18042 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

1NASD is now known as the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’). 

2 In 1999, the Commission published a concept 

release in which it sought comment regarding short 

sale price test regulation, including on whether to 

eliminate such regulation. See Securities Exchange 

Act Release No. 42037 (Oct. 20, 1999), 64 FR 57996 

(Oct. 28, 1999). 

3See Securities Exchange Act Release No. 42037 

(Oct. 20, 1999), 64 FR 57996 (Oct. 28, 1999). 

4See Securities Exchange Act Release No. 50104 

(July 28, 2004), 69 FR 48032 (Aug. 6, 2004) (‘‘Pilot 

Release’’). 

5See http://www.sec.gov/about/economic/ 

shopilottrans091506.pdf. 

6See 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 discussion of 

findings of staff study, supra notes 25 to 41 and 

accompanying text. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 242 

[Release No. 34–59748; File No. S7–08–09] 

RIN 3235–AK35 

Amendments to Regulation SHO 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing amendments to Regulation 

SHO under the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’). We are 

proposing two approaches to 

restrictions on short selling—one is a 

price test that would apply on a market 

wide and permanent basis (‘‘short sale 

price test’’ or ‘‘short sale price test 

restriction’’) and one that would apply 

only to a particular security during 

severe market declines in that security 

(‘‘circuit breaker’’). With respect to the 

first approach, we propose two 

alternative short sale price tests: One 

based on the national best bid and the 

second based on the last sale price. With 

respect to the second approach, we 

propose two basic alternatives: One 

alternative is a circuit breaker rule that 

would temporarily prohibit short selling 

in a particular security when there is a 

severe decline in the price of that 

security (a ‘‘halt’’), which could operate 

in place of, or in addition to, a short sale 

price test rule; and the second 

alternative is a circuit breaker rule that 

would trigger a short sale price test rule; 

we propose that such a short sale price 

test either be based on the national best 

bid for any security for which there has 

been a severe price decline or be based 

on the last sale price for any security for 

which there has been a severe price 

decline. 

Due to the extreme market conditions 

that we are currently facing and the 

resulting deterioration in investor 

confidence, we believe it is appropriate 

at this time to re-evaluate and seek 

comment on some form of short sale 

price test restriction, either in the form 

of a short sale price test such as the 

proposed modified uptick rule or 

proposed uptick rule, or a circuit 

breaker rule. 

For each of the proposed short sale 

price test restrictions and proposed 

circuit breaker rules, we are also 

proposing to amend Regulation SHO to 

require that a broker-dealer mark certain 

sell orders ‘‘short exempt.’’ If the 

Commission adopts a short sale price 

test proposal or a circuit breaker 

proposal, and adopts a ‘‘short exempt’’ 

marking requirement, we are proposing 

that the implementation period for these 

amendments would be three months 

from the effective date of the 

amendments. 

DATES: Comments should be received on 

or before June 19, 2009. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–08–09 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–08–09. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/final.shtml). 

Comments are also available for public 

inspection and copying in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC 

20549, on official business days 

between the hours of 10 am and 3 p.m. 

All comments received will be posted 

without change; we do not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

FOR FURTHER INFORMATION CONTACT: 

James Brigagliano, Deputy Director; Jo 

Anne Swindler, Acting Associate 

Director; Josephine Tao, Assistant 

Director; Victoria Crane, Branch Chief; 

Joan Collopy, Special Counsel; Christina 

Adams, Special Counsel; or Matthew 

Sparkes, 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 requesting public 

comment on proposed amendments to 

Rules 200(g) and 201 of Regulation 

SHO, 17 CFR 242.200(g) and 17 CFR 

242.201, under the Exchange Act. The 

Commission is soliciting comments on 

all aspects of the proposed amendments. 

I. Executive Summary 

In July 2007, the Commission 

eliminated all short sale price test 

restrictions. At 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, 

and the National Association of 

Securities Dealers, Inc.’s (‘‘NASD’’) 1 bid 

test, that applied to certain Nasdaq 

securities. 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.2

Prior to taking that action, the 

Commission took a number of steps, 

including seeking extensive public 

comment and staff study to consider 

removing short sale price test 

restrictions. For example, beginning in 

1999, the Commission published a 

concept release in which it sought 

comment regarding short sale price test 

regulation, including on whether to 

eliminate such regulation.3 In 2004, the 

Commission initiated a year-long pilot 

to study the removal of short sale price 

tests for approximately one-third of the 

largest stocks.4 Short sale data was 

made publicly available during this 

pilot to allow the public and 

Commission 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 2006.5 In addition, the 

results of the Commission staff study of 

the pilot data were made publicly 

available in draft form in September 

2006 and in final form in February 

2007.6


sroberts on PROD1PC70 with PROPOSALS
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7See infra Section II(C). 

8 In 2003, the Commission proposed a short sale 

price test based on the national best bid (‘‘uniform 

bid test’’). See Securities Exchange Act Release No. 

48709 (Oct. 28, 2003), 68 FR 62972 (Nov. 6, 2003) 

(‘‘2003 Regulation SHO Proposing Release’’). The 

Commission determined not to proceed with the 

uniform bid test, but instead established a pilot 

program pursuant to which it could evaluate the 

overall effectiveness of short sale price test 

restrictions on short sales. See Securities Exchange 

Act Release No. 50103 (July 28, 2004), 69 FR 48008, 

48009 (Aug. 6, 2004) (‘‘2004 Regulation SHO 

Adopting Release’’). See also infra Section II(B) 

(discussing the pilot program). 

9See, e.g., infra note 239 and accompanying text. 

10A ‘‘trading center’’ means 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. See infra note 111 and 

supporting text. 

11For instance, the approaches could be 

combined so that persons are prohibited from 

selling short on a downbid and trading centers are 

also required to have reasonable policies and 

procedures to prevent the execution or display of 

a short sale on a downbid. 

12See Section III.C below discussing the proposed 

circuit breaker rules. 

13See 17 CFR 242.200(a). 

As discussed in detail below,7

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 issuers, has 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). As market conditions have 

continued to worsen, investor 

confidence has eroded, and the 

Commission has received requests from 

many commenters to consider imposing 

restrictions with respect to short selling, 

in part in the belief that such action 

would help restore investor confidence. 

Due to the extreme market conditions 

that we are currently facing and the 

resulting deterioration in investor 

confidence, we believe it is appropriate 

at this time to re-examine and seek 

comment on whether to restore 

restrictions with respect to short selling. 

Thus, we are proposing two approaches 

to restrictions on short selling. One 

approach would apply a price test on a 

market wide and permanent basis. With 

respect to this approach, we propose 

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’’).8

The other approach would apply only 

to a particular security during a severe 

market decline in that security 

(collectively, the ‘‘proposed circuit 

breaker rules’’). With respect to this 

second approach, we are proposing two 

basic alternatives. First, we propose a 

circuit breaker rule that, when triggered 

by a severe 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’’). 

The proposed circuit breaker halt rule 

could operate in place of, or in addition 

to, a short sale price test restriction. 

Second, we propose a circuit breaker 

rule that, when triggered by a severe 

price decline in a particular security, 

would trigger a temporary short sale 

price test for that security. In connection 

with this approach, we are proposing 

two price tests. One is the modified 

uptick rule—that is, we propose a 

circuit breaker rule that would, when 

triggered by a severe decline in a 

particular security, temporarily impose 

the proposed modified uptick rule for 

that security (‘‘proposed circuit breaker 

modified uptick rule’’). The other is the 

uptick rule—that is, we propose a 

circuit breaker rule that would, when 

triggered by a severe market decline in 

a particular security, temporarily 

impose the proposed uptick rule for that 

security (‘‘proposed circuit breaker 

uptick rule’’). A circuit breaker that 

triggers a short sale price test rule such 

as the proposed modified uptick rule or 

the proposed uptick rule would operate 

in place of a short sale price test rule 

(collectively, the ‘‘circuit breaker price 

test rules’’). 

As discussed in detail below, we 

preliminarily believe that of the short 

sale price test proposals, a price test 

based on the national best bid would 

have advantages over a test based on the 

last sale price in today’s markets. 

Among other reasons, we believe that 

bids generally are a more accurate 

reflection of current prices for a security 

than last sale prices due to delays that 

can occur in the reporting of last sale 

price information and the manner in 

which last sale price information is 

published to the markets. For example, 

sale transactions may be reported 

manually up to 90 seconds after they 

occur. Even sale transactions that are 

reported automatically can be reported 

out-of-sequence if trades are occurring 

in multiple trading venues. This may 

make the proposed uptick rule more 

difficult to implement. In addition, last 

sale price information is published to 

the markets in reporting sequence rather 

than in transaction sequence. Thus, we 

preliminarily believe that if we were to 

adopt a short sale price test restriction, 

whether as a full-time rule or as part of 

a circuit breaker rule, that it would be 

more appropriate for such short sale 

price test restrictions to be based on the 

national best bid rather than on the last 

sale price. 

A short sale price test similar to 

former Rule 10a–1 that is based on the 

last sale price, a short sale price test 

based on a national best bid, and a 

circuit breaker rule resulting in a short 

sale halt, should generally be familiar to 

investors and market participants. 

Former Rule 10a–1 was in place for 

almost 70 years. NASD adopted its bid 

test in 1994 and that rule was in place 

for over a decade. Various circuit 

breaker rules have been in place 

throughout the markets for many years.9

A circuit breaker rule resulting in a 

short sale price test for particular stocks 

that have suffered a severe price decline 

would be an amalgamation of these 

familiar rules. 

