credit Suisse (Sept. 2009); letter 

from STA (June 2009). 

726See letter from Glen Shipway (June 2009). 

implement and monitor than would be 

the case under the proposed modified 

uptick rule or the proposed uptick 

rule.711 We note that one of the 

commenters that expressed concerns 

about the implementation cost of the 

broker-dealer provision also 

acknowledged that a rule ‘‘that would 

not require data centralization and 

sequencing would be significantly less 

complex and faster to implement.’’ 712

We disagree with several commenters 

who stated that, although 

implementation and on-going 

monitoring and surveillance of the 

alternative uptick rule might be easier 

and/or less costly for trading centers, 

this would not hold true for brokerdealers.713 One of these commenters 

stated that ‘‘in order to avoid rejection 

of short sale orders under an alternative 

uptick rule, programming would need to 

be implemented to anticipate changes in 

the national best bid between the time 

a short sale order is entered and the 

time it reaches the relevant market 

center.’’ 714 However, the broker-dealer 

provision of Rule 201(c) is designed 

specifically to help avoid this result. 

Under the broker-dealer provision, a 

broker-dealer may, in accordance with 

the policies and procedures required by 

the provision, identify the order as 

being at a price that is above the current 

national best bid at the time the order 

is submitted to the trading center and 

mark the order ‘‘short exempt.’’ Trading 

centers are required to have written 

policies and procedures in place to 

permit the execution or display of a 

short sale order of a covered security 

marked ‘‘short exempt’’ without regard 

to whether the order is at a price that 

is less than or equal to the current 

national best bid.715

In addition, as noted in the Proposal, 

while we have based our burden 

estimates on the burden estimates 

provided in connection with the 

adoption of Regulation NMS with 

respect to non-SRO trading centers 

(which includes broker-dealers),716 we 

note that these estimates may be on the 

high end for those broker-dealers that 

have already had to establish policies 

and procedures in connection with that 

Regulation’s Order Protection Rule, 

which could help form the basis for the 

policies and procedures for the brokerdealer provision of Rule 201(c), or the 

riskless principal provision under Rule 

201(d)(6). Several commenters agreed, 

indicating that broker-dealers’ previous 

experience with the policies and 

procedures required under Regulation 

NMS might reduce the implementation 

and on-going monitoring and 

compliance burdens on brokerdealers.717 Some commenters stated that 

the Commission overstated the benefit 

of such previous experience 718 because, 

for example, ‘‘systems re-written and 

architected for Reg NMS * * * did not 

include any short sale restrictions,’’ 719

or because such systems will require 

modifications in order to be used in the 

context of a short sale price test 

restriction.720 However, we considered 

these issues when considering the 

impact of previous experience with the 

policies and procedures requirement of 

Regulation NMS’s Order Protection 

Rule. We continue to believe that 

because broker-dealers may already 

have in place systems and written 

policies and procedures in connection 

with Regulation NMS’s Order Protection 

Rule, those broker-dealers will already 

be familiar with establishing, 

maintaining, and enforcing tradingrelated policies and procedures, which 

will mitigate the burden of 

implementation of the policies and 

procedures requirement under the 

broker-dealer provision of Rule 201(c), 

or the riskless principal provision under 

Rule 201(d)(6). We realize, however, 

that the exact nature and extent of the 

policies and procedures that a brokerdealer must establish likely will vary 

depending upon the type, size, and 

nature of the broker-dealer. Thus, our 

estimates take into account different 

types of broker-dealers and we realize 

that these estimates may be on the lowend for some broker-dealers while they 

may be on the high-end for other brokerdealers. 

We considered whether our estimates 

of the burdens associated with the 

collection of information requirements 

for broker-dealers with respect to the 

proposed modified uptick rule included 

in the Proposal 721 would change under 

the circuit breaker approach of Rule 

201, but concluded, as discussed below, 

that these estimates continue to 

represent reasonable estimates under 

the circuit breaker approach. 

As discussed previously,722 despite 

some commenters’ concerns regarding 

the implementation costs of a circuit 

breaker rule,723 we believe that the 

circuit breaker approach will result in 

largely the same implementation costs 

as we estimated would be incurred if we 

adopted a permanent, market-wide short 

sale price test restriction.724 We believe 

that that there will be only minimal, if 

any, implementation costs for a circuit 

breaker approach in addition to the 

costs we estimated previously for the 

implementation of a permanent, marketwide short sale price test rule because 

broker-dealers relying on Rule 201(c) or 

Rule 201(d)(6) must establish written 

policies and procedures required to 

comply with those provisions regardless 

of whether the short sale price test 

restriction is adopted on a permanent, 

market-wide basis or, in the case of Rule 

201, adopted in conjunction with a 

circuit breaker. Several other 

commenters agreed, stating that the 

costs of the circuit breaker approach 

would be similar to, or only 

incrementally higher than, the costs of 

a permanent, market-wide approach.725

In addition, with respect to on-going 

monitoring and surveillance costs of the 

circuit breaker approach, we recognize, 

as noted by one commenter,726 that 

broker-dealers relying on Rule 201(c) or 

Rule 201(d)(6) must continuously 

monitor whether a security is subject to 

the provisions of Rule 201 and that 

there will be costs associated with such 

monitoring. However, we believe that 

these costs will be offset because, under 

the circuit breaker approach, the 

alternative uptick rule is time limited 

and will only apply on a stock by stock 

basis, which will reduce our previously 

estimated costs for on-going monitoring 

and surveillance. This is because 

broker-dealers relying on Rule 201(c) 

will only need to monitor and surveil 

for compliance with the alternative 

uptick rule, and broker-dealers relying 

on Rule 201(d)(6) will only need to 

monitor for compliance with the 

requirements of that provision, during 

the limited period of time that the 

circuit breaker is in effect with respect 

to a specific security. As such, the 

circuit breaker approach will allow 


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727See, e.g., letter from Nasdaq OMX Group (Oct. 

2009); letter from SIFMA (Sept. 2009). 

728See Proposal, 74 FR at 18088–18089. 

729The Proposal indicated that there were 

approximately 5,561 broker-dealers. This number 

was based on a review of 2007 FOCUS Report 

filings reflecting registered broker-dealers, 

including introducing broker-dealers. This number 

did not include broker-dealers that were delinquent 

on FOCUS Report filings. See Proposal, 74 FR at 

18086. We now estimate that there are 

approximately 5,178 broker-dealers. See supra note 

652 and accompanying text. 

730We base this estimate of 160 hours on the 

estimated burden hours we believe it will take a 

non-SRO trading center (which includes brokerdealers) to develop similarly required policies and 

procedures, since the policies and procedures 

required under the broker-dealer provision or the 

riskless principal exception will be similar to those 

required for non-SRO trading centers in complying 

with paragraph (b) of Rule 201. See Regulation NMS 

Adopting Release, 70 FR 37496; see also Proposal, 

74 FR at 18087. 

731Based on experience and the estimates 

provided in connection with Regulation NMS, we 

anticipate that of the 160 hours we estimate will be 

spent to establish policies and procedures, 37 hours 

will be spent by legal personnel, 77 hours will be 

spent by compliance personnel, 23 hours will be 

spent by information technology personnel and 23 

hours will be spent by business operations 

personnel of the broker-dealer. 

732As discussed above, we base our burden 

estimate of 50 hours of outsourced legal time on the 

burden estimate used for Regulation NMS because 

the policies and procedures developed in 

connection with that Regulation’s Order Protection 

Rule are in many ways similar to what a brokerdealer will need to do to comply with the policies 

and procedures required under the broker-dealer 

provision and the riskless principal exception of 

Rule 201. See Regulation NMS Adopting Release, 

70 FR 37496; see also Proposal, 74 FR at 18087. 

733The estimated 828,480 burden hours necessary 

for a broker-dealer to establish policies and 

procedures are calculated by multiplying 5,178 

times 160 hours (5,178 × 160 hours = 828,480 

hours). See supra note 730. 

734This figure was calculated as follows: (50 legal 

hours × $400 × 5,178 broker-dealers) = 

$103,560,000. Based on industry sources, we 

estimate that the average hourly rate for outsourced 

legal services in the securities industry is $400. 

735This figure was calculated as follows: (2 legal 

hours × 12 months) + (3 compliance hours × 12 

months). As discussed above, this burden estimate 

of 60 hours is based on experience and what was 

estimated for a Regulation NMS respondent to 

ensure that its written policies and procedures were 

up-to-date and remained in compliance. 

736This figure was calculated as follows: (16 

compliance hours × 12 months) + (8 information 

technology hours × 12 months) + (4 legal hours × 

12 months) = 336 hours annually per respondent. 

As discussed above, this burden estimate of 336 

hours is based on experience and what was 

estimated for Regulation NMS for similarly required 

on-going monitoring and surveillance for and 

enforcement of trading in compliance with that 

regulation’s policies and procedures requirement. 

737See Rule 200(g); see also supra Section IV. 

(discussing the amendments to Rule 200(g)). 

738See Rule 200(g)(2). 

739See Proposal, 74 FR at 18089; Re-Opening 

Release, 74 FR at 42036. 

740See, e.g., letter from FIF (June 2009); letter 

from NSCP; letter from RBC (June 2009). 

741See letter from STA (June 2009). 

742See Proposal, 74 FR at 18089. 

regulatory, supervisory and compliance 

resources to focus on, and to address, 

those situations where a specific 

security is experiencing significant 

downward price pressure.727

On balance, we believe that the 

estimates of the burdens associated with 

the collection of information 

requirements for broker-dealers 

included in the Proposal 728 are 

appropriate with respect to Rule 201. 

Thus, our estimates have not changed 

from the Proposal, except to the extent 

that total burden estimates have 

changed because we have updated the 

estimated number of broker-dealers.729

Although the exact nature and extent 

of the required policies and procedures 

that a broker-dealer must establish 

under the broker-dealer or the riskless 

principal provisions likely will vary 

depending upon the nature of the 

broker-dealer (e.g., full service brokerdealer vs. market maker), we estimate 

that it initially will, on average, take a 

broker-dealer approximately 160 

hours 730 of legal, compliance, 

information technology and business 

operations personnel time,731 to develop 

the required policies and procedures. In 

addition to this estimate of 160 hours, 

we expect that broker-dealers will incur 

one-time external costs for outsourced 

legal services. While we recognize that 

the amount of legal outsourcing utilized 

to help establish written policies and 

procedures will vary widely from entity 

to entity, we estimate that on average, 

each broker-dealer will outsource 50 

hours 732 of legal time in order to 

establish policies and procedures in 

accordance with the broker-dealer 

provision in Rule 201(c) and the riskless 

principal provision in Rule 201(d)(6). 

We estimate that, on average, there 

will be an initial one-time burden of 160 

burden hours per broker-dealer or 

828,480 hours 733 to establish policies 

and procedures required under the 

broker-dealer provision in Rule 201(c) 

and the riskless principal provision in 

Rule 201(d)(6). We estimate an average 

cost of approximately $103,560,000 for 

broker-dealers resulting from 

outsourced legal work.734

Once a broker-dealer has established 

written policies and procedures that are 

required under Rule 201(c) or Rule 

201(d)(6), we estimate that it will take, 

on average, a broker-dealer 

approximately two hours per month of 

internal legal time and three hours of 

internal compliance time to ensure that 

its written policies and procedures are 

up-to-date and remain in compliance 

with Rule 201(c) or 201(d)(6), or a total 

of 60 hours annually per respondent.735

In addition, we estimate that, on 

average, it will take a broker-dealer 

approximately 16 hours per month of 

on-going compliance time, 8 hours per 

month of on-going information 

technology time, and 4 hours per month 

of on-going legal time associated with 

on-going monitoring and surveillance 

for and enforcement of trading in 

compliance with Rule 201, or a total of 

336 hours annually per respondent.736

3. Marking Requirements 

The amendments to Rule 200(g) add 

a new marking requirement of ‘‘short 

exempt.’’ 737 In particular, if the brokerdealer chooses to rely on its own 

determination that it is submitting the 

short sale order to the trading center at 

a price that is above the current national 

best bid at the time of submission or to 

rely on an exception specified in the 

Rule, it must mark the order as ‘‘short 

exempt.’’ 738

In the Proposal, we provided 

estimates of the reporting and 

recordkeeping burdens for the ‘‘short 

exempt’’ marking requirement. We also 

requested comment, in the Proposal and 

Re-Opening Release, on the accuracy of 

such estimates.739

Several commenters noted that the 

‘‘short exempt’’ marking requirement 

would impose significant 

implementation costs, but did not 

provide a specific estimate of such 

costs.740 One commenter stated that 

costs of the ‘‘short exempt’’ marking 

requirement would be worth the 

benefits gained.741 We considered these 

comments in reviewing the burden 

estimates of the ‘‘short exempt’’ marking 

requirement of Rule 200(g). 

We also considered whether our 

estimates of the burdens associated with 

the collection of information 

requirements for broker-dealers with 

respect to the amendments to Rule 

200(g) in conjunction with the proposed 

modified uptick rule included in the 

Proposal 742 would change under the 

circuit breaker approach of Rule 201, 

but concluded, as discussed below, that 

these estimates continue to represent 

reasonable estimates under the circuit 

breaker approach. 

We believe that the ‘‘short exempt’’ 

marking requirements of Rule 200(g), in 

conjunction with a circuit breaker 

approach, will result in largely the same 

implementation costs as would be 

incurred if the ‘‘short exempt’’ marking 

requirements were combined with a 

market-wide short sale price test 

restriction. This is because brokerdealers relying on the provisions of Rule 

201(c) or Rule 201(d) would need to 

make systems changes to implement the 

‘‘short exempt’’ marking requirements 


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743See letter from Glen Shipway (June 2009). 

744See, e.g., letter from Nasdaq OMX Group (Oct. 

2009); letter from SIFMA (Sept. 2009). 

745See Proposal, 74 FR at 18089. 

746See supra note 729. 

747See 2004 Regulation SHO Adopting Release, 

69 FR at 48023. 

748The adjustment for inflation was calculated 

using information in the Consumer Price Index, 

U.S. Department of Labor, Bureau of Labor 

Statistics. 

749These figures were calculated as follows: 

($115,000 × 5,178) = $595,470,000 and ($145,000 × 

5,178) = $750,810,000. 

750As we stated in the Proposal, our estimate of 

12.9 billion ‘‘short exempt’’ orders was calculated 

based on a review of short sale trades and short sale 

orders during August 2008. We believe that August 

2008 data is representative of a normal month of 

trading. Specifically, we calculated that there were 

about 263 million short sale trades during August 

2008 for Amex, FINRA, Nasdaq, NYSE Arca, and 

NYSE market centers. Based on a review of Rule 

605 reports from the three largest market centers 

during August 2008, we estimate a ratio of 14.4 

orders to trades. We gross up 263 million short sale 

trades by 14.4, which yields 3.8 billion short sale 

orders during August 2008 or an annualized figure 

of 45.4 billion. We estimate that approximately 

28.5% of short sale orders are short exempt using 

Nasdaq short sale data from January to April 2005. 

We multiply 45.4 billion times 0.285 to obtain our 

estimate of 12.9 billion short exempt orders. See 

Proposal, 74 FR at 18089. We also note that, 

because the circuit breaker rule will not be in place 

at all times or for all securities, the frequency and, 

therefore, the estimated burden of marking ‘‘short 

exempt’’ is expected to be lower. We did not receive 

any comments on the estimated number of annual 

‘‘short exempt’’ orders. 

751This figure was calculated as follows: 12.9 

billion ‘‘short exempt’’ orders divided by 5,178 

broker-dealers. 

752See 2004 Regulation SHO Adopting Release, 

69 FR at 48023, n.140; see also 2003 Regulation 

SHO Proposing Release, 68 FR at 63000, n.232. 

regardless of whether the short sale 

price test restriction is adopted on a 

permanent, market-wide basis or, in the 

case of Rule 201, adopted in 

conjunction with a circuit breaker. 

In addition, with respect to on-going 

monitoring and surveillance costs of the 

‘‘short exempt’’ marking requirements in 

conjunction with a circuit breaker 

approach, we recognize, as noted by one 

commenter,743 that market participants 

will need to continuously monitor 

whether a security is subject to the 

provisions of Rule 201 and that there 

will be costs associated with such 

monitoring. However, we believe that 

these costs will be offset because, under 

the circuit breaker approach, use of the 

‘‘short exempt’’ provisions of Rule 201(c) 

and Rule 201(d) and the related marking 

requirements are time limited and will 

only apply on a stock by stock basis, 

which will reduce our previously 

estimated costs for on-going monitoring 

and surveillance. This is because 

broker-dealers who choose to rely on 

Rule 201(c) or Rule 201(d) will only 

need to monitor and surveil for 

compliance with the requirements of 

those provisions and will only need to 

mark qualifying orders ‘‘short exempt’’ 

during the limited period of time that 

the circuit breaker is in effect with 

respect to a specific security. As such, 

the circuit breaker approach will allow 

regulatory, supervisory and compliance 

resources to focus on, and to address, 

those situations where a specific 

security is experiencing significant 

downward price pressure.744

On balance, we believe our proposed 

estimates of the burdens associated with 

the collection of information 

requirements of the ‘‘short exempt’’ 

marking requirement 745 are appropriate 

with respect to Rule 200(g) as adopted. 

Thus, our estimates have not changed 

from the Proposal, except to the extent 

that total burden estimates have 

changed because we have updated the 

estimated number of broker-dealers.746

We believe that the implementation 

cost of the ‘‘short exempt’’ marking 

requirement will likely be similar to the 

implementation cost of the order 

marking requirements of Rule 200(g) of 

Regulation SHO, which had originally 

included the category of ‘‘short exempt.’’ 

Industry sources at that time estimated 

initial implementation costs for the 

former ‘‘short exempt’’ marking 

requirement to be approximately 

$100,000 to $125,000.747 Based on these 

estimates, as adjusted for inflation, we 

estimate that the initial implementation 

cost of the ‘‘short exempt’’ marking 

requirement will be approximately 

$115,000 to $145,000 per brokerdealer 748 for a total initial 

implementation cost of approximately 

$595,470,000 to $750,810,000 for all 

broker-dealers.749

While not all broker-dealers likely 

will enter sell orders in securities 

covered by the amendments to Rules 

200(g) and 201 in a manner that will 

subject them to this collection of 

information, we estimate, for purposes 

of the PRA, that all of the approximately 

5,178 registered broker-dealers will do 

so. For purposes of the PRA, the Staff 

has estimated that a total of 

approximately 12.9 billion ‘‘short 

exempt’’ orders are entered annually.750

This is an average of approximately 

2,491,309 annual responses by each 

respondent.751 As we discussed in the 

Proposal, each response of marking sell 

orders ‘‘short exempt’’ will take 

approximately .000139 hours (.5 

seconds) to complete. This estimate is 

based on the same time estimate for 

marking sell orders ‘‘long’’ or ‘‘short’’ 

used upon adoption of Rule 200(g) 

under Regulation SHO.752 We believe 

this estimate is appropriate because, in 

accordance with the current marking 

requirements of Rule 200(g) of 

Regulation SHO, broker-dealers are 

already required to mark a sell order 

either ‘‘long’’ or ‘‘short.’’ Thus, most 

broker-dealers already have the 

necessary mechanisms and procedures 

in place and are already familiar with 

processes and procedures to comply 

with the marking requirements of Rule 

200(g) of Regulation SHO and brokerdealers will be able to continue to use 

the same mechanisms, processes and 

procedures to comply with the 

amendments to Rules 200(g) and 

200(g)(2). We note, however, that this 

estimate may be too high given 

technological advances, such as 

automation of sell order marking, since 

the adoption of Rule 200(g) in 2004. 

Thus, the total approximate estimated 

annual hour burden per year is 

1,793,100 burden hours (12,900,000,000 

orders marked ‘‘short exempt’’ 

multiplied by 0.000139 hours/order 

marked ‘‘short exempt’’). Our estimate 

for the paperwork compliance for the 

marking requirement of Rule 200(g) for 

each broker-dealer is approximately 346 

burden hours (2,491,309 responses 

multiplied by 0.000139 hours/ 

responses) or (a total of 1,793,100 

burden hours divided by 5,178 

respondents). 

F. Collection of Information Is 

Mandatory 

1. Policies and Procedures 

Requirements 

The collection of information required 

under Rule 201’s policies and 

procedures requirement is mandatory 

for trading centers executing and 

displaying short sale orders in covered 

securities. The collection of information 

required under Rule 201’s policies and 

procedures requirements in connection 

with the broker-dealer provision in Rule 

201(c) and the riskless principal 

exception in Rule 201(d)(6) is 

mandatory for broker-dealers relying on 

these provisions. 

2. Marking Requirements 

The collection of information is 

mandatory for all broker-dealers 

submitting sale orders marked ‘‘short 

exempt’’ in reliance on one of the 

provisions contained in paragraph (c) or 

(d) of Rule 201. 

G. Confidentiality 

1. Policies and Procedures 

Requirements 

We expect that the information 

collected pursuant to Rule 201’s 

required policies and procedures for 

trading centers will be communicated to 


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753 17 CFR 240.17a–1. 

754 17 CFR 240.17a–4(e)(7). 

755 Id. 

756See Proposal, 74 FR at 18090; Re-Opening 

Release, 74 FR at 42037. 

757See Proposal, 74 FR at 18090. 

758See id. 

759See id.; Re-Opening Release, 74 FR at 42037. 

760Rule 201(b). 

761Rule 201(b). 

762See Rules 200(g) and 200(g)(2). 

763See supra note 17. 

764But see infra notes 821 to 827 and 

accompanying text (discussing the potential 

negative impact of Rule 201 on various trading 

strategies that include short selling). 

the members, subscribers, and 

employees (as applicable) of all trading 

centers. In addition, the information 

collected pursuant to Rule 201’s 

required policies and procedures for 

trading centers will be retained by the 

trading centers and will be available to 

the Commission and SRO examiners 

upon request, but not subject to public 

availability. The information collected 

pursuant to Rule 201’s broker-dealer 

provision and the riskless principal 

exception will be retained by the brokerdealers and will be available to the 

Commission and SRO examiners upon 

request, but not subject to public 

availability. 

2. Marking Requirements 

The information collected pursuant to 

the ‘‘short exempt’’ marking 

requirements in Rule 200(g) and Rule 

200(g)(2) will be submitted to trading 

centers and will be available to the 

Commission and SRO examiners upon 

request. The information collected 

pursuant to the ‘‘short exempt’’ marking 

requirement may be publicly available 

because it may be published, in a form 

that would not identify individual 

broker-dealers, by SROs that publish on 

their Internet Web sites aggregate short 

selling volume data in each individual 

equity security for that day and, on a 

one-month delayed basis, information 

regarding individual short sale 

transactions in all exchange-listed 

equity securities. 

H. Record Retention Period 

1. Policies and Procedures 

Requirements 

Any records generated in connection 

with Rule 201’s requirements that 

trading centers and broker-dealers (with 

respect to the broker-dealer and riskless 

principal provisions) establish written 

policies and procedures must be 

preserved in accordance with, and for 

the periods specified in, Exchange Act 

Rules 17a–1 753 for SRO trading centers 

and 17a–4(e)(7) 754 for non-SRO trading 

centers and registered broker-dealers. 

2. Marking Requirements 

The amendments to Rule 200(g) and 

Rule 200(g)(2) do not contain any new 

record retention requirements. All 

registered broker-dealers that are subject 

to the amendments are currently 

required to retain records in accordance 

with Rule 17a–4(e)(7) under the 

Exchange Act.755

X. Cost-Benefit Analysis 

We are sensitive to the costs and 

benefits of our rules. To assist us in 

evaluating the costs and benefits of the 

amendments to Regulation SHO, in the 

Proposal and the Re-Opening Release, 

we encouraged commenters to discuss 

any costs or benefits that the proposed 

rules might impose.756 In particular, we 

requested comment on the potential 

costs for any modification to both 

computer systems and surveillance 

mechanisms and for information 

gathering, management, and 

recordkeeping systems or procedures, as 

well as any potential benefits resulting 

from the proposed amendments for 

registrants, issuers, investors, brokerdealers, other securities industry 

professionals, regulators, and others.757

We also requested comment as to the 

extent to which placing price 

restrictions on short selling could 

impact or lessen some of the benefits of 

legitimate short selling or could lead to 

a decrease in market efficiency, price 

discovery, or liquidity.758 Commenters 

were requested to provide analysis and 

data to support their views on the costs 

and benefits associated with the 

proposed amendments to Rule 201 and 

Rule 200(g).759 We discuss below the 

benefits and costs, including cost 

mitigation features, of Rule 201. 

A. Benefits 

We believe it is appropriate at this 

time to adopt in Rule 201 a circuit 

breaker approach combined with the 

alternative uptick rule. Specifically, 

Rule 201(b) requires that a trading 

center establish, maintain, and enforce 

written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day.760 In addition, the Rule requires 

that the trading center establish, 

maintain, and enforce written policies 

and procedures reasonably designed to 

impose this short sale price test 

restriction for the remainder of the day 

and the following day when a national 

best bid for the covered security is 

calculated and disseminated on a 

current and continuing basis by a plan 

processor pursuant to an effective 

national market system plan.761

In conjunction with the amendments 

to Rule 201, we are amending Rule 

200(g) of Regulation SHO to provide 

that a broker-dealer may mark certain 

qualifying sell orders ‘‘short exempt.’’ In 

particular, if the broker-dealer chooses 

to rely on its own determination that it 

is submitting the short sale order to the 

trading center at a price that is above the 

current national best bid at the time of 

submission or to rely on an exception 

specified in the Rule, it must mark the 

order as ‘‘short exempt.’’ 762

We discuss below the benefits of Rule 

201 with respect to two inter-related 

aspects of the Rule: the short sale price 

test restriction, specifically the 

alternative uptick rule, and the circuit 

breaker approach that triggers 

application of that restriction. We have 

separated the discussion into two parts 

in order to more clearly address the 

comments that we received with respect 

to the various aspects of Rule 201. 

However, the circuit breaker approach 

and the alternative uptick rule under 

Rule 201 operate in conjunction with 

one another and should not be 

considered isolated provisions. 

1. Alternative Uptick Rule 

The alternative uptick rule is 

designed to prevent the execution or 

display of short sale orders at a price 

that is less than or equal to the current 

national best bid. By not allowing short 

sellers to sell at or below the current 

national best bid, the alternative uptick 

rule will allow long sellers, by selling at 

the bid, to sell first in a declining 

market for a particular security. As the 

Commission has noted previously in 

connection with short sale price test 

restrictions, a goal of such restrictions is 

to allow long sellers to sell first in a 

declining market.763 A short seller that 

is seeking to profit quickly from 

accelerated, downward market moves 

may find it advantageous to be able to 

short sell at the current national best 

bid. By placing long sellers ahead of 

short sellers in the execution queue 

under certain circumstances, Rule 201 

will help promote capital formation, 

since investors may be more willing to 

hold long positions if they know they 

may have a preferred position over short 

sellers when they wish to sell.764


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765As noted by some commenters, there may be 

situations in which a short seller could get 

immediate execution, such as where an order is 

executed in a facility that provides executions at the 

mid-point of the national best bid and offer. See, 

e.g., letter from ISE (Sept. 2009); see also letter from 

BATS (Sept. 2009). 766Letter from Glen Shipway (Sept. 2009). 767See, e.g., supra note 94 (citing comment letters 

suggesting that reinstatement of short price test 

restrictions in some form will help restore investor 

confidence in the markets). 768See supra note 97 (citing commenters who 

stated that a short sale price test restriction would 

aid small investors). 

769See Proposal, 74 FR at 18050, 18053, 18059, 

18061, 18065, 18069; see also Securities and 

Exchange Commission, Special Study of Securities 

Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., at 

251 (1963). 770See, e.g., letter from BATS (Sept. 2009); letter 

from Wells Fargo (Sept. 2009); see also letter from 

SIFMA (Sept. 2009) (stating that a circuit breaker 

coupled with the alternative uptick rule ‘‘would 

limit instances where a security is the subject of 

severe downward pressure’’). 771See letter from BATS (Sept. 2009); letter from 

Wells Fargo (Sept. 2009); letter from STA (Sept. 

2009); letter from Glen Shipway (Sept. 2009). 772Letter from Virtu Financial. 773See, e.g., letter from Direct Edge (June 2009); 

letter from BATS (Sept. 2009); letter from Credit 

Suisse (Sept. 2009); letter from STA (Sept. 2009); 

letter from Wells Fargo (Sept. 2009); see also letter 

from Hudson River Trading (expressing a 

preference for the alternative uptick rule, as 

opposed to the proposed modified uptick rule or 

the proposed uptick rule, if in conjunction with a 

circuit breaker); see also supra notes 661 to 664 and 

accompanying text. 774See, e.g., letter from BATS (Sept. 2009); letter 

from Credit Suisse (Sept. 2009); letter from 

European Investors (Sept. 2009); letter from 

Goldman Sachs (Sept. 2009); letter from STA (Sept. 

2009); letter from Glen Shipway (Sept. 2009); letter 

from T. Rowe Price (Sept. 2009); letter from Wells 

Fargo (Sept. 2009); see also letter from Hudson 

River Trading; see also supra notes 661 to 664 and 

accompanying text. 

775See letter from SIFMA (Sept. 2009). 

776See Rule 201(b). 

777See id. 

778See Rule 201(b)(3). 

779 17 CFR 242.603(b); see supra note 368. 

780See Rule 201(b)(3); 17 CFR 242.603(b). 

781See supra Section III.A.4. 

782See supra note 36 and accompanying text. 

In addition, because the alternative 

uptick rule, when triggered, will 

generally permit short selling only at a 

price above the current national best 

bid, the alternative uptick rule will not 

allow short sales to get immediate 

execution at the bid.765 In other words, 

short sellers will not be permitted to act 

as liquidity takers when the alternative 

uptick rule applies, but will participate, 

if at all, as liquidity providers (unless an 

exception applies), adding depth to the 

market. Put another way, unless an 

exception applies, short sales will 

execute only when purchasers arrive 

willing to buy at prices above the 

national best bid. In discussing the 

alternative uptick rule, one commenter 

stated that ‘‘[n]ot only does it faithfully 

replicate the old uptick rule it improves 

upon it by making each and every short 

sale a liquidity providing 

transaction.’’ 766

Further, the alternative uptick rule is 

designed to help restore investor 

confidence in the securities markets.767

It will also help restore investor 

confidence during times of substantial 

uncertainty because, once the circuit 

breaker has been triggered for a 

particular security, long sellers will 

have preferred access to bids for the 

security, and the security’s continued 

price decline will more likely be due to 

long selling and the underlying 

fundamentals of the issuer, rather than 

to other factors. Bolstering investor 

confidence in the markets should help 

to encourage investors to be more 

willing to invest in the markets, thus 

adding depth and liquidity to the 

markets. In addition, we note that a 

number of commenters stated that they 

believe that a short sale price test 

restriction will aid small investors.768

As we stated in the Proposal, short 

sale price test restrictions, whether a 

permanent market-wide restriction or in 

combination with a circuit breaker, 

might help prevent short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security.769 Because the alternative 

uptick rule only permits short selling at 

a price above the current national best 

bid, unless an exception applies, we 

believe it will be more effective than the 

proposed uptick rule or the proposed 

modified uptick rule at achieving our 

goals in helping to prevent short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security. Several commenters stated 

that the alternative uptick rule would 

dramatically decrease price pressure on 

a security 770 and, thereby, the ability of 

market participants to use short selling 

as a market manipulation tool.771

Another commenter, in supporting the 

alternative uptick rule, stated that it 

would ‘‘likely be more restrictive on 

short selling than the original Rule 

10a–1 ‘uptick rule’.’’ 772

In addition, we believe that the 

alternative uptick rule is preferable to 

the proposed modified uptick rule or 

the proposed uptick rule, in part, 

because it will be easier and less costly 

to implement and monitor. Unlike the 

proposed modified uptick rule and the 

proposed uptick rule, which would 

have required sequencing of the 

national best bid or last sale price, the 

alternative uptick rule references only 

the current national best bid. Several 

commenters expressed support for the 

alternative uptick rule, stating that the 

alternative uptick rule was preferable to 

the proposed modified uptick rule or 

the proposed uptick rule because it 

would eliminate sequencing issues 773

and would be easier and less costly to 

implement.774 One commenter noted 

that the alternative uptick rule would 

simplify on-going surveillance and 

enforcement, as compared to the other 

proposed short sale price test 

restrictions.775 In addition, we believe 

that the implementation and on-going 

monitoring and compliance costs of the 

alternative uptick rule are justified by 

the benefits provided in preventing 

short selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security. 

2. Circuit Breaker Approach 

Under the circuit breaker approach, 

the alterative uptick rule will apply only 

if the price of a covered security has 

declined by 10% or more from the 

covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day.776 In 

addition, the short sale price test 

restriction will only remain in place for 

the remainder of the day and for the 

following day.777 The listing market for 

each covered security must determine 

whether that covered security is subject 

to Rule 201 778 and must immediately 

notify the single plan processor 

responsible for consolidation of 

information for the covered security in 

accordance with Rule 603(b) of 

Regulation NMS 779 of the fact that a 

covered security has become subject to 

the short sale price test restriction of 

Rule 201. The plan processor must then 

disseminate this information.780

We believe that a circuit breaker 

approach strikes the appropriate balance 

between our goal of preventing short 

selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security and the 

need to allow for the continued smooth 

functioning of the markets, including 

the provision of liquidity and price 

efficiency in the markets.781 The circuit 

breaker approach of Rule 201 will help 

benefit the market for a particular 

security by allowing participants, when 

a security is undergoing a significant 

intra-day price decline, an opportunity 

to re-evaluate circumstances and 

respond to volatility in that security. We 

also believe that a circuit breaker will 

better target short selling that may be 

related to potential bear raids 782 and 

other forms of manipulation that may be 


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783See, e.g., letter from Direct Edge (June 2009); 

letter from Citadel et al. (Sept. 2009); letter from 

Direct Edge (Sept. 2009); letter from BATS (Sept. 

2009); letter from Goldman Sachs (Sept. 2009); 

letter from Hudson River Trading (Sept. 2009); 

letter from Qtrade; letter from SIFMA (Sept. 2009); 

letter from Virtu Financial; see also letter from 

Goldman Sachs (June 2009); letter from SIFMA 

(June 2009); letter from Nasdaq OMX Group (Oct. 

2009). 

784Letter from BATS (Sept. 2009). 

785Letter from Nasdaq OMX Group (Oct. 2009); 

see also letter from Goldman Sachs (June 2009); 

letter from BATS (Sept. 2009); letter from SIFMA 

(Sept. 2009); letter from Credit Suisse (Sept. 2009); 

letter from Virtu Financial. 

786See supra Section III.A.5. (discussing the 

circuit breaker trigger level). 

787See, e.g., letter from Direct Edge (Sept. 2009); 

letter from Credit Suisse (Sept. 2009). 

788Letter from Nasdaq OMX Group (Oct. 2009); 

see also letter from Goldman Sachs (June 2009); 

letter from BATS (Sept. 2009); letter from SIFMA 

(Sept. 2009); letter from Credit Suisse (Sept. 2009); 

letter from Virtu Financial. 

789See, e.g., 1998 Release, 63 FR 18477; see also 

Proposal, 74 FR at 18067. 

790Letter from BIO. 

791Letter from Brian M. Collie, Esq., Associate, 

Taurus Compliance Consulting, LLC, dated June 19, 

2009 (‘‘Taurus Compliance’’). 

792Letter from Nasdaq OMX Group (Oct. 2009); 

see also letter from SIFMA (Sept. 2009). 