To offer straight-forward alternatives, 

this release proposes a modified uptick 

rule based on the national best bid that 

would apply to trading centers 10 and 

applies a policies and procedures 

approach that would require that 

trading centers have policies and 

procedures reasonably designed to 

prevent the execution or display of short 

sales at impermissible prices. As an 

alternative short sale price test, this 

release proposes an uptick rule based on 

the last sale price that, similar to former 

Rule 10a–1, applies a straight 

prohibition approach that would 

prohibit any person from effecting short 

sales at impermissible prices. However, 

either alternative could ultimately be 

implemented through a policies and 

procedures approach or through a 

prohibition approach or some 

combination thereof.11

We are also proposing circuit breaker 

rules.12 As noted above, these are the 

proposed circuit breaker halt rule, the 

proposed circuit breaker modified 

uptick rule, and the proposed circuit 

breaker uptick rule. In addition, we are 

proposing that a broker-dealer be 

required to mark a sell order ‘‘short 

exempt’’ if the seller is relying on an 

exemption under the proposed short 

sale price test rules or proposed circuit 

breaker rules. 

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.13 In order 


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18044 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

14See, e.g., Securities 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. 

15See id. See also Securities Exchange Act 

Release No. 29278 (June 7, 1991), 56 FR 27280 (June 

13, 1991); 2004 Regulation SHO Adopting Release, 

69 FR 48008, n. 6; Boehmer, Ekkehart and Wu, 

Julie, Short Selling and the Informational Efficiency 

of Prices (Jan. 8, 2009). 

16See, e.g., 2006 Price Test Elimination Proposing 

Release, 71 FR at 75069; 2003 Regulation SHO 

Proposing Release, 68 FR at 62974. 

17See id. 

18See id. 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. 

19See, 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. March 27, 1991) (alleged 

manipulation by sales representative by directing or 

inducing customers to sell stock short in order to 

depress its price). 

20Many people blamed ‘‘bear raids’’ for the 1929 

stock market crash and the market’s prolonged 

inability to recover from the crash. See 8 Louis Loss 

and Joel Seligman, Securities Regulation, section 8– 

B–3 (3d ed. 2006). 

21See 2006 Price Test Elimination Proposing 

Release, 71 FR at 75069; 2003 Regulation SHO 

Proposing Release, 68 FR at 62074. 

22 15 U.S.C. 78j(a). 

23See also 2006 Price Test Elimination Proposing 

Release, 71 FR at 75068; 2003 Regulation SHO 

Proposing Release, 68 FR at 62973. 

24The study covered two weekly periods, that of 

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

1937. See Securities Exchange Act Release No. 1548 

(Jan. 24, 1938), 3 FR 213 (Jan. 26, 1938) (‘‘Former 

Rule 10a–1 Adopting Release’’). 

25See 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). 

26See, e.g., Letter from Larry E. Bergmann, Senior 

Associate Director, Division of Market Regulation, 

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

dated April 23, 2003 (granting exemptive relief from 

former Rule 10a–1 for trades executed through an 

alternative trading system that matches buying and 

selling interest among institutional investors and 

broker-dealers at various set times during the day). 

27See, e.g., Securities 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 

to deliver the security to the purchaser, 

the short seller will borrow the security, 

typically 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.14

A. Short Selling and Its Market Impact 

The Commission has long held the 

view that short selling provides the 

market with important benefits, 

including market liquidity and pricing 

efficiency.15 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.16

Short selling also can contribute to 

the pricing efficiency of the equities 

markets.17 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.18

We recognize that, to the extent that 

the proposed short sale price test 

restrictions would result in increased 

costs to short selling in equity 

securities, it may lessen some of the 

benefits of legitimate short selling. Such 

a reduction may lead to a decrease in 

market efficiency and price discovery, 

less protection against upward stock 

price manipulations, a less efficient 

allocation of capital, an increase in 

trading costs, and a decrease in 

liquidity. Thus, we believe there may be 

potential costs associated with the 

proposed short sale price tests in terms 

of potential impact of such price tests 

on quote depths, spread widths, and 

market liquidity. We also believe costs 

may be incurred in terms of execution 

and pricing inefficiencies. For example, 

requiring all short sale orders to be 

executed or displayed above the best 

bid, or last sale price, in a declining 

market may slow the speed of 

executions and impose additional costs 

on market participants, including 

buyers. Also, by not allowing short 

sellers to sell at the bid, or last sale 

price, the proposed short sale price tests 

may impede trading and distort market 

pricing. 

Although short selling serves useful 

market purposes, it also may be used to 

illegally manipulate stock prices.19 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.20 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 price is 

falling for fundamental reasons, when 

the decline, or the speed of the decline, 

is being driven by other factors.21

B. History of Short Sale Price Test 

Restrictions in the U.S. 

Section 10(a) of the Exchange Act 22

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.23 After conducting an 

inquiry into the effects of concentrated 

short selling during the market break of 

1937,24 the Commission adopted former 

Rule 10a–1 (also known as the ‘‘tick 

test’’ or ‘‘uptick rule’’) in 1938 to restrict 

short selling in a declining market.25

The core provisions of former Rule 

10a–1 remained virtually unchanged for 

almost 70 years. Over the years, 

however, in response to changes in the 

securities markets, including changes in 

trading strategies and systems used in 

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,26 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.27


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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 18045 

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 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 

self-regulatory organization (‘‘SRO’’) from having a 

short sale price test in July 2007, Nasdaq Global 

Market securities traded on Nasdaq or the OTC 

market and reported to a NASD facility were subject 

to a bid test. Other listed securities traded on an 

exchange, or otherwise, were subject to former Rule 

10a–1. Nasdaq securities traded on exchanges other 

than Nasdaq were not subject to any price test. In 

addition, many thinly-traded securities, such as 

Nasdaq Capital Market securities, and securities 

quoted on the over-the-counter (‘‘OTC’’) Bulletin 

Board and Pink Sheets, were not subject to any 

price test wherever traded. According to the 

Commission’s Office of Economic Analysis 

(‘‘OEA’’), in 2005, prior to the start of the Pilot, 

NASD Rule 3350 applied to approximately 2,800 

securities, while former Rule 10a–1 applied to 

approximately 4,000 securities. 

28 17 CFR 242.202T. 

29See 17 CFR 242.202T; see also 2004 Regulation 

SHO Adopting Release, 69 FR at 48012–48013. 

30See Pilot Release, 69 FR 48032 (commencing 

the Pilot on January 3, 2005 and terminating the 

Pilot on December 31, 2005). On November 29, 

2004, the Commission issued an order resetting the 

Pilot to commence on May 2, 2005 and end on 

April 28, 2006 to give market participants 

additional time to make systems changes necessary 

to comply with the Pilot. See Securities Exchange 

Act Release No. 50747 (Nov. 29, 2004), 69 FR 70480 

(Dec. 6, 2004). On April 20, 2006, the Commission 

issued an order extending the termination date of 

the Pilot to August 6, 2007. See Securities Exchange 

Act Release No. 53684 (April 20, 2006), 71 FR 

24765 (April 26, 2006). 

31See Pilot Release, 69 FR at 48032. 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 Commission-mandated 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. 

32See supra note 6. 

33OEA selected the securities to be included in 

the Pilot by sorting the 2004 Russell 3000, first by 

listing market and then by average daily dollar 

volume from June 2003 through May 2004, and then 

within each listing market, selecting every third 

company starting with the second. Because the 

selection process relied on average daily dollar 

volume, companies that had their Initial Public 

Offering (‘‘IPO’’) in May or June 2004, just prior to 

the Russell reconstitution, were not included. The 

securities in the control group came from the 

remainder of the 2004 Russell 3000 not included in 

the Pilot (excluding the IPOs in May or June 2004 

and any securities added to the Russell 3000 after 

June 2004). See OEA Staff’s Summary Pilot Report 

at 22 (discussing the selection of securities included 

in the Pilot and the control group). 

34 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 January 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. The SROs published the information on 

a monthly basis on their Internet Web sites. 

35See OEA Staff’s Summary Pilot Report, at 55 n. 

61–63 and supporting text. 

36On 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 OEA Staff’s Summary Pilot Report at 8. 

37See OEA Staff’s Summary Pilot Report, at 55 n. 

61–63 and supporting text. 

38This 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 intraday volatility. However, 

OEA concluded that overall, the Pilot data did not 

suggest a deleterious impact on market quality or 

liquidity. See OEA Staff’s Summary Pilot Report at 

42, 56. 

39See OEA Staff’s Summary Pilot Report at 35. 

40See id. 

41See 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, 

August 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 

(‘‘Bai’’). 

42See supra note 5. 

43See 2006 Price Test Elimination Proposing 

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

Results). 

In July 2004, the Commission adopted 

Rule 202T of Regulation SHO,28 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.29 Pursuant to the process 

established in Rule 202T, the 

Commission issued an order creating a 

one year pilot (‘‘Pilot’’) temporarily 

suspending the tick test of former Rule 

10a–1(a) and any price test of any 

exchange or national securities 

association for short sales of certain 

securities.30 The Pilot was designed to 

assist the Commission in assessing 

whether changes to current 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.31

OEA gathered the data made public 

during the Pilot, analyzed the data and 

provided the Commission with a 

summary report on the Pilot (‘‘OEA 

Staff’s Summary Pilot Report’’).32 The 

OEA Staff’s Summary Pilot Report, 

which was made public, examined 

several aspects of market quality 

including the overall effect of price tests 

on short selling, liquidity, volatility and 

price efficiency.33 The Pilot was also 

designed to allow the Commission and 

members of the public to examine 

whether the effects of short sale price 

tests were similar across stocks.34

As set forth in the OEA Staff’s 

Summary Pilot Report, OEA found little 

empirical justification at that time for 

maintaining short sale price test 

restrictions, especially for actively 

traded securities. Amongst its results, 

OEA found that short sale price tests did 

not have a significant impact on daily 

volatility. However, OEA also found 

some evidence that short sale price tests 

dampened intraday volatility for smaller 

stocks.35

OEA also found that the Pilot data 

provided limited evidence that price 

test restrictions distort a security’s 

price.36 In addition, OEA found that 

price test restrictions resulted in an 

increase in quote depths.37 Realized 

liquidity levels, however, were 

unaffected by the removal of short sale 

price test restrictions.38 The Pilot data 

also provided evidence that short sale 

price test restrictions reduce the volume 

of executed short sales to total volume 

and, therefore, act as a constraint on 

short selling.39 OEA 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.40

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.41

The Commission also held a public 

roundtable (the ‘‘Regulation SHO 

Roundtable’’) that focused on the 

empirical evidence learned from the 

Pilot data (the OEA Staff’s Summary 

Pilot Report, Academic Studies, and 

Regulation SHO Roundtable are referred 

to collectively herein as, the ‘‘Pilot 

Results’’).42 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. 