793See supra note 327 (discussing NYSE’s 

procedures to ensure the accuracy and reliability of 

its closing price). 

used to exacerbate a price decline in a 

covered security. 

In response to our requests for 

comment, some commenters expressed 

support for a circuit breaker approach 

because it would be more narrowlytailored to address our concerns about 

the effects of short selling in a market 

subject to a significant downturn than a 

permanent, market-wide short sale price 

test restriction.783 For example, one 

commenter noted that ‘‘by implementing 

the alternative uptick rule only after a 

circuit breaker threshold has been 

reached, [the commenter] believes the 

Commission would strike the 

appropriate balance between the 

desirable goals of maximizing efficiency 

when the market is operating within 

normal trading ranges and prohibiting 

potentially abusive short selling when it 

is not, while refraining from imposing 

excessive implementation costs on the 

industry.’’ 784 Another commenter stated 

that a circuit breaker is preferable 

because it ‘‘will restrict short selling 

when prices begin to decline 

substantially and short selling becomes 

more likely to be abusive and 

potentially harmful.’’ 785

As discussed above, short selling is an 

important tool in price discovery and 

the provision of liquidity to the market, 

and we recognize that imposition of a 

short selling circuit breaker that when 

triggered imposes the alternative uptick 

rule could restrict otherwise legitimate 

short selling activity during periods of 

significant volatility. Under the circuit 

breaker approach, the alternative uptick 

rule will only be imposed when a 

covered security has experienced an 

intra-day price decline of 10% or more 

and will only apply for the remainder of 

the day and the following day. As 

discussed previously,786 commenters’ 

estimates and the Staff’s analysis show 

that a 10% circuit breaker threshold 

generally should affect only a limited 

percentage of covered securities. In 

addition, when triggered, the short sale 

price test restriction will apply for a 

limited period of time, i.e., the 

remainder of the day and the following 

day, rather than all the time. Thus, Rule 

201 is structured so that it will not be 

triggered for the majority of covered 

securities most of the time and, thereby, 

will not interfere with the smooth 

functioning of the markets for those 

securities, including when prices in 

such securities are undergoing minimal 

downward price pressure or are stable 

or rising. To the extent that Rule 201 

results in a disruption to the smooth 

functioning of the markets, including 

the provision of liquidity and price 

efficiency in the markets, we believe 

that such costs are justified by the 

benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

Several commenters stated their belief 

that implementing short sale price test 

restrictions on a permanent, marketwide basis, rather than in combination 

with a circuit breaker, would 

substantially diminish the benefits that 

short sellers bring to the markets.787

Another commenter stated that a circuit 

breaker is preferable to a permanent, 

market-wide short sale price test 

restriction because it ‘‘permits normal 

market activity while a stock is trading 

in a natural range and short selling is 

more likely to benefit the market (by, for 

example, increasing price discovery and 

liquidity).’’ 788

The Commission has long held the 

view that circuit breakers may help 

restore investor confidence during times 

of substantial uncertainty.789 We believe 

that the requirements of Rule 201 will 

produce such benefits. By imposing the 

alternative uptick rule once a security’s 

price is experiencing a significant intraday price decline, the short selling 

circuit breaker rule in Rule 201(b) is 

designed to target only those securities 

that experience such declines and, 

therefore, will help to prevent short 

selling from being used as a tool to 

exacerbate the decline in the price of 

those securities. This approach 

establishes a narrowly-tailored Rule that 

targets only those securities 

experiencing such a decline and which 

only applies a short sale price test 

restriction for a limited period of time. 

We believe that addressing short selling 

in connection with such declines will 

help restore investor confidence in the 

markets generally. One commenter 

noted that ‘‘preventing rapid declines in 

stock prices strengthens investor 

confidence.’’ 790 Another commenter 

stated that a circuit breaker triggering a 

short sale price test restriction would 

provide ‘‘investors with confidence that 

short sellers will be restricted from 

conducting any perceived market 

manipulation strategies such as ‘bear 

raids.’ ’’ 791

A circuit breaker approach will also 

allow regulatory, supervisory and 

compliance resources to focus on, and 

to address, those situations where a 

specific security is experiencing 

significant downward price pressure. As 

noted by one commenter, a circuit 

breaker ‘‘is particularly efficient in 

stable and rising markets because it 

avoids imposing continuous monitoring 

and compliance costs where there is 

little or no corresponding risk of abusive 

short selling.’’ 792

Requiring the listing market for a 

covered security to determine whether 

the security has become subject to the 

short sale price test restrictions of Rule 

201 will help ensure consistency for 

each covered security with respect to 

such determinations as only the listing 

market for that covered security will be 

making the determination. In addition, 

we believe that listing markets will be 

in the best position to respond to 

anomalous or unforeseeable events that 

may impact a covered security’s price, 

such as an erroneous trade, because the 

listing markets generally have in place 

specific procedures designed to address 

such events.793 Further, because the 

single plan processors currently receive 

information from listing markets 

regarding trading restrictions (i.e. 

Regulatory Halts as defined in those 

plans) on individual securities and 

disseminate such information, the 

requirements of Rule 201(b)(3) are 

similar to existing obligations on plan 

processors pursuant to the requirements 

of Regulation NMS, the CTA and CQ 

Plans and the Nasdaq UTP Plan. 

3. Marking Requirements 

The ‘‘short exempt’’ marking 

requirements under Rule 200(g) will 

provide a record that a broker-dealer is 

availing itself of the provisions of 


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794See, e.g., letter from STA (June 2009); letter 

from CFA. 

795See, e.g., letter from STA (June 2009). 

796See letter from STA (June 2009). 

797See Proposal, 74 FR at 18092–18100. 

798See Proposal, 74 FR at 18100; Re-Opening 

Release, 74 FR at 42037. 

799See Proposal, 74 FR at 18090. 

800See id. 

801See infra note 878 (citing empirical evidence 

showing that former Rule 10a–1 did not have an 

effect on market liquidity and price efficiency and 

that price test restrictions resulted in an increase in 

quote depths). We note that, although the 

alternative uptick rule is by definition more 

restrictive than the proposed modified uptick rule, 

differences between the operation of the proposed 

uptick rule and the alternative uptick rule mean 

that one approach or the other would be more 

restrictive in particular circumstances. See, e g., 

supra note 242 and accompanying text (discussing 

automated trade matching systems). 

802As discussed above, on the day the Pilot went 

into effect, listed Pilot securities underperformed 

listed control group securities by approximately 24 

basis points. The Pilot and control group securities, 

however, had similar returns over the first six 

months of the Pilot. See supra note 52 (referencing 

Staff’s Summary Pilot Report at 8). 

803See supra Section III.A.5. (discussing the 

circuit breaker trigger level). 

paragraph (c) or (d) of Rule 201. Thus, 

the records created pursuant to the 

‘‘short exempt’’ marking requirements of 

Rule 200(g) will aid surveillance by 

SROs and the Commission for 

compliance with the provisions of Rule 

201. In addition, the ‘‘short exempt’’ 

marking requirement will provide an 

indication to a trading center regarding 

when it must execute or display a short 

sale order without regard to whether the 

order is at a price that is less than or 

equal to the current national best bid 

and will aid broker-dealers in 

complying with their legal 

requirements. 

In response to our requests for 

comment, several commenters indicated 

that requiring broker-dealers to mark all 

sell orders ‘‘long,’’ ‘‘short,’’ or ‘‘short 

exempt’’ would provide valuable 

information to the Commission 794 and 

that such information would be worth 

the costs of requiring such marking.795

One commenter stated that the 

information provided by a ‘‘short 

exempt’’ marking requirement would 

provide the Commission with data on 

the extent to which exceptions are being 

used to circumvent the requirements of 

Rule 201.796

B. Costs 

In the Proposal, we discussed the 

anticipated costs of the proposed short 

sale price test restrictions, both on a 

permanent, market-wide basis and in 

conjunction with a circuit breaker.797

We requested comment, in the Proposal 

and Re-Opening Release, on the costs 

associated with the proposed 

amendments.798 In particular, we 

requested comment on the potential 

costs for any modification to both 

computer systems and surveillance 

mechanisms and for information 

gathering, management, and 

recordkeeping systems or procedures.799

We also requested comment as to the 

extent to which placing price 

restrictions on short selling could 

impact or lessen some of the benefits of 

legitimate short selling or could lead to 

a decrease in market efficiency, price 

discovery, or liquidity.800 We discuss 

the comments that we received with 

respect to the costs of Rule 201 in detail 

in Sections X.B.1., X.B.2., X.B.3 and 

X.B.4., below. 

We recognize that Rule 201 will 

impose costs on market participants to 

implement and assure compliance with 

the requirements of the Rule. After 

considering empirical evidence 

regarding former Rule 10a–1 and the 

comments that we received in response 

to the Proposal and the Re-Opening 

Release, as discussed below, we believe 

that Rule 201 will have a minimal, if 

any, negative effect on market liquidity, 

price efficiency, and quote depths.801 In 

addition, we recognize that there will be 

market costs associated with Rule 201 in 

terms of the potential impact of such a 

short sale-related circuit breaker on 

execution speed and probability. By 

requiring for a limited time-period that 

short sales may only be executed or 

displayed above the current national 

best bid once a covered security has 

experienced an intra-day price decline 

of 10% or more, Rule 201 may slow the 

speed of executions and impose 

additional costs on market participants, 

including buyers.802 Such costs may 

increase the costs of legitimate short 

selling. 

To the extent that Rule 201 results in 

increased costs for short selling in 

covered securities that trigger the 

alternative uptick rule, it may increase 

the trading costs of legitimate short 

selling for these securities and may 

result in a reduction in short selling 

generally. Restricting short selling may 

also reduce ‘‘long’’ activity where the 

short selling is part of a larger trading 

strategy. 

We believe, however, that such costs 

will be mitigated by the circuit breaker 

approach of Rule 201. Under the circuit 

breaker approach, the alternative uptick 

rule will only be imposed when a 

covered security has experienced an 

intra-day price decline of 10% or more 

and will only apply for the remainder of 

the day and the following day. As 

discussed previously,803 commenters’ 

estimates and the Staff’s analysis show 

that a 10% circuit breaker threshold 

generally should affect only a limited 

percentage of covered securities. In 

addition, when triggered, the short sale 

price test restriction will apply for a 

limited period of time, i.e., the 

remainder of the day and the following 

day, rather than all the time. Thus, Rule 

201 is structured so that it will not be 

triggered for the majority of covered 

securities most of the time and, thereby, 

will not interfere with the smooth 

functioning of the markets for those 

securities, including when prices in 

such securities are undergoing minimal 

downward price pressure or are stable 

or rising. To the extent that Rule 201 

results in increased costs for short 

selling in covered securities that trigger 

the alternative uptick rule, a reduction 

in short selling generally, and a 

reduction in ‘‘long’’ activity where the 

short selling is part of a larger trading 

strategy, we believe that such costs are 

justified by the benefits provided by the 

Rule in preventing short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security. 

In addition, we recognize that Rule 

201, when triggered, will impose a short 

sale price test restriction, when, 

currently, there is an absence of any 

short sale price test restrictions. This 

will result in costs in terms of 

modifications to systems and 

surveillance mechanisms, as well as 

changes to processes and procedures. 

We anticipate that these changes will 

likely result in immediate 

implementation costs for trading centers 

and SROs and other market participants 

associated with reprogramming trading 

and surveillance systems to account for 

short sale price test restrictions based on 

best bid information, as discussed in 

more detail below. We also believe Rule 

201 will impose costs on trading centers 

and SROs and other market participants 

related to systems changes to computer 

software, reprogramming costs, and 

surveillance and compliance costs, as 

well as staff time and technology 

resources, associated with monitoring 

compliance with Rule 201, as discussed 

below. 

Moreover, imposing a short salerelated circuit breaker that, if triggered, 

will impose a short sale price test 

restriction, when there are currently no 

short sale price test restrictions in place 

also may mean that staff (compliance 

personnel, associated persons, etc.) may 

need to be trained or re-trained 

regarding rules related to short sale 

price test restrictions. As such, we 

believe Rule 201 may impose training 

and compliance costs for trading 


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11292 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

804See infra Section X.B.1.b.i. and Section 

X.B.1.b.ii. (discussing the implementation and ongoing monitoring and surveillance costs of the 

alternative uptick rule on trading centers and 

broker-dealers). 

805See Regulation NMS Adopting Release, 70 FR 

37496; see also Proposal, 74 FR at 18087; 17 CFR 

242.611. 

806See Rule 201(b)(1). 

807See Proposal, 74 FR at 18090, 18100; ReOpening Release, 74 FR at 42037. 

808See Proposal, 74 FR at 18090. 

809See, e.g., letter from Prof. Lipkin; letter from 

Citadel et al. (June 2009); letter from GETCO (June 

2009); letter from Goldman Sachs (June 2009); letter 

from ICI (June 2009); letter from ISDA; letter from 

Lime Brokerage (June 2009); letter from RBC (June 

2009); letter from Vanguard (June 2009); letter from 

Allston Trading (Sept. 2009); letter from TD Asset 

Management; letter from EWT (Sept. 2009); letter 

from BATS (Sept. 2009); letter from Citadel et al. 

(Sept. 2009); letter from CPIC (Sept. 2009); letter 

from Credit Suisse (Sept. 2009); letter from EWT 

(Sept. 2009); letter from Dialectic Capital (Sept. 

2009); letter from GETCO (Sept. 2009); letter from 

Hudson River Trading; letter from Lime Brokerage 

(Sept. 2009); letter from RBC (Sept. 2009); letter 

from STA (Sept. 2009); letter from STANY (Sept. 

2009); letter from Vanguard (Sept. 2009); letter from 

Bingham McCutchen; letter from MFA (Oct. 2009); 

letter from Nasdaq OMX Group (Oct. 2009); see also 

letter from Credit Suisse (Mar. 2009). 

810See, e.g., letter from Chad Stogel, Trillium 

Trading, LLC, dated May 26, 2009 (‘‘Chad Stogel’’); 

letter from Citadel et al. (June 2009); letter from 

Credit Suisse (June 2009); letter from Lime 

Brokerage (June 2009); letter from MFA (June 2009); 

letter from STA (June 2009); letter from EWT (Sept. 

2009); letter from BATS (Sept. 2009); letter from 

Citadel et al. (Sept. 2009); letter from Lime 

Brokerage (Sept. 2009); letter from RBC (Sept. 

2009); letter from STA (Sept. 2009); letter from 

Bingham McCutchen; see also letter from Credit 

Suisse (Mar. 2009). 

811See, e.g., letter from Chad Stogel; letter from 

Citadel et al. (June 2009); letter from Credit Suisse 

(June 2009); letter from MFA (June 2009); letter 

from STA (June 2009); letter from EWT (Sept. 2009); 

letter from BATS (Sept. 2009); letter from Citadel 

et al. (Sept. 2009); letter from RBC (Sept. 2009); 

letter from Bingham McCutchen; see also letter from 

Credit Suisse (Mar. 2009). 

812See, e.g., letter from Credit Suisse (June 2009); 

letter from MFA (June 2009); letter from Lime 

Brokerage (June 2009); letter from STA (June 2009); 

letter from RBC (Sept. 2009); see also letter from 

Credit Suisse (Mar. 2009). 

813See, e.g., letter from Prof. Lipkin; letter from 

AIMA; letter from Citadel et al. (June 2009); letter 

from Credit Suisse (June 2009); letter from RBC 

(June 2009); letter from SIFMA (June 2009); letter 

from Citadel et al. (Sept. 2009); letter from TD Asset 

Management; letter from Barclays (Sept. 2009); see 

also letter from NSCP. 

814See Staff’s Summary Pilot Report at 55–56. 

815See Staff’s Summary Pilot Report at 55; see 

also Karl B. Diether, Kuan Hui Lee and Ingrid M. 

Werner, 2009, It’s SHO Time! Short-Sale Price-Tests 

and Market Quality, Journal of Finance 64:37. 

816See supra note 54. 

817See J. Julie Wu, Uptick Rule, short selling and 

price efficiency, Aug. 14, 2006. 

818See Lynn Bai, 2008, The Uptick Rule of Short 

Sale Regulation—Can it Alleviate Downward Price 

Pressure from Negative Earnings Shocks? Rutgers 

Business Law Journal 5:1–63. 

819See, e g., supra note 242 and accompanying 

text (discussing automated trade matching systems). 

820See supra Section III.A.5. (discussing the 

circuit breaker trigger level and duration). 

centers, SROs, and other market 

participants. 

However, as discussed below, because 

the alternative uptick rule references 

only the current national best bid, 

unlike the proposed modified uptick 

rule and the proposed uptick rule, 

which would have required sequencing 

of the national best bid or last sale price, 

we believe that the alternative uptick 

rule will be easier and less costly to 

implement and monitor than the 

proposed modified uptick rule or the 

proposed uptick rule.804

Further, we note that the policies and 

procedures that are required to be 

implemented under Rule 201 are similar 

to those that are required under the 

Order Protection Rule of Regulation 

NMS.805 Thus, we believe trading 

centers and broker-dealers may already 

be familiar with establishing, 

maintaining, and enforcing tradingrelated policies and procedures, 

including programming their trading 

systems in accordance with such 

policies and procedures. We believe this 

familiarity may reduce the 

implementation costs of Rule 201 and 

may make Rule 201 less burdensome to 

implement. 

In addition, we believe that the 

implementation, and on-going 

monitoring and compliance costs of 

Rule 201 are justified by the benefits 

provided by the Rule in preventing 

short selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security. 

We discuss below the costs of Rule 

201 with respect to two inter-related 

aspects of the Rule: The short sale price 

test restriction, specifically the 

alternative uptick rule, and the circuit 

breaker approach that triggers 

application of that restriction. We have 

separated the discussion into two parts 

in order to more clearly address the 

comments that we received with respect 

to the various aspects of Rule 201. 

However, the circuit breaker approach 

and the alternative uptick rule under 

Rule 201 operate in conjunction with 

one another and should not be 

considered isolated provisions. 

1. Alternative Uptick Rule 

Rule 201 requires a trading center to 

have written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day.806

a. Impact on Market Quality 

As stated above, in the Proposal and 

Re-Opening Release, we requested 

comment on the costs of a short sale 

price test restriction,807 and specifically 

as to the extent to which placing price 

restrictions on short selling could 

impact or lessen some of the benefits of 

legitimate short selling or could lead to 

a decrease in market efficiency, price 

discovery, or liquidity.808

The Commission received comments 

stating that the alternative uptick rule, 

or any short sale price restriction for 

that matter, would reduce the benefits 

that short selling provides to the 

markets.809 For example, commenters 

stated that a short sale price test 

restriction would negatively impact 

liquidity,810 market volume,811 bid-ask 

spreads and price discovery.812 Several 

commenters also stated that a short sale 

price test restriction might increase 

volatility.813

We believe, however, that the short 

sale price test restriction of Rule 201 

will have a limited negative effect on 

liquidity, market volume, bid-ask 

spreads, price discovery and volatility. 

The Pilot Results found that the former 

tick test of Rule 10a–1 and former bid 

test of NASD, which were permanent, 

market-wide short sale price tests, did 

not have a significant impact on daily 

volatility, and also found some evidence 

that the short sale price tests dampened 

intra-day volatility for smaller stocks.814

In addition, the Pilot Results found that 

the Pilot data provided limited evidence 

that then-current short sale price test 

restrictions distort a security’s price. 

The Pilot Results also found that the 

short sale price test restrictions resulted 

in an increase in quote depths.815

Realized liquidity levels, however, were 

unaffected by the removal of such short 

sale price test restrictions.816 In 

addition, one study concluded that 

former Rule 10a–1 had little or no effect 

on price efficiency.817 Another study 

found no evidence that former Rule 

10a–1 negatively impacted price 

discovery.818 Due to differences in the 

operation of former Rule 10a–1 and Rule 

201, when it applies, the alternative 

uptick rule under Rule 201 will be more 

restrictive than former Rule 10a–1 in 

some circumstances and less restrictive 

in others.819 As discussed above, 

however, due to the circuit breaker 

approach in Rule 201, the alternative 

uptick rule of Rule 201 generally will 

apply to a limited number of covered 

securities 820 and will apply only when 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11293 

821See, e.g., letter from Peter J. Driscoll, 

Chairman, John C. Giesea, President and CEO, 

Security Traders Association, dated May 4, 2009 

(‘‘STA (May 2009)’’); letter from Citadel et al. (June 

2009); letter from CPIC (June 2009); letter from MFA 

(June 2009); letter from Allston Trading (Sept. 

2009); letter from Barclays (Sept. 2009); letter from 

CBOE (Sept. 2009); letter from Citadel et al. (Sept. 

2009); letter from CPIC (Sept. 2009); letter from 

EWT (Sept. 2009); letter from GETCO (Sept. 2009); 

letter from ICI (Sept. 2009); letter from ISE (Sept. 

2009); letter from RBC (Sept. 2009); letter from MFA 

(Oct. 2009). 

822See, e.g., letter from CPIC (June 2009); letter 

from Barclays (Sept. 2009). 

823See, e.g., letter from STA (May 2009); letter 

from Citadel et al. (June 2009); letter from STA 

(June 2009); letter from Barclays (Sept. 2009); letter 

from STA (Sept. 2009); see also letter from Lime 

Brokerage (June 2009) (explaining specifically the 

increased risk that would be associated with virtual 

market making strategies). 

824See, e.g., letter from STA (May 2009); letter 

from Credit Suisse (June 2009); letter from STA 

(June 2009); letter from Barclays (Sept. 2009); letter 

from STA (Sept. 2009); letter from MFA (Oct. 2009); 

see also letter from Lime Brokerage (June 2009) 

(explaining specifically the increased risk that 

would be associated with virtual market making 

strategies). 

825See, e.g., letter from Allston Trading (Sept. 

2009); letter from Barclays (Sept. 2009); letter from 

CBOE (Sept. 2009); letter from Citadel et al. (Sept. 

2009); letter from CPIC (Sept. 2009); letter from 

EWT (Sept. 2009); letter from GETCO (Sept. 2009); 

letter from ICI (Sept. 2009); letter from ISE (Sept. 

2009); letter from RBC (Sept. 2009); letter from MFA 

(Oct. 2009). 

826See, e.g., letter from STA (May 2009); letter 

from Chad Stogel; letter from Allston Trading (June 

2009); letter from Credit Suisse (June 2009); letter 

from STA (June 2009); letter from STA (Sept. 2009); 

letter from MFA (June 2009). 

827See, e.g., letter from Citadel et al. (June 2009); 

letter from Vanguard (June 2009); letter from 

Allston Trading (Sept. 2009); letter from EWT (Sept. 

2009); letter from GETCO (Sept. 2009); see also 

letter from NSCP (stating that, without empirical 

evidence of inefficiency or failure in the equity 

markets that both caused deterioration of investor 

confidence and that would be remedied by a short 

sale price test restriction, a loss in confidence in the 

Commission as a fair and impartial regulator could 

do more harm in the long-run to damage the 

confidence of investors); letter from STA (June 

2009) (stating that ‘‘[p]romulgating a rule that would 

not have any impact on the execution of abusive 

short sales may, in fact, foster further deterioration 

of investor confidence’’). 

828See supra Section III.A.5. (discussing the 

circuit breaker trigger level and duration). 

829See Staff’s Summary Pilot Report at 55 and 

supporting text; see also Karl B. Diether, Kuan Hui 

Lee and Ingrid M. Werner, 2009, It’s SHO Time! 

Short-Sale Price-Tests and Market Quality, Journal 

of Finance 64:37. 

830See supra note 54. 

831See J. Julie Wu, Uptick Rule, short selling and 

price efficiency, Aug. 14, 2006. 

832See Lynn Bai, 2008, The Uptick Rule of Short 

Sale Regulation—Can it Alleviate Downward Price 

Pressure from Negative Earnings Shocks? Rutgers 

Business Law Journal 5:1–63. 

833See, e g., supra note 242 and accompanying 

text (discussing automated trade matching systems). 

834See supra Section III.A.5. (discussing the 

circuit breaker trigger level and duration). 

835See, e.g., letter from Citadel et al. (June 2009); 

letter from Credit Suisse (June 2009); letter from 

ISDA; letter from RBC (June 2009); letter from STA 

(June 2009); letter from Vanguard (June 2009); letter 

from EWT (Sept. 2009); letter from TD Asset 

Management; letter from Lime Brokerage (Sept. 

2009); letter from Bingham McCutchen; letter from 

MFA (Oct. 2009); see also letter from Credit Suisse 

(Mar. 2009). 

the circuit breaker has been triggered for 

a covered security. As such, it will not 

be triggered for the majority of covered 

securities at any given time and, when 

triggered, will remain in effect for a 

short duration—that day and the 

following day. Considering the 

empirical studies and the comments, 

and because of the limited scope and 

duration of Rule 201, we believe that the 

impact of Rule 201, if any, on liquidity, 

market volume, bid-ask spreads, price 

discovery and volatility will be limited. 

To the extent that Rule 201 negatively 

impacts liquidity, market volume, bidask spreads, price discovery and 

volatility, we believe that such costs are 

justified by the benefits provided by the 

Rule in preventing short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security. 

The Commission received a number 

of comments addressing the extent to 

which a short sale price test restriction 

might cause a reduction in short 

selling.821 For example, commenters 

stated that a reduction in short selling 

might result from: The implementation 

costs and on-going compliance costs of 

a short sale price test restriction; 822

uncertainty about whether a short sale 

order can be executed; 823 and reduced 

use of trading strategies that are market 

neutral or that rely on the ability to 

hedge through short sales.824 Several 

commenters stated that the alternative 

uptick rule would restrict short sales 

more than the other proposed short sale 

price test restrictions, specifically 

because it would not allow immediate 

execution, and fewer short sales might 

be executed as a result.825 A number of 

commenters stated that a reduction in 

short selling would result in decreased 

liquidity, wider price spreads, and more 

costly trading for investors overall.826

Some commenters stated that such an 

increase in costs to investors would 

have a negative effect on investor 

confidence.827

The short sale price test restriction of 

Rule 201 may cause a limited reduction 

in short selling as a result of the 

implementation costs and on-going 

compliance costs of a short sale price 

test restriction; uncertainty about 

whether a short sale order can be 

executed; and reduced use of trading 

strategies that are market neutral or that 

rely on the ability to hedge through 

short sales. However, the alternative 

uptick rule will only be imposed when 

a covered security has experienced an 

intra-day price decline of 10% or more 

and will only apply for the remainder of 

the day and the following day. Due to 

the limited scope and applicability of 

Rule 201, we believe that any reduction 

in short selling will be limited.828 In 

addition, we believe that any such 

reduction in short selling will have a 

minimal, if any, resulting negative 

impact on liquidity and price efficiency. 

As noted above, the Pilot Results found 

that the Pilot data provided limited 

evidence that then-current short sale 

price test restrictions, which were 

permanent and market-wide, distort a 

security’s price. The Pilot Results also 

found that the short sale price test 

restrictions resulted in an increase in 

quote depths.829 Realized liquidity 

levels, however, were unaffected by the 

removal of such short sale price test 

restrictions.830 In addition, one study 

concluded that former Rule 10a–1 had 

little or no negative effect on price 

efficiency.831 Another study found no 

evidence that former Rule 10a–1 

negatively impacted price discovery.832

Due to differences in the operation of 

former Rule 10a–1 and Rule 201, when 

it applies, the alternative uptick rule 

under Rule 201 will be more restrictive 

than former Rule 10a–1 in some 

circumstances and less restrictive in 

others.833 As discussed above, however, 

due to the circuit breaker approach in 

Rule 201, the alternative uptick rule of 

Rule 201 generally will apply to a 

limited number of covered securities 834

and will apply only when the circuit 

breaker has been triggered for a covered 

security. As such, it will not be triggered 

for the majority of covered securities at 

any given time and, when triggered, will 

remain in effect for a short duration— 

that day and the following day. 

Considering the empirical studies and 

the comments, and due to the limited 

scope and duration of Rule 201, we 

believe that any reduction in short 

selling as a result of Rule 201 will have 

a minimal, if any, negative impact on 

liquidity and price efficiency. To the 

extent that Rule 201 has a negative 

impact on liquidity and price efficiency, 

we believe that such costs are justified 

by the benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

In addition, commenters stated that a 

short sale price test restriction in 

general, or the alternative uptick rule 

specifically, might negatively impact 

various trading strategies that include 

short selling,835 such as high frequency 


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836See, e.g., letter from Bingham McCutchen. 

837See, e.g., letter from ISDA. 

838See, e.g., letter from Citadel et al. (June 2009); 

letter from Credit Suisse (June 2009); letter from 

EWT (Sept. 2009); letter from TD Asset 

Management; letter from MFA (Oct. 2009). This 

category includes such trading methods as long 

short equity strategies, convertible securities 

investors, and hedged strategies such as 130/30 

portfolios. See id. 

839See, e.g., letter from Citadel et al. (June 2009); 

letter from Credit Suisse (June 2009); letter from 

Goldman Sachs (June 2009); letter from SIFMA 

(June 2009). 

840See, e.g., letter from Citadel et al. (June 2009). 

841See letter from TD Asset Management. 

842See, e.g., letter from Lime Brokerage (June 

2009); letter from Lime Brokerage (Sept. 2009). 

843See, e.g., letter from Citadel et al. (June 2009); 

letter from Lime Brokerage (Sept. 2009); letter from 

Bingham McCutchen; letter from Credit Suisse 

(June 2009). 

844See, e.g., letter from Chad Stogel; letter from 

Citadel et al. (June 2009); letter from Lime 

Brokerage (June 2009); letter from STA (June 2009); 

letter from EWT (Sept. 2009); letter from BATS 

(Sept. 2009); letter from Citadel et al. (Sept. 2009); 

letter from Lime Brokerage (Sept. 2009); letter from 

STA (Sept. 2009); letter from Bingham McCutchen. 

845See e.g., letter from Citadel et al. (June 2009); 

letter from Citadel et al. (Sept. 2009). 

846See, e.g., letter from Citadel et al. (June 2009); 

letter from Credit Suisse (June 2009); letter from 

Goldman Sachs (June 2009); letter from SIFMA 

(June 2009). 

847See, e.g., letter from Credit Suisse (June 2009). 

848See, e.g., letter from Prof. Rosenthal; letter 

from Barclays (June 2009) (warning that a mere 

transfer of short selling activity to other types of 

markets would impair the price discovery, 

efficiency, safety, and soundness of the public 

equity markets); letter from STA (June 2009) 

(discussing a possible shift to the derivative 

markets); letter from RBC (June 2009) (discussing 

sales of calls, purchases of puts, and short selling 

of security futures as methods to bypass the price 

restrictions); letter from Vanguard (June 2009) 

(discussing the use of synthetic short sales through 

OTC derivatives); see also supra Section III.A.1. 

(discussing the creation of ‘‘synthetic’’ short 

positions that are the economic equivalent of a 

short sale through the use of derivative securities). 849See, e.g., letter from Bingham McCutchen; 

letter from ISDA; letter from TD Asset Management; 

letter from EWT (Sept. 2009); letter from Lime 

Brokerage (Sept. 2009); letter from Citadel et al. 

(Sept. 2009); letter from STA (Sept. 2009); letter 

from BATS (Sept. 2009); letter from MFA (Oct. 

2009). 850See supra Section III.A.5. (discussing the 

circuit breaker trigger level and duration). 

851See, e.g., letter from Matlock Capital (May 

2009); letter from Prof. Rosenthal; letter from 

Goldman Sachs (June 2009); Autore, Billingsley, 

and Kovacs, Short Sale Constraints, Dispersion of 

Opinion, and Market Quality: Evidence from the 

Short Sale Ban on U.S. Financial Stocks (June 19, 

2009); letter from GETCO (June 2009); letter from 

STA (June 2009); letter from Allston Trading (Sept. 

2009); letter from Bingham McCutchen; letter from 

Citadel et al. (Sept. 2009); letter from CPIC (Sept. 

2009); letter from Dialectic Capital (Sept. 2009); 

letter from EWT (Sept. 2009); letter from Hudson 

River Trading; letter from STA (Sept. 2009); letter 

from TD Asset Management. 852See, e.g., letter from Citadel et al. (Sept. 2009); 

letter from Dialectic Capital (Sept. 2009); letter from 

Bingham McCutchen; see also letter from GETCO 

(June 2009); letter from Charles A. Trzcinka, 

Professor of Finance and Chairman of the Finance 

Department, Kelly School of Business, Indiana 

University, dated May 10, 2009; letter from Prof. 

Rosenthal; Autore, Billingsley, and Kovacs, Short 

Sale Constraints, Dispersion of Opinion, and 

Market Quality: Evidence from the Short Sale Ban 

on U.S. Financial Stocks (June 19, 2009). 853See, e.g., letter from TD Asset Management; 

letter from CPIC (Sept. 2009); see also letter from 

GETCO (June 2009); letter from Goldman Sachs 

(June 2009). 854See, e.g., letter from Allston Trading (Sept. 

2009); letter from Citadel et al. (Sept. 2009); letter 

from CPIC (Sept. 2009); letter from Dialectic Capital 

(Sept. 2009); letter from EWT (Sept. 2009); letter 

from Hudson River Trading; letter from STA (Sept. 

2009). 

855See, e.g., letter from Allston Trading (Sept. 

2009); letter from Citadel et al. (Sept. 2009); letter 

from RBC (Sept. 2009); see also letter from AIMA; 

letter from Citadel et al. (June 2009); letter from 

Goldman Sachs (June 2009); letter from RBC (June 

2009). 

trading,836 options valuation models 

that are used to value and hedge equity 

derivatives transactions,837 market 

neutral trading strategies or those that 

rely on hedging,838 convertible 

arbitrage,839 statistical arbitrage,840

program or portfolio trading baskets,841

and hedging strategies that significantly 

contribute to market liquidity, such as 

computerized liquidity providers or 

‘‘virtual market makers.’’ 842 Commenters 

noted what they believe would be the 

negative consequences of such an 

impact, including increasing bid-ask 

spreads, reducing market volume,843

reducing market liquidity,844 reducing 

market efficiency,845 complicating the 

raising of capital by corporate issuers,846

and causing investors to exit the 

market.847 Other commenters expressed 

the belief that restrictions on short 

selling might encourage the use of other 

trading strategies that largely mirror the 

benefits of short selling (such as sales of 

calls, purchase of puts, synthetic short 

sales of OTC derivatives, and sales of 

security futures), but that impose 

additional costs, such as reduced 

efficiency or inaccessibility to small 

investors.848

To the extent that Rule 201 may have 

a negative effect on various trading 

strategies that include short selling, we 

believe any such negative effect will be 

limited. Under Rule 201, although short 

selling will be restricted for a limited 

time by the alternative uptick rule if the 

price of a covered security decreases by 

10% or more, unlike with securities 

subject to the Short Sale Ban Emergency 

Order, Rule 201 will permit short selling 

at a price above the current national best 

bid in the covered security even when 

the restriction is in place. Thus, short 

sellers engaged in various trading 

strategies that include short selling will 

generally continue to be able to sell 

short for the limited period of time 

when the short sale price test restriction 

is in effect. In addition, we note that 

many of the above comments on 

potential market-wide impacts of a short 

sale price test restriction on various 

trading strategies that include short 

selling were not specific to a short sale 

price test applied in conjunction with a 

circuit breaker.849 Under the circuit 

breaker approach, the alternative uptick 

rule will only be imposed when a 

covered security has experienced an 

intra-day price decline of 10% or more 

and will only apply for the remainder of 

the day and the following day.850 We 

believe that the negative impact of Rule 

201, if any, on various trading strategies 

that include short selling will be limited 

because of the limited scope and 

duration of Rule 201. To the extent that 

Rule 201 has a negative impact on 

various trading strategies that include 

short selling, we believe that such costs 

are justified by the benefits provided by 

the Rule in preventing short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security. 