Generally, the Pilot Results supported 

removal of short sale price test 

restrictions at that time.43 In addition to 

the Pilot Results, thirteen other analyses 

by SEC staff and various third party 


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44See OEA Staff’s Summary Pilot Report at 14, 

17–22 (discussing the thirteen studies). 

45See 2006 Price Test Elimination Proposing 

Release, 71 FR 75068. 

46See, e.g., letter from Howard Teitelman, CSO, 

Trillium Trading (Feb. 6, 2007) (‘‘Teitelman 

Letter’’); letter from S. Kevin An, Deputy General 

Counsel, E*TRADE (Feb. 9, 2007) (‘‘E*TRADE 

Letter’’); letter from Carl Giannone (Feb. 11, 2007) 

(‘‘Giannone Letter’’); letter from David Schwarz 

(Feb. 12, 2007) (‘‘Schwarz Letter’’); letter from John 

G. Gaine, President, MFA (Feb. 12, 2007) (‘‘MFA 

Letter’’); letter from Lisa M. Utasi, Chairman of the 

Board and John C. Giesea, President and CEO, STA 

(Feb. 12, 2007) (‘‘STA Letter’’); letter from Gerard 

S. Citera, Executive Director, U.S. Equities, UBS 

(Feb. 14, 2007) (‘‘UBS Letter’’); letter from Mary 

Yeager, Assistant Secretary, NYSE (Feb. 14, 2007) 

(‘‘NYSE Letter’’); letter from James J. Angel, Ph.D., 

CFA, Associate Professor of Finance, McDonough 

School of Business, Georgetown University (Feb. 

14, 2007) (‘‘Angel Letter’’); letter from Ira D. 

Hammerman, SIFMA Managing Director and 

General Counsel (Feb. 16, 2007) (‘‘SIFMA Letter’’); 

see also Securities 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). 

47See, e.g., Giannone Letter; E*TRADE Letter; 

STA Letter; UBS Letter; see also Securities 

Exchange Act Release No. 55970 (June 28, 2007), 72 

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

the comment letters). 

48See, e.g., letter from Jim Ferguson (Dec. 19, 

2006); letters from David Patch (Jan. 1, 2007; Jan. 

12, 2007) (‘‘Patch Letters’’). 

49See Giannone Letter. 

50See id. 

51See NYSE Letter. 

52See 2007 Price Test Adopting Release, 72 FR 

36348. 

53See id at 36352. 

54See id. 

55See, e.g., letter to Mary Schapiro, Chairman, 

from Rep. Barney Frank and other Members of the 

House Financial Services Committee, dated March 

11, 2009; letter to Mary Schapiro, Chairman, 

Commission, from Professor Constantine Katsoris 

(‘‘Katsoris letter’’), Fordham University School of 

Law, dated March 4, 2009; letter from Albert C. 

Roelse, dated Feb. 20, 2009; letter from Robert A. 

Lee, dated Feb. 10, 2009; letter from Giulio Liotine, 

dated Jan. 22, 2009 (‘‘Liotine Letter’’); letter from 

Edward L. Yingling, American Bankers Association, 

dated Dec. 16, 2008 (‘‘American Bankers Assn. 2008 

Letter’’); letter from Peter Brown, dated Dec. 12, 

2008 (‘‘Brown Letter’’); letter to Christopher Cox, 

Chairman, Commission, from Peter T. King, 

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

Christopher Cox, Chairman, Commission, from Bill 

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

to Christopher Cox, Chairman, Commission, from 

T.J. Rodgers, President and CEO, Cypress 

Semiconductor Corp., dated October 1, 2008; letter 

to Christopher Cox, Chairman, Commission, from 

Carl H. Tiedmann, General Partner, Tiedmann 

Investment Group, dated Sept. 22, 2008; letter to 

Christopher Cox, Chairman, Commission, from 

Hillary Rodham Clinton, Senator, dated Sept. 17, 

2008 (‘‘Clinton Letter’’). The Commission’s Office of 

Investor Education and Advocacy estimates that it 

has received over 4,000 requests (including 

duplicate requests) from individuals regarding 

reinstating a short sale price test. 

56See, e.g., letter from Chris Baratta, dated March 

9, 2009 (‘‘Baratta Letter’’); letter from Paul Kent, 

dated March 7, 2009; letter from Troy Williams, 

dated March 6, 2009; letter from Briggs Diuguid, 

dated March 5, 2009 (‘‘Diuguid Letter’’); letter from 

Bob Young, dated March 5, 2009; letter from Kevin 

Girard, dated March 4, 2009; letter from Mike 

Rogers, dated March 3, 2009; letter from George 

Flagg, dated March 3, 2009; letter from Arleen 

Golden, dated March 2, 2009; letter from Doug 

Cameron, dated March 2, 2009; letter from Dr. Bill 

Daniel, dated Feb. 26, 2009; letter from Glenn 

Webster, dated Feb. 26, 2009; letter from Robert 

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

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

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

dated Feb. 10, 2009; American Bankers Assn. 2008 

letter; letter from David Campbell and Natalie Win, 

dated Nov. 25, 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 Jeff Brower, dated Nov. 20, 

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

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

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

2008; letter from Phil Mason, dated Nov. 19, 2008; 

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

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

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

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

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

Joe Garrett, dated Oct. 15, 2008; letter from Peter 

Eckle, dated Oct. 11, 2008; letter from Maureen 

Christensen, dated Oct. 9, 2008; letter from Richard 

Vulpi, dated Sept. 24, 2008; see also Katsoris Letter 

(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’’). 

researchers were conducted between 

1963 and 2004 addressing price test 

restrictions.44 Among these were several 

studies that evaluated short sale price 

tests during times of severe market 

decline, including the market break of 

May 28, 1962, the market decline in 

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 they found that 

former Rule 10a–1 did not prevent short 

sales in extreme down markets and did 

limit short selling in up markets and 

provided additional support for the 

removal of short sale price restrictions. 

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 

price test.45 The Commission received 

27 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, academics, brokerdealers, SROs and trade associations) 

advocated removing all price test 

restrictions.46 Generally, these 

commenters believed that price test 

restrictions were no longer necessary 

due to increased market transparency 

and the existence of real-time regulatory 

surveillance that could monitor for and 

detect any potential short sale 

manipulation.47

Two commenters (both individual 

investors) opposed the proposed 

amendments noting the need for price 

tests to prevent ‘‘bear raids.’’ 48 One 

commenter, although generally in 

support of removing all price test 

restrictions, stated the belief that at 

some level unrestricted short selling 

should be collared.49 This commenter 

supported having a 10% circuit breaker 

to prevent panic in the event there is a 

major market collapse.50 The 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.51

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.52 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, 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 1938.53 In addition, the 

Commission stated that it believed 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.54

C. Changes in Market Conditions Since 

Elimination of Rule 10a–1 

Recently, market volatility has 

increased markedly in the U.S., as well 

as in every major stock market around 

the world. Although we are not aware 

of specific empirical evidence that the 

elimination of short sale price tests has 

contributed to the increased volatility in 

U.S. markets, many members of the 

public currently associate the removal 

of former Rule 10a–1 with the recent 

volatility, including steep declines in 

some securities’ prices, and the loss of 

investor confidence in our markets. 

In addition, we have received 

numerous requests for reinstatement of 

short sale price test restrictions from a 

variety of individuals, including 

investors, issuers, academics, trade 

associations, and members of 

Congress.55 Most of these commenters 

have asked that we reinstate short sale 

price test restrictions because they 

believe that such a measure would help 

restore investor confidence.56


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57See, e.g., letter from Tim Zanni, dated Feb. 19, 

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

58See, e.g., Baratta Letter (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 Young Letter 

(suggesting that reinstatement of the uptick rule 

‘‘will not be a quick or total fix, but it will help’’); 

letter to Mary Schapiro, Chairman, Commission, 

from Paul D. Mendelsohn, President of Windham 

Financial Services, Inc., dated March 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’’). 

59See American Bankers Assn. 2009 Letter. 

60See id. See also letter to Christopher Cox, 

Chairman, Commission, 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 to Mary 

Schapiro, Chairman, Commission, from James F. 

Kane, Jr., dated Feb. 6, 2009 (stating that he believes 

that reinstating ‘‘the Up-tick Rule will go a long way 

in preventing speculators from ganging up on a 

particular stock and forcing it down’’); Diuguid 

Letter (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). 

61See letter to Mary Schapiro, Chairman, 

Commission, from Gary L. Ackerman, Member of 

Congress, dated Jan. 27, 2009. 

62See Clinton Letter. 

63See, e.g., Edgar Ortega, Short-Sale Rule 

Undermined as Bernanke Backs Review, Bloomberg 

News Service, March 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); Ben Stein, How to 

Deal with a 3 A.M. Fear, The New York Times, 

March 8, 2009; Charles R. Schwab, Restore the 

Uptick Rule, Restore Confidence, Wall Street 

Journal Online, December 9, 2008. The Federal 

Reserve Chairman also recently noted that, while 

the ‘‘traditional literature on this doesn’t seem to 

find much effect of the uptick rule,’’ short sale price 

test restrictions are ‘‘worth looking at’’ and that the 

rule (i.e., former Rule 10a–1) ‘‘might have had some 

benefit.’’ Monetary Policy and the State of the 

Economy: Hearing Before the House Financial 

Services Comm., 111th Cong., 1st Sess. (Lexis 

Federal News Service at 33) (Feb. 25, 2009). See 

also letter from Duncan Niederauer, CEO, The 

NYSE/Euronext Group, Inc., Robert Greifeld, CEO, 

The NASDAQ OMX Group, Inc., Joe Ratterman, 

CEO, BATS Exchange, Inc., Joseph Rizzello, CEO, 

National Stock Exchange, dated March 24, 2009 

(‘‘National Exchanges Letter’’) (stating that the 

United States national securities exchanges 

welcome the announcement that the Commission 

will consider a proposal to adopt a rule to combat 

abusive short selling and suggesting that any such 

rule proposal include a circuit breaker in the form 

discussed therein). 

64See D. Harmon and Y. Bar-Yam, 2008, 

Technical Report on the SEC Uptick Repeal Pilot, 

New England Complex Systems Institute; see also 

Robert C. Pozen and Dr. Yaneer Bar-Yam, There’s 

a Better Way to Prevent Bear Raids, The Wall Street 

Journal, Opinion, November 18, 2008 (stating that 

the ‘‘uptick rule’’ is an effective way to prevent 

‘‘bear raids’’). But cf. John C. Bogle, Jr. and Howard 

Flinker, Uptick Rule Won’t Prevent More Raids by 

the Bear, The Wall Street Journal, Opinion Section 

(November 26, 2008). 

65See George Soros, The Game Changer, available 

at http://www.ft.com/cms/s/0/49b1654a-ed60-11ddbd60-0000779fd2ac.html. 

66See id. (concluding that Lehman, AIG and other 

financial institutions were destroyed by ‘‘bear 

raids’’ in which the shorting of stocks and buying 

of CDS amplified and reinforced each other). 

67See Securities Exchange Act Release No. 58166 

(July 15, 2008), 73 FR 42379 (July 21, 2008). 

68 15 U.S.C. 78l(k). 

69See July Emergency Order, 73 FR 42379. 

70See id. 

71See Securities Exchange Act Release No. 58592 

(Sept. 18, 2008), 73 FR 55169 (Sept. 24, 2008). 

72See, e.g., July Emergency Order, 73 FR 42379; 

Securities Exchange Act Release No. 58592 (Sept. 

18, 2008), 73 FR 55169 (Sept. 24, 2008) (‘‘Short Sale 

Ban Emergency Order’’); Securities Exchange Act 

Release No. 58572 (Sept. 17, 2008), 73 FR 54875 

(Sept. 23, 2008) (‘‘September Emergency Order’’). 

73See Short Sale Ban Emergency Order, 73 FR 

55169; September Emergency Order, 73 FR 54875. 

74See id. 

Some of these commenters have 

stated that a lack of price test 

restrictions makes them question 

whether they should invest in the stock 

market.57 Other commenters have stated 

that they believe a short sale price test 

would aid small investors.58 In addition, 

some commenters have asserted that 

restricting the prices at which securities 

may be sold short would help address 

recent steep declines in securities’ 

prices. For example, the American 

Bankers Association (the ‘‘ABA’’) noted 

that its members, ‘‘both large and small, 

are telling [the ABA] that short sellers 

are taking advantage of the uptick rule’s 

absence and that their stock prices are 

experiencing excessive downward price 

pressure * * *.’’ 59 This commenter 

further noted that ‘‘its members strongly 

believe that reinstatement of the uptick 

rule in some format would help limit 

these downward stock spirals and 

restore investor confidence.’’ 60

In commenting on the recent market 

volatility and the absence of a short sale 

price test, one member of Congress 

recently stated that ‘‘[o]ne of the 

simplest but most important and 

effective initiatives that the SEC could 

undertake immediately to combat 

market volatility is the reinstatement of 

a * * * ‘uptick rule’.’’ 61 A former U.S. 

Senator urged the Commission to 

‘‘* * * give close consideration to the 

many calls for the immediate restoration 

of the uptick rule whose repeal has been 

linked to the recent market volatility 

and proliferation of abusive short sale 

transactions.’’ 62 SRO representatives 

and others have also commented on the 

need for a short sale price test.63

Researchers have also indicated that 

they believe that they have collected 

data that establishes a possible 

association between the current market 

downturn and the elimination of former 

Rule 10a–1.64 In addition, we note that 

recently there are reports of significant 

short selling in connection with credit 

default swaps, particularly in the 

securities of significant financial 

institutions.65 One commenter has 

suggested that the interaction between 

and amplifying effects of credit default 

swaps and short selling may be a reason 

to reinstate a short sale price test.66

Questions and comments have been 

raised about the role that short selling, 

and in particular potentially abusive 

short selling, may have in connection 

with the price fluctuations and 

disruption in our markets. As such, 

recently we took a number of short salerelated 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’’) 67 pursuant to Section 12(k)(2) 

of the Exchange Act 68 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 confidence 

in our markets. Such loss of 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.69 If significant financial 

institutions are involved, this chain of 

events can threaten disruption of our 

markets.70

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.71 Our 

concerns, however, have not been 

limited to financial institutions given 

the importance of confidence in our 

markets and recent rapid and steep 

declines in the prices of securities 

generally.72 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.73 This erosion of 

confidence can impair the liquidity and 

ultimate viability of an institution, with 

potentially broad market 

consequences.74

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 


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75See September Emergency Order, 73 FR 54875. 76See id. We subsequently issued an interim final 

temporary rule imposing the delivery requirements 

of Rule 204T of Regulation SHO until July 31, 2009. 

See Securities Exchange Act Release No. 58773 

(Oct. 14, 2008), 73 FR 61706 (Oct. 17, 2008) 

(‘‘Interim Final Temporary Rule 204T’’). We and 

Commission staff are currently reviewing the 

comment letters received in response to that rule. 

In addition, we issued an emergency order, and 

subsequent interim final temporary rule, to require 

disclosure of short sales and short positions in 

certain securities. The temporary rule expires on 

August 1, 2009. We and Commission staff are 

currently reviewing comment letters received in 

response to the temporary rule. See Securities 

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

See also Securities Exchange Act Release No. 58785 

(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008). 

77See September Emergency Order, 73 FR 54875. 

78See Interim Final Temporary Rule 204T, 73 FR 

at 61708. 

79See Securities Exchange Act Release No. 56212 

(Aug. 7, 2007), 72 FR 45544 (Aug. 14, 2007) 

(eliminating the ‘‘grandfather’’ exception to 

Regulation SHO’s close-out 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 Securities Exchange Act Release No. 58775 

(Oct. 14, 2008), 73 FR 61690 (Oct. 17, 2008). 

80See Securities Exchange Act Release No. 58774 

(Oct. 14, 2008), 73 FR 61666 (Oct. 17, 2008); 

Securities Exchange Act Release No. 57511 (March 

17, 2008), 73 FR 15376 (March 21, 2008). 

81See Memorandum from OEA Re: Impact of 

Recent SHO Rule Changes on Fails to Deliver, 

November 26, 2008 at http://www.sec.gov/ 

comments/s7-30-08/s73008-37.pdf; Memorandum 

from OEA Re: Impact of Recent SHO Rule Changes 

on Fails to Deliver, March 20, 2009 at http:// 

www.sec.gov/comments/s7-30-08/s73008-107.pdf 

(stating, among other things, that the average daily 

number of aggregate fails to deliver for all securities 

decreased from 1.1 billion to 582 million for a total 

decline of 47.2% when comparing a pre-Rule to 

post-Rule period). 

82See 2007 Price Test Adopting Release, 72 FR 

36348. 

83On July 3, 2007, the DJIA closed at 13,577, and 

on March 3, 2009, the DJIA closed at 6,726. On July 

3, 2007, the S&P 500 Index closed at 1524.87, and 

on March 3, 2009, the S&P 500 Index closed at 

700.82. 

84We note that we have no empirical evidence 

that such falling prices are the result of short selling 

activity and the lack of short sale price test 

restrictions. 

85See, e.g., Office of Thrift Supervision, 

Receivership Of A Federal Saving Association, 

dated Sept. 25, 2008 at http://files.ots.treas.gov/ 

680024.pdf; Office of Thrift Supervision, PassThrough Receivership Of A Federal Savings 

Association Into A De Novo Federal Savings 

Association That Is Placed Into Conservatorship 

With the FDIC, dated July 11, 2008 at http:// 

files.ots.treas.gov/680018.pdf. 

86See Alison Vekshin, Bair Says Insurance Fund 

Could Be Insolvent This Year, http:// 

www.bloomberg.com/apps/ 

news?pid=washingtonstory&sid=alsJZqIFuN3k, 

March 4, 2009. 

87We note, however, that stock markets have 

incurred significant declines in value under former 

short sale price test restrictions, most notably the 

1987 Market Crash and the 2000 Tech Bubble Burst. 

88See NYSE letter. 