We recognize that imposing a short 

sale price test restriction with respect to 

NMS stocks, without a similar 

restriction on derivative securities, 

could increase the use of derivative 

securities to create a short position and 

that such ‘‘synthetic’’ short positions 

could increase as a result of Rule 201. 

As discussed in Section III.A.1., above, 

however, short sales in the equity 

markets to hedge derivatives 

transactions are subject to Rule 201. In 

addition, we remain concerned that the 

ability to create a short position through 

the use of derivative securities may 

undermine the goals of short sale price 

test restrictions. At a later time, we may 

reconsider whether additional 

regulation of derivative securities and 

the use of ‘‘synthetic’’ short positions 

may be appropriate. 

Several commenters discussed how 

constraints on short selling might harm 

price discovery and pricing 

efficiency.851 Commenters stated that, 

under the alternative uptick rule, only 

long sellers could hit bids displayed as 

part of the national market system, 

which would result in long sellers 

exclusively dictating the market price of 

purchases, which would harm price 

discovery.852 Additionally, commenters 

stated that the alternative uptick rule 

would restrict the informational content 

that short sale orders contain to only 

passive orders, meaning that the 

information would not be fully 

communicated in the price discovery 

process and pricing inefficiency would 

arise.853 Other commenters stated that 

the alternative uptick rule might result 

in an inflated transaction price 854 or 

upward stock price manipulation.855


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856See Staff’s Summary Pilot Report at 55; Karl 

B. Diether, Kuan Hui Lee and Ingrid M. Werner, 

2009, It’s SHO Time! Short-Sale Price-Tests and 

Market Quality, Journal of Finance 64:37–73; 

Gordon J. Alexander and Mark A. Peterson, 2008, 

The Effect of Price Tests on Trader Behavior and 

Market Quality: An Analysis of Reg. SHO, Journal 

of Financial Markets 11:84–111; J. Julie Wu, Uptick 

Rule, short selling and price efficiency, Aug. 14, 

2006; Lynn Bai, 2008, The Uptick Rule of Short Sale 

Regulation—Can it Alleviate Downward Price 

Pressure from Negative Earnings Shocks? Rutgers 

Business Law Journal 5:1–63. 

857See J. Julie Wu, Uptick Rule, short selling and 

price efficiency, Aug. 14, 2006. 

858See Lynn Bai, 2008, The Uptick Rule of Short 

Sale Regulation—Can it Alleviate Downward Price 

Pressure from Negative Earnings Shocks? Rutgers 

Business Law Journal 5:1–63. 

859See, e g., supra note 242 and accompanying 

text (discussing automated trade matching systems). 

860See supra notes 305 to 311 and accompanying 

text (discussing data reflecting that, on average, a 

limited number of covered securities would hit a 

10% trigger level each day). 

861See, e.g., letter from Citadel et al. (Sept. 2009); 

letter from Group One Trading (Sept. 2009); letter 

from TD Asset Management; letter from CPIC (Sept. 

2009); letter from Lime Brokerage (Sept. 2009); 

letter from RBC (Sept. 2009); letter from SIFMA 

(Sept. 2009); letter from STA (Sept. 2009); letter 

from Barclays (Sept. 2009). 862See, e.g., letter from Citadel et al. (Sept. 2009); 

letter from TD Asset Management; letter from CPIC 

(Sept. 2009); letter from STA (Sept. 2009). As noted 

by some commenters, however, there may be 

situations in which a short seller could get 

immediate execution, such as where an order is 

executed in a facility that provides executions at the 

mid-point of the national best bid and offer. See, 

e.g., letter from ISE (Sept. 2009); see also letter from 

BATS (Sept. 2009). 863See, e.g., letter from Barclays (Sept. 2009); 

letter from STA (Sept. 2009). 864See, e.g., letter from Allston Trading (Sept. 

2009); letter from Citadel et al. (Sept. 2009); letter 

from Dialectic Capital (Sept. 2009); see also letter 

from Chad Stogel. 865See Re-Opening Release, 74 FR at 42034; see 

also supra note 227 (noting that under some 

circumstances a short seller may be able to get 

immediate execution). 866See supra note 52 (discussing returns for listed 

Pilot securities and listed control group securities 

during the first six months of the Pilot and 

referencing Staff’s Summary Pilot Report at 8). 

867See, e.g., letter from Allston Trading (Sept. 

2009); letter from Barclays (Sept. 2009); letter from 

Citadel et al. (Sept. 2009); letter from Dialectic 

Capital (Sept. 2009); letter from TD Asset 

Management; letter from CPIC (Sept. 2009); letter 

from STA (Sept. 2009). 

868See supra Section III.A.5. (discussing the 

circuit breaker trigger level and duration). 869See, e.g., letter from STA (May 2009); letter 

from Group One Trading (Sept. 2009); letter from 

Lime Brokerage (Sept. 2009). 870See letter from Group One Trading (Sept. 

2009); letter from STANY (Sept. 2009). 871See, e.g., letter from Barclays (Sept. 2009); 

letter from MFA (Oct. 2009); see also letter from 

STA (Sept. 2009) (stating that because short sale 

orders would have to be priced one increment 

above the national best bid, and would drop in 

price as bids were exhausted, the alternative uptick 

rule ‘‘would also prolong and deepen downward 

moves by forcing there to be overhanging, passive 

supply’’). 872Letter from Citadel et al. (Sept. 2009). 

We believe that Rule 201 will have a 

limited negative effect on price 

discovery and price efficiency. As 

discussed above, the Pilot Results 856

found that the Pilot data provided 

limited evidence that the former tick 

test of Rule 10a–1(a) and former bid test 

of NASD, which were permanent, 

market-wide short sale price tests, 

distorted a security’s price. In addition, 

one study concluded that former Rule 

10a–1 had little or no effect on price 

efficiency.857 Another study found no 

evidence that former Rule 10a–1 

negatively impacted price discovery.858

Due to differences in the operation of 

former Rule 10a–1 and Rule 201, when 

it applies, the alternative uptick rule 

under Rule 201 will be more restrictive 

than former Rule 10a–1 in some 

circumstances and less restrictive in 

others.859 As discussed above, however, 

due to the circuit breaker approach in 

Rule 201, the alternative uptick rule of 

Rule 201 generally will apply to a 

limited number of covered securities 860

and will apply only when the circuit 

breaker has been triggered for a covered 

security. As such, it will not be triggered 

for the majority of covered securities at 

any given time and, when triggered, will 

remain in effect for a short duration— 

that day and the following day. 

Considering the empirical studies and 

the comments and because of the 

limited scope and duration of Rule 201, 

we believe that Rule 201 will have little, 

if any, negative effect on price discovery 

and price efficiency. To the extent that 

Rule 201 negatively affects price 

discovery and price efficiency, we 

believe that such costs are justified by 

the benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

A number of commenters discussed 

the impact that the alternative uptick 

rule might have on execution.861 Several 

commenters stated that, under the 

alternative uptick rule, short sales 

would be ineligible for immediate 

execution, causing increased trading 

costs and opportunity costs, decreased 

liquidity, and widened spreads.862

Commenters also stated that the 

alternative uptick rule would increase 

the risk of non-execution of a short sale, 

which would reduce the speed of price 

discovery and increase execution 

prices.863 Commenters also noted that 

the alternative uptick rule could cause 

missed execution opportunities, thereby 

causing retail investors to pay 

artificially high prices to obtain 

execution.864

As we stated in the Re-Opening 

Release, because the alternative uptick 

rule will only permit short selling at a 

price above the current national best 

bid, the alternative uptick rule will 

generally not allow short sales to get 

immediate execution, even in an 

advancing market,865 which may slow 

the speed of executions and impose 

additional costs on market participants, 

including buyers.866 We note, however, 

that the above comments on the 

potential impacts of the alternative 

uptick rule on execution were not 

specific to a short sale price test in 

conjunction with a circuit breaker.867

Under the circuit breaker approach, the 

alternative uptick rule will only be 

imposed when a covered security has 

experienced an intra-day price decline 

of 10% or more and will only apply for 

the remainder of the day and the 

following day.868 We believe that the 

negative impact of Rule 201, if any, on 

execution speed and probability will be 

limited because of the limited scope and 

duration of Rule 201. To the extent that 

Rule 201 negatively impacts execution 

speed and probability, we believe that 

such costs are justified by the benefits 

provided by the Rule in preventing 

short selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security. 

Several commenters suggested that 

short sellers who remain in the markets, 

as well as other market participants, 

might change their trading behavior in 

response to a short sale price test 

restriction.869 For example, commenters 

expressed the belief that other traders 

might use computer algorithms to 

identify the presence of short sellers 

who have sell orders exactly one 

increment above the bid and quickly 

adjust their bid price downward in 

anticipation of the stock price dropping, 

which would result in the price of the 

security declining even further 

overall.870 Similarly, several 

commenters stated that short sale limit 

orders might be perceived by other 

market participants as a negative view 

on a covered security, which might have 

negative implications on market 

efficiency, market liquidity, and bid-ask 

spreads and might cause buyers to 

withdraw their bids.871 One commenter 

noted that displayed short sale limit 

orders could be ‘‘subject to the risk that 

long sellers would use the information 

in the orders to their advantage and 

front-run or pick off the orders.’’ 872

Additionally, commenters stated that 

short sellers who seek to execute above 

the best bid without displaying the offer 

would be driven to transact in market 

centers that do not display their betterpriced bids as part of the national 


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11296 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

873See, e.g., letter from EWT (Sept. 2009); letter 

from Group One Trading (Sept. 2009); letter from 

STANY (Sept. 2009). 874See id.; see also letter from STA (May 2009). 875See supra Section III.A.5. (discussing the 

circuit breaker trigger level and duration). 876See Ekkehart Boehmer, Charles M. Jones, and 

Xiaoyan Zhang, Unshackling Short Sellers: The 

Repeal of the Uptick Rule (Nov. 2008). 

877See, e.g., letter from NAREIT; letter from High 

Street Advisors; letter from European Investors 

(Sept. 2009). 

878See, e.g., the Pilot Results; see also supra note 

856 and accompanying text. Numerous commenters 

also sent analyses on short selling restrictions in 

general or on the short selling ban. See, e.g., letter 

from AIMA; letter Allston Trading (June 2009); 

Autore, Billingsley, and Kovacs, Short Sale 

Constraints, Dispersion of Opinion, and Market 

Quality: Evidence from the Short Sale Ban on U.S. 

Financial Stocks (June 19, 2009); letter from BATS 

(May 2009); letter from CBOE (June 2009); letter 

from Citadel et al. (June 2009); letter from Credit 

Suisse (June 2009), letter from CPIC (June 2009); 

letter from GETCO (June 2009); letter from Goldman 

Sachs (Sept. 2009); letter from Hudson River 

Trading; letter from ICI (June 2009); letter from 

NSCP; letter from NYSE Euronext (June 2009); letter 

from TD Asset Management; letter from STANY 

(June 2009); letter from Wolverine. 

879See supra note 128. 

880See, e.g., J. Julie Wu, Uptick Rule, short selling 

and price efficiency, Aug. 14, 2006. 

881See supra note 878 (citing empirical evidence 

showing that former Rule 10a–1 did not have an 

effect on market liquidity and price efficiency and 

that price test restrictions resulted in an increase in 

quote depths). We note that, although the 

alternative uptick rule is by definition more 

restrictive than the proposed modified uptick rule, 

differences between the operation of the proposed 

uptick rule and the alternative uptick rule mean 

that one approach or the other would be more 

restrictive in particular circumstances. See, e. g., 

supra note 242 and accompanying text (discussing 

automated trade matching systems). 

882See supra note 17. 

883See supra Section III.B.2. (discussing the 

‘‘short exempt’’ provision for seller’s delay in 

delivery). 

market system, such as dark pools, or 

through broker-dealers that offer 

internalization.873 Commenters noted 

that such an increase in volume directed 

to non-public markets would decrease 

overall market transparency, liquidity, 

and pricing efficiency.874

Although we recognize that short 

sellers who remain in the markets, as 

well as other market participants, might 

change their trading behavior in 

response to a short sale price test 

restriction, we believe any such effect 

will be limited by the circuit breaker 

approach of Rule 201. Under the circuit 

breaker approach, the alternative uptick 

rule will only be imposed when a 

covered security has experienced an 

intra-day price decline of 10% or more 

and will only apply for the remainder of 

the day and the following day.875 To the 

extent that Rule 201 results in changes 

in trading behavior, we believe that 

such an impact is justified by the 

benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

In addition, we note that, as discussed 

in Section II.D., above, we reviewed the 

empirical analyses that commenters 

submitted to us or discussed in their 

comments. Consistent with the Pilot 

Results, a study of the effect that 

rescission of former Rule 10a–1 had on 

market quality found that the 

elimination had no measurable effect on 

market volatility,876 while the results of 

other studies on the effect of the lack of 

a short sale price test restriction on 

volatility were mixed.877 However, we 

note that the study showing no 

measurable effect on market volatility 

only analyzed daily volatility during a 

six-week period following the 

elimination of former Rule 10a–1 and, 

thus, may have limited statistical 

significance. In addition, the studies 

evidencing an increase in volatility do 

not address the extent to which other 

factors may have contributed to or 

caused the increased volatility. 

Studies of other aspects of market 

quality suggest little measurable impact 

of a short sale price test restriction on 

price discovery, market efficiency, 

liquidity or market quality in general.878

Several commenters cited empirical 

evidence showing that restrictions on 

short selling, particularly bans on short 

selling, may impede liquidity, price 

discovery, and market efficiency,879 but 

the cited studies do not address the 

effects of a short sale price test 

restriction in general or Rule 201 in 

particular. The empirical analyses that 

commenters submitted on whether a 

short sale price test restriction dampens 

price pressure from short sellers are 

mixed, but generally focus on long time 

horizons, such as weeks or months, as 

opposed to short time horizons, such as 

seconds or minutes, which are more 

relevant to the impact of a short sale 

price test restriction on price 

pressure.880

In summary, after considering the 

empirical evidence and the comments 

that we received in response to the 

Proposal and the Re-Opening Release, 

we believe that Rule 201 will have a 

minimal, if any, negative effect on 

market liquidity, price efficiency, and 

quote depths.881 In addition, we 

recognize that there will be market costs 

associated with Rule 201 in terms of the 

potential impact of such a short salerelated circuit breaker on execution 

speed and probability. Such costs may 

increase the costs of legitimate short 

selling. To the extent that Rule 201 

results in increased costs for short 

selling in covered securities, it may 

increase the trading costs of legitimate 

short selling for these securities and 

may result in a reduction in short 

selling generally. Restricting short 

selling may also reduce ‘‘long’’ activity 

where the short selling is part of a larger 

trading strategy. As discussed above, we 

believe that these costs will be limited 

because of the circuit breaker approach 

of Rule 201. 

We believe that the potential costs of 

Rule 201 are justified by its design, such 

that, when Rule 201 is triggered, it will 

allow long sellers, by selling at the bid, 

to sell first, ahead of short sellers, in a 

declining market for a particular 

security. As the Commission has noted 

previously in connection with short sale 

price test restrictions, a goal of such 

restrictions is to allow long sellers to 

sell first in a declining market.882 A 

short seller that is seeking to profit 

quickly from accelerated, downward 

market moves may find it advantageous 

to be able to short sell at the current 

national best bid. In addition, by making 

bids accessible only by long sellers 

when a security’s price is undergoing 

significant downward price pressure, 

Rule 201 will help to facilitate and 

maintain stability in the markets and 

help ensure that they function 

efficiently. It will also help restore 

investor confidence during times of 

substantial uncertainty because, once 

the circuit breaker has been triggered for 

a particular security, long sellers will 

have preferred access to bids for the 

security, and the security’s continued 

price decline will more likely be due to 

long selling and the underlying 

fundamentals of the issuer, rather than 

to other factors. In addition, combining 

the alternative uptick rule with a circuit 

breaker strikes the appropriate balance 

between our goal of preventing short 

selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security and the 

need to allow for the continued smooth 

functioning of the markets, including 

the provision of liquidity and price 

efficiency in the markets. 

In addition, we believe several of the 

provisions contained in paragraph (d) of 

Rule 201 will help to mitigate any 

potential price distortions or costs 

associated with Rule 201. These 

provisions are designed to help promote 

the workability of Rule 201, while at the 

same time furthering our goals for 

adopting short sale price test regulation. 

As discussed above,883 we are 

adopting the seller’s delay in delivery 

exception under Rule 201(d)(1) to allow 

sale orders of owned but restricted 


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884See supra Section III.B.3. (discussing the 

‘‘short exempt’’ provision for odd lot transactions). 

885See supra Section III.B.4. (discussing the 

‘‘short exempt’’ provision for domestic arbitrage 

transactions). 

886See supra Section III.B.5. (discussing the 

‘‘short exempt’’ provision for international arbitrage 

transactions). 

887See supra Sections III.B.4. and III.B.5. 

(discussing the benefits of bona fide arbitrage 

activities to market efficiency because they tend to 

reduce pricing disparities between related 

securities). 

888See supra Section III.B.6. (discussing the 

‘‘short exempt’’ provision for over-allotments and 

lay-off sales). 

889See id. 

890See supra Section III.B.7. (discussing the 

‘‘short exempt’’ provision for riskless principal 

transactions). 

891See supra Section III.B.8. (discussing the 

‘‘short exempt’’ provision for transactions on a 

volume weighted average price basis). 

892See Rule 201(b)(1)(i). 

893See Rule 201(b)(1)(ii). 

894See Rule 201(b)(2). 

895See Proposal, 74 FR at 18090, 18092–18103; 

Re-Opening Release, 74 FR at 42037. 

896See Proposal, 74 FR at 18090. 

897See, e.g., letter from NSCP; letter from STANY 

(June 2009); letter from RBC (June 2009); letter from 

Wolverine; letter from CPIC (Sept. 2009); letter from 

EWT (Sept. 2009); letter from RBC (Sept. 2009); 

letter from STA (Sept. 2009). 

898See, e.g., letter from NSCP; letter from STANY 

(June 2009); letter from RBC (June 2009); letter from 

Wolverine. 

899See, e.g., letter from CPIC (Sept. 2009); letter 

from EWT (Sept. 2009); letter from RBC (Sept. 

2009); letter from STA (Sept. 2009). 

900See, e.g., letter from EWT (Sept. 2009) (stating 

that the net savings of the alternative uptick rule to 

the broader industry compared to the other 

proposals would at best be minimal); letter from 

Continued 

securities to be displayed or executed at 

a price that is less than or equal to the 

current national best bid, thereby 

mitigating the negative impact of Rule 

201, if any, on execution speed and 

probability and helping to promote the 

workability of Rule 201. 

Rule 201(d)(2) allows a broker-dealer 

to mark a short sale order as ‘‘short 

exempt’’ if the broker-dealer has a 

reasonable basis to believe that the short 

sale order is by a market maker to offset a customer odd-lot order or liquidate 

an odd-lot position which changes such 

broker-dealer’s position by no more than 

a unit of trading.884 We believe that the 

odd-lot exception will promote the 

workability of Rule 201 and help 

mitigate potential price distortions or 

costs associated with the Rule, if any, 

because it will allow those acting in the 

capacity of a ‘‘market maker’’ to off-set 

customer odd-lot orders without regard 

to whether the sale order is at a price 

that is less than or equal to the current 

national best bid, thereby facilitating the 

liquidity providing function of market 

makers. 

Rule 201(d)(3) permits a broker-dealer 

to mark as ‘‘short exempt’’ short sale 

orders associated with certain bona fide 

domestic arbitrage transactions.885

Moreover, to facilitate arbitrage 

transactions in which a short position is 

taken in a security in the U.S. markets, 

and which is to be immediately covered 

on a foreign market, Rule 201(d)(4) 

permits a broker-dealer to mark as ‘‘short 

exempt’’ short sale orders associated 

with certain international arbitrage 

transactions.886 Because domestic 

arbitrage and international arbitrage 

transactions promote market efficiency 

by equalizing prices at an instant in 

time in different markets or between 

relatively equivalent securities,887 we 

believe these provisions will help 

mitigate the negative effect of Rule 201, 

if any, on market and pricing efficiency 

and help to promote the workability of 

Rule 201. 

Rule 201(d)(5) permits a broker-dealer 

to mark as ‘‘short exempt’’ short sale 

orders by underwriters or syndicate 

members participating in a distribution 

in connection with an over-allotment, 

and any short sale orders for purposes 

of lay-off sales by such persons in 

connection with a distribution of 

securities through a rights or standby 

underwriting commitment.888 We are 

including a ‘‘short exempt’’ marking 

provision for syndicate and lay-off sales 

because, as discussed above, we have 

historically excepted such activity from 

short sale rules.889 In addition, we note 

that the public offering process is key to 

capital formation. By facilitating price 

support during the offering process, 

Rule 201(d)(5) will mitigate the negative 

effects of Rule 201, if any, on capital 

formation. 

Rule 201(d)(6) allows a broker-dealer 

to mark as ‘‘short exempt’’ short sale 

orders where broker-dealers are 

facilitating customer buy orders or sell 

orders where the customer is net long, 

and the broker-dealer is net short but is 

effecting the sale as riskless 

principal.890 We believe that the riskless 

principal exception of Rule 201(d)(6) 

will facilitate broker-dealers’ ability to 

provide best execution to certain 

customer orders, thus mitigating the 

negative impact of Rule 201, if any, on 

execution speed and probability and 

helping to promote the workability of 

Rule 201. 

Rule 201(d)(7) permits a broker-dealer 

to mark as ‘‘short exempt’’ certain short 

sale orders executed on a VWAP 

basis.891 We believe that the exception 

for VWAP short sale transactions will 

provide an additional source of liquidity 

for investors’ VWAP orders and will 

help enable investors to achieve their 

objective of obtaining an execution at 

the VWAP, thus mitigating the negative 

impact of Rule 201, if any, on liquidity 

and execution speed and probability 

and helping to promote the workability 

of Rule 201. 

b. Implementation and On-Going 

Monitoring and Surveillance Costs 

i. Policies and Procedures Requirement 

Under Rule 201 

Rule 201 requires a trading center to 

have written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day.892 In addition, the Rule requires 

that the trading center establish, 

maintain, and enforce written policies 

and procedures reasonably designed to 

impose this short sale price test 

restriction for the remainder of the day 

and the following day when a national 

best bid for the covered security is 

calculated and disseminated on a 

current and continuing basis by a plan 

processor pursuant to an effective 

national market system plan.893 In 

addition, trading centers are required to 

regularly surveil to ascertain the 

effectiveness of the policies and 

procedures required under the Rule and 

to take prompt action to remedy 

deficiencies in such policies and 

procedures.894

As stated previously, we discussed in 

the Proposal the anticipated costs of the 

proposed short sale price test 

restrictions and, in the Proposal and ReOpening Release, we requested 

comment on the costs associated with 

the proposed amendments.895 In 

particular, we requested comment on 

the potential costs for any modification 

to both computer systems and 

surveillance mechanisms and for 

information gathering, management, and 

recordkeeping systems or procedures.896

A number of commenters expressed 

concerns that the costs of implementing 

a short sale price test restriction would 

be significant.897 However, many of 

these comments were not specific to the 

alternative uptick rule.898 While some 

commenters discussed the potential 

implementation costs of the alternative 

uptick rule, they did not provide 

specific estimates of such costs.899 Most 

commenters compared estimated 

implementation costs of the alternative 

uptick rule to the other proposed 

rules.900


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STA (Sept. 2009); letter from BATS (Sept. 2009); 

letter from Goldman Sachs (Sept. 2009); letter from 

Wells Fargo (Sept. 2009); letter from SIFMA (Sept. 

2009); letter from ICI (Sept. 2009); letter from Credit 

Suisse (Sept. 2009). 

901See supra Section IX.E.1. (discussing 

estimated burdens on trading centers of the 

collection of information requirements in 

connection with Rule 201). 

902See, e.g., letter from BATS (May 2009); letter 

from BATS (Sept. 2009); letter from GETCO (Sept. 

2009); letter from ICI (Sept. 2009); letter from Glen 

Shipway (Sept. 2009). In addition, several 

commenters acknowledged that implementation of 

the alternative uptick rule will likely be less costly, 

without referencing the sequencing issue. See, e.g., 

letter from STANY (Sept. 2009). 

903See, e.g., letter from Glen Shipway (Sept. 

2009); letter from SIFMA (Sept. 2009); letter from 

STA (Sept. 2009); see also letter from Credit Suisse 

(June 2009). In addition, one commenter 

acknowledged that implementation of the 

alternative uptick rule will likely be easier, without 

referencing the sequencing issue. See letter from 

Allston Trading (Sept. 2009). 

904See, e.g., letter from BATS (May 2009); letter 

from Glen Shipway (Sept. 2009); letter from ICI 

(Sept. 2009); see also letter from National Stock 

Exchange et al. 

905Letter from BATS (Sept. 2009). 

906See, e.g., letter from Matlock Capital (Sept. 

2009); letter from NYSE Euronext (Sept. 2009); 

letter from Knight Capital (Sept. 2009). 

907See, e.g., letter from NYSE Euronext (Sept. 

2009) (stating that implementation of the alternative 

uptick rule would be more difficult on the basis that 

the alternative uptick rule would be paired with a 

circuit breaker and attributing implementation 

difficulties to the circuit breaker approach, not the 

alternative uptick rule). 

908See, e.g., letter from Knight Capital (Sept. 

2009) (characterizing a potential increase in 

friction, confusion, or inefficiency in the market as 

an implementation difficulty that may arise from 

the alternative uptick rule). 

909See letter from Matlock Capital (Sept. 2009). 

910See, e.g., letter from Matlock Capital (Sept. 

2009); letter from ISE (Sept. 2009); letter from 

Bingham McCutchen. 

911Letter from RBC (Sept. 2009). 

912 In addition, with respect to the commenter’s 

concern that we underestimated the time required 

for implementation, we note that, as discussed in 

Section VII., above, we believe that a six month 

implementation period is appropriate. This 

implementation period, which is longer than the 

implementation periods proposed in the Proposal 

and the Re-Opening Release, takes into 

consideration commenters’ concerns that 

implementation of a price test could be complex. 

We do not believe that a longer implementation 

time is warranted because, for example, Rule 201 

does not require monitoring of the sequence of bids 

or last sale prices, unlike other proposed price tests, 

and because Rule 201 requires the implementation 

of policies and procedures similar to those required 

for trading centers under Regulation NMS. 

913See letter from Wolverine. In its letter, 

Wolverine multiplied its implementation cost 

estimate of $500,000 by 382 non-SRO trading 

centers for a total of $191,000,000. See id. As 

indicated above, however, we now estimate that 

there are 407 non-SRO trading centers. See supra 

note 686. 

914 Id. 

915See infra note 960 and accompanying text 

(discussing our estimated implementation costs for 

trading centers). 

916See supra notes 661 to 669 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs). 

As discussed in the PRA section 

above, we believe that the 

implementation and on-going 

monitoring and surveillance costs of the 

alternative uptick rule will be lower 

than the implementation and on-going 

monitoring and surveillance costs that 

would be associated with adoption of 

the proposed modified uptick rule or 

the proposed uptick rule.901 Unlike the 

proposed modified uptick rule and the 

proposed uptick rule, which would 

have required sequencing of the 

national best bid or last sale price (i.e., 

whether the current national best bid or 

last sale price is above or below the 

previous national best bid or last sale 

price), the alternative uptick rule 

references only the current national best 

bid. In addition, we believe that the 

implementation and on-going 

monitoring and surveillance costs of the 

alternative uptick rule are justified by 

the benefits provided by preventing 

short selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security. 

A number of commenters stated that 

because the alternative uptick rule 

would not require monitoring of the 

sequence of bids or last sale prices, 

implementing the alternative uptick rule 

would be less costly 902 or easier than 

implementing the proposed modified 

uptick rule or the proposed uptick 

rule.903 In addition, several commenters 

stated that the alternative uptick rule 

would be easier to program into trading 

and surveillance systems than the 

proposed modified uptick rule or the 

proposed uptick rule.904 Another 

commenter stated, with respect to the 

alternative uptick rule, that ‘‘actual 

implementation costs in terms of time 

and capital expenditure would be 

negligible when compared to those 

involved in implementing either the 

uptick rule or modified uptick rule.’’ 905

Several commenters indicated that 

implementation of the alternative uptick 

rule would not be easier or less costly 

than implementation of the proposed 

modified uptick rule or the proposed 

uptick rule.906 However, we note that 

some of these commenters presented 

concerns that were not directly related 

to the alternative uptick rule 907 or to 

implementation costs or difficulties.908

Additionally, one commenter did not 

provide the reasoning for its belief that 

the alternative uptick rule would not be 

easier or less costly to implement.909

Several commenters indicated their 

belief that other commenters’ estimates 

regarding the difficulty or costs of 

implementing and monitoring the 

proposed modified uptick rule and the 

proposed uptick rule were 

exaggerated.910 We recognize that some 

commenters’ estimates of the costs of 

the proposed modified uptick rule or 

the proposed uptick rule may have been 

conservative. We also believe that 

because the alternative uptick rule does 

not include a sequencing requirement, 

the implementation and on-going 

monitoring and surveillance costs of the 

alternative uptick rule will be less than 

such costs would be with respect to the 

other proposed short sale price test 

restrictions. 

One commenter stated that the 

Commission ‘‘underestimate[s] the time 

and expense that will be required for 

market participants to comply with the 

[alternative uptick] rule (or any other of 

the proposed alternatives)’’ and that 

such costs ‘‘will include expenses * * * 

for the initial implementation of any 

restriction.’’ 911 However, this 

commenter did not specify why or how 

the implementation cost of the 

alternative uptick rule may be greater 

than we estimated.912

One commenter indicated that 

implementation costs would be 

approximately $500,000 per firm, for a 

total of $191,000,000 for all non-SRO 

trading centers subject to Rule 201,913

including costs for ‘‘the purchase of 

additional costly data feeds’’ but not 

including ‘‘costs associated with 

developing appropriate internal 

supervisory procedures and compliance 

programs.’’ 914 The implementation cost 

estimates provided by this commenter, 

which are significantly higher than our 

estimate of, on average, $68,381 per 

non-SRO trading center,915 were not 

specific to the alternative uptick rule. 

Because the alternative uptick rule 

references only the current national best 

bid, unlike the proposed modified 

uptick rule and the proposed uptick 

rule, which would have required 

sequencing of the national best bid or 

last sale price, we believe that the 

alternative uptick rule will be easier and 

less costly to implement and monitor 

than the proposed modified uptick rule 

or the proposed uptick rule.916 In 

addition, we note that implementation 

of Rule 201 will not require 

modifications to how data feeds are 

currently received. As discussed above, 

Rule 201 does not mandate that the 

receipt of the current national best bid 

must be from any one particular data 

feed; thus, trading centers will be able 

to continue using the data feed they 

currently use, and for which they 


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917See supra notes 404 to 411 and accompanying 

text (discussing the use of various data feeds in 

determining the current national best bid). 

918See letter from SIFMA (June 2009). SIFMA did 

not categorize estimates of the implementation costs 

of a circuit breaker triggering a short sale price test 

based on the national best bid by SRO trading 

centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms, 

with implementation cost estimates that averaged 

$2,000,000 per firm, with the highest estimate at 

$9,000,000 per firm, regional firms, with estimates 

that averaged $235,000 per firm, with the highest 

estimate at $500,000 per firm, and clearing firms, 

with estimates that averaged $1,200,000 per firm, 

with the highest estimate at $1,900,000 per firm. 

SIFMA only provided the average and highest cost 

estimates per category. See id. 

919See infra note 960 and accompanying text 

(discussing our estimated implementation costs for 

trading centers). 

920See supra notes 661 to 669 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs). 

921As discussed above, implementation of Rule 

201 will not require modifications to how data 

feeds are currently received. See supra notes 404 to 

411 and accompanying text (discussing the use of 

various data feeds in determining the current 

national best bid). 

922See, e.g., letter from NSCP; letter from STANY 

(June 2009); letter from RBC (June 2009); letter from 

Wolverine; letter from EWT (Sept. 2009). 

923See infra note 960 and accompanying text 

(discussing our estimates of the implementation 

costs of Rule 201 by trading centers). 

924See, e.g., letter from NSCP; letter from RBC 

(June 2009); letter from SIFMA (June 2009); letter 

from Wolverine; letter from RBC (Sept. 2009). 

925See letter from RBC (Sept. 2009). 

926See letter from STA (Sept. 2009). 

927See supra notes 661 to 669 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs). 

928See letter from Wolverine. Wolverine does not 

apply this estimate to exchanges and ATSs, but 

only to other non-SRO trading centers (such as 

market makers), noting that on-going costs for 

exchanges and ATSs ‘‘should be minimal because 

they would be limited to system testing and 

maintenance, not the regulation of hundreds of 

members’ systems, procedures and trading activity.’’ 

Id. 

929See infra notes 961 to 962 and accompanying 

text (discussing our estimates of the on-going 

monitoring and surveillance costs of Rule 201 by 

trading centers). 

930See infra notes 934 and 935 and 

accompanying text (discussing the scope of our ongoing monitoring and compliance cost estimates). 

931See letter from SIFMA (June 2009). SIFMA did 

not categorize estimates of the on-going monitoring 

costs of a circuit breaker triggering a short sale price 

test based on the national best bid by SRO trading 

centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms, 

with on-going monitoring cost estimates that 

averaged $130,000 per firm, with the highest 

estimate at $1,500,000 per firm, regional firms, with 

estimates that averaged $45,000 per firm, with the 

highest estimate at $350,000 per firm, and clearing 

firms, with estimates that averaged $175,000 per 

firm, with the highest estimate at $250,000 per firm. 

SIFMA only provided the average and highest cost 

estimates per category. See id. 

932See infra notes 961 to 962 and accompanying 

text (discussing our estimated on-going monitoring 

and surveillance costs for trading centers). 

currently pay.917 As a result, we believe 

this commenter’s estimates of the 

implementation costs are higher than 

our estimated implementation costs for 

Rule 201. 

Another commenter conducted a 

survey of firms with respect to 

implementation cost estimates. Cost 

estimates in response to the survey 

indicated that a circuit breaker 

triggering a short sale price test based on 

the national best bid would have 

implementation costs that averaged 

between $235,000 and $2,000,000 per 

firm.918 This estimated implementation 

cost range is significantly higher than 

our estimated range of, on average, 

$68,381 per non-SRO trading center to 

$86,880 per SRO trading center for 

implementation.919 We note that the 

commenter’s survey results covered fifty 

firms, categorized as large firms, 

regional firms, and clearing firms, rather 

than SRO trading centers, non-SRO 

trading centers and broker-dealers. 