89See, e.g., Brown Letter (noting that ‘‘the 

investigation performed before the uptick rule was 

rescinded was insufficient, particularly [because] it 

covered a period of relative market stability and 

studied the side effects of the rule rather than the 

primary effect of the rule which would only be seen 

in a sharply down market such as we have just 

suffered’’); Liotine Letter (stating that ‘‘[t]he 

research done prior to the [amendment] of rule 10– 

A was far too short’’ and that the study should have 

lasted longer to ‘‘ensure at least one bear market 

was involved in the study’’). 

short selling in all equity securities.75

Pursuant to the September Emergency 

Order we imposed enhanced delivery 

requirements on sales of all equity 

securities under Rule 204T of 

Regulation SHO.76

The enhanced close-out requirements 

of Rule 204T of Regulation SHO in the 

September Emergency Order, which, 

among other things, require participants 

of a registered clearing agency to closeout 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 occurs, 

appear to be having a positive effect 

toward achieving our goal of reducing 

fails to deliver.77 As we stated in the 

October 2008 release adopting Rule 

204T as an interim final temporary rule, 

we are concerned about the potentially 

negative market impact of large and 

persistent fails to deliver.78 Thus, our 

adoption of Rule 204T followed a series 

of other steps aimed at reducing such 

fails to deliver and addressing 

potentially abusive short selling. Such 

steps included eliminating the 

‘‘grandfather’’ and options market maker 

exceptions to Regulation SHO’s closeout requirement,79 and proposing and 

subsequently adopting a ‘‘naked’’ short 

selling anti-fraud rule, Rule 10b–21.80

Although we recognize that fails to 

deliver can occur for legitimate reasons, 

we are concerned about the impact of 

large and persistent fails to deliver on 

market confidence. Preliminary results 

from OEA indicate that our actions to 

further reduce fails to deliver and, 

thereby, address potentially abusive 

short selling are having their intended 

effect. For example, preliminary results 

from OEA indicate that fails to deliver 

in all equity securities have declined 

significantly since the adoption of Rule 

204T.81

Questions persist, however, about the 

rapid and steep declines in the prices of 

securities, and we recognize the concern 

over the continuing erosion of investor 

confidence in our markets. Thus, we 

have continued to examine whether 

there are other actions that the 

Commission might consider, including 

re-evaluating whether a short sale price 

test ought to be reintroduced or a circuit 

breaker rule should be imposed, in light 

of the extreme market declines and 

volatility, as well as the loss of investor 

confidence we continue to experience. 

We also note that when we eliminated 

all short sale price test restrictions in 

July 2007, we acknowledged that 

circumstances may develop that would 

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.82 Thus, in 

determining whether or not to propose 

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. The 

turbulence in the financial markets has 

been underscored over the past 18 

months by events such as the March 

2008 sale of Bear Stearns Corporation, 

and the crisis surrounding the collapse 

of Lehman Brothers in September 2008. 

In addition, between July 2007 and 

March 2009, the Dow Jones Industrial 

Average (‘‘DJIA’’) lost roughly 50% of its 

value, while the Standard and Poor’s 

500 Index fell approximately 54%.83

The publicly traded securities of 

significant financial institutions have 

experienced large reductions in value in 

2008 and early 2009.84 For example, one 

significant financial institution’s stock 

price declined from approximately $49 

per share in the beginning of July 2007, 

to approximately $1 per share in March 

2009. Similarly, in July 2007, another 

significant financial institution’s stock 

price declined from approximately $49 

per share to approximately $3 per share 

in March 2009. In addition, in 2008, a 

number of major banks became the 

subjects of federal seizure.85 A total of 

25 banks failed in 2008, resulting in a 

$33.5 billion expenditure of the fund 

used by the Federal Deposit Insurance 

Corporation (‘‘FDIC’’) to protect 

individual depositors’ savings.86 Put 

simply, market conditions have changed 

dramatically in recent months.87

In addition, as noted above, in 

response to the proposed amendments 

to eliminate former Rule 10a–1, one 

commenter expressed its concern about 

unrestricted short selling during periods 

of unusually rapid and large market 

declines.88 This concern has been 

echoed in recent comment letters to the 

Commission.89 We note, however, that 

in the 2007 Price Test Adopting Release, 

we noted that because of the 

Commission’s stated objective when it 

adopted Rule 10a–1 and our concerns 

about the potential use of short sales to 

manipulate stock prices, OEA examined 

the Pilot data for any indication that 

there is an association between extreme 

price movements and price test 


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90See 2007 Price Test Adopting Release, 72 FR 

at 36351. 

91See OEA Staff’s Summary Pilot Report, at 9. 

92See Office of Economic Analysis, Analysis of a 

short sale price test using intraday quote and trade 

data, Dec. 17, 2008. 

93See Office of Economic Analysis, Analysis of 

Short Selling Activity during the First Weeks of 

September, 2008, Dec. 16, 2008. 

94See OEA analysis (Dec. 17, 2008), supra note 

92. 

95See OEA analysis (Dec. 16, 2008), supra note 

93. 

restrictions. OEA, however, did not find 

any such association.90

Due to the extreme market conditions 

with which we are currently faced and 

the resulting deterioration in investor 

confidence, we believe it is appropriate 

at this time to propose amending 

Regulation SHO to add a short sale price 

test or a circuit breaker rule. In issuing 

this proposing release, we seek 

empirical data regarding the costs and 

benefits of reinstating short sale price 

test restrictions or imposing circuit 

breaker rules, including the potential 

impact on legitimate short selling. We 

note that although we have received 

numerous letters requesting 

reinstatement of short sale price test 

restrictions, such requests have not 

included empirical data, but rather 

focus on what such commenters believe 

might be the impact on the markets of 

reinstating such restrictions. In 

addition, such requests do not discuss 

the potential impact of short sale price 

test restrictions on the benefits of 

legitimate short selling. 

As discussed in this release, we 

remain mindful that there are benefits of 

short selling. 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.91 Because 

short sale price test restrictions may 

lessen some of these benefits, it is 

important that any short sale price test 

regulation be designed to limit any 

potentially unnecessary impact on 

legitimate short selling. 

We also recognize that some market 

participants may be advocating for a 

short sale price test because such 

participants may believe that it would 

put them at a competitive advantage 

over other participants who may be less 

able to implement or adjust their trading 

strategies to account for a short sale 

price test or may otherwise benefit at 

the expense of investors. Other market 

participants may favor a short sale price 

test due to concerns about the 

imposition of a greater restriction on 

short selling. 

We believe that all arguments, both 

for and against a short sale price test 

rule and a possible circuit breaker rule, 

should be considered and addressed in 

light of current market conditions and 

recent experience. Thus, we believe it is 

important at this time to propose and 

obtain informed public comment 

regarding restricting the prices at which 

securities can be sold short before 

determining whether or not to impose 

any such restrictions, and what any 

such restrictions should be, as well as 

the proposed circuit breaker rules. 

As discussed in detail below, we are 

proposing two alternative price tests. 

The first test would be the proposed 

modified uptick rule that would be 

based on the national best bid. The 

second test would be the proposed 

uptick rule that would be a modified 

version of the tick test under former 

Rule 10a–1. We are also proposing 

amendments to Rule 200(g) of 

Regulation SHO that would require that 

a broker-dealer mark certain sell orders 

‘‘short exempt.’’ 

In considering whether to reinstitute 

short sale price test restrictions, it is 

important that the Commission take into 

account any extant empirical data and 

analyses that would shed light on the 

potential impact of such restrictions on 

capital markets. In that connection, we 

note that OEA has analyzed the impact 

that a short sale price test might have 

had during a thirteen day period in 

September of 2008 92 as well as whether 

and the extent to which short selling 

drove prices downward during a 

volatile period in early September 

2008.93 The first of these studies noted 

that, although its data were limited to 

historical trade and quote data from a 

period when no price test was in place 

and the shape of order book and trading 

sequences might have differed had a 

price test been in place, a 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.94 The 

second study found that long sellers 

were primarily responsible for price 

declines during this period. 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.95 The Commission looks 

forward to receiving additional analysis 

of relevant data and factors. 

Similarly, it is important that the 

Commission take into account any 

extant empirical data and analyses that 

would shed light on the potential 

impact of such restrictions on capital 

markets, and it looks forward to 

receiving analysis of relevant data. 

III. Discussion of Proposed Short Sale 

Restrictions 

We discuss below our price test 

approach, the alternatives contained 

therein and our circuit breaker 

approach. As noted above, we 

preliminarily believe that a price test 

based on the national best bid would 

have advantages over a test based on the 

last sale price in today’s markets. In 

particular, we believe that bids 

generally are a more accurate reflection 

of current prices for a security than last 

sale prices due to delays that can occur 

in the reporting of last sale price 

information and because last sale price 

information is published to the markets 

in reporting rather than trade sequence. 

In adopting a final rule, we could take 

several different approaches, or a 

combination of approaches. For 

example, we could consider a straight 

prohibition approach prohibiting all 

persons from effecting short sales under 

a price test that references either the 

national best bid or the last sale price; 

a policies and procedures approach 

imposing obligations on market 

participants to adopt policies and 

procedures to guard against 

impermissible short selling; or a 

combination of a straight prohibition 

and a policies and procedures approach. 

We discuss below the proposed 

modified uptick rule which would 

require trading centers to have policies 

and procedures reasonably designed to 

prevent the execution or display of short 

sales at impermissible prices. As an 

alternative, in Section II.B, below, we 

discuss the proposed uptick rule that is 

based on the last sale price and that, 

similar to former Rule 10a–1, would 

apply a straight prohibition approach 

that would prohibit any person from 

effecting short sales at impermissible 

prices. However, either alternative 

could ultimately be implemented 

through a policies and procedures or 

through a straight prohibition approach 

or some combination thereof. 

We also discuss below our circuit 

breaker approach, which includes two 

basic alternatives—a halt and a price 

test. The proposed circuit breaker price 

test rule would temporarily result in 

either the proposed modified uptick 

rule or the proposed uptick rule 

applying to a specific security if there 

was a severe decline in the price of that 

security. As with the proposed short 

sale price test rules, the proposed circuit 

breaker price test rules could also be in 

the form of either a straight prohibition 


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96See Proposed Rule 201(b)(1). 

97Proposed Rule 201(a)(2). 

98A trading center could display a short sale 

order priced at $47.00 provided such order would 

comply with the locking or crossing requirements 

of any Commission or SRO rule. See, e.g., 17 CFR 

242.610(d). 

99Any such execution or display would also need 

to be in compliance with applicable rules regarding 

minimum pricing increments. See 17 CFR 242.612. 

100A trading center could display a short sale 

order priced at $47.00 provided such order would 

comply with the locking or crossing requirements 

of any Commission or SRO rule. See, e.g., 17 CFR 

242.610(d). 

101Any such execution or display would also 

need to be in compliance with applicable rules 

regarding minimum pricing increments. See 17 CFR 

242.612. 

102See proposed Rule 201(a)(1). 

103 17 CFR 242.600(b)(47). 

104 17 CFR 242.600(b)(46). 

105See proposed Rule 201(a)(1) (providing that a 

‘‘covered security’’ shall mean all ‘‘NMS stock’’ as 

defined in § 242.600(b)(47) of Regulation NMS). 

106When 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 letter to Marc Menchel, 

Executive Vice President and General Counsel, 

NASD, Inc., June 26, 2006. 

107The three joint-industry plans are (1) the 

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

which disseminates transaction information for 

or a policies and procedures approach. 

The proposed circuit breaker halt rule, 

which would temporarily halt short 

selling in a specific security if there is 

a severe price decline in that security, 

could operate either in addition to, or in 

place of, a proposed short sale price test 

rule. 

A. Proposed Modified Uptick Rule 

1. Operation of the Proposed Modified 

Uptick Rule 

We are proposing to amend Rule 201 

of Regulation SHO to add a short sale 

price test that would use the national 

best bid as a reference point for short 

sale orders. Specifically, the proposed 

modified uptick rule would provide 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 in a covered security at 

a down-bid price.’’ 96 The proposed 

modified uptick rule defines a ‘‘downbid price’’ as ‘‘a price that is less than 

the current national best bid or, if the 

last differently priced national best bid 

was greater than the current national 

best bid, a price that is less than or 

equal to the current national best 

bid.’’ 97

Thus, under the proposed modified 

uptick rule, a trading center would be 

required to have policies and 

procedures reasonably designed to 

prevent it from executing or displaying 

any short sale order, absent an 

exception, at a price that is below the 

national best bid. If the current national 

best bid is below the last differently 

priced national best bid, a trading center 

would be required to have policies and 

procedures reasonably designed to 

prevent it from executing or displaying 

the order unless the order is priced 

above the current national best bid. 

Such a rule might help prevent short 

sellers from driving the market down. In 

addition, the proposed modified uptick 

rule might help prevent short sales from 

being used as a tool to accelerate a 

declining market. 

The following example demonstrates 

the operation of the proposed modified 

uptick rule. If the current national best 

bid in a security is $47.00, and the 

immediately preceding national best bid 

was $46.99 (i.e., the current bid is above 

the previous bid), a trading center could 

immediately execute a short sale order 

at $47.00 or above. Similarly, a trading 

center could display a short sale order 

priced at $47.00 or above.98 If the 

current national best bid in a security is 

$47.00, and the immediately preceding 

bid was $47.01 (i.e., the current bid is 

below the previous bid), a trading center 

could execute or display a short sale 

order at a price above $47.00.99 If the 

current national best bid in a security is 

$47.00, and the immediately preceding 

national best bid was $47.00, but that 

bid was above the prior national best 

bid (i.e., the last differently priced 

national best bid), a trading center could 

execute a short sale order at $47.00 or 

above. Similarly, a trading center could 

display a short sale order priced at 

$47.00 or above.100 If the current 

national best bid is $47.00, and the 

immediately preceding national best bid 

was $47.00, but that was below the prior 

national best bid (i.e., the last differently 

priced national best bid), a trading 

center could execute or display a short 

sale at a price above $47.00.101

The proposed modified uptick rule 

would apply to any ‘‘covered security,’’ 

which is defined as an ‘‘NMS stock’’ 

under Rule 600(b)(47) of Regulation 

NMS.102 Rule 600(b)(47) of Regulation 

NMS defines an ‘‘NMS stock’’ as ‘‘any 

NMS security other than an option.’’ 103

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.’’ 104 Thus, the proposed 

modified uptick rule would 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.105 As a 

result, the proposed modified uptick 

rule generally would cover all 

securities, except options, listed on a 

national securities exchange whether 

traded on an exchange or in the overthe-counter (‘‘OTC’’) market. It would 

not include non-NMS stocks quoted on 

the OTC Bulletin Board or elsewhere in 

the OTC market. We are not proposing 

to apply the proposed modified uptick 

rule 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. In 

addition, former Rule 10a–1 did not 

apply to non-exchange listed securities 

quoted on the OTC Bulletin Board or 

elsewhere in the OTC market. We 

recognize, however, that issuers of 

securities quoted in the OTC market 

may believe that they are particularly 

vulnerable to abusive short selling. 

Thus, we seek specific comment 

regarding whether the proposed 

modified uptick rule or some other form 

of price test, or any other restrictions on 

short sales, should apply to these types 

of securities. 

The scope of securities covered by the 

proposed modified uptick rule would be 

similar to the scope of securities 

covered by former Rule 10a–1. Former 

Rule 10a–1(a) 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 would also be 

subject to the proposed modified uptick 

rule. 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, would be 

subject to the proposed modified uptick 

rule.106

Market information for NMS stocks, 

including quotes, is disseminated 

pursuant to three different national 

market system plans.107 The national 


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securities primarily listed on an exchange other 

than Nasdaq, (2) the Consolidated Quotation Plan 

(‘‘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. 

108Rule 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). 

109These 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. 

110See Securities Exchange Act Release No. 

51808 (June 9, 2005), 70 FR 37496, 37503 (June 29, 

2005) (‘‘Regulation NMS Adopting Release’’). 

111See 17 CFR 242.600(b)(78); see also proposed 

Rule 201(a)(7) (providing that the term ‘‘trading 

center’’ shall have the same meaning as in 

§ 242.600(b)(78) of Regulation NMS). 

112For 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, but the 

immediately preceding national best bid was $47.01 

(i.e., the current bid is below the previous bid), 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. 

113See proposed Rule 201(b)(1)(i). 

114See 17 CFR 242.602(b)(2). We note that to the 

extent that a short sale order is undisplayed, the 

proposed modified uptick rule would prevent the 

trading center from executing the order unless at 

the time of execution, the execution price complies 

with the proposed modified uptick rule at the time 

of execution of the order. 

securities exchanges and FINRA 

participate in these joint-industry plans 

(‘‘Plans’’).108 The Plans establish three 

separate networks to disseminate market 

information for NMS stocks.109 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 trading centers 

would have access to the consolidated 

bids for all the securities that would be 

subject to the proposed modified uptick 

rule.110 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. 

The proposed modified uptick rule 

would apply to any trading center that 

executes or displays a short sale order 

in a covered security. It would define 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.’’ 111 The 

proposed definition encompasses all 

entities that may execute short sale 

orders. Thus, the proposed modified 

uptick rule would apply to any entity 

that executes short sale orders. 

Under the proposed modified uptick 

rule, a trading center would be required 

to have written policies and procedures 

reasonably designed to prevent the 

execution or display of short sale orders 

on a down-bid price. Thus, upon receipt 

of a short sale order, a trading center’s 

policies and procedures would have to 

require that the trading center be able to 

determine whether or not the short sale 

order could be executed or displayed in 

accordance with the provisions of 

proposed Rule 201(b)(1). If the order is 

marketable at a permissible price, the 

trading center would be able to present 

the order for immediate execution or, if 

not immediately marketable, hold for 

execution later at its specified price. 

The proposed modified uptick rule 

would permit 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 down-bid price, reprice the order at the lowest permissible 

price and hold it for later execution at 

its new price or better.112 As quoted 

prices change, the proposed rule would 

allow 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). 

In addition, paragraph (b)(1)(i) of the 

proposed rule would require 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 down-bid price provided that, 

at the time the order was displayed by 

the trading center it was permissibly 

priced, i.e., not on a down-bid price.113

This exception for properly displayed 

short sale orders would help avoid a 

conflict between the proposed modified 

uptick rule and the ‘‘Quote Rule’’ under 

Rule 602 of Regulation NMS. 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.114 Thus, pursuant to this 

exception, a trading center would 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 the proposed 

rule at the time it was first displayed, 

even if the execution of the transaction 

would be on a down-bid price at the 

time of execution. 

Because a trading center could reprice and display a previously 

impermissibly priced short sale order 

the proposed modified uptick rule 

potentially allows for the more efficient 

functioning of the markets than the 

proposed uptick rule because trading 

centers would 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 recognize that some 

trading centers might not want to reprice an impermissibly priced short sale 

order. Thus, re-pricing would not be a 

requirement under the proposed 

modified uptick rule. 

In addition, the proposed modified 

uptick rule would 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 could offer their 

customers various order types regarding 

the handling of impermissibly priced 

orders such that a trading center either 

could reject an impermissibly priced 

order or re-price the order at the lowest 

permissible price until the order is 

filled. 

The proposed modified uptick rule 

would focus on a trading center’s 

written policies and procedures as the 

mechanism through which to prevent 

the execution or display of short sale 

orders on a down-bid price. Under this 

approach, trading centers would be 

required to have policies and 

procedures reasonably designed to 

prevent the execution or display of short 

sale orders at impermissible prices and 

to surveil the effectiveness of the 

policies and procedures. Thus, short 

sale orders executed or displayed at 

impermissible prices would require the 

trading center that executed or 

displayed the short sales to take prompt 

action to remedy any deficiencies. 

We also note that the policies and 

procedures requirements of the 

proposed modified uptick rule are 

similar to those set forth under 


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115See Regulation NMS Adopting Release, 70 FR 

37496; see also 17 CFR 242.611. 116See id. 117See id. 118See Section V below discussing short sale 

orders marked ‘‘short exempt.’’ 119See proposed Rules 201(c) and 201(d). 

120See proposed Rule 201(b)(2). 