Thus, it is difficult to determine the 

implementation costs to trading centers, 

including non-SRO trading centers, 

from these survey results. In addition, 

these cost estimates were based on a 

circuit breaker triggering the proposed 

modified uptick rule and, as such, were 

not specific to the alternative uptick 

rule. Because the alternative uptick rule 

references only the current national best 

bid, unlike the proposed modified 

uptick rule and the proposed uptick 

rule, which would have required 

sequencing of the national best bid or 

last sale price, we believe that the 

alternative uptick rule will be easier and 

less costly to implement and monitor 

than the proposed modified uptick rule 

or the proposed uptick rule.920

Commenters indicated that 

implementation costs would include 

costs for modifications to multiple 

systems, including blue sheet, OATS, 

and OTS reporting systems, trading 

system interfaces, execution 

management systems, and order 

management systems; modifications to 

data feeds; 921 adjustments to data 

retention capabilities; revisions to 

written policies and procedures; and 

personnel training regarding the new 

requirements.922 We recognize that 

implementation of Rule 201 will impose 

surveillance and reprogramming costs 

for enforcing, monitoring, and updating 

trading, order management, execution 

management, surveillance, and 

reporting systems under Rule 201, 

systems changes to computer software, 

adjustments to data retention 

capabilities, as well as staff time and 

technology resources. These costs are 

included in our estimates of the costs of 

implementing Rule 201.923

In addition, commenters expressed 

concerns that the costs of on-going 

monitoring and surveillance of a short 

sale price test restriction would be 

significant.924 Only one commenter 

specifically discussed concerns about 

the on-going monitoring and 

surveillance costs of the alternative 

uptick rule, and this commenter did not 

provide specific cost estimates.925 One 

commenter stated that the alternative 

uptick rule would be easier to surveil 

and monitor than the proposed 

modified uptick rule or the proposed 

uptick rule, and thus would present 

lower on-going costs to the industry.926

The alternative uptick rule references 

only the current national best bid, 

unlike the proposed modified uptick 

rule and the proposed uptick rule, 

which would have required sequencing 

of the national best bid or last sale price. 

Thus, we believe that the alternative 

uptick rule will be easier and less costly 

to implement and monitor than the 

proposed modified uptick rule or the 

proposed uptick rule.927

Another commenter estimated that 

on-going system maintenance would 

cost $20,000 annually per firm.928 This 

estimate is lower than our estimated 

total cost of, on average, $121,356 

annually per trading center for on-going 

monitoring and surveillance.929 This 

commenter stated that this estimate 

covers the cost ‘‘annually to maintain 

the system.’’ It is not clear what specific 

on-going monitoring and surveillance 

functions are included in the 

commenter’s estimate but we believe 

that our estimate is more inclusive, in 

that it specifically takes into account 

costs for the commitment of resources 

associated with compliance 

administration and oversight, response 

to regulatory inquiries and 

examinations, response to internal 

inquiries, market surveillance, data 

retention, testing, training, and 

enforcement, with attendant 

opportunity costs.930

One commenter conducted a survey 

of fifty firms with respect to on-going 

monitoring cost estimates. Cost 

estimates in response to the survey 

indicated that a circuit breaker 

triggering a short sale price test based on 

the national best bid would have ongoing monitoring costs that averaged 

between $45,000 and $175,000 per 

firm.931 Although our estimated cost of, 

on average, $121,356 per trading center 

for on-going monitoring and 

surveillance,932 falls within this 

commenter’s estimated range of ongoing monitoring cost, we note that the 

survey results covered fifty firms, 


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933See supra notes 661 to 669 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs). 

934See, e.g., letter from NSCP; letter from RBC 

(June 2009); letter from SIFMA (June 2009); letter 

from Wolverine; letter from RBC (Sept. 2009). 

935See infra notes 961 to 962 and accompanying 

text (discussing our estimates of the on-going 

monitoring and surveillance costs of Rule 201 to 

trading centers). 

936See Regulation NMS Adopting Release, 70 FR 

37496; see also Proposal, 74 FR at 18087; 17 CFR 

242.611. 

937See Regulation NMS Adopting Release, 70 FR 

37496; see also 17 CFR 242.611. 

938We also believe some trading centers may 

have retained personnel familiar with the former 

SRO bid tests, which may make Rule 201 even less 

burdensome to implement. See, Proposal, 74 FR at 

18095, n.393 and 18053, n.125. 

939See, e.g., letter from FIF (June 2009); letter 

from NSCP; letter from RBC (June 2009). 

940Letter from FIF (June 2009); see also letter 

from RBC (June 2009). 

941See letter from NSCP; letter from RBC (June 

2009). 

942See, e.g., letter from EWT (Sept. 2009); letter 

from Goldman Sachs (Sept. 2009); letter from MFA 

(Oct. 2009). 

943Letter from Goldman Sachs (Sept. 2009); see 

also letter from MFA (Oct. 2009). 

944Letter from EWT (Sept. 2009). 

945See supra notes 404 to 411 and accompanying 

text (discussing the use of various data feeds in 

determining the current national best bid). 

categorized as large firms, regional 

firms, and clearing firms, rather than 

SRO trading centers, non-SRO trading 

centers and broker-dealers. Thus, it is 

difficult to determine the 

implementation costs to trading centers, 

including non-SRO trading centers, 

from these survey results. In addition, 

these cost estimates were not specific to 

the alternative uptick rule. Because the 

alternative uptick rule references only 

the current national best bid, unlike the 

proposed modified uptick rule and the 

proposed uptick rule, which would 

have required sequencing of the 

national best bid or last sale price, we 

believe that the alternative uptick rule 

will be easier and less costly to 

implement and monitor than the 

proposed modified uptick rule or the 

proposed uptick rule.933

Commenters indicated that the ongoing costs to trading centers of a short 

sale price test restriction would include 

surveillance, testing, training, 

administration and supervision, data 

retention, response to regulatory 

inquiries and examinations, and 

response to internal inquiries.934 We 

agree with these comments and believe 

that Rule 201 will require the 

commitment of resources associated 

with compliance administration and 

oversight, response to regulatory 

inquiries and examinations, response to 

internal inquiries, market surveillance, 

data retention, testing, training, and 

enforcement, with attendant 

opportunity costs. These costs are 

included in our estimates of the costs of 

on-going monitoring and surveillance of 

Rule 201.935

In estimating the costs to trading 

centers of implementing Rule 201, we 

considered that the policies and 

procedures required to be implemented 

for purposes of Rule 201 are similar to 

those that are required under Regulation 

NMS.936 In accordance with Regulation 

NMS, trading centers must have in place 

written policies and procedures in 

connection with that Regulation’s Order 

Protection Rule, which could help form 

the basis for implementing the policies 

and procedures for Rule 201.937 Thus, 

we believe trading centers may already 

be familiar with establishing, 

maintaining, and enforcing tradingrelated policies and procedures, 

including programming their trading 

systems in accordance with such 

policies and procedures. We believe this 

familiarity will reduce the 

implementation costs of Rule 201 on 

trading centers and will make Rule 201 

less burdensome to implement. 

Moreover, because trading centers have 

already developed or modified their 

surveillance mechanisms in order to 

comply with Regulation NMS’s policies 

and procedures requirement, trading 

centers may already have retained and 

trained the necessary personnel to 

ensure compliance with that 

Regulation’s policies and procedures 

requirements and, therefore, may 

already have in place most of the 

infrastructure and potential policies and 

procedures necessary to comply with 

Rule 201.938 Further, we believe that the 

implementation and on-going 

monitoring and surveillance costs of the 

alternative uptick rule are justified by 

the benefits provided in preventing 

short selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security. 

Several commenters indicated that the 

Commission overstated the benefit of 

previous implementation of Regulation 

NMS in mitigating the costs of 

implementing a short sale price test 

restriction,939 because, for example, 

‘‘systems re-written and architected for 

Reg NMS * * * did not include any 

short sale restrictions,’’ 940 or because 

such systems will require modifications 

in order to be used in the context of a 

short sale price test restriction.941

However, we took into account that 

Regulation NMS was implemented after 

elimination of the prior short sale price 

tests when considering the impact of 

previous experience with the policies 

and procedures requirement of 

Regulation NMS’s Order Protection 

Rule. And, although we recognize that 

systems and processes will have to be 

modified for implementation of Rule 

201, we continue to believe that because 

most trading centers already have in 

place systems and written policies and 

procedures in order to comply with 

Regulation NMS’s Order Protection 

Rule, most trading centers will already 

be familiar with establishing, 

maintaining, and enforcing tradingrelated policies and procedures, which 

will mitigate the burden of 

implementation of the policies and 

procedures requirement under Rule 201. 

Several commenters agreed, stating 

that previous experience with the 

policies and procedures required under 

Regulation NMS might reduce the 

implementation and on-going 

monitoring and compliance burdens on 

trading centers.942 One commenter 

stated that implementation of a circuit 

breaker approach combined with the 

alternative uptick rule would be easier 

to implement than the other proposed 

short sale price tests or proposed circuit 

breaker rules, ‘‘provided that the 

Commission permits firms to leverage 

the numerous systems changes made to 

facilitate compliance with Regulation 

NMS (including the use of internal 

market data rather than consolidated 

data supplied by the industry 

plans).’’ 943 And one commenter stated 

that prior implementation of Regulation 

NMS could ease implementation of a 

short sale price test restriction, 

‘‘provided that broker-dealers’ 

implementations of Regulation NMS 

was sufficiently modular and 

extensible.’’ 944 We believe that Rule 201 

is structured so that trading centers will 

be able to leverage their existing systems 

and experience with implementing the 

policies and procedures required by 

Regulation NMS’s Order Protection 

Rule. For example, Rule 201 does not 

mandate that the receipt of the current 

national best bid must be from any one 

particular data feed; thus, trading 

centers will be able to use internal 

market data if they choose.945 Thus, as 

stated above, we believe that familiarity 

with trading-related policies and 

procedures under Regulation NMS will 

mitigate the burden of implementation 

of the policies and procedures 

requirement under Rule 201. 

Moreover, the written policies and 

procedures requirement of Rule 201 is 

designed to provide trading centers with 

significant flexibility in determining 

how to comply with the requirements of 


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946For example, if a trading center receives a 

short sale order priced at $47.00 when the current 

national best bid in the security is $47.00, the 

trading center could re-price the order at the 

permissible offer price of $47.01, and display the 

order for execution at this new limit price. 

947See, e.g., letter from T. Rowe Price (June 2009); 

letter from AIMA; letter from RBC (June 2009); 

letter from Citadel et al. (Sept. 2009). 

948See, e.g., letter from Glen Shipway (Sept. 

2009); see also letter from Credit Suisse (June 2009); 

letter from FIF (June 2009); letter from Lime 

Brokerage (June 2009); letter from RBC (June 2009); 

letter from SIFMA (June 2009); letter from Direct 

Edge (June 2009); letter from BATS (Sept. 2009); 

letter from Credit Suisse (Sept. 2009); letter from 

Lime Brokerage (Sept. 2009). 

949See Proposal, 74 FR at 18093. 

950See supra note 676. 

951See Proposal, 74 FR at 18093. 

952Letter from Nasdaq OMX Group (Oct. 2009). 

953Letter from Credit Suisse (Sept. 2009). 

954See, e.g., letter from STA (June 2009). 

955See letter from Glen Shipway (June 2009). 

956See, e.g., letter from Nasdaq OMX Group (Oct. 

2009); letter from SIFMA (Sept. 2009). 

957See supra notes 292 and 684 and 

accompanying text (discussing stock exchanges’ 

and FINRA’s rules or policies to implement 

coordinated circuit breaker halts and SRO rules or 

polices to coordinate individual security trading 

halts corresponding to significant news events). 

958See Proposal, 74 FR at 18093. 

959See supra note 686 (discussing the change in 

the estimated number of trading centers). 

the Rule. For example, Rule 201 is 

designed to provide trading centers and 

their customers with flexibility in 

determining how to handle orders that 

are not immediately executable or 

displayable by the trading center 

because the order is impermissibly 

priced. Thus, if an order were 

impermissibly priced, the trading center 

could, in accordance with policies and 

procedures reasonably designed to 

prevent the execution or display of a 

short sale at a price that is less than or 

equal to the current national best bid, 

re-price the order upwards to the lowest 

permissible price and hold it for later 

execution at its new price or better.946

As quoted prices change, Rule 201 

allows a trading center to repeatedly reprice and display an order at the lowest 

permissible price down to the order’s 

original limit order price (or, if a market 

order, until the order is filled). Because 

a trading center could re-price and 

display a previously impermissibly 

priced short sale order, Rule 201 may 

allow for the more efficient functioning 

of the markets because trading centers 

do not have to reject or cancel 

impermissibly priced orders unless 

instructed to do so by the trading 

center’s customer submitting the short 

sale order. We note that a number of 

commenters expressed support for a 

policies and procedures approach to any 

short sale price test restriction, in part, 

because it would add flexibility to the 

Rule’s requirements.947

Moreover, while latencies in 

obtaining data regarding the national 

best bid from consolidated market data 

feeds, as discussed in detail above, may 

impact implementation costs associated 

with Rule 201, a trading center could 

have policies and procedures that 

would provide for a snapshot of the 

applicable national best bid of the 

security. We note that some commenters 

expressed concerns regarding latencies 

in obtaining data regarding the national 

best bid disseminated by proprietary 

data feeds and/or by SIPs.948 We believe 

that a policies and procedures approach 

that provides for a snapshot of the 

applicable current national best bid will 

aid trading centers in dealing with time 

lags in receiving data regarding the 

national best bid from different data 

sources, as well as lead to reduced 

initial and on-going costs associated 

with Rule 201 for trading centers by 

facilitating verification of whether a 

short sale order was executed or 

displayed at a permissible price. 

We considered whether our estimates 

of the costs to trading centers for 

implementation and on-going 

monitoring and surveillance of the 

proposed modified uptick rule included 

in the Proposal 949 would change under 

the circuit breaker approach of Rule 

201, but concluded, as discussed below, 

that these estimates continue to 

represent reasonable estimates under 

the circuit breaker approach. 

Despite some commenters’ concerns 

regarding the implementation costs of a 

circuit breaker rule,950 we believe that 

the circuit breaker approach will result 

in largely the same implementation 

costs as we estimated would be incurred 

if we adopted a permanent, market-wide 

short sale price test restriction.951 As 

one commenter stated, ‘‘[o]nce the price 

test is in place, there is minimal 

incremental effort required to add a 

Circuit Breaker that controls the 

application of the price test.’’ 952

Similarly, another commenter stated 

that ‘‘[t]he additional coding required to 

implement a circuit breaker is minimal 

***’’ 953 We believe that there will be 

only minimal, if any, implementation 

costs for a circuit breaker approach in 

addition to the costs that we estimated 

previously for the implementation of a 

permanent, market-wide short sale price 

test rule because trading centers will 

need to establish written policies and 

procedures to implement the short sale 

price test restriction regardless of 

whether the short sale price test 

restriction is adopted on a permanent, 

market-wide basis or, in the case of Rule 

201, adopted in conjunction with a 

circuit breaker. Several other 

commenters agreed, stating that the 

costs of the circuit breaker approach 

would be similar to, or only 

incrementally higher than, the costs of 

a permanent, market-wide approach.954

In addition, with respect to on-going 

monitoring and surveillance costs of the 

circuit breaker approach, we recognize, 

as noted by one commenter,955 that 

trading centers will need to 

continuously monitor whether a 

security is subject to the provisions of 

Rule 201 and that there will be costs 

associated with such monitoring. 

However, we believe that these costs 

will be offset because, under the circuit 

breaker approach, the alternative uptick 

rule will be time limited and will only 

apply on a stock-by-stock basis, which 

will reduce our previously estimated 

costs for on-going monitoring and 

surveillance. This is because trading 

centers will only need to monitor and 

surveil for compliance with the 

alternative uptick rule during the 

limited period of time that the circuit 

breaker is in effect with respect to a 

specific security. As such, the circuit 

breaker approach will allow regulatory, 

supervisory and compliance resources 

to focus on, and to address, those 

situations where a specific security is 

experiencing significant downward 

price pressure.956 Further, although, 

under the circuit breaker approach, 

market participants will need to monitor 

whether a stock is subject to Rule 201 

or not, we believe that familiarity with 

a circuit breaker approach may help 

mitigate such compliance costs.957

On balance, we believe that the 

estimates of the costs to trading centers 

for implementation and on-going 

monitoring and surveillance of the 

proposed modified uptick rule included 

in the Proposal 958 are appropriate with 

respect to Rule 201. Thus, our estimates 

have not changed from the Proposal, 

except to the extent that total burden 

estimates have changed because we 

have updated the estimated number of 

trading centers.959 As detailed in PRA 

Section IX.E.1., above, we realize that 

the exact nature and extent of the 

policies and procedures that a trading 

center is required to establish likely will 

vary depending upon the type, size, and 

nature of the trading center (e.g., SRO 

vs. non-SRO, full service broker-dealer 

vs. market maker). Thus, our estimates 

take into account different types of 

trading centers and we realize that these 

estimates may be on the low-end for 

some trading centers while they may be 

on the high-end for other trading 

centers. 


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960This figure was calculated by adding 

$20,359,867 and $8,340,000 (for outsourced legal 

work). The $20,359,867 figure was calculated as 

follows: (70 legal hours × $305) + (105 compliance 

hours × $313) + (20 information technology hours 

× $292) + (25 business operation hours × $273) = 

$66,880 per SRO × 10 SROs = $668,800 total cost 

for SROs; (37 legal hours × $305) + (77 compliance 

hours × $313) + (23 information technology hours 

× $292) + (23 business operation hours × $273) = 

$48,381 per broker-dealer × 407 broker-dealers = 

$19,691,067 total cost for broker-dealers; $668,800 

+ $19,691,067 = $20,359,867. The $8,340,000 figure 

for outsourced legal work was calculated as follows: 

(50 legal hours × $400 × 10 SROs) + (50 legal hours 

× $400 × 407 broker-dealers) = $8,340,000. 

Based on industry sources, we estimate that the 

average hourly rate for outsourced legal services in 

the securities industry is $400. For in-house legal 

services, we estimate that the average hourly rate 

for an attorney in the securities industry is 

approximately $305 per hour. The $305/hour figure 

for an attorney is from SIFMA’s Management & 

Professional Earnings in the Securities Industry 

2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. In 

addition, we estimate that the average hourly rate 

for an assistant compliance director, a senior 

computer programmer, and a senior operations 

manager in the securities industry is approximately 

$313, $292, and $273 per hour, respectively. These 

figures are from SIFMA’s Management & 

Professional Earnings in the Securities Industry 

2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. 

961This figure was calculated as follows: (2 legal 

hours × 12 months × $305) × (10 + 407) + (3 

compliance hours × 12 months × $313) × (10 + 407) 

= $7,751,196. 

962We estimate that each trading center will incur 

an average annual on-going compliance cost of 

$102,768 for a total annual cost of $42,854,256 for 

all trading centers. This figure was calculated as 

follows: (16 compliance hours × $313) + (8 

information technology hours × $292) + (4 legal 

hours × $305) × 12 months = $102,768 per trading 

center × 417 trading centers = $42,854,256. As 

discussed above, we base our burden hour estimates 

on the estimates used for Regulation NMS because 

it requires similar on-going monitoring and 

surveillance for and enforcement of trading in 

compliance with that regulation’s policies and 

procedures requirement. 

For in-house legal services, we estimate that the 

average hourly rate for an attorney in the securities 

industry is approximately $305 per hour. The $305/ 

hour figure for an attorney is from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2008, modified to account for an 

1800-hour work-year and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits 

and overhead. In addition, we estimate that the 

average hourly rate for an assistant compliance 

director, a senior computer programmer, and a 

senior operations manager in the securities industry 

is approximately $313, $292, and $273 per hour, 

respectively. These figures are from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2008, modified to account for an 

1800-hour work-year and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits 

and overhead. 

963See supra note 960. 

964See supra note 961. 

965See supra note 962. 

966See Rule 201(c). As a result, a trading center’s 

policies and procedures will need to be reasonably 

designed to permit the execution or display of such 

orders without regard to whether the order is at a 

price that is less than or equal to the current 

national best bid. See Rule 201(b)(1)(iii). 967See Rule 201(c)(1). As part of its written 

policies and procedures, a broker-dealer also is 

required to regularly surveil to ascertain the 

effectiveness of its policies and procedures and take 

prompt remedial steps. See Rule 201(c)(2). This 

provision is intended to reinforce the on-going 

maintenance and enforcement requirements of the 

provision contained in Rule 201(c)(1) by explicitly 

assigning an affirmative responsibility to brokerdealers to surveil to ascertain the effectiveness of 

their policies and procedures. See id. 968See Rule 201(d)(6). As a result, a trading 

center’s policies and procedures must be reasonably 

designed to permit the execution or display of such 

orders without regard to whether the order is at a 

price that is less than or equal to the current 

national best bid. See Rule 201(b)(1)(iii). 

969See Rule 201(d)(6). 

970See Proposal, 74 FR at 18090, 18092–18103; 

Re-Opening Release, 74 FR at 42037. 

971See Proposal, 74 FR at 18090. 

As detailed in PRA Section IX.E.1., 

above, we estimate a total one-time 

initial cost of $28,699,867 960 for all 

trading centers subject to Rule 201 to 

establish the written policies and 

procedures reasonably designed to 

prevent the execution or display of short 

sale orders at a price that is less than or 

equal to the current national best bid. 

Once a trading center has established 

written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order at a price that is less than or equal 

to the current national best bid, we 

estimate a total annual on-going cost of 

$7,751,196 961 for all trading centers 

subject to Rule 201 to ensure that their 

written policies and procedures are upto-date and remain in compliance with 

Rule 201. In addition, with regard to ongoing monitoring for and enforcement of 

trading in compliance with Rule 201, as 

detailed in PRA Section IX.E.1., above, 

we believe that, once the tools necessary 

to carry out on-going monitoring have 

been put in place, a trading center will 

be able to incorporate on-going 

monitoring and enforcement within the 

scope of its existing surveillance and 

enforcement policies and procedures 

without a substantial additional burden. 

We recognize, however, that this ongoing compliance will not be cost-free, 

and that trading centers will incur some 

additional annual costs associated with 

on-going compliance, including 

compliance costs of reviewing 

transactions. We estimate that each 

trading center will incur an average 

annual on-going compliance cost of 

$102,768, for a total annual cost of 

$42,854,256 for all trading centers.962

To summarize, we estimate an average 

one-time initial cost of $86,880 per SRO 

trading center and $68,381 per non-SRO 

trading center for a total one-time initial 

cost of $28,699,867 963 for all trading 

centers subject to Rule 201 to establish 

the written policies and procedures 

reasonably designed to prevent the 

execution or display of short sale orders 

at a price that is less than or equal to 

the current national best bid. We 

estimate an average annual on-going 

cost of $18,588 per trading center for a 

total annual on-going cost of 

$7,751,196 964 for all trading centers 

subject to Rule 201 to ensure that their 

written policies and procedures are upto-date and remain in compliance with 

Rule 201. In addition, we estimate an 

average annual cost of $102,768 per 

trading center for a total annual cost of 

$42,854,256 for all trading centers for 

on-going monitoring for and 

enforcement of trading in compliance 

with Rule 201.965

ii. Policies and Procedures Requirement 

Under the Broker-Dealer and Riskless 

Principal Provisions 

A broker-dealer marking an order 

‘‘short exempt’’ under Rule 201(c) must 

identify the order as being at a price 

above the current national best bid at 

the time of submission to the trading 

center 966 and must establish, maintain, 

and enforce written policies and 

procedures reasonably designed to 

prevent the incorrect identification of 

orders as being priced in accordance 

with the requirements of Rule 201(c).967

Rule 201(d)(6) allows a broker-dealer 

to mark short sale orders of a covered 

security ‘‘short exempt’’ where a brokerdealer is facilitating customer buy 

orders or sell orders where the customer 

is net long, and the broker-dealer is net 

short but is effecting the sale as riskless 

principal, provided certain conditions 

are satisfied.968 A broker-dealer marking 

an order ‘‘short exempt’’ under this 

provision is required to have written 

policies and procedures in place to 

assure that, at a minimum: (i) The 

customer order was received prior to the 

offsetting transaction; (ii) the offsetting 

transaction is allocated to a riskless 

principal or customer account within 60 

seconds of execution; and (iii) that it has 

supervisory systems in place to produce 

records that enable the broker-dealer to 

accurately and readily reconstruct, in a 

time-sequenced manner, all orders on 

which the broker-dealer relies pursuant 

to this provision.969

As stated previously, we discussed in 

the Proposal the anticipated costs of the 

proposed short sale price test 

restrictions and we requested comment, 

in the Proposal and Re-Opening Release, 

on the costs associated with the 

proposed amendments.970 In particular, 

we requested comment on the potential 

costs for any modification to both 

computer systems and surveillance 

mechanisms and for information 

gathering, management, and 

recordkeeping systems or procedures.971


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972See, e.g., letter from BATS (May 2009); letter 

from SIFMA (June 2009); letter from Credit Suisse 

(June 2009); letter from NYSE Euronext (Sept. 

2009). 

973See, e.g., letter from Credit Suisse (June 2009); 

letter from STANY (June 2009); letter from FIF 

(June 2009); letter from Lime Brokerage (June 2009); 

letter from NSCP; letter from Direct Edge (June 

2009). 

974See, e.g., letter from Credit Suisse (June 2009); 

letter from STANY (June 2009). 

975See letter from Lime Brokerage (June 2009). 

976See supra notes 709 to 715 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs). 

977Letter from Credit Suisse (June 2009). 

978See, e.g., letter from Citadel et al. (Sept. 2009); 

letter from EWT (Sept. 2009); letter Lime Brokerage 

(Sept. 2009). 

979Letter from Citadel et al. (Sept. 2009). 

980See Rule 201(b)(1)(iii). 

981See, e.g., letter from STANY (June 2009); letter 

from FIF (June 2009); letter from Lime Brokerage 

(June 2009). 

982See, e.g., letter from T.D. Pro Ex; letter from 

Taurus Compliance; letter from Credit Suisse (June 

2009). 

983See, e.g., letter from Credit Suisse (June 2009); 

letter from NSCP. 

984We also note that it is possible that some 

smaller broker-dealers that determine to rely on the 

broker-dealer provision may determine that it is 

cost-effective for them to outsource certain 

functions necessary to comply with Rule 201(c) to 

larger broker-dealers, rather than performing such 

functions in house, to remain competitive in the 

market. This may help mitigate costs associated 

with implementing and complying with Rule 

201(c). Additionally, they may decide to purchase 

order management software from technology firms. 

Order management software providers may 

integrate changes imposed by Rules 200(g) and 201 

into their products, thereby providing another costeffective way for smaller broker-dealers to comply 

with the requirement of Rule 201(c). 

985See supra notes 709 to 715 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs to brokerdealers). 

In response to our request for comment, 

commenters that specifically addressed 

the riskless principal provision of Rule 

201(d)(6) supported its inclusion.972

Several commenters expressed 

concerns with respect to the costs of the 

broker-dealer provision of Rule 201(c), 

but did not provide a specific estimate 

of such costs.973 Several commenters 

stated that the broker-dealer provision 

would place responsibility for ensuring 

order compliance with Rule 201 on 

broker-dealers, rather than exchanges, 

and noted that this is a significant 

difference from former Rule 10a–1 and 

NASD’s former bid test.974 Similarly, 

one commenter stated that the brokerdealer provision would significantly 

expand the implementation cost of Rule 

201, without providing a specific 

estimate of such cost.975 Although we 

agree that implementation of the brokerdealer provision of Rule 201(c) will 

impose costs on broker-dealers who 

choose to rely on this provision, we note 

that Rule 201(c) is not a requirement of 

the Rule, but rather provides that a 

broker-dealer may mark a sell order for 

a security that has triggered the circuit 

breaker as ‘‘short exempt,’’ provided that 

the broker-dealer identifies the order as 

being at a price above the current 

national best bid at the time of 

submission to the trading center and 

otherwise complies with the 

requirements of the provision. 

In addition, as discussed throughout 

this adopting release, the alternative 

uptick rule references only the current 

national best bid, unlike the proposed 

modified uptick rule and the proposed 

uptick rule, which would have required 

sequencing of the national best bid or 

last sale price. In order to rely on the 

broker-dealer provision, a broker-dealer 

must establish, maintain, and enforce 

written policies and procedures 

reasonably designed to prevent the 

incorrect identification of orders as 

being at a price above the current 

national best bid at the time of 

submission of the order to the trading 

center. Because the alternative uptick 

rule does not require sequencing of the 

national best bid, we believe that the 

policies and procedures required in 

order to rely on the broker-dealer 

provision under the alternative uptick 

rule will be easier and less costly to 

implement and monitor than would be 

the case under the proposed modified 

uptick rule or the proposed uptick 

rule.976 We note that one of the 

commenters that expressed concerns 

about the implementation cost of the 

broker-dealer provision also 

acknowledged that a rule ‘‘that would 

not require data centralization and 

sequencing would be significantly less 

complex and faster to implement.’’ 977

We disagree with several commenters 

who stated that, although 

implementation and on-going 

monitoring and surveillance of the 

alternative uptick rule might be easier 

and/or less costly for trading centers, 

this would not hold true for brokerdealers.978 One of these commenters 

stated that ‘‘in order to avoid rejection 

of short sale orders under an alternative 

uptick rule, programming would need to 

be implemented to anticipate changes in 

the national best bid between the time 

a short sale order is entered and the 

time it reaches the relevant market 

center.’’ 979 However, the broker-dealer 

provision of Rule 201(c) is designed 

specifically to help avoid this result. 

Under the broker-dealer provision, a 

broker-dealer may, in accordance with 

the policies and procedures required by 

the provision, identify the order as not 

being at a price that is less than or equal 

to the current national best bid at the 

time the order is submitted to the 

trading center and mark the order ‘‘short 

exempt.’’ Trading centers are required to 

have written policies and procedures in 

place to permit the execution or display 

of a short sale order of a covered 

security marked ‘‘short exempt’’ without 

regard to whether the order is at a price 

that is less than or equal to the current 

national best bid.980

Commenters also expressed concerns 

about the competitive pressure of the 

broker-dealer provision, stating either 

that broker-dealers would feel 

compelled to undertake implementation 

of the provision, despite the high 

cost,981 which would be particularly 

burdensome for smaller firms,982 or that 

smaller firms would find the costs 

prohibitive, placing them at a 

competitive disadvantage.983 We 

recognize that broker-dealers are faced 

with competitive concerns and that 

such concerns may influence their 

decision whether or not to rely on the 

broker-dealer provision of Rule 201(c). 

With respect to the cost, as stated above, 

although we recognize that the brokerdealer provision will impose 

implementation costs on broker-dealers 

who choose to rely on this provision, we 

believe that this cost will not be as great 

as stated by some commenters because 

the alternative uptick rule does not 

require sequencing of the national best 

bid, unlike the proposed modified 

uptick rule and the proposed uptick 

rule, which would have required 

sequencing of the national best bid or 

last sale price.984 We believe that, 

without a sequencing requirement, the 

policies and procedures required in 

order to rely on the broker-dealer 

provision under the alternative uptick 

rule will be easier and less costly to 

implement and monitor, for all brokerdealers including smaller brokerdealers, than would be the case under 

the proposed modified uptick rule or 

the proposed uptick rule.985

Further, we believe that the 

implementation and on-going 

monitoring and compliance costs for 

broker-dealers who choose to rely on the 

broker-dealer provision are justified by 

the benefits of providing broker-dealers 

with the option to manage their order 

flow, rather than having to always rely 

on their trading centers to manage their 

order flow on their behalf. 

One commenter stated that the brokerdealer provision would impose 

significant on-going costs in the form of 

data storage, surveillance, and review, 

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11304 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

986See letter from NSCP; see also letter from 

Credit Suisse (June 2009). 

987See supra notes 709 to 715 and accompanying 

text (discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs to brokerdealers). 

988See supra note 661. 

989See, e.g., letter from Glen Shipway (Sept. 

2009); letter from SIFMA (Sept. 2009); letter from 

STA (Sept. 2009); see also letter from Credit Suisse 

(June 2009). In addition, one commenter 

acknowledged that monitoring of the alternative 

uptick rule will likely be easier, without referencing 

the sequencing issue. See letter from Allston 

Trading (Sept. 2009). 

990See letter from STA (Sept. 2009). 

991Letter from NSCP. 

992See Proposal, 74 FR at 18093. 

993See infra notes 1022 to 1024 and 

accompanying text (discussing our estimates of 

implementation and on-going monitoring and 

surveillance costs to broker-dealers). 

994See supra Section X.B.1.b.i. (discussing costs 

to trading centers). 

995See letter from Wolverine. Wolverine provided 

an estimate of $500,000 per firm for implementation 

costs, which it applied to both non-SRO trading 

centers and other registered broker-dealers. In its 

letter, Wolverine multiplied its implementation cost 

estimate of $500,000 by 5,561 for a total of 

$2,780,500,000. See id. As indicated above, the 

Commission now estimates the number of brokerdealers at 5,178 based on a review of 2008 FOCUS 

Report filings reflecting registered broker-dealers, 

including introducing broker-dealers. This number 

does not include broker-dealers that are delinquent 

on FOCUS Report filings. See supra note 652. 

996Letter from Wolverine. 

997See infra note 1022 and accompanying text 

(discussing our estimated implementation costs for 

broker-dealers). 

998See supra notes 709 to 715 and accompanying 

text and notes 978 to 980 and accompanying text 

(discussing comments on the impact of the 

alternative uptick rule on implementation and ongoing monitoring and compliance costs). 

999See supra notes 404 to 411 and accompanying 

text (discussing the use of various data feeds in 

determining the current national best bid). 

1000See supra note 918 (discussing the results of 

SIFMA’s cost estimate survey with respect to the 

costs of implementing a circuit breaker triggering a 

short sale price test based on the national best bid); 

see also letter from Wolverine. 

1001See infra note 1022 and accompanying text 

(discussing our estimated implementation costs for 

broker-dealers). 

1002See supra note 931 (discussing the results of 

SIFMA’s cost estimate survey with respect to the 

on-going monitoring costs of a circuit breaker 

triggering a short sale price test based on the 

national best bid). 

1003See infra note 1022 and accompanying text 

(discussing our estimated implementation costs for 

broker-dealers). 

of such cost.986 We agree that brokerdealers who choose to rely on the 

broker-dealer provision of Rule 201(c) 

will face on-going costs for data storage, 

surveillance and review. However, we 

believe that broker-dealers’ on-going 

monitoring and surveillance costs under 

Rule 201(c) will be mitigated by the 

alternative uptick rule, as compared to 

the proposed modified uptick rule or 

the proposed uptick rule, because the 

alternative uptick rule will reference 

only the current national best bid in 

determining permissible short sales.987

In order to rely on the broker-dealer 

provision, a broker-dealer must 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to prevent the incorrect 

identification of orders as being at a 

price above the current national best bid 

at the time of submission of the order to 

the trading center. Under the alternative 

uptick rule, broker-dealers who choose 

to rely on Rule 201(c) will need to 

monitor the current national best bid, 

but will not be required to monitor the 

sequence of bids or last sale prices, as 

would have been required under the 

proposed modified uptick rule or the 

proposed uptick rule, respectively. 

Several commenters noted that the lack 

of a sequencing requirement would 

make the alternative uptick rule, in 

comparison to the other proposed short 

sale price tests, less costly 988 or easier 

to monitor on an on-going basis.989 One 

commenter stated that the alternative 

uptick rule would reduce the data 

retention requirements of a new short 

sale price test restriction.990

Another commenter stated that the 

‘‘Commission’s cost estimates seem to 

underestimate the cost to large, full 

service broker-dealers, since the volume 

of orders handled by these firms are 

likely to lead to significantly greater 

technology and storage costs alone as 

well as more frequent reviews’’ but did 

not provide a specific cost estimate.991

As we stated in the Proposal,992 we 

recognize that the exact nature and 

extent of the required policies and 

procedures, and thus the costs 

associated with such policies and 

procedures, that a broker-dealer is 

required to establish under the brokerdealer provision in Rule 201(c) likely 

will vary depending upon the nature of 

the broker-dealer, and we have taken 

this into account in our cost 

estimates.993

The following discussion of 

comments on the costs to broker-dealers 

includes comments that were discussed 

above with respect to the costs to 

trading centers 994 because, in some 

cases, commenters provided comments 

and estimates on the costs of 

establishing and monitoring policies 

and procedures under the proposed 

short sale price tests without 

distinguishing between costs that would 

be applicable to trading centers as 

opposed to broker-dealers. One 

commenter provided a dollar estimate of 

broker-dealer implementation costs at 

approximately $500,000 per brokerdealer, for a total of $2,780,500,000 for 

all broker-dealers subject to Rule 201,995

including costs for ‘‘the purchase of 

additional costly data feeds’’ but not 

including ‘‘costs associated with 

developing appropriate internal 

supervisory procedures and compliance 

programs.’’ 996 However, we note that 

this implementation cost estimate for 

the broker-dealer provision, which is 

significantly higher than our estimate of, 

on average, $68,381 per brokerdealer,997 was not specific to the 

alternative uptick rule. As discussed 

above, we believe that the alternative 

uptick rule will be easier and less costly 

to monitor than the proposed modified 

uptick rule or the proposed uptick rule 

because under the alternative uptick 

rule, broker-dealers who choose to rely 

on Rule 201(c) will need to monitor the 

current national best bid, but will not be 

required to monitor the sequence of bids 

or last sale prices, as would have been 

required under the proposed modified 

uptick rule or the proposed uptick rule, 

respectively.998 In addition, we note 

that implementation of Rule 201 will 

not require modifications to how data 

feeds are currently received. As 

discussed above, Rule 201 does not 

mandate that the receipt of the current 

national best bid must be from any one 

particular data feed; thus, broker-dealers 

will be able to continue using the data 

feed they currently use and for which 

they currently pay.999

Another commenter conducted a 

survey of fifty firms with respect to 

implementation and on-going 

monitoring cost estimates. Cost 

estimates in response to the survey 

indicated that a circuit breaker 

triggering a short sale price test based on 

the national best bid would have 

implementation costs that averaged 

between $235,000 and $2,000,000 per 

firm.1000 This estimated implementation 

cost range is significantly higher than 

our cost estimate of, on average, $68,381 

per broker-dealer for 

implementation.1001 In addition, cost 

estimates in response to the survey 

indicated that a circuit breaker 

triggering a short sale price test based on 

the national best bid would have ongoing monitoring costs that averaged 

between $45,000 and $175,000 per 

firm.1002 Our estimated cost of $121,356 

per broker-dealer for on-going 

monitoring and surveillance 1003 falls 

within this commenter’s estimated 

range of on-going monitoring cost. We 

note that the estimated costs were 

categorized by large firms, regional 

firms, and clearing firms, rather than by 

SRO trading centers, non-SRO trading 

centers and broker-dealers. As a result, 

it is difficult to determine the 

applicability of these cost estimates to 

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1004See supra notes 709 to 715 and 

accompanying text and notes 978 to 980 and 

accompanying text (discussing comments on the 

impact of the alternative uptick rule on 

implementation and on-going monitoring and 

compliance costs). 

1005See Regulation NMS Adopting Release, 70 FR 

37496; see also 17 CFR 242.611. 

1006See, e.g., letter from FIF (June 2009); letter 

from RBC (June 2009). 

1007See, e.g., letter from MFA (Oct. 2009). 

1008See, e.g., letter from GE. 

1009See, e.g., letter from Credit Suisse (June 

2009); letter from STANY (June 2009); letter from 

FIF (June 2009); letter from Lime Brokerage (June 

2009); letter from NSCP. 

1010See, e.g., letter from STANY (June 2009); 

letter from FIF (June 2009). 

1011See, e.g., letter from STANY (June 2009); 

letter from FIF (June 2009); letter from NSCP; letter 

from Direct Edge (June 2009). 

1012See letter from STA (Sept. 2009). 

1013See Proposal, 74 FR at 18093–18094. 

1014See supra Section IX.E.1. (discussing 

estimated burdens of the collection of information 

requirements applicable to trading centers under 

Rule 201). 

1015See supra note 676. 

1016See Proposal, 74 FR at 18093–18094. 

1017See, e.g., letter from Nasdaq OMX Group 

(Oct. 2009); letter from Credit Suisse (Sept. 2009); 

letter from STA (June 2009). 

1018See letter from Glen Shipway (June 2009). 

going monitoring and compliance costs 

of Rule 201 to broker-dealers. In 

addition, this commenter’s cost 

estimates were not specific to the 

alternative uptick rule. As discussed 

above, because the alternative uptick 

rule references only the current national 

best bid, unlike the proposed modified 

uptick rule and the proposed uptick 

rule, which would have required 

sequencing of the national best bid or 

last sale price, we believe that the 

alternative uptick rule will be easier and 

less costly to implement and monitor 

than the proposed modified uptick rule 

or the proposed uptick rule.1004

We considered these comments in 

evaluating the costs of implementation 

and on-going monitoring and 

surveillance of the broker-dealer 

provision of Rule 201(c) and the riskless 

principal provision of Rule 201(d)(6). 

We note that the policies and 

procedures that must be implemented 

under the broker-dealer provision are 

similar to those that are required under 

the Order Protection Rule of Regulation 

NMS.1005 Thus, we believe brokerdealers will already be familiar with 

establishing, maintaining, and enforcing 

trading-related policies and procedures, 

including programming their trading 

systems in accordance with such 

policies and procedures. 

Although, as discussed above with 

respect to trading centers, several 

commenters stated that previous 

implementation of Regulation NMS 

would not mitigate the costs to brokerdealers of implementing a short sale 

price test restriction,1006 we considered 

these comments, as well as comments 

stating that previous implementation of 

Regulation NMS could ease 

implementation provided that brokerdealers could leverage existing systems 

in implementing Rule 201,1007 and 

continue to believe that familiarity with 

Regulation NMS policies and 

procedures will reduce the 

implementation costs of the brokerdealer provision under Rule 201(c) on 

broker-dealers. Moreover, because 

broker-dealers may have already 

developed or modified their 

surveillance mechanisms in order to 

comply with the policies and 

procedures requirement of the Order 

Protection Rule under Regulation NMS, 

broker-dealers may already have 

retained and trained the necessary 

personnel to ensure compliance with 

that Regulation’s policies and 

procedures requirements and, therefore, 

may already have in place most of the 

infrastructure and potential policies and 

procedures necessary to comply with 

the broker-dealer provision of Rule 

201(c). In addition, one commenter 

supported using a policies and 

procedures approach to any short sale 

price test restriction because it would 

ease implementation for brokerdealers.1008

Moreover, while latencies in 

obtaining data regarding the national 

best bid from consolidated market data 

feeds, as discussed in detail above, may 

impact implementation costs associated 

with Rule 201, a broker-dealer could 

have policies and procedures that 

would provide for a snapshot of the 

applicable national best bid of the 

security. Several commenters expressed 

concerns that implementing ‘‘snapshot’’ 

capability to preserve an auditable 

record of the current national best bid 

would be difficult and costly for brokerdealers,1009 particularly because this is 

not a capability currently supported by 

many broker-dealers.1010 Commenters 

also noted that ‘‘snapshot’’ capability 

would require increased data 

storage.1011

Although we recognize commenters’ 

concerns that implementing ‘‘snapshot’’ 

capability could be costly for some 

broker-dealers, we note that most 

broker-dealers may already have 

developed ‘‘snapshot’’ capability in 

connection with Regulation NMS’s 

Order Protection Rule. We also agree 

that ‘‘snapshot’’ capability will require 

data storage by broker-dealers; however, 

as noted by one commenter,1012 because 

the alternative uptick rule does not 

require sequencing of the national best 

bid, the data storage requirements under 

the alternative uptick rule are lower 

than they would be under the proposed 

modified uptick rule or the proposed 

uptick rule. In addition, we believe that 

the costs of a policies and procedures 

approach that provides for a snapshot of 

the applicable current national best bid 

of the security are justified because 

snapshot capability will aid brokerdealers in dealing with time lags in 

receiving data regarding the national 

best bid from different data sources and 

facilitate verification of whether a short 

sale order was executed or displayed at 

a permissible price. 

We considered whether our estimates 

of the costs to broker-dealers for 

implementation and on-going 

monitoring and surveillance of the 

proposed modified uptick rule included 

in the Proposal 1013 would change under 

the circuit breaker approach of Rule 

201, but, as discussed below, concluded 

that these estimates continue to 

represent reasonable estimates under 

the circuit breaker approach combined 

with the alternative uptick rule. 

As discussed previously,1014 despite 

some commenters’ concerns regarding 

the implementation costs of a circuit 

breaker rule,1015 we believe that the 

circuit breaker approach will result in 

largely the same implementation costs 

as we estimated would be incurred if we 

adopted a permanent, market-wide short 

sale price test restriction.1016 We believe 

that that there will be only minimal, if 

any, implementation costs for a circuit 

breaker approach in addition to the 

costs we estimated previously for the 

implementation of a permanent, marketwide short sale price test rule because 

broker-dealers relying on Rule 201(c) or 

Rule 201(d)(6) are required to establish 

written policies and procedures 

required to comply with those 

provisions regardless of whether the 

short sale price test restriction is 

adopted on a permanent, market-wide 

basis or, in the case of Rule 201, 

adopted in conjunction with a circuit 

breaker. Several other commenters 

agreed, stating that the costs of the 

circuit breaker approach would be 

similar to, or only incrementally higher 

than, the costs of a permanent, marketwide approach.1017

In addition, with respect to on-going 

monitoring and surveillance costs of the 

circuit breaker approach, we recognize, 

as noted by one commenter,1018 that 

broker-dealers relying on Rule 201(c) or 

Rule 201(d)(6) will need to continuously 

monitor whether a security is subject to 

the provisions of Rule 201 and that 

there will be costs associated with such 


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1019See, e.g., letter from Nasdaq OMX Group 

(Oct. 2009); letter from SIFMA (Sept. 2009). 

1020See Proposal, 74 FR at 18093–18094. 

1021See supra note 729 (discussing the change in 

the estimated number of broker-dealers). 

1022This figure was calculated by adding 

$250,516,818 and $103,560,000 (for outsourced 

legal work). The $250,516,818 figure was calculated 

as follows: (37 legal hours × $305) + (77 compliance 

hours × $313) + (23 information technology hours 

× $292) + (23 business operation hours × $273) = 

$48,381 per broker-dealer × 5,178 broker-dealers = 

$250,516,818 total cost for broker-dealers. The 

$103,560,000 figure was calculated as follows: (50 

legal hours × $400 × 5,178) = $103,560,000. 

Based on industry sources, we estimate that the 

average hourly rate for outsourced legal services in 

the securities industry is $400. For in-house legal 

services, we estimate that the average hourly rate 

for an attorney in the securities industry is 

approximately $305 per hour. In addition, we 

estimate that the average hourly rate for an assistant 

compliance director, a senior computer 

programmer, and a senior operations manager in the 

securities industry is approximately $313, $292, 

and $273 per hour, respectively. The estimates for 

in-house legal services, assistant compliance 

director, senior computer programmer, and senior 

operations manager are from SIFMA’s Management 

& Professional Earnings in the Securities Industry 

2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. 

1023This figure was calculated as follows: (2 legal 

hours × 12 months x $305) × 5,178 + (3 compliance 

hours × 12 months × $313) × 5,178 = $96,248,664. 

1024This figure was calculated as follows: (16 

compliance hours × $313) + (8 information 

technology hours × $292) + (4 legal hours × $305) 

x 12 months = $102,768 per broker-dealer × 5,178 

broker-dealers = $532,132,704. As discussed above, 

we base our estimate of burden hours on the 

estimates used for Regulation NMS because it 

requires similar on-going monitoring and 

surveillance for and enforcement of trading in 

compliance with that regulation’s policies and 

procedures requirement. 

For in-house legal services, we estimate that the 

average hourly rate for an attorney in the securities 

industry is approximately $305 per hour. In 

addition, we estimate that the average hourly rate 

for an assistant compliance director and a senior 

computer programmer in the securities industry is 

approximately $313 and $292 per hour, 

respectively. These figures are from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2008, modified to account for an 

1800-hour work-year and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits 

and overhead. 

1025See supra note 1022. 

1026See supra note 1023. 

monitoring. However, we believe that 

these costs will be offset because, under 

the circuit breaker approach, the 

alternative uptick rule will be time 

limited and will only apply on a stock 

by stock basis, which will reduce our 

previously estimated costs for on-going 

monitoring and surveillance. This is 

because broker-dealers relying on Rule 

201(c) will only need to monitor and 

surveil for compliance with the 

alternative uptick rule, and brokerdealers relying on Rule 201(d)(6) will 

only need to monitor for compliance 

with the requirements of that provision, 

during the limited period of time that 

the circuit breaker is in effect with 

respect to a specific security. As such, 

the circuit breaker approach will allow 

regulatory, supervisory and compliance 

resources to focus on, and to address, 

those situations where a specific 

security is experiencing significant 

downward price pressure.1019

On balance, we believe that the 

estimates of the costs to broker-dealers 

for implementation and on-going 

monitoring and surveillance of the 

proposed modified uptick rule included 

in the Proposal 1020 are appropriate with 

respect to the broker-dealer provision of 

Rule 201(c) and the riskless principal 

provision of Rule 201(d)(6). Thus, our 

estimates have not changed from the 

Proposal, except to the extent that total 

cost estimates have changed because we 

have updated the estimated number of 

broker-dealers.1021 Our estimates of the 

implementation costs to broker-dealers 

include the costs of surveillance and 

reprogramming costs for enforcing, 

monitoring, and updating trading, 

execution management, and 

surveillance systems under Rule 201, 

systems changes to computer software, 

as well as staff time and technology 

resources. Our estimates of the on-going 

monitoring and surveillance costs 

include the commitment of resources 

associated with compliance oversight, 

market surveillance, data storage and 

enforcement, with attendant 

opportunity costs. 

As detailed in PRA Section IX.E.2., 

above, we realize that the exact nature 

and extent of the required policies and 

procedures that a broker-dealer is 

required to establish under the brokerdealer provision in Rule 201(c), as well 

as under the riskless principal provision 

in Rule 201(d)(6), likely will vary 

depending upon the type, size and 

nature of the broker-dealer (e.g., full 

service broker-dealer vs. market maker). 

Thus, our estimates take into account 

different types of broker-dealers and we 

realize that these estimates may be on 

the low-end for some broker-dealers 

while they may be on the high-end for 

other broker-dealers. 

As detailed in PRA Section IX.E.2., 

above, we estimate a total one-time 

initial cost of $354,076,818 for all 

broker-dealers relying on the brokerdealer provision in Rule 201(c) and the 

riskless principal provision in Rule 

201(d)(6) to establish written policies 

and procedures reasonably designed to 

prevent the incorrect identification of 

orders as being priced in accordance 

with the broker-dealer provision or, in 

the case of the riskless principal 

provision, to assure that, at a minimum: 

(i) The customer order was received 

prior to the offsetting transaction; (ii) 

the offsetting transaction is allocated to 

a riskless principal or customer account 

within 60 seconds of execution; and (iii) 

that it has supervisory systems in place 

to produce records that enable the 

broker-dealer to accurately and readily 

reconstruct, in a time-sequenced 

manner, all orders on which the brokerdealer relies pursuant to this 

provision.1022

Once a broker-dealer has established 

written policies and procedures so that 

it may rely on the broker-dealer 

provision in Rule 201(c) and the riskless 

principal provision in Rule 201(d)(6), 

we estimate a total annual on-going cost 

of $96,248,664 for all broker-dealers 

relying on either of these provisions to 

ensure that their written policies and 

procedures are up-to-date and remain in 

compliance with Rule 201.1023 In 

addition, with regard to on-going 

monitoring for and enforcement of 

trading in compliance with the brokerdealer provision in Rule 201(c) and the 

riskless principal provision in Rule 

201(d)(6), as detailed in PRA Section 

IX.E.2., above, we believe that, once the 

tools necessary to carry out on-going 

monitoring have been put in place, a 

broker-dealer will be able to incorporate 

on-going monitoring and enforcement 

within the scope of its existing 

surveillance and enforcement policies 

and procedures without a substantial 

additional burden. We recognize, 

however, that this on-going compliance 

will not be cost-free, and that brokerdealers will incur some additional 

annual costs associated with on-going 

compliance, including compliance costs 

of reviewing transactions. We estimate 

that each broker-dealer will incur an 

average annual on-going compliance 

cost of $102,768, for a total annual cost 

of $532,132,704 for all brokerdealers.1024

To summarize, we estimate an average 

one-time initial cost of $68,381 per 

broker-dealer for a total one-time initial 

cost of $354,076,818 for all brokerdealers relying on the broker-dealer 

provision in Rule 201(c) and the riskless 

principal provision in Rule 201(d)(6) to 

establish the written policies and 

procedures required to rely on the 

broker-dealer provision or the riskless 

principal provision.1025 We estimate an 

average annual on-going cost of $18,588 

per broker-dealer for a total annual ongoing cost of $96,248,664 for all brokerdealers relying on either of these 

provisions to ensure that their written 

policies and procedures are up-to-date 

and remain in compliance with Rule 

201.1026 In addition, we estimate an 

average annual cost of $102,768 per 


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1027See supra note 1024. 

1028See Rule 201(b)(i). 

1029See Rule 201(b)(ii). 

1030See Proposal, 74 FR at 18090, 18100; ReOpening Release, 74 FR at 42037. 

1031See Proposal, 74 FR at 18090. 

1032See Proposal, 74 FR at 18067. 

1033See, e.g., letter from Matlock Capital (May 

2009); letter from Schwab; letter from Lime 

Brokerage (June 2009); letter from STA (June 2009); 

letter from Glen Shipway (June 2009); letter NYSE 

Euronext (June 2009); letter from Wolverine; letter 

from Direct Edge (June 2009); letter from Amer. 

Bankers Assoc.; letter from NYSE Euronext (Sept. 

2009); see also letter from SIFMA (June 2009) 

(indicating that an ‘‘on/off’’ circuit breaker trigger 

could dampen any magnet effect); letter from Direct 

Edge (Mar. 2009). 

1034See letter from STA (June 2009); letter from 

Wolverine. 

1035See letter from BATS (May 2009); letter from 

Credit Suisse (June 2009); letter from Credit Suisse 

(Sept. 2009); letter from Hudson River Trading; 

letter from Virtu Financial; see also letter from 

Credit Suisse (Mar. 2009). 

1036See letter from Credit Suisse (June 2009); 

letter from Credit Suisse (Sept. 2009); see also letter 

from Credit Suisse (Mar. 2009); letter from Nasdaq 

OMX Group (Oct. 2009). 

1037See supra notes 280 to 285 and 

accompanying text (discussing comments on the 

‘‘magnet effect’’ and our response). 

1038See supra note 285. 

1039Letter from Schwab; see also letter from 

Amer. Bankers Assoc. 

1040Letter from EWT (June 2009). 

1041Letter from EWT (June 2009); see also letter 

from Matlock Capital (May 2009). 1042See letter from NYSE Euronext (Sept. 2009). 1043See supra Section II.C. (discussing investor 

confidence); see also Proposal, 74 FR at 18046– 

18049. 

broker-dealer for a total annual cost of 

$532,132,704 for all broker-dealers for 

on-going monitoring for and 

enforcement of trading in compliance 

with the broker-dealer provision in Rule 

201(c) and the riskless principal 

provision in Rule 201(d)(6).1027

2. Circuit Breaker Approach 

Under the circuit breaker approach, 

the alterative uptick rule will apply only 

if the price of a covered security has 

declined by 10% or more from the 

covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day.1028 In 

addition, this short sale price test 

restriction will apply for the remainder 

of the day and the following day when 

a national best bid for the covered 

security is calculated and disseminated 

on a current and continuing basis by a 

plan processor pursuant to an effective 

national market system plan.1029

a. Impact on Market Quality 

As stated above, in the Proposal and 

Re-Opening Release, we requested 

comment on the costs of a circuit 

breaker rule,1030 and specifically on the 

extent to which the proposed 

amendments to Regulation SHO, 

including the proposed circuit breaker 

rules, could impact or lessen some of 

the benefits of legitimate short selling or 

could lead to a decrease in market 

efficiency, price discovery, or 

liquidity.1031

As we stated in the Proposal, we 

understand that there are concerns 

about a potential ‘‘magnet effect’’ that 

could arise as an unintended 

consequence of a circuit breaker that 

imposes a short selling price test 

restriction.1032 This ‘‘magnet effect’’ 

could result in short sellers driving 

down the price of an equity security in 

a rush to execute short sales before the 

circuit breaker is triggered. We are also 

concerned about short selling demand 

building until the circuit breaker is 

lifted. 

In response to our requests for 

comments, several commenters stated 

that a short sale circuit breaker could 

exacerbate downward pressure on 

stocks as their value reached the 

threshold level.1033 Commenters also 

discussed the possibility that short 

selling demand could be built up until 

the short selling restriction is lifted.1034

Other commenters, however, discounted 

the possibility or impact of a ‘‘magnet 

effect,’’ 1035 including some commenters 

who cited empirical studies that 

question whether a circuit breaker 

would result in artificial pressure on the 

price of individual securities.1036

After considering the comments, 

including studies cited by commenters, 

we do not believe that the evidence is 

clear regarding a ‘‘magnet effect.’’ 1037 In 

fact, many academic studies that have 

analyzed circuit breakers in other 

contexts found no evidence of such 

trading patterns.1038 We recognize, 

however, that some of these studies 

were conducted in markets dissimilar 

from the highly automated markets 

currently existing in the United States 

and, therefore, that limits their utility in 

this context. Overall, however, the most 

relevant studies fail to demonstrate a 

magnet effect and we believe that 

adopting the circuit breaker approach 

best serves our goals. 

Commenters also stated that a circuit 

breaker could have a stigmatizing effect 

on affected securities by creating the 

impression that a stock is ‘‘down so 

significantly that the trading rules must 

change.’’ 1039 Other commenters 

expressed concerns that the circuit 

breaker could have a negative effect on 

affected securities because ‘‘if a security 

has suffered a significant decline, 

additional constraints that affect the 

ability of market makers to provide 

high-quality markets may actually 

hasten the decline, as decreased size 

and wider spreads will further 

undermine the already battered investor 

confidence in the security.’’ 1040 Another 

commenter noted that a circuit breaker 

‘‘may exacerbate market dislocations by 

suddenly and unexpectedly altering the 

regulatory regime and liquidity 

characteristics of a particular security, 

precisely when it is under duress.’’ 1041

We recognize that the circuit breaker 

approach of Rule 201 could result in 

some perception of stigmatization of 

stocks that trigger the short sale price 

test restriction of Rule 201. As discussed 

above in Section X.B.1.a., we also 

recognize that imposing a short sale 

price test restriction may negatively 

impact market quality with respect to a 

covered security that has triggered the 

circuit breaker. In addition, although we 

agree that a circuit breaker combined 

with a halt on short selling could cause 

or exacerbate market dislocations, we do 

not believe that the circuit breaker 

approach of Rule 201 will have the same 

impact because it will continue to allow 

short selling at a price above the 

national best bid, even when the short 

sale price test restriction is in effect. 

Further, to the extent that the circuit 

breaker approach results in 

stigmatization, market dislocations, or 

other negative impacts on market 

quality, we believe any such costs are 

justified by the benefits provided by the 

Rule. 

As discussed in detail in Section 

III.A.5., above, commenters’ estimates 

and the Staff’s analysis show that a 10% 

circuit breaker threshold generally 

should affect only a limited percentage 

of covered securities, thus will not 

interfere with the smooth functioning of 

the markets for the majority of covered 

securities most of the time. And, 

although a permanent market-wide 

approach that would apply to all 

covered securities all the time may, as 

one commenter stated, provide an 

element of predictability,1042 we believe 

that the circuit breaker approach of Rule 

201 is appropriate because it provides a 

balance between achieving our goals for 

adopting a short sale price test 

restriction and limiting impediments to 

the normal operations of the market. As 

discussed above, due to the changes in 

market conditions and erosion of 

investor confidence that occurred 

recently, investors have become 

increasingly concerned about sudden 

and excessive declines in prices that 

appear to be unrelated to issuer 

fundamentals.1043 We believe that a 

time-limited circuit breaker that is 

triggered by a significant intra-day 

decline in price of an individual 


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11308 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

1044Letter from Atherton Lane; see also letter 

from Citadel et al. (June 2009); letter from Goldman 

Sachs (June 2009); letter from ISE (June 2009); letter 

from MFA (June 2009); letter from SIFMA (June 

2009); letter from Wells Fargo (June 2009); letter 

from SIFMA (Sept. 2009). 

1045See, e.g., letter from Citadel et al. (June 2009); 

letter from Goldman Sachs (June 2009); letter from 

MFA (June 2009); letter from SIFMA (June 2009); 

letter from SIFMA (Sept. 2009). 

1046Letter from T. Rowe Price (June 2009); see 

also letter from Atherton Lane; letter from Chlebina 

(Apr. 2009); letter from Equity Insight; letter from 

Wells Fargo (June 2009); letter from Glen Shipway 

(Sept. 2009). 

1047Letter from Equity Insight. 

1048See Proposal, 74 FR at 18067, n.252 (noting 

a letter from Peter Brown, dated Dec. 12, 2008). 

1049See, e.g., 1998 Release, 63 FR 18477; see also 

Proposal, 74 FR at 18067. 1050See Proposal, 74 FR at 18097–18100; ReOpening Release, 74 FR at 42035. 1051See Proposal, 74 FR at 18101–18103; ReOpening Release, 74 FR at 42037. 

security is a targeted response to 

address these concerns. 

Commenters also expressed concerns 

that, during periods of volatility, ‘‘circuit 

breakers could potentially impact far too 

many stocks on any given day and 

damage the benefits of short selling.’’1044

Similarly, a number of commenters 

expressed concerns that, if the trigger 

level for a circuit breaker were set too 

low, the circuit breaker would impose a 

short sale price test restriction that 

would impair trading in a stock not only 

due to a price decline that might 

indicate abusive or abnormal trading 

activity, but also during normal market 

conditions, thus impairing normal 

trading activity, further limiting the 

provision of market benefits such as 

liquidity and price efficiency, and 

causing disruptions to investors and 

markets.1045

When the markets experience periods 

of extreme volatility, we expect that the 

circuit breaker will be triggered for more 

securities than during periods of low 

volatility. We believe this is an 

appropriate result of Rule 201 because 

it is designed to impose restrictions on 

short selling when individual securities 

are undergoing significant intra-day 

price declines. In addition, we recognize 

that a 10% trigger level may capture 

some ‘‘normal’’ trading activity. 

However, as discussed in detail in 

Section III.A.5., above, commenters’ 

estimates and the Staff’s analysis show 

that a 10% circuit breaker threshold 

generally should affect only a limited 

percentage of covered securities. This 

supports the conclusion that Rule 201 

provides a tailored approach that 

reaches a limited subset of covered 

securities that are experiencing a 

significant intra-day price decline, 

while generally not restricting short 

selling in the majority of covered 

securities. To the extent that Rule 201 

impairs normal trading activity, we 

believe that such costs are justified by 

the benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

Several commenters expressed 

concerns that a circuit breaker approach 

‘‘does not adequately address the 

negative implications of unregulated 

short selling’’ because it would permit 

relatively unrestricted, and potentially 

manipulative, short selling up to the 

trigger point.1046 One commenter stated 

that a circuit breaker would not be 

effective to address manipulative short 

selling because ‘‘predatory short selling 

is not a one-day event, but the 

culmination of a series of events.’’ 1047

While it is true that, under a circuit 

breaker approach, the short sale price 

test restriction of Rule 201 will not 

apply to short selling in a security 

before the 10% intra-day decline trigger 

is reached, or after the duration of the 

restriction has passed, we believe that 

the circuit breaker approach is designed 

to strike the appropriate balance 

between our goal of preventing potential 

short sale abuse and the need to limit 

impediments to the normal operations 

of the market. As we stated in the 

Proposal, in discussing a short selling 

circuit breaker, one commenter noted 

that such a measure could address the 

issue of ‘‘bear raids’’ while limiting the 

market impact that may arise from other 

forms of short sale price test 

restrictions.1048 As discussed above, 

short selling is an important tool in 

price discovery and the provision of 

liquidity to the market, and we 

recognize that imposition of a short 

selling circuit breaker that when 

triggered imposes the alternative uptick 

rule could restrict otherwise legitimate 

short selling activity during periods of 

significant volatility. To the extent that 

Rule 201 permits relatively unrestricted, 

and potentially manipulative, short 

selling during times when the circuit 

breaker has not been triggered for a 

particular security, we believe that such 

costs are justified by the benefits 

provided by the circuit breaker 

approach in not interfering with the 

provision of market benefits such as 

liquidity and price efficiency for the 

majority of covered securities most of 

the time. 

After considering the comments, as 

discussed above, that we received with 

respect to the potential market impacts 

of a circuit breaker approach, we believe 

that such potential market impacts do 

not undermine our goals of preventing 

potential short sale abuse and 

addressing investor confidence, while 

balancing these goals with the need to 

limit impediments to the normal 

operations of the market. The 

Commission has long held the view that 

circuit breakers may help restore 

investor confidence during times of 

substantial uncertainty.1049 We believe 

that the requirements of Rule 201 will 

produce such benefits. By imposing the 

alternative uptick rule once a security’s 

price is experiencing a significant price 

decline, the short selling circuit breaker 

rule in Rule 201(b) is designed to target 

only those securities that experience 

significant intra-day price declines and, 

therefore, will help to prevent short 

selling from being used as a tool to 

exacerbate the decline in the price of 

those securities. This approach 

establishes a narrowly-tailored Rule that 

will target only those securities 

experiencing such a decline. We believe 

that addressing short selling in 

connection with such declines in 

individual securities will help restore 

investor confidence in the markets 

generally. 

Further, as discussed above, short 

selling is an important tool in price 

discovery and the provision of liquidity 

to the market, and we recognize that 

imposition of a short selling circuit 

breaker that when triggered imposes the 

alternative uptick rule could restrict 

otherwise legitimate short selling 

activity during periods of significant 

volatility. Under the circuit breaker 

approach, the alternative uptick rule 

will only be imposed when a covered 

security has experienced an intra-day 

price decline of 10% or more and will 

only apply for the remainder of the day 

and the following day. We believe that 

the negative impact of Rule 201, if any, 

on the market will be limited because of 

the limited scope and duration of Rule 

201. Further, to the extent that Rule 201 

negatively impacts market quality, we 

believe that such costs are justified by 

the benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

b. Implementation and On-Going 

Monitoring and Surveillance Costs 

We discussed in the Proposal and the 

Re-Opening Release the anticipated 

costs of the proposed circuit breaker 

rules 1050 and we requested comment on 

the costs associated with the proposed 

circuit breaker rules.1051 In particular, 

we requested comment on the potential 


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1052See Proposal, 74 FR at 18090. 

1053See supra note 676. 

1054Letter from T. Rowe Price (June 2009). 

1055See letter from SIFMA (June 2009). 

1056See letter from SIFMA (June 2009). SIFMA 

did not categorize estimates of the implementation 

costs of a permanent, market-wide short sale price 

test based on the national best bid by SRO trading 

centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms, 

with implementation cost estimates that averaged 

$1,000,000 per firm, with the highest estimate at 

$7,000,000 per firm, regional firms with estimates 

that averaged $200,000 per firm, with the highest 

estimate at $500,000 per firm, and clearing firms, 

with estimates that averaged $1,100,000 per firm, 

with the highest estimate at $1,900,000 per firm. 

SIFMA provided cost estimates in terms of the 

average estimated cost and the highest estimated 

cost. See id. 

1057See supra note 918 (discussing SIFMA’s 

survey of cost estimates with respect to the 

implementation costs of a circuit breaker triggering 

a short sale price test based on the national best 

bid). 

1058We also note that the commenter’s survey 

results covered fifty firms, categorized as large 

firms, regional firms, and clearing firms, rather than 

SRO trading centers, non-SRO trading centers and 

broker-dealers. Thus, it is difficult to determine 

costs of a circuit breaker approach to trading centers 

as opposed to broker-dealers from the survey 

results. 

1059Although under the circuit breaker approach, 

a price test will not be in place all the time or for 

all securities, trading centers, and broker-dealers 

relying on Rule 201(c) or Rule 201(d)(6), will need 

to establish reasonable policies and procedures in 

advance to ensure compliance whenever the circuit 

breaker is triggered. We note that it would not be 

reasonable for a trading center, or a broker-dealer 

relying on Rule 201(c) or Rule 201(d)(6) to wait 

until the circuit breaker is triggered to begin 

establishing reasonable policies and procedures to 

prevent the execution or display of the particular 

covered security at a price that is less than or equal 

to the current national best bid. Thus, we recognize 

that the circuit breaker approach will result in 

immediate upfront costs to trading centers and to 

broker-dealers intending to rely on Rule 201(c) or 

Rule 201(d)(6). See supra Section X.B.1. (discussing 

costs of the alternative uptick rule). 

1060See supra notes 676 to 684 and 723 to 727 

and accompanying text (discussing the impact of 

the circuit breaker approach on implementation and 

on-going monitoring and surveillance costs to 

trading centers and broker-dealers). 

1061See Proposal, 74 FR 18093–18094. 

1062Several commenters agreed, stating that the 

costs of the circuit breaker approach would be 

similar to, or only incrementally higher than, the 

costs of a permanent, market-wide approach. See, 

e.g., letter from Nasdaq OMX Group (Oct. 2009); 

letter from Credit Suisse (Sept. 2009); letter from 

STA (June 2009). 

1063See letter from Glen Shipway (June 2009). 

1064Commenters noted that the circuit breaker 

approach will allow regulatory, supervisory and 

compliance resources to focus on, and to address, 

those situations where a specific security is 

experiencing significant downward price pressure. 

See, e.g., letter from Nasdaq OMX Group (Oct. 

2009); letter from SIFMA (Sept. 2009). 

1065See supra note 292. 

1066See, e.g., FINRA Rule 6120; see also Proposal, 

74 FR at 18065–18066 (discussing the background 

on circuit breakers). 

costs for any modification to both 

computer systems and surveillance 

mechanisms and for information 

gathering, management, and 

recordkeeping systems or 

procedures.1052

Several commenters expressed 

concerns regarding the implementation 

costs of a circuit breaker approach in 

comparison to the costs of 

implementing a permanent, marketwide test, but did not provide specific 

cost estimates.1053 One commenter 

stated that ‘‘the circuit breaker proposal 

would be the least cost effective’’ but did 

not provide a specific cost estimate with 

respect to a circuit breaker rule.1054

One commenter conducted a survey 

of fifty firms with respect to 

implementation cost and on-going 

monitoring costs estimates of a new 

short sale price test restriction.1055 Cost 

estimates in response to the survey 

indicated that a permanent, marketwide short sale price test based on the 

national best bid would have 

implementation costs that averaged 

between $200,000 and $1,100,000 per 

firm,1056 while a circuit breaker 

triggering a short sale price test based on 

the national best bid would have 

implementation costs that averaged 

between $235,000 and $2,000,000 per 

firm.1057 This represents an estimated 

increase in implementation costs for a 

circuit breaker approach, as compared 

to a permanent, market-wide approach, 

of $35,000 to $900,000 per firm. 