121We note that Rule 611(a)(2) of Regulation NMS 

contains a similar provision for trading centers. See 

17 CFR 242.611(a)(2). 

122See supra note 94; see also letter from Dan 

Mathisson, Managing Director, Credit Suisse 

Securities USA, LLC, dated March 30, 2009 (‘‘letter 

from Credit Suisse’’) (stating that ‘‘requiring an 

uptick of more than one cent would be tantamount 

to a total ban for any stock that trades actively’’). 

123See proposed Rule 201(e). 

Regulation NMS.115 In accordance with 

Regulation NMS, trading centers must 

have in place written policies and 

procedures in connection with that 

Regulation’s order protection rule.116

Thus, 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. This 

familiarity should reduce the 

implementation costs of the proposed 

modified uptick rule on trading centers. 

Similar to the requirements under 

Regulation NMS in connection with the 

order protection rule,117 at a minimum, 

a trading center’s policies and 

procedures would need to enable a 

trading center to monitor, on a real-time 

basis, the national best bid, and whether 

the current national best bid is an upor down-bid from the last differently 

priced national best bid, so as to 

determine the price at which the trading 

center may execute or display a short 

sale order. In addition, a trading center 

would need to 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 down-bid 

price.118 A trading center’s policies and 

procedures would 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 the proposed modified 

uptick rule.119

A trading center would also need to 

take such steps as would be necessary 

to enable it to enforce its policies and 

procedures effectively. For example, 

trading centers could establish policies 

and procedures that could include 

regular exception reports to evaluate 

their trading practices. If a trading 

center’s policies and procedures include 

exception reports, any such reports 

would 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. 

To help ensure compliance with the 

proposed modified uptick rule, trading 

centers could also have policies and 

procedures that would 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, as well as the last differently 

priced national best bid. Such 

‘‘snapshots’’ of the market would aid 

SROs in evaluating a trading center’s 

written policies and procedures and 

compliance with the proposed modified 

uptick rule. In addition, such snapshots 

would 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 

would 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 would 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 would need to 

implement reasonable steps to monitor 

such latencies on a continuing basis and 

take appropriate steps to address a 

problem should one develop. 

Trading centers would be required to 

conduct surveillance under the 

proposed modified uptick rule. 

Proposed Rule 201(b)(2) provides that a 

trading center must regularly surveil to 

ascertain the effectiveness of the 

policies and procedures required under 

the proposed modified uptick rule and 

must take prompt action to remedy 

deficiencies in such policies and 

procedures.120 This provision would 

reinforce the ongoing maintenance and 

enforcement requirements of proposed 

Rule 201(b)(1) by explicitly assigning an 

affirmative responsibility to trading 

centers to surveil to ascertain the 

effectiveness of their policies and 

procedures.121 Thus, under the 

proposed modified uptick rule, trading 

centers would not be able to merely 

establish policies and procedures that 

may be reasonable when created and 

assume that such policies and 

procedures would continue to satisfy 

the requirements of proposed Rule 

201(b). Rather, trading centers would be 

required to regularly assess the 

continuing effectiveness of their 

procedures and take prompt action 

when needed to remedy deficiencies. In 

particular, trading centers would 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. 

The proposed modified uptick rule 

would differ from the tick test of former 

Rule 10a–1, and the alternative 

proposed uptick rule discussed below. 

Similar to former Rule 10a–1, the 

alternative proposed uptick rule would 

be based on the last sale price, rather 

than the national best bid, and it would 

not include an explicit policies and 

procedures requirement. The proposed 

uptick rule would prevent the execution 

of short sale orders below the last sale 

price, unless an exception applies. The 

proposed modified uptick rule would 

prevent the execution or display of short 

sale orders below the current national 

best bid, unless, among other things, the 

order is marked ‘‘short exempt.’’ 

Because the proposed modified uptick 

rule would use the national best bid as 

its reference point, short selling could 

occur below the last sale price. 

The two proposed alternative short 

sale price tests would operate similarly, 

however, in that they would be 

designed to achieve a similar purpose. 

In addition, to help limit the impact of 

the proposed alternative short sale price 

tests on legitimate short selling, both 

rules would permit short selling at an 

increment above the national best bid, 

or the last sale price, as applicable, in 

a declining market. As commenters have 

noted, the higher the increment the 

more restrictive such an increment 

could be on short selling and could even 

be tantamount to a ban on short 

selling.122

In addition, the proposed modified 

uptick rule, similar to the proposed 

uptick rule, would not result in the type 

of disparate short sale regulation that 

existed under former Rule 10a–1.123 The 

proposed modified uptick rule would 

apply a uniform rule to trades in the 

same securities that can occur in 


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124See proposed Rule 201(e). 

125See supra note 27 (discussing NASD Rule 

3350). Similar to the proposed modified uptick rule, 

NASD’s 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. NASD’s bid test, however, took a straight 

prohibition approach, rather than a policies and 

procedures approach, and, by its terms, applied 

only to Nasdaq Global Market securities. 

126See e.g., 17 CFR 242.602. 

127See Securities Exchange Act Release No. 

43085 (July 28, 2000), 65 FR 47918 (Aug. 4, 2000). 

128See id. 

129See id. 

130See FINRA Rule 6380A. 

131See, e.g., supra note 26. 

132See id.; see e.g., letter from James A. 

Brigagliano, Acting Associate Director, Division of 

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

President and Director of Compliance, Instinet 

Group, LLC. (June 15, 2006) (granting Instinet 

modified exemptive relief from Rule 10a–1 for 

certain transactions executed through Instinet’s 

Intraday Crossing System); POSIT letter. 

multiple, dispersed, and diverse 

markets. 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 

because the application of short sale 

price tests had become disjointed with 

different price tests applying to the 

same securities trading in different 

markets. Under the proposed modified 

uptick rule, all covered securities, 

wherever traded, would be subject to 

one short sale price test, the proposed 

modified uptick rule. To further this 

goal of having a uniform short sale price 

test, subsection (e) of proposed Rule 201 

would provide that no SRO shall have 

any rule that is not in conformity with, 

or conflicts with proposed Rule 201.124

In addition, just as market participants 

would be familiar with the proposed 

uptick rule because it is a modified 

version of former Rule 10a–1 that was 

in existence for almost 70 years, market 

participants would also be familiar with 

using the current national best bid as a 

reference point because NASD’s bid test, 

which was in existence from 1994 to 

mid-2007, was based on the current 

national best bid.125

We preliminarily believe that a short 

sale price test based on the national best 

bid would be more suitable to today’s 

markets than a short sale price test 

based on the last sale price. 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.126 By requiring 

that quotations are firm, the 

Commission intended to ensure that 

quotations provide reliable information 

to the marketplace so that broker-dealers 

are able to make best execution 

decisions for their customers’ orders 

and customers are able to make 

informed investment decisions.127

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.128

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.129

Further, we believe that bids generally 

are a more accurate reflection of current 

prices for a security because changes in 

the national best bid are sequenced 

across trading centers. In contrast, 

transactions may be reported within a 

90 second window, which can easily 

result in out-of-sequence reports. Even 

transactions that are executed and 

reported automatically may be out of 

sequence if they occur in different 

trading centers. 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. In addition, trades are 

published in reporting sequence, not 

trade sequence.130 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 may be a fairer and more 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. 

The proposed modified uptick rule 

would be designed to restrict short 

selling at successively lower prices and, 

thereby, might help prevent short 

selling, including potentially abusive or 

manipulative short selling, from being 

used as a tool to drive the markets down 

and from being used to accelerate a 

decline in the market by exhausting all 

remaining bids at one price level. By 

seeking to advance these goals, the 

proposed modified uptick rule might 

restore investor confidence in our 

securities markets. 

In addition, the proposed modified 

uptick rule would be designed to 

preserve instant execution and liquidity 

by allowing relatively unrestricted short 

selling in an advancing market. As 

discussed above, one of the benefits of 

legitimate short selling is that it 

provides market liquidity by, for 

example, adding to the selling interest 

of stock available to purchasers, and, 

when sellers are covering their short 

sales, adding to the buying interest of 

stock available to sellers. 

In addition, we believe the proposed 

modified uptick rule would 

accommodate 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.131 The proposed modified 

uptick rule would accommodate 

matching systems that execute trades at 

an independently derived price because 

such systems are designed so that 

matches occur above the current 

national best bid.132 Thus, even in a 

declining market where a trading center 

could execute or display an order only 

if it is priced above the current national 

best bid at the time of execution or 

display, such matching system 

executions would comply with the 

proposed modified uptick rule. 

If we were to adopt the proposed 

modified uptick rule, we are proposing 

that there would be a three month 

implementation period such that trading 

centers would have to comply with the 

proposed modified uptick rule three 

months following the effective date of 

the proposed modified uptick rule. We 

believe that a proposed three month 

implementation period would provide 

trading centers with sufficient time in 

which to modify their systems and 

procedures in order to comply with the 

requirements of the proposed modified 

uptick rule. Because the proposed 

modified uptick rule would require the 

implementation of policies and 

procedures similar to those required for 

trading centers under Regulation NMS, 

we believe that a three month 

implementation period would be 

reasonable. The addition of an 

implementation period should alleviate 

any potential disruptive effects of the 

proposal. 

We realize, however, that a shorter or 

longer implementation period may be 

manageable or preferable. In the 

Solicitation of Comment below, we seek 

specific comment as to what length of 

implementation period would be 

necessary or appropriate, and why, such 

that trading centers would be able to 


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133See proposed Rule 201(b)(1)(ii). 

134See proposed Rule 201(b)(1)(ii). 

135See Section V below discussing proposed Rule 

200(g)(2). 

136We note that NASD Rule 3350 contained 

exceptions to that rule similar to exceptions to 

former Rule 10a–1. In addition, we note NASD Rule 

3350 included an exception related to bona fide 

market making activity. See infra note 190 and 

accompanying text (discussing our decision not to 

propose that a broker-dealer may mark an order 

‘‘short exempt’’ in connection with bona fide 

market making activity). See also supra note 125. 