However, we note that these cost 

estimates were based on a circuit 

breaker triggering the proposed 

modified uptick rule and, as such, were 

not specific to the alternative uptick 

rule.1058 As discussed throughout this 

adopting release, because the alternative 

uptick rule does not require sequencing 

of the national best bid, unlike the 

proposed modified uptick rule and the 

proposed uptick rule, which would 

have required sequencing of the 

national best bid or last sale price, we 

believe that the policies and procedures 

required under the alternative uptick 

rule will be easier and less costly to 

implement and monitor than would be 

the case under the proposed modified 

uptick rule or the proposed uptick rule. 

We recognize that imposing a short 

sale-related circuit breaker rule when, 

currently, there is an absence of a short 

sale-related circuit breaker may result in 

costs in terms of modifications to 

systems and surveillance mechanisms, 

as well as changes to processes and 

procedures.1059 Such costs will include 

implementation costs for market 

participants associated with 

reprogramming trading and surveillance 

systems to account for the requirements 

of the short sale related circuit breaker. 

We also recognize that the circuit 

breaker approach may impose costs on 

market participants related to systems 

changes to computer software, 

reprogramming costs, and surveillance 

and compliance costs, as well as staff 

time and technology resources, 

associated with monitoring compliance 

with the short sale related circuit 

breaker. Moreover, imposing a short sale 

related circuit breaker rule when there 

are currently no short sale related 

circuit breakers in place also may mean 

that staff (compliance personnel, 

associated persons, etc.) may need to be 

trained or re-trained regarding rules 

related to the circuit breaker 

requirements. 

As discussed previously,1060 despite 

some commenters’ concerns regarding 

the implementation costs of a circuit 

breaker rule, we believe that the circuit 

breaker approach will result in largely 

the same implementation costs as we 

estimated would be incurred if we 

adopted a permanent, market-wide short 

sale price test restriction.1061 We believe 

that there will be only minimal, if any, 

implementation costs for a circuit 

breaker approach in addition to the 

costs we estimated previously for the 

implementation of a permanent, marketwide short sale price test rule.1062

In addition, with respect to on-going 

monitoring and surveillance costs of the 

circuit breaker approach, we recognize, 

as noted by one commenter,1063 that 

market participants will need to 

continuously monitor whether a 

security is subject to the provisions of 

Rule 201 and that there will be costs 

associated with such monitoring. 

However, we believe that these costs 

will be offset because, under the limited 

scope and duration of the circuit breaker 

approach, market participants will only 

need to monitor and surveil for 

compliance with the alternative uptick 

rule during the limited period of time 

that the circuit breaker is in effect with 

respect to a specific security. This will 

reduce our previously estimated costs 

for on-going monitoring and 

surveillance.1064

In addition, although, under the 

circuit breaker approach, market 

participants will need to monitor 

whether a stock is subject to Rule 201 

or not, we believe that familiarity with 

a circuit breaker approach may help 

mitigate such compliance costs. As 

discussed in the Proposal, currently, all 

stock exchanges and FINRA have rules 

or policies to implement coordinated 

circuit breaker halts.1065 Moreover, 

SROs have rules or policies in place to 

coordinate individual security trading 

halts corresponding to significant news 

events.1066


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1067See letter from SIFMA (June 2009). 

1068See letter from SIFMA (June 2009). SIFMA 

did not categorize estimates of the on-going costs 

of a permanent, market-wide short sale price test 

based on the national best bid by SRO trading 

centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms, 

with on-going monitoring cost estimates that 

averaged $100,000 per firm, with the highest 

estimate at $1,500,000 per firm, regional firms with 

estimates that averaged $50,000 per firm, with the 

highest estimate at $450,000 per firm, and clearing 

firms, with estimates that averaged $175,000 per 

firm, with the highest estimate at $250,000 per firm. 

SIFMA only provided the average and highest cost 

estimates per category. See id. 

1069See supra note 931 (discussing SIFMA’s 

survey of cost estimates with respect to the on-going 

monitoring costs of a circuit breaker triggering a 

short sale price test based on the national best bid). 

1070See Rule 201(b)(3). 

1071See supra note 368 (discussing the single 

plan processors for NMS stocks). 

1072See Rule 201(b)(3); 17 CFR 242.603(b). 

1073See letter from FIF (June 2009); see also supra 

Section III.A.6. (discussing the determination 

regarding securities subject to Rule 201 and 

dissemination of such information). 

1074For example, commenters indicated that a 

circuit breaker rule triggering the alternative uptick 

rule would require an implementation period of 

between three and twelve months. See letter from 

NSCP; letter from NYSE Euronext (June 2009); letter 

from RBC (June 2009); letter from STA (June 2009); 

letter from FIF (Sept. 2009); letter from Citadel et 

al. (Sept. 2009); letter from Credit Suisse (Sept. 

2009); letter from Direct Edge (Sept. 2009); letter 

from EWT (Sept. 2009); letter from RBC (Sept. 

2009); letter from SIFMA (Sept. 2009); letter from 

MFA (Oct. 2009); see also letter from Amer. Bankers 

Assoc.; letter from NYSE Euronext (Sept. 2009); 

letter from Goldman Sachs (Sept. 2009). 

1075See supra Section VII. (discussing the 

implementation period for Rule 201); see also supra 

Section III.A.6. 

1076See supra Section X.B.1. (discussing costs of 

the alternative uptick rule). 

1077See supra note 292. 1078See supra note 684. 1079For example, listing markets already have 

rules or policies in place to coordinate trading 

suspensions or halts in individual NMS stocks. See, 

e.g., Nasdaq Rule 4120 (relating to trading halts in 

Nasdaq-listed securities); NYSE Rule 123D (relating 

to delayed openings and trading halts in NYSElisted securities). 

1080See Rule 201(a)(9). 

1081See supra Section IX.E.1. (discussing 

implementation costs to trading centers). 

1082See id. 

We also note that one commenter 

conducted a survey of firms with 

respect to on-going monitoring costs 

estimates of a new short sale price test 

restriction.1067 Cost estimates in 

response to the survey indicated that a 

permanent, market-wide short sale price 

test based on the national best bid 

would have on-going monitoring costs 

that averaged between $50,000 and 

$175,000 per firm,1068 while a circuit 

breaker triggering a short sale price test 

based on the national best bid would 

have on-going monitoring costs that 

averaged between $45,000 and $175,000 

per firm.1069 This seems to support our 

view that the on-going monitoring costs 

of a circuit breaker approach, as 

compared to a permanent, market-wide 

approach, would be largely the same. 

After considering the comments, we 

believe that the implementation, ongoing monitoring and surveillance costs 

of a circuit breaker triggering a short 

sale price test restriction will be similar 

to the implementation, on-going 

monitoring and surveillance costs of the 

same short sale price test restriction on 

a permanent, market-wide basis. Thus, 

we believe that our estimates of the 

implementation and on-going 

monitoring and surveillance costs of 

Rule 201 for trading centers and brokerdealers, as reflected in Sections X.B.1.b.i 

and X.B.1.b.ii., discussing the 

implementation and on-going 

monitoring and compliance costs of the 

alternative uptick rule, are appropriate 

after taking into consideration the 

circuit breaker approach of Rule 201. 

Further, we believe that such costs are 

justified by the benefits provided by the 

Rule in preventing short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security. 

Under the circuit breaker approach of 

Rule 201, the listing market for each 

covered security must determine 

whether that covered security is subject 

to Rule 201.1070 Once the listing market 

has determined that a security has 

become subject to the requirements of 

Rule 201, the listing market shall 

immediately notify the single plan 

processor responsible for consolidation 

of information for the covered security 

in accordance with Rule 603(b) of 

Regulation NMS 1071 of this fact. The 

plan processor must then disseminate 

this information.1072 We recognize that 

these requirements will require changes 

by the listing markets and single plan 

processors to systems currently 

supported by each.1073 We note that, 

because listing markets and single plan 

processors will require time in which to 

reprogram and test their systems and 

procedures to comply with Rule 201, 

the systems and programming costs 

associated with Rule 201 might be 

higher without a sufficient 

implementation period.1074 We believe 

that the six month implementation 

period will provide listing markets and 

single plan processors with time to 

make required changes in a measured 

fashion, which will help alleviate some 

of the potential disruptions that may be 

associated with implementing Rule 

201.1075

While we recognize that listing 

markets will incur initial up-front costs 

associated with having to update their 

systems, including systems changes to 

computer software, as well as staff time 

and technology resources to update 

their systems and surveillance 

mechanisms to ensure compliance with 

the Rule’s requirements,1076 familiarity 

with a circuit breaker approach may 

help mitigate the implementation and 

compliance costs. In addition, we 

believe that listing markets may be able 

to leverage some of their existing 

procedures to ease the implementation 

of Rule 201’s requirements. For 

example, as discussed in the Proposal, 

currently, all stock exchanges and 

FINRA have rules or policies to 

implement coordinated circuit breaker 

halts 1077 and listing markets also 

already send information to single plan 

processors regarding Regulatory Halts as 

defined in those plans. Moreover, SROs 

have rules or policies in place to 

coordinate individual security trading 

halts corresponding to significant news 

events.1078 In addition, we note that 

listing markets are familiar with making 

determinations regarding, and imposing 

trading restrictions on, individual NMS 

stocks.1079 Similarly, in connection with 

such activities, listing markets currently 

monitor price changes in covered 

securities relative to the closing price as 

of the end of regular trading hours on 

the prior day. 

Further, we note that listing markets 

are also trading centers, as defined by 

Rule 201,1080 and as such, will have 

costs in connection with systems 

changes to implement the policies and 

procedures requirements of Rule 201 

applicable to trading centers.1081 We 

believe that the costs to listing markets 

associated with having to update their 

systems to ensure compliance with the 

Rule’s requirements applicable to listing 

markets will be an incremental addition 

to the costs associated with the 

implementation of the policies and 

procedures requirements applicable to 

trading centers.1082 We believe that the 

implementation and compliance costs 

for listing markets are justified by the 

benefits provided by requiring the 

listing market for a covered security to 

determine whether the security has 

become subject to the short sale price 

test restrictions of Rule 201 because this 

will help to ensure consistency for each 

covered security with respect to such 

determinations. 

We recognize that single plan 

processors will also incur initial upfront costs associated with having to 

update their systems, including systems 

changes to computer software, as well as 

staff time and technology resources to 

update their systems and surveillance 

mechanisms in order to ensure 


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1083See supra Section X.B.1. (discussing costs of 

the alternative uptick rule). 1084See letter from NYSE Euronext (Sept. 2009); 

letter from Virtu Financial. 1085See supra Section VII. (discussing the 

implementation period). 

1086See letter from NSCP; letter from NYSE 

Euronext (June 2009); letter from RBC (June 2009); 

letter from STA (June 2009); letter from FIF (Sept. 

2009); letter from Citadel et al. (Sept. 2009); letter 

from Credit Suisse (Sept. 2009); letter from Direct 

Edge (Sept. 2009); letter from EWT (Sept. 2009); 

letter from RBC (Sept. 2009); letter from SIFMA 

(Sept. 2009); letter from MFA (Oct. 2009); see also 

letter from Amer. Bankers Assoc.; letter from NYSE 

Euronext (Sept. 2009); letter from Goldman Sachs 

(Sept. 2009). 1087See, e.g., letter from NSCP; letter from RBC 

(June 2009); letter from SIFMA (June 2009); letter 

from RBC (Sept. 2009); see also letter from Direct 

Edge (Sept. 2009) (stating that adoption of a circuit 

breaker approach will add approximately four to six 

weeks to the implementation time of the alternative 

uptick rule); letter from NYSE Euronext (Sept. 2009) 

(stating that ‘‘a circuit breaker approach raises 

significant implementation complexities’’). But cf. 

letter from Credit Suisse (Sept. 2009) (stating that 

a circuit breaker approach will not significantly 

increase implementation time); letter from Nasdaq 

OMX Group (Oct. 2009) (stating that ‘‘[o]nce the 

price test is in place, there is minimal incremental 

effort required to add a Circuit Breaker that controls 

the application of the price test’’). 

1088Several commenters noted that because the 

alternative uptick rule, unlike the other proposed 

price tests, does not require sequencing of bids or 

last sale prices, the alternative uptick rule could be 

implemented more quickly than the other proposed 

price tests, in three to six months. See, e.g., letter 

from Credit Suisse (June 2009); letter from STA 

(June 2009); letter from Credit Suisse (Sept. 2009); 

letter from FIF (Sept. 2009). But cf. letter from 

Citadel et al. (Sept. 2009); letter from NYSE 

Euronext (Sept. 2009); letter from RBC (Sept. 2009); 

letter from SIFMA (Sept. 2009). 

1089One commenter stated that implementation 

concerns with respect to a short sale price test 

restriction could be mitigated, provided that trading 

centers ‘‘could leverage existing architecture 

developed to comply with the order protection rule 

in Reg NMS (Rule 611).’’ Letter from MFA (Oct. 

2009). Another commenter stated that 

implementation of a circuit breaker triggering the 

alternative uptick rule would be easier to 

implement, ‘‘provided that the Commission permits 

firms to leverage the numerous systems changes 

made to facilitate compliance with Regulation NMS 

(including the use of internal market data rather 

than consolidated data supplied by the industry 

plans).’’ Letter from Goldman Sachs (Sept. 2009). 

But cf. letter from FIF (June 2009); letter from NSCP; 

letter from RBC (June 2009). 

1090 17 CFR 242.200(g). 

1091See Rule 200(g); see also supra Section IV. 

(discussing the amendments to Rule 200(g)). 

1092See Rule 200(g)(2). 

1093See Proposal, 74 FR at 18100. 

1094See Proposal, 74 FR at 18103; Re-Opening 

Release, 74 FR at 42037. 

1095See, e.g., letter from FIF (June 2009); letter 

from NSCP; letter from RBC (June 2009); letter from 

Lime Brokerage (Sept. 2009); letter from FIF (Sept. 

2009). 

1096See, e.g., letter from NSCP; letter from RBC 

(June 2009); letter from FIF (June 2009); letter from 

FIF (Sept. 2009). 

1097See letter from FIF (June 2009); letter from 

FIF (Sept. 2009). 

1098Letter from Lime Brokerage (Sept. 2009). 

compliance with the circuit breaker 

requirements.1083 We believe, however, 

that the single plan processors’ current 

familiarity with receiving and 

disseminating information regarding 

individual NMS stocks will help 

mitigate these implementation and 

compliance costs. For example, the 

single plan processors currently receive 

information from listing markets 

regarding trading restrictions, such as 

Regulatory Halts as defined in those 

plans, on individual securities and 

disseminate such information. As a 

result, the requirements of Rule 

201(b)(3) are similar to existing 

obligations on plan processors pursuant 

to the requirements of Regulation NMS, 

the CTA and CQ Plans and the Nasdaq 

UTP Plan. Two commenters agreed that 

dissemination of information regarding 

the triggering of Rule 201 would be a 

function similar to other functions 

currently performed by the plan 

processors.1084 Further, we believe that 

the implementation and compliance 

costs for single plan processors are 

justified by the benefits provided by 

requiring the single plan processors to 

disseminate information on whether a 

security has become subject to the short 

sale price test restrictions of Rule 201 

because the similarity of this function to 

current functions performed by the 

single plan processors will help to 

ensure the workability and smooth 

functioning of the Rule. 

3. Implementation Period 

We believe that a six month 

implementation period will provide 

trading centers, broker-dealers, listing 

markets, the single plan processors and 

other market participants with a 

sufficient amount of time in which to 

modify their systems and procedures in 

order to comply with the requirements 

of Rule 201.1085 The six month 

implementation period will provide 

market participants with time to make 

required changes in a measured fashion, 

which will help alleviate some of the 

potential disruptions that may be 

associated with implementing Rule 201. 

Because trading centers, listing markets, 

the single plan processors and other 

market participants will require time in 

which to reprogram and test their 

systems and procedures to comply with 

Rule 201, the systems and programming 

costs associated with Rule 201 might be 

higher without a sufficient 

implementation period. For example, 

commenters indicated that a circuit 

breaker rule triggering the alternative 

uptick rule would require an 

implementation period of between three 

and twelve months.1086

The six month implementation 

period, which is longer than the 

implementation periods proposed in the 

Proposal and the Re-Opening Release, 

takes into consideration commenters’ 

concerns that implementation of a short 

sale price test could be complex.1087 We 

do not believe that an implementation 

period longer than 6 months is 

warranted because Rule 201 does not 

require monitoring of the sequence of 

bids or last sale prices, unlike other 

proposed short sale price tests,1088 and 

because Rule 201 requires the 

implementation of policies and 

procedures similar to those required for 

trading centers under Regulation 

NMS.1089 In addition, as discussed 

above, market participants will be able 

to leverage the numerous systems 

changes made and current architecture 

developed to facilitate compliance with 

Regulation NMS. These factors should 

reduce implementation time. 

4. Marking Requirements 

While the current marking 

requirements in Rule 200(g) of 

Regulation SHO, which require brokerdealers to mark all sell orders of any 

equity security as either ‘‘long’’ or 

‘‘short,’’ 1090 will remain in effect, the 

amendments to Rule 200(g) will add a 

new marking requirement of ‘‘short 

exempt.’’ 1091 In particular, if the brokerdealer chooses to rely on its own 

determination that it is submitting the 

short sale order to the trading center at 

a price that is above the current national 

best bid at the time of submission or to 

rely on an exception specified in the 

Rule, it must mark the order as ‘‘short 

exempt.’’ 1092 We discussed in the 

Proposal the anticipated costs of the 

proposed amendments 1093 and, in the 

Proposal and Re-Opening Release, we 

requested comment on the costs 

associated with the proposed 

amendments.1094

Several commenters expressed 

concerns regarding the implementation 

costs of the ‘‘short exempt’’ marking 

requirements.1095 Several commenters 

noted that the ‘‘short exempt’’ marking 

requirements would require 

modifications to multiple systems, 

including modifications to blue sheet, 

OATS and OTS reporting systems.1096

One commenter noted that such 

modifications would be in addition to 

changes to order entry and routing 

applications.1097 Another commenter 

noted that one of its primary 

implementation concerns was related to 

‘‘re-implementation of ‘Short Sale 

Exempt’ order types in interfaces 

between [the commenter] and [its] 

Customers as well as the venues that 

support such exempt order types.’’ 1098

In contrast, one commenter, in 

supporting adoption of the ‘‘short 


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1099Letter from STA (June 2009). 

1100See Proposal, 74 FR at 18089. 

1101See Proposal, 74 FR at 18100. 

1102See letter from Glen Shipway (June 2009). 

1103See, e.g., letter from Nasdaq OMX Group 

(Oct. 2009); letter from SIFMA (Sept. 2009). 

1104See Proposal, 74 FR at 18089. 

1105See supra note 729. 

1106See 2004 Regulation SHO Adopting Release, 

69 FR at 48023. 

1107The adjustment for inflation was calculated 

using information in the Consumer Price Index, 

U.S. Department of Labor, Bureau of Labor 

Statistics. 

1108These figures were calculated as follows: 

($115,000 × 5,178) = $595,470,000 and ($145,000 × 

5,178) = $750,810,000. 

1109This figure was calculated as follows: (346 

hours × $270) = $93,420 per broker-dealer. The 346 

hour estimate was calculated as follows: 12.9 

billion ‘‘short exempt’’ orders/5,178 broker-dealers = 

2,491,309 annual responses by each broker-dealer. 

Each response of marking sell orders ‘‘short exempt’’ 

will take approximately .000139 hours (.5 seconds) 

to complete. (2,491,309 responses × 0.000139 hours) 

= 346 burden hours. 

Based on industry sources, we estimate that the 

average hourly rate for compliance attorneys is 

$270. The $270/hour figure for compliance 

attorneys is from SIFMA’s Management & 

Professional Earnings in the Securities Industry 

2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. 

1110This figure was calculated as follows: 

($93,420 × 5,178) = $483,728,760. 

1111See, e.g., letter from RBC (June 2009); letter 

from NSCP; letter from FIF (June 2009). 

exempt’’ marking requirements (in the 

event that the Commission decided to 

adopt a short sale price test restriction), 

stated that ‘‘[t]he costs of marking the 

orders appropriately will be worth the 

benefits gained.’’ 1099

We recognize commenters’ concerns 

with respect to the costs of the ‘‘short 

exempt’’ marking requirement and we 

considered these comments in 

evaluating the costs of the ‘‘short 

exempt’’ marking requirement. Such 

costs will include one-time costs for 

broker-dealers for reprogramming and 

systems changes, including 

modifications to reporting systems, 

order entry and routing applications. In 

addition, the costs of the ‘‘short exempt’’ 

marking requirement will include ongoing monitoring and surveillance costs 

for broker-dealers. However, we believe 

that such costs will be limited because 

broker-dealers already have established 

systems, processes, and procedures in 

place to comply with the current 

marking requirements of Rule 200(g) of 

Regulation SHO with respect to marking 

a sell order either ‘‘long’’ or ‘‘short’’ and, 

therefore, will likely leverage such 

systems, processes and procedures to 

comply with the ‘‘short exempt’’ 

marking requirements in Rules 200(g) 

and 200(g)(2). Further, we believe that 

the implementation and compliance 

costs of the ‘‘short exempt’’ marking 

requirements are justified by the 

benefits provided by the requirements 

in aiding surveillance by SROs and the 

Commission for compliance with the 

provisions of Rule 201 and providing an 

indication to a trading center regarding 

when it must execute or display a short 

sale order without regard to whether the 

order is at a price that is less than or 

equal to the current national best bid. 

We also considered whether our 

estimates of the implementation and ongoing monitoring and compliance costs 

associated with the ‘‘short exempt’’ 

marking requirements under the 

amendments to Rule 200(g), as proposed 

in conjunction with the proposed 

modified uptick rule 1100 would change 

under the circuit breaker approach of 

Rule 201, but concluded, as discussed 

below, that these estimates continue to 

represent reasonable estimates under 

the circuit breaker approach. 

We believe that the ‘‘short exempt’’ 

marking requirements of Rule 200(g), in 

conjunction with a circuit breaker 

approach, will result in largely the same 

implementation costs as we estimated 

would be incurred if the ‘‘short exempt’’ 

marking requirements were combined 

with a market-wide short sale price test 

restriction.1101 This is because brokerdealers relying on the provisions of Rule 

201(c) or Rule 201(d) will need to make 

systems changes to implement the 

‘‘short exempt’’ marking requirements 

regardless of whether the short sale 

price test restriction is adopted on a 

permanent, market-wide basis or, in the 

case of Rule 201, adopted in 

conjunction with a circuit breaker. 

In addition, with respect to on-going 

monitoring and surveillance costs of the 

‘‘short exempt’’ marking requirements in 

conjunction with a circuit breaker 

approach, we recognize, as noted by one 

commenter,1102 that market participants 

will need to continuously monitor 

whether a security is subject to the 

provisions of Rule 201 and that there 

will be costs associated with such 

monitoring. However, we believe that 

these costs will be offset because, under 

the circuit breaker approach, use of the 

‘‘short exempt’’ provisions of Rule 201(c) 

and Rule 201(d) and the related marking 

requirements will be time limited and 

will only apply on a stock by stock 

basis. As a result, broker-dealers who 

choose to rely on Rule 201(c) or Rule 

201(d) will only need to monitor and 

surveil for compliance with the 

requirements of those provisions and 

will only need to mark qualifying orders 

‘‘short exempt’’ during the limited 

period of time that the circuit breaker is 

in effect with respect to a specific 

security. The circuit breaker approach 

will allow regulatory, supervisory and 

compliance resources to focus on, and 

to address, those situations where a 

specific security is experiencing 

significant downward price 

pressure.1103

On balance, we believe our proposed 

estimates of the costs associated with 

the ‘‘short exempt’’ marking 

requirement 1104 are appropriate with 

respect to Rule 200(g) as adopted. Thus, 

our estimates have not changed from the 

Proposal, except to the extent that total 

burden estimates have changed because 

we have updated the estimated number 

of broker-dealers.1105

We believe that the implementation 

cost of the ‘‘short exempt’’ marking 

requirement will likely be similar to the 

implementation cost of the order 

marking requirements of Rule 200(g) of 

Regulation SHO, which had originally 

included the category of ‘‘short exempt.’’ 

Industry sources at that time estimated 

initial implementation costs for the 

former ‘‘short exempt’’ marking 

requirement to be approximately 

$100,000 to $125,000.1106 Based on 

these estimates, as adjusted for inflation, 

we estimate that the initial 

implementation cost of the ‘‘short 

exempt’’ marking requirement will be 

approximately $115,000 to $145,000 per 

broker-dealer 1107 for a total initial 

implementation cost of approximately 

$595,470,000 to $750,810,000 for all 

broker-dealers.1108

We recognize that there will be an ongoing paperwork burden cost associated 

with adding the ‘‘short exempt’’ marking 

requirements. For example, as detailed 

in PRA Section IX.E.3., above, we 

estimate that the total annual cost for 

each broker-dealer subject to the ‘‘short 

exempt’’ marking requirements will be 

$93,420 1109 for a total annual on-going 

cost of $483,728,760 for all brokerdealers subject to the ‘‘short exempt’’ 

marking requirements.1110

To provide market participants with 

the time needed to make the changes 

required to comply with Rule 200(g), we 

are adopting an implementation period 

under which market participants will 

have to comply with these requirements 

six months following the effective date 

of the adoption of these amendments. In 

the Proposal, we proposed a three 

month implementation period for the 

‘‘short exempt’’ marking requirements 

under Rule 200(g). In response to our 

request for comment, several 

commenters stated that the ‘‘short 

exempt’’ marking requirement would 

require systems changes.1111 Another 

commenter stated that the ‘‘short 

exempt’’ marking requirement would 

require coding for new fields in order 


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1112See letter from STA (June 2009). 

1113 15 U.S.C. 78c(f). 

1114 15 U.S.C. 78w(a)(2). 

1115See, e.g., letter from Joseph A. Dear, Chief 

Investment Officer, California Public Employees’ 

Retirement System, dated June 19, 2009; letter from 

Citadel et al. (June 2009); letter from Pershing 

Square; letter from Vanguard (June 2009); letter 

from Amer. Bar Assoc. (July 2009); letter from 

Amer. Bar Assoc. (Sept. 2009); letter from MFA 

(Oct. 2009). 

1116Letter from Citadel et al. (June 2009). 

1117See letter from Pershing Square (citing 2006 

Price Test Elimination Proposing Release, 71 FR at 

75069–75070). 

1118Under Regulation ATS, any entity that falls 

within the definition of a securities exchange must 

apply to be a securities exchange or must register 

as an ATS, subject to certain exceptions. See 17 

CFR 242.300, 301; see also 15 U.S.C. 78c(a)(1); 17 

CFR 240.3b–16. 

1119See 17 CFR 242.600(b)(78). Currently, no 

national securities association is a trading center, as 

that term is defined in Rule 600(b)(78) of Regulation 

NMS. 

1120See Exchange Act Release No. 60997 (Nov. 

13, 2009), 74 FR 61208, 61234 (Nov. 23, 2009) 

(discussing the reasonably low barriers to entry for 

ATSs and that these reasonably low barriers to 

entry have generally helped to promote competition 

and efficiency). 

1121 17 CFR 242.611. 

1122 17 CFR 242.605. 

1123 17 CFR 242.606. 

1124These numbers are based on a review of 2007 

and 2008 FOCUS Report filings reflecting registered 

broker-dealers, and discussions with SRO staff. The 

number does not include broker-dealers that are 

delinquent on FOCUS Report filings. We discuss 

the impact of Rule 201 on small broker-dealers in 

Section XII.B., below. 

1125This number is based on a review of FOCUS 

Report filings reflecting registered broker-dealers 

from 2001 through 2008. The number does not 

include broker-dealers that are delinquent on 

FOCUS Report filings. New registered brokerdealers for each year during the period from 2001 

through 2008 were identified by comparing the 

Continued 

records, which should be accomplished 

in approximately three months.1112

We are sensitive to commenters’ 

concerns that implementation of the 

‘‘short exempt’’ marking requirement 

could be complex, and believe that a six 

month implementation period, which is 

longer than the 3 month implementation 

period proposed in the Proposal, will 

afford market participants sufficient 

time to make the necessary 

modifications to their systems and 

procedures. In addition, we believe that 

because it will provide broker-dealers 

with time to make required changes in 

a measured fashion, the six month 

implementation period will help 

alleviate some of the potential 

disruptions that may be associated with 

implementing the ‘‘short exempt’’ 

marking requirements. 

XI. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Section 3(f) of the Exchange Act 

requires the Commission, whenever it 

engages in rulemaking and is required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action would promote efficiency, 

competition, and capital formation.1113

In addition, Section 23(a)(2) of the 

Exchange Act requires the Commission, 

when adopting rules under the 

Exchange Act, to consider the impact 

such rules would have on 

competition.1114 Exchange Act Section 

23(a)(2) prohibits the Commission from 

adopting any rule that would impose a 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. 

A number of commenters noted 

concerns about the impact of a short 

sale price test restriction on efficiency, 

competition and capital formation.1115

One commenter stated that ‘‘the 

empirical evidence from the many 

academic and Commission studies and 

experiences of [the commenters] * * * 

raise a substantial question about 

whether the proposed short sale 

restrictions can satisfy these 

standards.’’ 1116 Another commenter 

noted the beneficial impact of short 

selling on efficiency and competition, 

quoting the Commission’s statements 

that short selling provides the market 

with liquidity and pricing 

efficiency.1117 As discussed below, we 

considered these concerns, and took 

them into account in formulating Rules 

200(g) and 201, as adopted, to address, 

to the extent possible, these concerns. 

A. Competition 

We begin our consideration of 

potential competitive impacts with 

observations of the current structure of 

the markets with respect to trading 

centers and broker-dealers, mindful of 

the statutory requirements regarding 

competition. Based on our experience in 

regulating the securities markets, 

including reviewing information 

provided by trading centers and brokerdealers in their registrations and filings 

with us, and approving such registration 

applications, we discuss below the basic 

framework of the markets they 

comprise. 

1. Market Structure for Trading Centers 

and Broker-Dealers 

Trading centers include national 

securities exchanges or national 

securities associations that operate an 

SRO trading facility, ATSs,1118

exchange market makers and OTC 

market makers, and any other brokerdealer that executes orders internally, 

whether as agent or principal.1119 All of 

these entities will be required to alter 

their trading mechanisms to comply 

with Rule 200(g) and Rule 201. 

The equity trading industry is a 

competitive one, with reasonably low 

barriers to entry. The intensity of 

competition across trading platforms in 

this industry has increased in the past 

decade as a result of a number of factors, 

including market reforms and 

technological advances. This increase in 

competition has resulted in decreases in 

market concentration, more competition 

among trading centers, a proliferation of 

trading platforms competing for order 

flow, and decreases in trading fees. 

The reasonably low barriers to entry 

for trading centers are evidenced, in 

part, by the fact that new entities, 

primarily ATSs, continue to enter the 

market.1120 For example, currently there 

are approximately 50 registered ATSs 

that trade covered securities. In 

addition, the Commission within the 

past few years has approved 

applications by two entities—BATS and 

Nasdaq—to become registered as 

national securities exchanges for trading 

equities, and approved proposed rule 

changes by two existing exchanges—ISE 

and CBOE—to add equity trading 

facilities to their existing options 

business. We believe that competition 

among trading centers has been 

facilitated by Rule 611 of Regulation 

NMS,1121 which encourages quote-based 

competition between trading centers; 

Rule 605 of Regulation NMS,1122 which 

empowers investors and broker-dealers 

to compare execution quality statistics 

across trading centers; and Rule 606 of 

Regulation NMS,1123 which enables 

customers to monitor order routing 

practices. 

Broker-dealers are required to register 

with the Commission and at least one 

SRO. The broker-dealer industry, 

including market makers, is a 

competitive industry, with most trading 

activity concentrated among several 

dozen larger participants and with 

thousands of smaller participants 

competing for niche or regional 

segments of the market. 

There are 5,178 registered brokerdealers, of which 890 are small brokerdealers.1124 Larger broker-dealers often 

enjoy economies of scale over smaller 

broker-dealers and compete with each 

other to service the smaller brokerdealers, who are both their competitors 

and customers. The reasonably low 

barriers to entry for broker-dealers are 

evidenced, for example, by the fact that 

the average number of new brokerdealers entering the market each year 

between 2001 and 2008 was 389.1125


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unique registration number of each broker-dealer 

filed for the relevant year to the registration 

numbers filed for each year between 1995 and the 

relevant year. 

1126See, e.g., letter from Credit Suisse (June 

2009); letter from EWT (June 2009); letter from FIF 

(June 2009); letter from NSCP. 

1127Letter from EWT (June 2009). 

1128 Id. 

1129See supra Section X.B.1.a. (discussing the 

impact of Rule 201 on liquidity, market volume, 

bid-ask spreads, price discovery and volatility). 

1130Letter from FIF (June 2009). In addition, some 

commenters raised concerns with respect to 

competitive pressure on smaller broker-dealers, in 

particular, in connection with a short sale price test 

restriction. As noted above, we discuss the impact 

of Rule 201 on small broker-dealers in Section 

XII.B., below. 

1131See supra Section IX.E.2. (discussing the 

implementation and on-going monitoring and 

compliance costs of the broker-dealer provision). 

1132See, e.g., letter from STANY (June 2009); 

letter from FIF (June 2009); letter from Lime 

Brokerage (June 2009); letter from T.D. Pro Ex; letter 

from Taurus Compliance; letter from Credit Suisse 

(June 2009); letter from NSCP. 

1133See, e.g., letter from EWT (June 2009); letter 

from EWT (Sept. 2009); letter from GETCO (June 

2009); letter from Goldman Sachs (June 2009); but 

cf. letter from Dr. Jim DeCosta (noting that there are 

currently few barriers to entry for market makers 

and abuse can arise from small market makers, who 

are in need of business, being willing to misuse a 

bona fide market making exemption in exchange for 

order flow). See also supra Section III.B.9. 

(discussing the decision not to include an 

exemption for bona fide market making). 

1134See, e.g., letter from CBOE (June 2009). 

1135See letter from Direct Edge (Sept. 2009); see 

also supra note 532 (discussing a 1997 study 

indicating that during a sample month in 1997, 

market maker short sales at or below the inside bid 

accounted for only 2.41% of their total share 

volume). 

1136See, e.g., NYSE Rule 104(f) (stating that ‘‘it is 

commonly desirable that a member acting as [a 

designated market maker] engage to a reasonable 

degree under existing circumstances in dealings for 

the [designated market maker’s] own account when 

lack of price continuity, lack of depth, or disparity 

between supply and demand exists or is reasonably 

to be anticipated’’); CBOE Rule 53.23(a)(1) (stating 

that ‘‘[w]ith respect to each security for which it 

holds an Appointment, a CBSX Remote Market 

Maker has a continuous obligation to engage, to a 

reasonable degree under the existing circumstances, 

in dealings for its own account when there exists, 

or it is reasonably anticipated that there will exist, 

a lack of price continuity, or a temporary disparity 

between the supply of and demand for a particular 

security’’). 

2. Discussion of Impacts of Rules 200(g) 

and 201 on Competition 

We believe that the estimated costs 

associated with implementing and 

complying with Rules 200(g) and 201 

are not so large as to raise significant 

barriers to entry, or otherwise 

significantly alter the competitive 

landscape of the industries involved. In 

industries characterized by reasonably 

low barriers to entry and intense 

competition, the viability of some of the 

less successful competitors may be 

sensitive to regulatory costs. 

Nonetheless, given the reasonably low 

barriers to entry into the market for 

execution services, we believe that the 

trading center and broker-dealer 

industries will remain competitive, 

despite the costs associated with 

implementing and complying with 

Rules 200(g) and 201, even if those costs 

influence to some degree the entry or 

exit decisions of individual trading 

centers or broker-dealers at the margin. 

Several commenters expressed 

concerns about the impact of a short 

sale price test restriction on competition 

among broker-dealers.1126 For example, 

one commenter noted concerns with 

respect to decreased competition and 

increased broker-dealer 

‘‘internalization.’’ 1127 Specifically, this 

commenter stated that, as a result of 

short sale price test restrictions, ‘‘a 

widening of bid/offer spreads and 

decrease in liquidity provided by 

professional market makers could 

reverse the consolidation of liquidity in 

the public markets, permitting some 

brokers once again to take advantage of 

decreased competition in price 

discovery and offer substantially 

inferior (but still technically legal) 

internalization prices to their 

customers.’’ 1128 Although we 

considered this commenter’s concerns, 

we note that, as discussed above, due to 

the circuit breaker approach of Rule 

201, as well as findings by the Pilot 

Results regarding the market impact of 

former Rule 10a–1, we believe that the 

short sale price test restrictions of Rule 

201 will have a limited, if any, negative 

market impact, such as widening of bid/ 

offer spreads or decreased liquidity.1129

Thus, we do not believe that Rule 201 

will result in decreased competition in 

price discovery or increased 

internalization. 

Another commenter stated that ‘‘while 

it will not be mandated that firms avail 

themselves of the [broker-dealer 

provision], competitive pressure is 

likely to mean that broker dealers will 

need to invest resources and time in 

building this functionality.’’ 1130 We 

recognize that broker-dealers are faced 

with competitive concerns and that 

such concerns may influence their 

decision whether or not to rely on the 

broker-dealer provision of Rule 201(c). 

We also recognize that if a broker-dealer 

chooses to rely on the broker-dealer 

provision it will impose costs on such 

broker-dealers, and we considered these 

costs in determining to adopt in Rule 

201 the alternative uptick rule rather 

than a rule that requires sequencing of 

the national best bid.1131 Although 

commenters expressed concerns with 

respect to the costs of the broker-dealer 

provision of Rule 201(c) and the 

resulting impact on competition, many 

of these comments were not specific to 

the alternative uptick rule.1132 Without 

a sequencing requirement under the 

alternative uptick rule, we believe that 

the policies and procedures required to 

rely on the broker-dealer provision 

under Rule 201(c) will be easier and less 

costly to implement and monitor than 

the cost concerns and estimates 

provided by some commenters. 

Other commenters noted concerns 

regarding reduced competition among 

market makers in the absence of a bona 

fide market making exception.1133 We 

believe, however, that due to the 

approach of Rule 201, that is, the 

combination of a circuit breaker with 

the alternative uptick rule, the lack of 

such a bona fide market maker 

exception will have minimal, if any, 

impact on competition among market 

makers. This is because, as noted by 

some commenters, equity market 

makers for the most part sell at their 

offer quote.1134 Thus, the short sale 

price test restriction of Rule 201, which 

requires short selling at a price above 

the national best bid and only if the 

circuit breaker has been triggered, is 

consistent with equity market making 

strategies because these market makers 

generally sell at prices above the 

national best bid.1135 This is 

particularly true where a security’s price 

is declining, as market makers often 

provide liquidity on the opposite side of 

price moves to help reduce volatility. 

Thus, even during times when a covered 

security is undergoing significant 

downward price pressure, market 

makers are generally required to provide 

liquidity in that security.1136

Weighing against the competitive 

concerns for the trading center and 

broker-dealer industries, Rule 201 will 

advance the purposes of the Exchange 

Act in a number of significant ways. It 

will help benefit the market for a 

particular security by allowing market 

participants, when a security is 

undergoing a significant intra-day price 

decline, an opportunity to re-evaluate 

circumstances and respond to volatility 

in that security. It will also help restore 

investor confidence during times of 

substantial uncertainty because, once 

the circuit breaker has been triggered for 

a particular security, long sellers will 

have preferred access to bids for the 

security, and the security’s continued 

price decline will more likely be due to 

long selling and the underlying 

fundamentals of the issuer, rather than 

to other factors. We also believe that a 

circuit breaker will better target short 

selling that may be related to potential 


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1137See supra note 36 and accompanying text. 

1138See supra Section III.B. (discussing ‘‘short 

exempt’’ provisions to Rule 201). Under these 

provisions, if a broker-dealer chooses to rely on its 

own determination that it is submitting the short 

sale order to the trading center at a price that is 

above the current national best bid at the time of 

submission or to rely on an exception specified in 

the Rule, it must mark the order as ‘‘short exempt.’’ 

1139See Rule 201(d)(5). 

1140See supra notes 425 to 426 and 

accompanying text (noting requests by commenters 

for exceptions for short sales in connection with the 

facilitation of capital raising transactions through 

convertible instruments by issuers and selling 

shareholders, and to allow investors purchasing a 

convertible instrument to hedge their long 

exposure). 

1141See supra Section II.C. (discussing restoring 

investor confidence); see also letter from Edward C. 

Springer, dated May 3, 2009; letter from Richard 

Anderson, dated May 5, 2009; letter from Mike 

Pascale, dated May 11, 2009; letter from Sigmon 

Wealth Management (June 2009); form letter type C, 

a petition drafted by Jim Cramer, William Furber, 

Eric Oberg, and Scott Rothbort and signed by 5,605 

investors. Another commenter stated that adoption 

of the alternative uptick rule would have a 

beneficial impact on capital formation, stating that 

‘‘[t]he most important function of the capital 

markets is to raise capital for American 

corporations,’’ and that ‘‘by adopting the alternative 

uptick rule, the Commission will have chosen the 

best approach to deal with the loss of confidence 

by Congress and most importantly the investing 

public.’’ Letter from Glen Shipway (Sept. 2009). We 

note, however, that this commenter did not support 

adoption of the alternative uptick rule in 

conjunction with a circuit breaker. 

1142See supra note 17. 

bear raids 1137 and other forms of 

manipulation that may be used to 

exacerbate a price decline in a covered 

security. 

At the same time, however, we 

recognize the benefits to the market of 

legitimate short selling, such as the 

provision of liquidity and price 

efficiency, and considered these benefits 

in adopting the circuit breaker approach 

of Rule 201. Under the circuit breaker 

approach, the alternative uptick rule 

will only be imposed when a covered 

security has experienced an intra-day 

price decline of 10% or more and will 

only apply for the remainder of the day 

and the following day. We believe that 

because of the limited scope and 

duration of Rule 201, it will not 

interfere with the smooth functioning of 

the markets for the majority of 

securities, including when prices in 

such securities are undergoing minimal 

downward price pressure or are stable 

or rising. To the extent that Rule 201 

impacts the benefits of legitimate short 

selling, such as the provision of 

liquidity and price efficiency, we 

believe that such costs are justified by 

the benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

After due consideration of all these 

factors and the comments we have 

received, we have determined that any 

burden on competition that Rules 200(g) 

and 201 may impose is necessary or 

appropriate in the furtherance of the 

purposes of the Exchange Act noted 

above. 

B. Capital Formation 

A purpose of Rule 201 is to strengthen 

investor confidence in the markets we 

regulate which should help make 

investors more willing to invest, 

resulting in the promotion of capital 

formation. Fair and robust secondary 

markets, in which legitimate short 

selling can play a positive role, supports 

the public offerings by which issuers 

raise capital and, as a result, investors 

who provided private capital realize 

profits and obtain liquidity. In addition, 

long holdings are integral to capital 

formation. By placing long holders 

ahead of short sellers in the execution 

queue under certain limited 

circumstances, Rule 201 promotes 

capital formation, since investors 

should be more willing to hold long 

positions if they know they may have a 

preferred position over short sellers 

when they wish to sell in the market for 

that security during a significant price 

decline in that security. 

In addition, paragraphs (c) and (d) of 

Rule 201 include provisions that are 

designed to limit any adverse effects on 

the public offering process, which is 

necessary to capital formation, while at 

the same time not undermining the 

goals of Rule 201.1138 In particular, Rule 

201(d)(5) is designed to facilitate price 

support during the offering process by 

allowing broker-dealers to mark short 

sale orders ‘‘short exempt’’ if the short 

sale is by an underwriter or syndicate 

member participating in a distribution 

in connection with an over-allotment or 

if the short sale order is by an 

underwriter or syndicate member for 

purposes of a lay-off sale in connection 

with a distribution of securities through 

a rights or standby underwriting 

commitment.1139

We note that short sales can facilitate 

convertible securities offerings, and, as 

stated by some commenters,1140 we 

recognize that hedges for this subset of 

offerings may become more expensive 

under Rule 201 due to the absence of an 

exception from Rule 201 for short 

selling in connection with convertible 

instruments. In this regard, however, we 

note that as adopted, as opposed to 

some of our alternative proposals, Rule 

201 will not prohibit short selling to 

hedge a position, although it could 

marginally increase the cost of adjusting 

a hedge after a significant market 

decline. Even if these indirect costs 

could, at the margin, reduce the 

attractiveness and, therefore, the volume 

of certain types of offerings, we do not 

believe that any such reduction will be 

significant because short sellers will be 

able to sell at a price above the national 

best bid even during the limited time 

the circuit breaker is in effect. Moreover, 

as described above, Rule 201 includes 

an exception for short selling in 

connection with certain types of capitalraising structures. Thus, while there 

may be a change in the total mix of 

offering types, we have no reason to 

believe that, in light of the anticipated 

positive effect of Rule 201 on investor 

confidence, particularly confidence in 

long holdings, that there will be any 

overall negative effect on capital 

formation as a result of our adoption of 

this Rule. 

We believe, and commenters agreed, 

that by helping to prevent short selling, 

including manipulative or abusive short 

selling, from driving down further the 

price of a security that has already 

experienced a significant intra-day price 

decline, Rule 201 will help restore and 

maintain investor confidence in the 

securities markets.1141 Bolstering 

investor confidence in the markets will 

help to encourage investors to be more 

willing to invest in the markets, 

including during times of substantial 

uncertainty, thereby adding depth and 

liquidity to the markets and promoting 

capital formation. 

C. Efficiency 

Rule 201 is designed to achieve the 

appropriate balance between our goal of 

preventing short selling, including 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security and the 

need to allow for the continued smooth 

functioning of the markets, including 

the provision of liquidity and price 

efficiency in the markets. By not 

allowing short sellers to sell at or below 

the current national best bid while the 

circuit breaker is in effect, the short sale 

price test restriction in Rule 201 will 

allow long sellers in certain limited 

circumstances, by selling at the bid, to 

sell first in a declining market for a 

particular security. As the Commission 

has noted previously in connection with 

short sale price test restrictions, a goal 

of such restrictions is to allow long 

sellers to sell first in a declining 

market.1142

The term ‘‘price efficiency’’ has a 

technical meaning in financial 

economics, which is not the only way 

the term can be interpreted in the 


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1143See supra note 18 (defining the term ‘‘price 

efficiency’’). 

1144See, e.g., Edward M. Miller, 1977, Risk, 

uncertainty, and divergence of opinion, Journal of 

Finance 32, 1151–1168; Douglas W. Diamond and 

Robert E. Verrecchia, 1987, Constraints on shortselling and asset price adjustment to private 

information, Journal of Financial Economics 18, 

277–311. 

1145See, e.g., letter from Pershing Square (citing 

2006 Price Test Elimination Proposing Release, 71 

FR at 75069–75070); letter from CPIC (June 2009) 

(citing Pedro A. C. Saffi and Kari Sigurdson, Price 

Efficiency and Short Selling, lESE Business School 

Working Paper No. 748 (Apr. 2008); letter from 

Citadel et al. (June 2009). 

1146See, e.g., supra Section II.B. (discussing the 

Pilot Results). 

1147See, e g., supra note 242 and accompanying 

text (discussing automated trade matching systems). 

1148See supra notes 305 to 311 and 

accompanying text (discussing data reflecting that, 

on average, a limited number of covered securities 

would hit a 10% trigger level each day). 

1149See supra Section III.B. (discussing ‘‘short 

exempt’’ provisions to Rule 201); see also supra 

note 1138. 

1150 5 U.S.C. 604. 

1151See Rule 201(b); see also supra Section 

III.A.7. (discussing the policies and procedures 

approach). 

1152See Rule 201(b)(3). 

1153Rule 603(b) of Regulation NMS provides that 

‘‘[e]very national securities exchange on which an 

NMS stock is traded and national securities 

association shall act jointly pursuant to one or more 

effective national market system plans to 

disseminate consolidated information, including a 

national best bid and national best offer, on 

quotations for and transactions in NMS stocks. 

Such plan or plans shall provide for the 

dissemination of all consolidated information for an 

individual NMS stock through a single plan 

processor.’’ 17 CFR 242.603(b). 

1154See Rule 201(b)(3); 17 CFR 242.603(b). 

1155See Rule 200(g); see also supra Section IV. 

(discussing the amendments to Rule 200(g)). 

1156See Rule 200(g)(2). 

1157See Proposal, 74 FR at 18043, 18046; see also 

supra Section II.C. (discussing the Proposal). 

Exchange Act.1143 We have, 

nonetheless, considered the effect of 

Rule 201 on price efficiency in terms of 

financial economic theory.1144

We have structured Rule 201 to 

mitigate its impact on price efficiency. 

In response to the Proposal and ReOpening Release, several commenters 

cited empirical evidence showing that 

short selling contributes to price 

efficiency and that restrictions on short 

selling, particularly bans on short 

selling, may negatively impact price 

efficiency.1145 We note, however, that 

empirical evidence on former Rule 10a– 

1 suggests that the former rule, which 

applied to all short selling all the time 

unless an exception or exemption 

applied, had minimal effect on price 

efficiency.1146 Due to differences in the 

operation of former Rule 10a–1 and Rule 

201, when it applies, the alternative 

uptick rule under Rule 201 will be more 

restrictive than former Rule 10a–1 in 

some circumstances and less restrictive 

in others.1147 As discussed above, 

however, due to the circuit breaker 

approach in Rule 201, the alternative 

uptick rule of Rule 201 generally will 

apply to a limited number of covered 

securities 1148 and will apply only to a 

particular security for a limited period 

of time when the circuit breaker has 

been triggered for a covered security. As 

such, it will not be triggered for the 

majority of covered securities at any 

given time and, when triggered, will 

remain in effect for a short duration— 

that day and the following day. Thus, 

consistent with the empirical evidence 

on former Rule 10a–1, we expect that 

the alternative uptick rule will have a 

minimal impact on price efficiency. 

Moreover, paragraphs (c) and (d) of 

Rule 201 include provisions designed to 

limit any adverse effects on price 

efficiency and liquidity, while at the 

same time not undermining the goals of 

Rule 201.1149 In particular, paragraphs 

(d)(3) and (d)(4) of Rule 201 are 

designed to facilitate pricing efficiency 

through certain domestic and 

international arbitrage transactions. As 

stated above, allowing arbitrage at a 

price that is less than or equal to the 

current national best bid will potentially 

promote market efficiency. In addition, 

paragraph (d)(6) of Rule 201, which 

relates to riskless principal transactions, 

is designed to facilitate liquidity. 

XII. Final Regulatory Flexibility 

Analysis 

The Commission has prepared a Final 

Regulatory Flexibility Analysis 

(‘‘FRFA’’), in accordance with the 

provisions of the Regulatory Flexibility 

Act.1150 This FRFA relates to the 

amendments to Rules 200(g) and 201 of 

Regulation SHO under the Exchange 

Act. Rule 201 of Regulation SHO 

implements a short sale-related circuit 

breaker that, if triggered, will impose a 

short sale price test restriction. 

Specifically, Rule 201 requires that a 

trading center establish, maintain, and 

enforce written policies and procedures 

reasonably designed to prevent the 

execution or display of a short sale 

order of a covered security at a price 

that is less than or equal to the current 

national best bid if the price of that 

covered security decreases by 10% or 

more from the covered security’s closing 

price as determined by the listing 

market for the covered security as of the 

end of regular trading hours on the prior 

day. In addition, the Rule requires that 

the trading center establish, maintain, 

and enforce written policies and 

procedures reasonably designed to 

impose this short sale price test 

restriction for the remainder of the day 

and the following day when a national 

best bid for the covered security is 

calculated and disseminated on a 

current and continuing basis by a plan 

processor pursuant to an effective 

national market system plan.1151 In 

addition, Rule 201 provides that the 

listing market for each covered security 

must determine whether that covered 

security is subject to Rule 201.1152 Once 

the listing market has determined that a 

security has become subject to the 

requirements of Rule 201, the listing 

market shall immediately notify the 

single plan processor responsible for 

consolidation of information for the 

covered security in accordance with 

Rule 603(b) of Regulation NMS 1153 of 

the fact that a covered security has 

become subject to the short sale price 

test restriction of Rule 201. The plan 

processor must then disseminate this 

information.1154 The amendments to 

Rule 200(g) of Regulation SHO add a 

new marking requirement of ‘‘short 

exempt.’’ 1155 In particular, if the brokerdealer chooses to rely on its own 

determination that it is submitting the 

short sale order to the trading center at 

a price that is above the current national 

best bid at the time of submission or to 

rely on an exception specified in the 

Rule, it must mark the order as ‘‘short 

exempt.’’ 1156

A. Need for and Objectives of the Rule 

We believe it is appropriate to adopt 

a circuit breaker in combination with 

the alternative uptick rule because, 

when triggered, it will prevent short 

selling, including potentially 

manipulative or abusive short selling, 

from being used as a tool to exacerbate 

a declining market in a security and will 

facilitate the ability of long sellers to sell 

first upon such decline. This approach 

establishes a narrowly-tailored Rule that 

will target only those securities that are 

experiencing significant intra-day price 

declines. We believe that addressing 

short selling in connection with such 

declines in individual securities will 

help address erosion of investor 

confidence in our markets generally. We 

are also adopting amendments to Rule 

200(g) of Regulation SHO in order to aid 

surveillance by SROs and the 

Commission for compliance with the 

provisions of Rule 201. 

As discussed above, following 

changes in market conditions since the 

elimination of former Rule 10a–1, 

including marked increases in market 

volatility in the U.S. and in every major 

stock market around the world, we 

proposed to re-examine and seek 

comment on whether to impose short 

sale price test restrictions or circuit 

breaker restrictions on short selling.1157


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1158See supra note 17. 

1159See supra note 36 and accompanying text. 

1160See supra Section III.A.5. (discussing the 

circuit breaker trigger level). 

1161See Proposal, 74 FR at 18107. 

1162See, e.g., letter from Credit Suisse (June 

2009); letter from NSCP; letter from T.D. Pro Ex. 

1163Letter from NSCP. 

1164Letter from Credit Suisse (June 2009). 

Although in recent months there has 

been an increase in stability in the 

securities markets, we remain 

concerned that excessive downward 

price pressure on individual securities 

accompanied by the fear of 

unconstrained short selling can 

undermine investor confidence in our 

markets generally. In addition, we are 

concerned about potential future market 

turmoil, including significant increases 

in market volatility and steep price 

declines. Thus, as discussed in more 

detail throughout this adopting release, 

after considering the comments, we 

have determined that it is appropriate to 

adopt in Rule 201 a targeted short sale 

price test restriction that will apply the 

alternative uptick rule for the remainder 

of the day and the following day if the 

price of an individual security declines 

intra-day by 10% or more from the prior 

day’s closing price for that security as 

determined by the covered security’s 

listing market. 

By not allowing short sellers to sell at 

or below the current national best bid 

while the circuit breaker is in effect, the 

short sale price test restriction in Rule 

201 will allow long sellers, by selling at 

the bid, to sell first in a declining 

market for a particular security. As the 

Commission has noted previously in 

connection with short sale price test 

restrictions, a goal of such restrictions is 

to allow long sellers to sell first in a 

declining market.1158 A short seller that 

is seeking to profit quickly from 

accelerated, downward market moves 

may find it advantageous to be able to 

short sell at the current national best 

bid. In addition, by making bids 

accessible only by long sellers when a 

security’s price is undergoing significant 

downward price pressure, Rule 201 will 

help to facilitate and maintain stability 

in the markets and help ensure that they 

function efficiently. It will also help 

restore investor confidence during times 

of substantial uncertainty because, once 

the circuit breaker has been triggered for 

a particular security, long sellers will 

have preferred access to bids for the 

security, and the security’s continued 

price decline will more likely be due to 

long selling and the underlying 

fundamentals of the issuer, rather than 

to other factors. 

In addition, combining the alternative 

uptick rule with a circuit breaker strikes 

the appropriate balance between our 

goal of preventing short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security and the need to allow for 

the continued smooth functioning of the 

markets, including the provision of 

liquidity and price efficiency in the 

markets. The circuit breaker approach of 

Rule 201 will help benefit the market for 

a particular security by allowing 

participants, when a security is 

undergoing a significant intra-day price 

decline, an opportunity to re-evaluate 

circumstances and respond to volatility 

in that security. We also believe that a 

circuit breaker will better target short 

selling that may be related to potential 

bear raids1159 and other forms of 

manipulation that may be used as a tool 

to exacerbate a price decline in a 

covered security. 

At the same time, however, we 

recognize the benefits to the market of 

legitimate short selling, such as the 

provision of liquidity and price 

efficiency. Thus, by imposing a short 

sale price test restriction only when an 

individual security is undergoing 

significant price pressure, rather than on 

all securities all the time, the short sale 

price test restrictions of Rule 201 will 

apply to a limited number of securities 

and for a limited duration.1160 Rule 201 

is structured so that generally it will not 

be triggered for the majority of covered 

securities at any given time and, 

thereby, will not interfere with the 

smooth functioning of the markets for 

those securities, including when prices 

in such securities are undergoing 

minimal downward price pressure or 

are stable or rising. If the short sale price 

test restrictions of Rule 201 apply to a 

covered security it will be because and 

when that security is undergoing 

significant downward price pressure. To 

the extent that Rule 201 negatively 

affects the benefits of legitimate short 

selling, such as the provision of 

liquidity and price efficiency, we 

believe that such costs are justified by 

the benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

In addition, to help ensure the Rule’s 

workability, we are amending Rule 

200(g) of Regulation SHO, as proposed, 

to provide that, once the circuit breaker 

has been triggered for a covered 

security, if a broker-dealer chooses to 

rely on its own determination that it is 

submitting a short sale order to a trading 

center at a price that is above the 

current national best bid at the time of 

submission or to rely on an exception 

specified in the Rule, it must mark the 

order ‘‘short exempt.’’ The short sale 

price test restriction of Rule 201 

generally will apply to a small number 

of securities for a limited duration, and 

will continue to permit short selling 

rather than, for example, halting short 

selling when the restriction is in place. 

As such, we believe that the 

circumstances under which a brokerdealer may need to mark a short sale 

order ‘‘short exempt’’ under Rule 201 are 

limited. 

B. Significant Issues Raised by Public 

Comment 

In the Initial Regulatory Flexibility 

Analysis included in the Proposal, we 

requested comment on the number of 

small entities that would be affected by 

the proposed amendments and on the 

impact the proposed amendments 

would have on small entities and how 

to quantify the impact.1161 The 

Commission did not receive any 

comment letters addressing the number 

of small entities that would be affected 

by the proposed amendments. 

Several commenters stated that the 

costs of implementing and complying 

with the broker-dealer provision of Rule 

201(c) could be particularly burdensome 

for smaller broker-dealers, but did not 

provide a cost estimate of such 

burdens.1162 One commenter stated that 

this burden would ‘‘adversely affect the 

ability of smaller broker-dealers to 

compete or the level of service that they 

can provide to their customers,’’ 1163

while another stated that a short sale 

price test would ‘‘disproportionately 

burden smaller broker-dealers, who 

would likely be forced to route their 

flow through a handful of larger brokers, 

impeding competition and adding to 

systemic risk as flow is consolidated 

among fewer players.’’ 1164

Although we agree that 

implementation of the broker-dealer 

provision of Rule 201(c) will impose 

costs on broker-dealers who choose to 

rely on this provision, we note that Rule 

201(c) is not a requirement of the Rule, 

but rather provides that a broker-dealer 

may mark a sell order for a security that 

has triggered the circuit breaker as 

‘‘short exempt,’’ provided that the 

broker-dealer identifies the order as 

being at a price above the current 

national best bid at the time of 

submission to the trading center and 

otherwise complies with the 

requirements of the provision. 

In addition, as discussed throughout 

this adopting release, the alternative 


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1165See, e.g., letter from Credit Suisse (June 

2009); letter from NSCP; letter from T.D. Pro Ex. 1166See supra notes 709 to 715 and 

accompanying text (discussing comments on the 

impact of the alternative uptick rule on 

implementation and on-going monitoring and 

compliance costs). 1167Letter from Credit Suisse (June 2009). 1168See, e.g., letter from Citadel et al. (Sept. 

2009); letter from EWT (Sept. 2009); letter Lime 

Brokerage (Sept. 2009). 1169Letter from Citadel et al. (Sept. 2009). 

1170See Rule 201(b)(1)(iii). 

1171See, e.g., letter from STANY (June 2009); 

letter from FIF (June 2009); letter from Lime 

Brokerage (June 2009). 

1172See, e.g., letter from T.D. Pro Ex; letter from 

Taurus Compliance; letter from Credit Suisse (June 

2009). 

1173See, e.g., letter from Credit Suisse (June 

2009); letter from NSCP. 

1174See supra note 1165 and accompanying text 

(discussing impact of the alternative uptick rule on 

commenters’ cost concerns with respect to the 

broker-dealer provision of Rule 201(c)). 

1175See Regulation NMS Adopting Release, 70 FR 

37496; see also 17 CFR 242.611. 

1176See, e.g., letter from GE. 

uptick rule references only the current 

national best bid, unlike the proposed 

modified uptick rule and the proposed 

uptick rule, which would have required 

sequencing of the national best bid or 

last sale price. Although commenters 

expressed concerns with respect to the 

costs of the broker-dealer provision of 

Rule 201(c), these comments were not 

specific to the alternative uptick 

rule.1165 In order to rely on the brokerdealer provision, a broker-dealer must 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to prevent the incorrect 

identification of orders as being at a 

price above the current national best bid 

at the time of submission of the order to 

the trading center. Without a sequencing 

requirement under the alternative 

uptick rule, we believe that the policies 

and procedures required to rely on the 

broker-dealer provision under Rule 

201(c) will be easier and less costly to 

implement and monitor than would be 

the case under the proposed modified 

uptick rule or the proposed uptick 

rule,1166 and, therefore, lower than the 

cost concerns and estimates provided by 

commenters. We note that one of the 

commenters that expressed concerns 

about the implementation cost of the 

broker-dealer provision acknowledged 

that a rule ‘‘that would not require data 

centralization and sequencing would be 

significantly less complex and faster to 

implement.’’1167

We disagree with several commenters 

who stated that, although 

implementation and on-going 

monitoring and surveillance of the 

alternative uptick rule might be easier 

and/or less costly for trading centers, 

this would not hold true for brokerdealers.1168 One of these commenters 

stated that ‘‘in order to avoid rejection 

of short sale orders under an alternative 

uptick rule, programming would need to 

be implemented to anticipate changes in 

the national best bid between the time 

a short sale order is entered and the 

time it reaches the relevant market 

center.’’ 1169 However, the broker-dealer 

provision of Rule 201(c) is designed 

specifically to avoid this result. Under 

the broker-dealer provision, a brokerdealer may, in accordance with the 

policies and procedures required by the 

provision, identify the order as being at 

a price above the current national best 

bid at the time the order is submitted to 

the trading center and mark the order 

‘‘short exempt.’’ Trading centers are 

required to have written policies and 

procedures in place to permit the 

execution or display of a short sale 

order of a covered security marked 

‘‘short exempt’’ without regard to 

whether the order is at a price that is 

less than or equal to the current national 

best bid.1170

Commenters also expressed concerns 

about the competitive pressure of the 

broker-dealer provision, stating either 

that broker-dealers would feel 

compelled to undertake implementation 

of the provision, despite the high 

cost,1171 which would be particularly 

burdensome for smaller firms,1172 or 

that smaller firms would find the costs 

prohibitive, placing them at a 

competitive disadvantage.1173 We 

recognize that broker-dealers are faced 

with competitive concerns and that 

such concerns may influence their 

decision whether or not to rely on the 

broker-dealer provision of Rule 201(c). 

However, with respect to the cost, 

although we recognize that the brokerdealer provision will impose 

implementation costs on broker-dealers 

who choose to rely on this provision, we 

believe that this cost will not be as great 

as stated by some commenters because 

the alternative uptick rule does not 

require sequencing of the national best 

bid, unlike the proposed modified 

uptick rule and the proposed uptick 

rule, which would have required 

sequencing of the national best bid or 

last sale price.1174 We believe that, 

without a sequencing requirement, the 

policies and procedures required in 

order to rely on the broker-dealer 

provision under the alternative uptick 

rule will be easier and less costly to 

implement and monitor than would be 

the case under the proposed modified 

uptick rule or the proposed uptick rule. 

In addition, we note that it is possible 

that some smaller broker-dealers that 

determine to rely on the broker-dealer 

provision may determine that it is costeffective for them to outsource certain 

functions necessary to comply with 

Rule 201(c) to larger broker-dealers, 

rather than performing such functions 

in house, to remain competitive in the 

market. This may help mitigate costs 

associated with implementing and 

complying with Rule 201(c). 

Additionally, they may decide to 

purchase order management software 

from technology firms. Order 

management software providers may 

integrate changes imposed by Rules 

200(g) and 201 into their products, 

thereby providing another cost-effective 

way for smaller broker-dealers to 

comply with the requirements of Rule 

201(c). 

Although we agree that the brokerdealer provision will impose costs for 

implementation and on-going 

monitoring and surveillance, we note 

that the policies and procedures that are 

required to be implemented under the 

broker-dealer provision are similar to 

those that are required under the Order 

Protection Rule of Regulation NMS.1175

In order to rely on the broker-dealer 

provision, a broker-dealer must 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to prevent the incorrect 

identification of orders as being at a 

price above the current national best bid 

at the time of submission of the order to 

the trading center. Because some brokerdealers, including small broker-dealers, 

may have already developed or 

modified their surveillance mechanisms 

in order to comply with the policies and 

procedures requirement of the Order 

Protection Rule under Regulation NMS, 

broker-dealers may already have 

retained and trained the necessary 

personnel to ensure compliance with 

that Regulation’s policies and 

procedures requirements and, therefore, 

may already have in place most of the 

infrastructure and potential policies and 

procedures necessary to comply with 

the broker-dealer provision of Rule 

201(c). In addition, one commenter 

supported using a policies and 

procedures approach to any short sale 

price test restriction because it would 

ease implementation for brokerdealers.1176 Thus, we believe brokerdealers will already be familiar with 

establishing, maintaining, and enforcing 

trading-related policies and procedures, 

including programming their trading 

systems in accordance with such 

policies and procedures. 

Although several commenters stated 

that previous implementation of 

Regulation NMS would not mitigate the 

costs to broker-dealers of implementing 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11319 

1177See, e.g., letter from FIF (June 2009); letter 

from RBC (June 2009). 

1178See, e.g., letter from MFA (Oct. 2009). 

1179See supra Section X.B.1.b.ii. (discussing 

implementation and on-going monitoring and 

surveillance costs to broker-dealers under Rule 

201(c) and Rule 201(d)(6)). 

1180See Rule 201(b)(1). 

1181See Rule 201(a)(9); see also 17 CFR 

242.600(b)(78). 

1182See 17 CFR 242.601. 

1183See 17 CFR 240.0–10(e); 13 CFR 121.201 

(setting size standards to define small business 

concerns). 

1184See supra note 651. 

1185See 17 CFR 240.0–10(c)(1). 

1186This number was derived from a review of 

2008 FOCUS Report filings and discussion with 

SRO staff. 

1187 17 CFR 240.0–10(c)(1). 

1188These numbers are based on a review of 2008 

FOCUS Report filings reflecting registered brokerdealers, including introducing broker-dealers. This 

number does not include broker-dealers that are 

delinquent on FOCUS Report filings. 

1189See Rule 201(b)(3). 

1190See Rule 201(a)(3). Rule 201(a)(2) provides 

that ‘‘[t]he term effective transaction reporting plan 

for a covered security shall have the same meaning 

as in § 242.600(b)(22).’’ Rule 201(a)(2); 17 CFR 

600(b)(22). 

1191See supra note 364 (discussing the definition 

of ‘‘listing market’’ in the CTA Plan and the Nasdaq 

UTP Plan). 

1192See 17 CFR 242.601. 

a short sale price test restriction,1177 we 

considered these comments, as well as 

comments stating that previous 

implementation of Regulation NMS 

could ease implementation provided 

that broker-dealers could leverage 

existing systems in implementing Rule 

201,1178 and continue to believe that 

familiarity with Regulation NMS 

policies and procedures will reduce the 

implementation costs of the brokerdealer provision under Rule 201(c) on 

broker-dealers.1179

Further, we believe that the 

implementation and on-going 

monitoring and compliance costs for 

broker-dealers who choose to rely on the 

broker-dealer provision are justified by 

the benefits of providing broker-dealers 

with the option to manage their order 

flow, rather than having to always rely 

on their trading centers to manage their 

order flow on their behalf. 

C. Small Entities Affected by the Rule 

Rule 201 requires that a trading center 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to prevent the execution or 

display of a short sale order of a covered 

security at a price that is less than or 

equal to the current national best bid if 

the price of that covered security 

decreases by 10% or more from the 

covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day. In 

addition, the Rule requires that the 

trading center establish, maintain, and 

enforce written policies and procedures 

reasonably designed to impose this 

short sale price test restriction for the 

remainder of the day and the following 

day when a national best bid for the 

covered security is calculated and 

disseminated on a current and 

continuing basis by a plan processor 

pursuant to an effective national market 

system plan.1180 Rule 201(a)(9) states 

that the term ‘‘trading center’’ shall have 

the same meaning as in Rule 600(b)(78) 

of Regulation NMS, which defines a 

‘‘trading center’’ as ‘‘a national securities 

exchange or national securities 

association that operates an SRO trading 

facility, an alternative trading system, 

an exchange market maker, an OTC 

market maker, or any other broker or 

dealer that executes orders internally by 

trading as principal or crossing orders as 

agent.’’ 1181

Rule 0–10(e) under the Exchange Act 

provides that the term ‘‘small business’’ 

or ‘‘small organization,’’ when referring 

to an exchange, means any exchange 

that: (i) Has been exempted from the 

reporting requirements of Rule 601 

under the Exchange Act; 1182 and (ii) is 

not affiliated with any person (other 

than a natural person) that is not a small 

business or small organization, as 

defined by Rule 0–10.1183 No national 

securities exchanges are small entities 

because none meets these criteria. Thus, 

the current national securities 

exchanges that are subject to Rule 201 

are not ‘‘small entities’’ for purposes of 

the Regulatory Flexibility Act. 

The remaining non-SRO trading 

centers that are subject to Rule 201 are 

registered broker-dealers. The 

Commission has determined that there 

are approximately 407 broker-dealers 

registered with the Commission that 

may meet the definition of a trading 

center,1184 which includes brokerdealers operating as equity ATSs, 

broker-dealers registered as market 

makers or specialists in covered 

securities, and any broker-dealer that is 

in the business of executing orders 

internally in covered securities. 

Pursuant to Rule 0–10(c) under the 

Exchange Act, a broker-dealer is defined 

as a small entity for purposes of the 

Exchange Act and the Regulatory 

Flexibility Act if the broker-dealer had 

a total capital (net worth plus 

subordinated liabilities) of less than 

$500,000 on the date in the prior fiscal 

year as of which its audited financial 

statements were prepared, and it is not 

affiliated with any person (other than a 

natural person) that is not a small 

entity.1185 Of these 407 non-SRO trading 

centers, only five 1186 are ‘‘small 

entities’’ for purposes of the Regulatory 

Flexibility Act. 

In addition, the broker-dealer 

provision of Rule 201(c) and the riskless 

principal provision of Rule 201(d)(6) 

include policies and procedures 

requirements to help prevent incorrect 

identification of orders by brokerdealers for purposes of the provisions. 

The entities covered by the brokerdealer provision of Rule 201(c), the 

riskless principal provision of Rule 

201(d)(6) and the marking requirements 

of Rule 200(g) include small brokerdealers. Paragraph (c)(1) of Rule 0–10 

under the Exchange Act, as mentioned 

above, states that the term ‘‘small 

business’’ or ‘‘small organization,’’ when 

referring to a broker-dealer, means a 

broker-dealer that had total capital (net 

worth plus subordinated liabilities) of 

less than $500,000 on the date in the 

prior fiscal year as of which its audited 

financial statements were prepared, and 

is not affiliated with any person (other 

than a natural person) that is not a small 

entity.1187 We estimate that as of 2008 

there were approximately 890 brokerdealers that are ‘‘small entities’’ for 

purposes of the Regulatory Flexibility 

Act.1188

In addition, Rule 201(b)(3) provides 

that the listing market for each covered 

security must determine whether that 

covered security is subject to Rule 201 

and must notify the single plan 

processor responsible for that covered 

security that the covered security has 

become subject to the short sale price 

test restriction of Rule 201. The plan 

processor must then disseminate this 

information.1189 As discussed below, 

the entities covered by the 

determination and dissemination 

requirements of Rule 201(b)(3) do not 

include small entities. 

Rule 201(a)(3) defines the term 

‘‘listing market’’ to have the same 

meaning as defined in the effective 

transaction reporting plan for the 

covered security.1190 Under the 

definitions of ‘‘listing market’’ of the two 

effective transaction reporting plans, the 

CTA Plan and the Nasdaq UTP Plan, 

‘‘listing markets’’ are national securities 

exchanges.1191 Rule 0–10(e) under the 

Exchange Act provides that the term 

‘‘small business’’ or ‘‘small organization,’’ 

when referring to an exchange, means 

any exchange that: (i) Has been 

exempted from the reporting 

requirements of Rule 601 under the 

Exchange Act; 1192 and (ii) is not 

affiliated with any person (other than a 

natural person) that is not a small 


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1193See 17 CFR 240.0–10(e); 13 CFR 121.201. 

1194See 17 CFR 242.603(b). 

1195See Rule 201(a)(6); 17 CFR 242.600(b)(55). 

1196 17 CFR 242.600(b)(55). 

1197See 17 CFR 240.0–10(g). 

1198As discussed above, there are no SRO trading 

centers that are ‘‘small entities’’ for purposes of the 

Regulatory Flexibility Act. Of the estimated 407 

non-SRO trading centers (which include brokerdealers operating as equity ATSs, broker-dealers 

registered as market makers or specialists in 

covered securities, and any broker-dealer that is in 

the business of executing orders internally in 

covered securities) we estimate that there are only 

5 non-SRO trading centers that are ‘‘small entities’’ 

for purposes of the Regulatory Flexibility Act. See 

supra Section XII.C. 

1199See supra Section X.B.1.b.i. (discussing 

comments on the implementation and on-going 

monitoring and compliance costs of the policies 

and procedures requirement of Rule 201). 

1200See supra notes 661 to 669 and 

accompanying text (discussing comments on the 

effect of the alternative uptick rule on 

implementation and on-going monitoring and 

surveillance costs). 

1201See Regulation NMS Adopting Release, 70 FR 

37496; see also Proposal, 74 FR at 18087; 17 CFR 

242.611. 

1202See supra notes 939 to 941 and 

accompanying text (discussing comments that prior 

implementation of Regulation NMS would not 

mitigate the costs of implementing a short sale price 

test restriction). 

1203See supra notes 942 to 945 and 

accompanying text (discussing comments that prior 

implementation of Regulation NMS could mitigate 

the costs of implementing a short sale price test 

restriction). 

1204As discussed above, we estimate that as of 

2008 there were approximately 890 broker-dealers 

that are ‘‘small entities’’ for purposes of the 

Regulatory Flexibility Act. See supra Section XII.C. 

1205See supra notes 1162 to 1173 and 

accompanying text (discussing comments on the 

costs of the broker-dealer provision of Rule 201(c) 

for smaller broker-dealers). 

1206See, e.g., letter from STANY (June 2009); 

letter from FIF (June 2009); letter from Lime 

Brokerage (June 2009). 

1207See, e.g., letter from T.D. Pro Ex; letter from 

Taurus Compliance; letter from Credit Suisse (June 

2009). 

1208See, e.g., letter from Credit Suisse (June 

2009); letter from NSCP. 

business or small organization, as 

defined by Rule 0–10.1193 No national 

securities exchanges are small entities 

because none meets these criteria. Thus, 

the listing markets that are subject to 

Rule 201 are not ‘‘small entities’’ for 

purposes of the Regulatory Flexibility 

Act. 

There are two effective transaction 

reporting plans, the CTA Plan and the 

Nasdaq UTP Plan. In accordance with 

Rule 603(b) of Regulation NMS,1194

these plans, together with the CQ Plan, 

provide for the dissemination of all 

consolidated information for individual 

NMS stocks through a single plan 

processor. The plan processor for the 

CTA Plan is SIAC and the plan 

processor for the Nasdaq UTP Plan is 

Nasdaq. Rule 201(a)(6) defines the term 

‘‘plan processor’’ to have the same 

meaning as in Rule 600(b)(55) of 

Regulation NMS.1195 Under Rule 

600(b)(55), the term ‘‘plan processor’’ 

means ‘‘any self-regulatory organization 

or securities information processor 

acting as an exclusive processor in 

connection with the development, 

implementation and/or operation of any 

facility contemplated by an effective 

national market system plan.’’ 1196

Paragraph (g) of Rule 0–10 defines the 

term ‘‘small business’’ or ‘‘small 

organization,’’ when referring to a 

securities information processor, to 

mean a securities information processor 

that had gross revenues of less than $10 

million during the preceding fiscal year; 

provided service to fewer than 100 

interrogation devices or moving tickers 

at all times during the preceding fiscal 

year; and is not affiliated with any 

person (other than a natural person) that 

is not a small business or small 

organization.1197 Neither SIAC nor 

Nasdaq meet these criteria. Thus, the 

plan processors that are subject to Rule 

201 are not ‘‘small entities’’ for purposes 

of the Regulatory Flexibility Act. 

D. Projected Reporting, Recordkeeping 

and Other Compliance Requirements 

Rule 201 imposes some new or 

additional reporting, recordkeeping, or 

compliance costs on trading centers and 

other broker-dealers that are small 

entities. Rule 201 focuses on a trading 

center’s written policies and procedures 

as the mechanism through which to 

help prevent the execution or display of 

short sale orders at a price that is less 

than or equal to the current national 

best bid, unless an exception applies. In 

addition, the broker-dealer provision of 

Rule 201(c) and the riskless principal 

provision of Rule 201(d)(6) include 

policies and procedures requirements to 

help prevent incorrect identification of 

orders by broker-dealers for purposes of 

those provisions. 

In regard to implementation and ongoing monitoring and surveillance costs 

of Rule 201 on trading centers that are 

small entities,1198 we considered 

commenters’ concerns that the cost and 

time required for trading centers’ 

implementation and on-going 

monitoring and surveillance of a short 

sale price test restriction could be 

high.1199 However, we note that the 

alternative uptick rule references only 

the current national best bid, unlike the 

proposed modified uptick rule and the 

proposed uptick rule, which would 

have required sequencing of the 

national best bid or last sale price. Thus, 

we believe that the alternative uptick 

rule will be easier and less costly to 

implement and monitor for trading 

centers that are small entities than the 

proposed modified uptick rule or the 

proposed uptick rule.1200

In addition, we note that the policies 

and procedures required to be 

implemented for purposes of Rule 201 

are similar to those that trading centers 

are required to have in place under the 

Order Protection Rule of Regulation 

NMS.1201 Thus, we believe trading 

centers that are small entities may 

already be familiar with establishing, 

maintaining, and enforcing tradingrelated policies and procedures, 

including programming their trading 

systems in accordance with such 

policies and procedures. 

Although, as discussed above, several 

commenters stated that previous 

implementation of Regulation NMS 

would not mitigate the costs of 

implementing a short sale price test 

restriction,1202 we considered these 

comments, as well as comments stating 

that previous implementation of 

Regulation NMS could ease 

implementation provided that trading 

centers could use existing systems in 

implementing Rule 201,1203 and 

continue to believe that familiarity with 

Regulation NMS policies and 

procedures will reduce the 

implementation costs for trading centers 

of the policies and procedures 

requirement under Rule 201. 

Further, we believe that the 

implementation and on-going 

monitoring and compliance costs for 

trading centers are justified by the 

benefits provided by the Rule in 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security. 

In regard to implementation and ongoing monitoring and surveillance costs 

of the broker-dealer provision of Rule 

201(c) or the riskless principal provision 

of Rule 201(d)(6) on small brokerdealers,1204 as discussed in Section 

XII.B., above, several commenters stated 

that the costs of implementing and 

complying with the broker-dealer 

provision of Rule 201(c) could be 

particularly burdensome for smaller 

broker-dealers.1205 Commenters also 

expressed concerns about the 

competitive pressure of the brokerdealer provision, stating either that 

broker-dealers would feel compelled to 

undertake implementation of the 

provision, despite the high cost,1206

which would be particularly 

burdensome for smaller firms,1207 or 

that smaller firms would find the costs 

prohibitive, placing them at a 

competitive disadvantage.1208


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1209See supra notes 1165 to 1167 and 

accompanying text (discussing impact of the 

alternative uptick rule on commenters’ cost 

concerns with respect to the broker-dealer provision 

of Rule 201(c)). 

1210See supra notes 709 to 715 and 

accompanying text (discussing comments on the 

effect of the alternative uptick rule on 

implementation and on-going monitoring and 

surveillance costs). 

1211See Regulation NMS Adopting Release, 70 FR 

37496; see also 17 CFR 242.611. 

1212See, e.g., letter from FIF (June 2009); letter 

from RBC (June 2009). 

1213See, e.g., letter from MFA (Oct. 2009). 

1214See Rule 200(g); see also supra Section IV. 

(discussing the amendments to Rule 200(g)). 

1215See Rule 200(g)(2). 

1216See supra notes 582 to 588 (discussing 

comments on the costs of the ‘‘short exempt’’ 

marking requirement). 

1217See supra notes 747 to 752 (discussing 

estimated costs of the amendment to Rule 

200(g)(2)). 

1218See supra notes 582 to 588 and 

accompanying text (discussing comments on the 

implementation time for the ‘‘short exempt’’ 

marking requirement). 

We considered these comments in 

evaluating the costs of implementation 

and on-going monitoring and 

surveillance of the broker-dealer 

provision of Rule 201(c) on small 

broker-dealers. Although we agree that 

implementation of the broker-dealer 

provision of Rule 201(c) will impose 

costs on broker-dealers who choose to 

rely on this provision, we note that Rule 

201(c) is not a requirement of the Rule, 

but rather provides that a broker-dealer 

may mark a sell order for a security that 

has triggered the circuit breaker as 

‘‘short exempt,’’ provided that the 

broker-dealer identifies the order as 

being at a price above the current 

national best bid at the time of 

submission to the trading center and 

otherwise complies with the 

requirements of the provision. We 

recognize, however, that broker-dealers 

are faced with competitive concerns and 

that such concerns may influence their 

decision whether or not to rely on the 

broker-dealer provision of Rule 201(c). 

With respect to the cost, although we 

recognize that the broker-dealer 

provision will impose implementation 

costs on broker-dealers who choose to 

rely on this provision, we believe that 

this cost will not be as great as stated 

by some commenters because the 

alternative uptick rule does not require 

sequencing of the national best bid, 

unlike the proposed modified uptick 

rule and the proposed uptick rule, 

which would have required sequencing 

of the national best bid or last sale 

price.1209 We believe that, without a 

sequencing requirement, the policies 

and procedures required in order to rely 

on the broker-dealer provision under the 

alternative uptick rule will be easier and 

less costly to implement and monitor 

than would be the case under the 

proposed modified uptick rule or the 

proposed uptick rule.1210

In addition, we note that it is possible 

that some smaller broker-dealers that 

determine to rely on the broker-dealer 

provision may determine that it is costeffective for them to outsource certain 

functions necessary to comply with 

Rule 201(c) to larger broker-dealers, 

rather than performing such functions 

in house, to remain competitive in the 

market. This may help mitigate costs 

associated with implementing and 

complying with Rule 201(c). 

Additionally, they may decide to 

purchase order management software 

from technology firms. Order 

management software providers may 

integrate changes imposed by Rules 

200(g) and 201 into their products, 

thereby providing another cost-effective 

way for smaller broker-dealers to 

comply with the requirement of Rule 

201(c). 

In addition, we note that the policies 

and procedures that are required to be 

implemented under the broker-dealer 

provision are similar to those that are 

required under the Order Protection 

Rule of Regulation NMS.1211 Thus, we 

believe broker-dealers will already be 

familiar with establishing, maintaining, 

and enforcing trading-related policies 

and procedures, including programming 

their trading systems in accordance with 

such policies and procedures. 

Although several commenters stated 

that previous implementation of 

Regulation NMS would not mitigate the 

costs to broker-dealers of implementing 

a short sale price test restriction,1212 we 

considered these comments, as well as 

comments stating that previous 

implementation of Regulation NMS 

could ease implementation provided 

that broker-dealers could leverage 

existing systems in implementing Rule 

201,1213 and continue to believe that 

familiarity with Regulation NMS 

policies and procedures will reduce the 

implementation costs of the brokerdealer provision under Rule 201(c) on 

broker-dealers. 

Further, we believe that the 

implementation and on-going 

monitoring and compliance costs for 

broker-dealers who choose to rely on the 

broker-dealer provision are justified by 

the benefits of providing broker-dealers 

with the option to manage their order 

flow, rather than having to always rely 

on their trading centers to manage their 

order flow on their behalf. 

The amendments to Rule 200(g), to 

add a new marking requirement of 

‘‘short exempt’’ 1214 and to provide that 

a broker-dealer may mark a sell order 

‘‘short exempt’’ only if the provisions in 

paragraph (c) or (d) of Rule 201 are 

met,1215 may impose some new or 

additional reporting, recordkeeping, or 

compliance costs on broker-dealers that 

are small entities. We recognize 

commenters’ concerns with respect to 

the costs of the ‘‘short exempt’’ marking 

requirement and we considered these 

comments in evaluating the costs of the 

‘‘short exempt’’ marking 

requirement.1216 However, we believe 

that such costs will be limited because 

small broker-dealers already have 

established systems, processes, and 

procedures in place to comply with the 

current marking requirements of Rule 

200(g) of Regulation SHO with respect 

to marking a sell order either ‘‘long’’ or 

‘‘short’’ and, therefore, will likely 

leverage such systems, processes and 

procedures to comply with the ‘‘short 

exempt’’ marking requirements in Rules 

200(g) and 200(g)(2).1217 Further, we 

believe that the implementation and 

compliance costs of the ‘‘short exempt’’ 

marking requirements are justified by 

the benefits provided by the 

requirements in aiding surveillance by 

SROs and the Commission for 

compliance with the provisions of Rule 

201 and providing an indication to a 

trading center regarding when it must 

execute or display a short sale order 

without regard to whether the order is 

at a price that is less than or equal to 

the current national best bid. 

In addition, to provide market 

participants with the time needed to 

make the changes required to comply 

with Rule 200(g), we are adopting an 

implementation period under which 

market participants will have to comply 

with these requirements six months 

following the effective date of the 

adoption of these amendments. We are 

sensitive to commenter’s concerns that 

implementation of the ‘‘short exempt’’ 

marking requirement could be 

complex,1218 and believe that a six 

month implementation period, which is 

longer than the 3 month implementation 

period proposed in the Proposal, will 

afford market participants sufficient 

time to make the necessary 

modifications to their systems and 

procedures. In addition, we believe the 

six month implementation period will 

help alleviate some of the potential 

disruptions that may be associated with 

implementing the ‘‘short exempt’’ 

marking requirements. 


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1219See supra notes 939 to 941 and 

accompanying text (discussing comments that prior 

implementation of Regulation NMS would not 

mitigate the costs of implementing a short sale price 

test restriction). 

1220See supra notes 942 to 944 and 

accompanying text (discussing comments that prior 

implementation of Regulation NMS could mitigate 

the costs of implementing a short sale price test 

restriction). 

1221See 17 CFR 242.200(g). 

1222See 5 U.S.C. 603(a)(5). 

1223See supra note 17. 

1224See supra note 36 and accompanying text. 

1225See supra Section X.B.1. (discussing the costs 

of the alternative uptick rule). 

1226See supra Section III.A.4. (discussing the 

circuit breaker approach). 

E. Agency Action to Minimize Effect on 

Small Entities 

As required by the Regulatory 

Flexibility Act, we have considered 

alternatives that would accomplish our 

stated objectives, while minimizing any 

significant adverse impact on small 

entities. As noted above, Rule 201 

imposes some new or additional 

reporting, recordkeeping, or compliance 

costs on trading centers and other 

broker-dealers that are small entities. 

However, we expect the impact of the 

new or additional reporting, 

recordkeeping, or compliance costs will 

be limited by the similarity of the 

policies and procedures requirements of 

Rule 201 to the policies and procedures 

requirement of the Order Protection 

Rule under Regulation NMS. Although, 

as discussed above, several commenters 

stated that previous implementation of 

Regulation NMS would not mitigate the 

costs of implementing a short sale price 

test restriction,1219 we considered these 

comments, as well as comments stating 

that previous implementation of 

Regulation NMS could ease 

implementation provided that firms 

could use existing systems in 

implementing Rule 201,1220 and 

continue to believe that familiarity with 

Regulation NMS policies and 

procedures will reduce the 

implementation costs of the brokerdealer provision under Rule 201(c) on 

broker-dealers. 

Thus, the five non-SRO trading 

centers that qualify as small entities and 

the approximately 890 broker-dealers 

that qualify as small entities should 

already have in place most of the 

infrastructure necessary to comply with 

Rule 201. The marking requirements of 

the amendments to Rule 200(g) are not 

expected to adversely affect small 

entities because they impose minimal 

reporting, recordkeeping, or compliance 

requirements. Rule 200(g) currently 

requires that broker-dealers mark all sell 

orders of any equity security as either 

‘‘long’’ or ‘‘short.’’ 1221 Broker-dealers that 

are small entities should already be 

familiar with the current marking 

requirements and should already have 

in place mechanisms that could be used 

to comply with the new ‘‘short exempt’’ 

marking requirement of Rule 200(g). 

Moreover, it is not appropriate to 

develop separate requirements for small 

entities under either Rule 201 or Rule 

200(g) because we believe that to 

accomplish the Commission’s goals, as 

well as to avoid the possibility of 

regulatory arbitrage that would 

undermine the Commission’s goals, all 

trading centers and broker-dealers, 

regardless of size, should be subject to 

the same circuit breaker short sale price 

test restrictions and all broker-dealers, 

regardless of size, should be subject to 

the same order marking requirements. 

F. Significant Alternatives 

The Regulatory Flexibility Act directs 

us to consider significant alternatives 

that would accomplish our stated 

objective, while minimizing any 

significant adverse impact on small 

entities.1222 In connection with Rules 

201 and 200(g), we considered the 

following alternatives: (i) Establishing 

different compliance or reporting 

requirements or timetables that take into 

account the resources available to small 

entities; (ii) clarifying, consolidating, or 

simplifying compliance and reporting 

requirements under the Rule for small 

entities; (iii) using performance rather 

than design standards; and (iv) 

exempting small entities from coverage 

of the Rule, or any part of the Rule. 

First, we note that Rule 201 as adopted 

and the amendments to Rule 200(g) use 

performance standards, which we 

believe will help to minimize any 

significant adverse impact on small 

entities. 

A primary goal of the short salerelated circuit breaker under Rule 201 is 

to help restore investor confidence by 

not allowing sellers to sell short at or 

below the current national best bid if 

the price of that covered security 

decreases by 10% or more from the 

covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day, unless 

an exception applies. Rule 201 will 

allow long sellers, by selling at the bid, 

to sell first in a declining market for a 

particular security. As the Commission 

has noted previously in connection with 

short sale price test restrictions, a goal 

of such restrictions is to allow long 

sellers to sell first in a declining 

market.1223 A short seller that is seeking 

to profit quickly from accelerated, 

downward market moves may find it 

advantageous to be able to short sell at 

the current national best bid. In 

addition, by making bids accessible only 

by long sellers when a security’s price 

is undergoing significant downward 

price pressure, Rule 201 will help to 

facilitate and maintain stability in the 

markets and help ensure that they 

function efficiently. It will also help 

restore investor confidence during times 

of substantial uncertainty because, once 

the circuit breaker has been triggered for 

a particular security, long sellers will 

have preferred access to bids for the 

security, and the security’s continued 

price decline will more likely be due to 

long selling and the underlying 

fundamentals of the issuer, rather than 

to other factors. 

In addition, combining the alternative 

uptick rule with a circuit breaker strikes 

the appropriate balance between our 

goal of preventing short selling, 

including potentially manipulative or 

abusive short selling, from being used as 

a tool to exacerbate a declining market 

in a security and the need to allow for 

the continued smooth functioning of the 

markets, including the provision of 

liquidity and price efficiency in the 

markets. The circuit breaker approach of 

Rule 201 will help benefit the market for 

a particular security by allowing 

participants, when a security is 

undergoing a significant intra-day price 

decline, an opportunity to re-evaluate 

circumstances and respond to volatility 

in that security. We also believe that a 

circuit breaker will better target short 

selling that may be related to potential 

bear raids 1224 and other forms of 

manipulation that may be used as a tool 

to exacerbate a price decline in a 

covered security. 

As discussed throughout this 

adopting release, we have designed Rule 

201 to accomplish its objectives with 

lower costs to trading centers and 

broker-dealers than some of the 

alternatives we proposed and 

considered. We believe the alternative 

uptick rule will require less time and 

less costs for implementation because it 

does not require sequencing of bids or 

last sale prices.1225 In addition, we 

believe that the circuit breaker 

approach, which limits the short sale 

price test restriction for an individual 

security to a two-day period following a 

significant intra-day decline in share 

price in that security, will also limit 

compliance costs for all participants.1226

The costs of compliance with Rules 

201 and 200(g) are likely to vary among 

individual trading centers and brokerdealer firms. As detailed in PRA Section 

IX.E.1., above, we realize that the 


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1227We note that one commenter stated that the 

‘‘Commission’s cost estimates seem to 

underestimate the cost to large, full service brokerdealers, since the volume of orders handled by 

these firms are likely to lead to significantly greater 

technology and storage costs alone as well as more 

frequent reviews’’ but did not provide a specific cost 

estimate. See letter from NSCP. 

policies and procedures that a trading 

center is required to establish will 

likewise vary depending upon the type, 

size, and nature of the trading center. In 

addition, as detailed in PRA Section 

IX.E.2., above, we note that the nature 

and extent of policies and procedures 

that a broker-dealer must establish 

under Rule 201(c) or 201(d)(6), if it 

determines to rely on either provision to 

mark an order ‘‘short exempt,’’ likely 

will vary based upon the type, size, and 

nature of the broker-dealer.1227 Our 

estimates take into account different 

types of trading centers and brokerdealers (including large versus small), 

and we realize that the applicable 

estimates may be on the low-end for 

some trading centers and broker-dealers 

while they may be on the high-end for 

others. 

Although we recognize that the costs 

of the Rules may vary based upon the 

type, size, and nature of the trading 

center or broker-dealer, we believe that 

uniform application of Rules 201 and 

200(g) to all trading centers and brokerdealers is necessary to prevent 

damaging opportunities for regulatory 

arbitrage and to avoid confusion in the 

markets. In addition, different 

application of the Rules’ requirements 

for small entities could undermine the 

goals of the short sale related circuit 

breaker by potentially providing an 

avenue for short sellers to evade the 

requirements of Rule 201. Further, in 

relation to the already-mentioned 

concerns, we believe that our goal of 

restoring investor confidence could be 

undermined by actual or perceived 

regulatory arbitrage, market confusion, 

and/or evasion of Rule 201’s 

requirements as a result of different 

requirements for different market 

participants in Rules 201 and 200(g). 

Due to these concerns, we have 

concluded that in order for Rules 201 

and 200(g) to be effective in helping to 

restore investor confidence by 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to exacerbate a declining market in a 

security, the Rules’ requirements must 

apply uniformly to all trading centers 

and broker-dealers. Thus, we have 

determined not to adopt different 

compliance requirements or a different 

timetable for compliance requirements 

for small entities. In addition, and for 

the same reasons, we have determined 

not to clarify, consolidate, simplify, or 

otherwise modify Rules 201 and 200(g) 

for small entities. Finally, we believe 

that it is inconsistent with the purposes 

of the Exchange Act and the goals of 

adopting Rules 201 and 200(g) to except 

small entities from having to comply 

with Rules 201 and 200(g). 

XIII. Statutory Authority 

Pursuant to the Exchange Act and, 

particularly, Sections 2, 3(b), 6, 9(h), 10, 

11A, 15, 15A, 17, 19, 23(a), and 36 

thereof, 15 U.S.C. 78b, 78c(b), 78(f), 

78i(h), 78j, 78k–1, 78o, 78o–3, 78q, 78s, 

78w(a), and 78mm, the Commission is 

amending §§ 242.200 and 242.201 of 

Regulation SHO. 

XIV. Text of the Amendments to 

Regulation SHO 

List of Subjects in 17 CFR Part 242 

Brokers, Fraud, Reporting and 

recordkeeping requirements, Securities. 

■ For the reasons set out in the 

preamble, Title 17, Chapter II, Part 242, 

of the Code of Federal Regulations is 

amended as follows. 

PART 242—REGULATIONS M, SHO, 

ATS, AC, AND NMS AND CUSTOMER 

MARGIN REQUIREMENTS FOR 

SECURITY FUTURES 

■ 1. The authority citation for part 242 

continues to read as follows: 

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 

78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–l(c), 78l, 

78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 

78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a– 

23, 80a–29, and 80a–37. 

■ 2. Section 242.200 is amended by 

revising paragraph (g) introductory text 

and adding paragraph (g)(2) to read as 

follows: 

§ 242.200 Definition of ‘‘short sale’’ and 

marking requirements. 

* * * * * 

(g) A broker or dealer must mark all 

sell orders of any equity security as 

‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’ 

(1) * * * 

(2) A sale order shall be marked ‘‘short 

exempt’’ only if the provisions of 

§ 242.201(c) or (d) are met. 

* * * * * 

■ 3. Section 242.201 is revised to read 

as follows: 

§ 242.201 Circuit breaker. 

(a) Definitions. For the purposes of 

this section: 

(1) The term covered security shall 

mean any NMS stock as defined in 

§ 242.600(b)(47). 

(2) The term effective transaction 

reporting plan for a covered security 

shall have the same meaning as in 

§ 242.600(b)(22). 

(3) The term listing market shall have 

the same meaning as the term ‘‘listing 

market’’ as defined in the effective 

transaction reporting plan for the 

covered security. 

(4) The term national best bid shall 

have the same meaning as in 

§ 242.600(b)(42). 

(5) The term odd lot shall have the 

same meaning as in § 242.600(b)(49). 

(6) The term plan processor shall have 

the same meaning as in § 242.600(b)(55). 

(7) The term regular trading hours 

shall have the same meaning as in 

§ 242.600(b)(64). 

(8) The term riskless principal shall 

mean a transaction in which a broker or 

dealer, after having received an order to 

buy a security, purchases the security as 

principal at the same price to satisfy the 

order to buy, exclusive of any explicitly 

disclosed markup or markdown, 

commission equivalent, or other fee, or, 

after having received an order to sell, 

sells the security as principal at the 

same price to satisfy the order to sell, 

exclusive of any explicitly disclosed 

markup or markdown, commission 

equivalent, or other fee. 

(9) The term trading center shall have 

the same meaning as in § 242.600(b)(78). 

(b)(1) A trading center shall establish, 

maintain, and enforce written policies 

and procedures reasonably designed to: 

(i) Prevent the execution or display of 

a short sale order of a covered security 

at a price that is less than or equal to 

the current national best bid if the price 

of that covered security decreases by 

10% or more from the covered security’s 

closing price as determined by the 

listing market for the covered security as 

of the end of regular trading hours on 

the prior day; and 

(ii) Impose the requirements of 

paragraph (b)(1)(i) of this section for the 

remainder of the day and the following 

day when a national best bid for the 

covered security is calculated and 

disseminated on a current and 

continuing basis by a plan processor 

pursuant to an effective national market 

system plan. 

(iii) Provided, however, that the 

policies and procedures must be 

reasonably designed to permit: 

(A) The execution of a displayed short 

sale order of a covered security by a 

trading center if, at the time of initial 

display of the short sale order, the order 

was at a price above the current national 

best bid; and 

(B) The execution or display of a short 

sale order of a covered security marked 

‘‘short exempt’’ without regard to 

whether the order is at a price that is 


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11324 Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 

less than or equal to the current national 

best bid. 

(2) A trading center shall regularly 

surveil to ascertain the effectiveness of 

the policies and procedures required by 

paragraph (b)(1) of this section and shall 

take prompt action to remedy 

deficiencies in such policies and 

procedures. 

(3) The determination regarding 

whether the price of a covered security 

has decreased by 10% or more from the 

covered security’s closing price as 

determined by the listing market for the 

covered security as of the end of regular 

trading hours on the prior day shall be 

made by the listing market for the 

covered security and, if such decrease 

has occurred, the listing market shall 

immediately notify the single plan 

processor responsible for consolidation 

of information for the covered security 

pursuant to § 242.603(b). The single 

plan processor must then disseminate 

this information. 

(c) Following any determination and 

notification pursuant to paragraph (b)(3) 

of this section with respect to a covered 

security, a broker or dealer submitting a 

short sale order of the covered security 

in question to a trading center may mark 

the order ‘‘short exempt’’ if the broker or 

dealer identifies the order as being at a 

price above the current national best bid 

at the time of submission; provided, 

however: 

(1) The broker or dealer that identifies 

a short sale order of a covered security 

as ‘‘short exempt’’ in accordance with 

this paragraph (c) must establish, 

maintain, and enforce written policies 

and procedures reasonably designed to 

prevent incorrect identification of 

orders for purposes of this paragraph; 

and 

(2) The broker or dealer shall 

regularly surveil to ascertain the 

effectiveness of the policies and 

procedures required by paragraph (c)(1) 

of this section and shall take prompt 

action to remedy deficiencies in such 

policies and procedures. 

(d) Following any determination and 

notification pursuant to paragraph (b)(3) 

of this section with respect to a covered 

security, a broker or dealer may mark a 

short sale order of a covered security 

‘‘short exempt’’ if the broker or dealer 

has a reasonable basis to believe that: 

(1) The short sale order of a covered 

security is by a person that is deemed 

to own the covered security pursuant to 

§ 242.200, provided that the person 

intends to deliver the security as soon 

as all restrictions on delivery have been 

removed. 

(2) The short sale order of a covered 

security is by a market maker to offset 

customer odd-lot orders or to liquidate 

an odd-lot position that changes such 

broker’s or dealer’s position by no more 

than a unit of trading. 

(3) The short sale order of a covered 

security is for a good faith account of a 

person who then owns another security 

by virtue of which he is, or presently 

will be, entitled to acquire an equivalent 

number of securities of the same class 

as the securities sold; provided such 

sale, or the purchase which such sale 

offsets, is effected for the bona fide 

purpose of profiting from a current 

difference between the price of the 

security sold and the security owned 

and that such right of acquisition was 

originally attached to or represented by 

another security or was issued to all the 

holders of any such securities of the 

issuer. 

(4) The short sale order of a covered 

security is for a good faith account and 

submitted to profit from a current price 

difference between a security on a 

foreign securities market and a security 

on a securities market subject to the 

jurisdiction of the United States, 

provided that the short seller has an 

offer to buy on a foreign market that 

allows the seller to immediately cover 

the short sale at the time it was made. 

For the purposes of this paragraph 

(d)(4), a depository receipt of a security 

shall be deemed to be the same security 

as the security represented by such 

receipt. 

(5)(i) The short sale order of a covered 

security is by an underwriter or member 

of a syndicate or group participating in 

the distribution of a security in 

connection with an over-allotment of 

securities; or 

(ii) The short sale order of a covered 

security is for purposes of a lay-off sale 

by an underwriter or member of a 

syndicate or group in connection with a 

distribution of securities through a 

rights or standby underwriting 

commitment. 

(6) The short sale order of a covered 

security is by a broker or dealer effecting 

the execution of a customer purchase or 

the execution of a customer ‘‘long’’ sale 

on a riskless principal basis. In addition, 

for purposes of this paragraph (d)(6), a 

broker or dealer must have written 

policies and procedures in place to 

assure that, at a minimum: 

(i) The customer order was received 

prior to the offsetting transaction; 

(ii) The offsetting transaction is 

allocated to a riskless principal or 

customer account within 60 seconds of 

execution; and 

(iii) The broker or dealer has 

supervisory systems in place to produce 

records that enable the broker or dealer 

to accurately and readily reconstruct, in 

a time-sequenced manner, all orders on 

which a broker or dealer relies pursuant 

to this exception. 

(7) The short sale order is for the sale 

of a covered security at the volume 

weighted average price (VWAP) that 

meets the following criteria: 

(i) The VWAP for the covered security 

is calculated by: 

(A) Calculating the values for every 

regular way trade reported in the 

consolidated system for the security 

during the regular trading session, by 

multiplying each such price by the total 

number of shares traded at that price; 

(B) Compiling an aggregate sum of all 

values; and 

(C) Dividing the aggregate sum by the 

total number of reported shares for that 

day in the security. 

(ii) The transactions are reported 

using a special VWAP trade modifier. 

(iii) The VWAP matched security: 

(A) Qualifies as an ‘‘actively-traded 

security’’ pursuant to § 242.101 and 

§ 242.102; or 

(B) The proposed short sale 

transaction is being conducted as part of 

a basket transaction of twenty or more 

securities in which the subject security 

does not comprise more than 5% of the 

value of the basket traded. 

(iv) The transaction is not effected for 

the purpose of creating actual, or 

apparent, active trading in or otherwise 

affecting the price of any security. 

(v) A broker or dealer shall be 

permitted to act as principal on the 

contra-side to fill customer short sale 

orders only if the broker’s or dealer’s 

position in the covered security, as 

committed by the broker or dealer 

during the pre-opening period of a 

trading day and aggregated across all of 

its customers who propose to sell short 

the same security on a VWAP basis, 

does not exceed 10% of the covered 

security’s relevant average daily trading 

volume. 

(e) No self-regulatory organization 

shall have any rule that is not in 

conformity with, or conflicts with, this 

section. 

(f) Upon written application or upon 

its own motion, the Commission may 

grant an exemption from the provisions 

of this section, either unconditionally or 

on specified terms and conditions, to 

any person or class of persons, to any 

transaction or class of transactions, or to 

any security or class of securities to the 

extent that such exemption is necessary 

or appropriate, in the public interest, 

and is consistent with the protection of 

investors. 

Dated: February 26, 2010. 


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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations 11325 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–4409 Filed 3–9–10; 8:45 am] 

BILLING CODE 8011–01–P 


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