137See proposed Rule 201(c)(1). 

138See proposed Rule 201(c)(1). 

139See proposed Rule 200(g)(2). 

140See proposed Rule 201(c)(1). 141Such policies and procedures would be 

similar to those required for trading centers 

complying with paragraph (b) of the proposed 

modified uptick rule. 142See proposed Rule 201(c)(1). 

meet the proposed short sale price test 

restrictions, if adopted. 

2. ‘‘Short Exempt’’ Provision of 

Proposed Modified Uptick Rule 

Paragraph (b)(1)(ii) of the proposed 

modified uptick rule provides 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 down-bid 

price.133 Thus, a trading center’s 

policies and procedures must be 

reasonably designed to recognize when 

an order is marked ‘‘short exempt’’ so 

that the trading center’s policies and 

procedures would not prevent the 

execution or display of such orders on 

a down-bid price.134

As discussed in more detail below, 

proposed Rule 200(g)(2) of Regulation 

SHO provides that a sale order shall be 

marked ‘‘short exempt’’ only if the 

provisions of paragraph (c) or (d) of 

proposed Rule 201 are met.135

Paragraphs (c) and (d) of the proposed 

modified uptick rule set forth when a 

broker-dealer may mark a short sale 

order ‘‘short exempt.’’ The provisions 

contained in paragraphs (c) and (d) of 

the proposed modified uptick rule are 

designed to promote the workability of 

the proposed modified uptick rule, 

while at the same time furthering the 

Commission’s stated goals. 

In addition, we note that the 

provisions contained in paragraph (d) of 

proposed Rule 201 would parallel 

exceptions to former Rule 10a–1 and 

exemptive relief granted pursuant to 

that rule. These exceptions and 

exemptions from former Rule 10a–1, as 

applicable, had been in place under 

former Rule 10a–1 for several years. We 

are not aware of any reason that the 

rationales underlying these exceptions 

and exemptions from former Rule 10a– 

1 would not still hold true today. 

Moreover, due to the limited scope of 

these exceptions and exemptions to 

former Rule 10a–1, we do not believe 

that including provisions that would 

parallel these exceptions and 

exemptions to former Rule 10a–1 would 

undermine the Commission’s stated 

goals for proposing short sale price test 

restrictions. 

Thus, the provisions in proposed Rule 

201(d) parallel exceptions to and 

exemptive relief granted under former 

Rule 10a–1, as applicable.136 As set 

forth in more detail below, however, we 

seek comment regarding each of these 

provisions, including whether or not 

these provisions would be appropriate 

or necessary under the proposed 

modified uptick rule. 

a. Broker-Dealer Provision 

Proposed Rule 201(c) provides that a 

broker-dealer may mark a short sale 

order of a covered security ‘‘short 

exempt’’ if a broker-dealer that submits 

a short sale order to a trading center 

identifies that the short sale order is not 

on a down-bid price at the time of 

submission of the order to the trading 

center.137 The proposed rule would 

require 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 proposed Rule 

201(c)(1).138

We are proposing this provision to 

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. In addition, we note that 

this provision would not undermine the 

Commission’s goals for short sale 

regulation because any broker-dealer 

marking an order ‘‘short exempt’’ in 

accordance with this provision would 

have to address whether its short sale 

order was not on a down-bid price at the 

time of submission of the order to a 

trading center. 

As discussed in more detail below, we 

are proposing amendments to Rule 

200(g) of Regulation SHO to require, in 

part, that a sale order shall be marked 

‘‘short exempt’’ only if the provisions of 

paragraph (c) of proposed Rule 201 of 

the proposed modified uptick rule are 

met.139

To mark an order ‘‘short exempt’’ 

pursuant to paragraph (c) of the 

proposed modified uptick rule, the 

broker-dealer must have mechanisms in 

place to enable the broker-dealer to 

identify the short sale order as priced in 

accordance with the provisions of 

proposed Rule 201(c)(1). In accordance 

with proposed 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 proposed Rule 

201(c)(1).140 Thus, although a brokerdealer relying on this provision in 

marking an order ‘‘short exempt’’ would 

not need to identify the order as 

permissibly priced to the trading center, 

it would 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.141

At a minimum, a broker-dealer’s 

policies and procedures would need to 

be reasonably designed to enable a 

broker-dealer to monitor, on a real-time 

basis, the national best bid, and whether 

the current national best bid is an upor down-bid from the last differently 

priced national best bid, so as to 

determine the price at which the brokerdealer may submit a short sale order to 

a trading center in compliance with the 

provisions of proposed Rule 201(c)(1). 

A broker-dealer would also need to 

take such steps as would be necessary 

to enable it to enforce its policies and 

procedures effectively.142 For example, 

broker-dealers could establish policies 

and procedures that could include 

regular exception reports to evaluate 

their trading practices. If a brokerdealer’s policies and procedures include 

exception reports, any such reports 

would 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. 

To ensure compliance with proposed 

Rule 201(c)(1), a broker-dealer could 

also have policies and procedures that 

would enable it to have a record 

identifying the current national best bid 

at the time of submission of a short sale 

order, as well as the last differently 

priced national best bid. Such 

‘‘snapshots’’ of the market would also 

aid SROs in evaluating a broker-dealer’s 

written policies and procedures and 

compliance with proposed Rule 201(c). 

In addition, such snapshots would aid 

broker-dealers in verifying that a short 

sale order was priced in accordance 

with the provisions of proposed Rule 

201(c)(1) if bid flickering during the 

period between identification of the 

current national best bid and the 


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143See proposed Rule 201(c)(2). 

144We note that Rule 611(a)(2) of Regulation NMS 

contains a similar surveillance provision. See 17 

CFR 242.611(a)(2). 

145Subsection (e)(1) of former Rule 10a–1 

contained an exception relating to a seller’s delay 

in the delivery of securities. The provision in 

proposed Rule 201(d)(1) parallels the exception 

contained in former Rule 10a–1(e)(1). 

146 17 CFR 242.200. 

147See proposed Rule 201(d)(1). This proposed 

provision is also consistent with Rule 203(b)(2)(ii) 

of Regulation SHO that 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 * * *’’ 17 CFR 

242.203(b)(2)(ii). 

148See 17 CFR 242.200(g)(1). 

149Proposed Rule 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). 

150See proposed Rule 201(d)(2). SRO rules define 

a ‘‘unit of trading’’ or ‘‘normal unit of trading,’’ and 

generally means 100 shares, i.e., a round lot. For 

example, FINRA Rule 6320A(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 * * *.’’ 

151The 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 supra note 24, Former Rule 

10a–1 Adopting Release 3 FR 213. 

152See Securities Exchange Act Release No. 

11030 (Sept. 27, 1974), 39 FR 35570 (Oct. 2, 1974). 

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 would 

also aid broker-dealers in dealing with 

time lags in receiving data regarding the 

national best bid from different data 

sources. A broker-dealer’s policies and 

procedures would be required to 

address any such latencies in obtaining 

data regarding the national best bid. In 

addition, to the extent such latencies 

occur, a broker-dealer’s policies and 

procedures would 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 would be a required part 

of a broker-dealer’s satisfaction of its 

legal obligations. Proposed Rule 

201(c)(1) provides that a broker-dealer 

must regularly surveil to ascertain the 

effectiveness of the policies and 

procedures required under proposed 

Rule 201(c)(2) and must take prompt 

action to remedy deficiencies in such 

policies and procedures.143 This 

provision would reinforce the ongoing 

maintenance and enforcement 

requirements of proposed Rule 201(c)(2) 

by explicitly assigning an affirmative 

responsibility to broker-dealers to 

surveil to ascertain the effectiveness of 

their policies and procedures.144 Thus, 

under proposed Rule 201(c)(1) and 

(c)(2), broker-dealers would not be able 

to merely establish policies and 

procedures that may be reasonable 

when created and assume that such 

policies and procedures would continue 

to satisfy the requirements of the 

proposed rule. Rather, broker-dealers 

would be required to regularly assess 

the continuing effectiveness of their 

procedures and take prompt action 

when needed to remedy deficiencies. In 

particular, each broker-dealer would 

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 proposed Rule 

201(c)(1) and whether the broker-dealer 

has failed to implement and maintain 

policies and procedures that would 

have reasonably prevented such 

impermissible submissions. 

b. Seller’s Delay in Delivery 

The proposed modified uptick rule 

provides that a broker-dealer may mark 

an order ‘‘short exempt’’ if the brokerdealer 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.145 Specifically, proposed Rule 

201(d)(1) provides that a broker-dealer 

may mark a short sale order of a covered 

security ‘‘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,146 provided that the 

person intends to deliver the security as 

soon as all restrictions on delivery have 

been removed.147

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 physical 

possession or control by settlement of 

the transaction.148 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, 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, proposed Rule 

201(d)(1) would be 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 security to its broker-dealer 

prior to settlement based on 

circumstances outside the seller’s 

control. 

c. Odd Lot Transactions 

Proposed Rule 201(d)(2) would 

provide that a broker-dealer may mark 

a short sale order ‘‘short exempt’’ if the 

broker-dealer has a reasonable basis to 

believe that the short sale order is by a 

market maker to off-set a customer oddlot 149 order or liquidate an odd-lot 

position which changes such brokerdealer’s position by no more than a unit 

of trading.150

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. 

Initially, sales of odd-lots were not 

subject to the restrictions of Rule 10a– 

1.151 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.152

Former Rule 10a–1(e)(3) contained a 

limited exception for odd-lot dealers 

registered in the security and third 

market makers. The exception 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 brokerdealer’s position by no more than a unit 

of trading. 

We believe that a provision that 

would allow a broker-dealer to mark a 

short sale order ‘‘short exempt’’ if it has 

a reasonable basis to believe that the 


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153Section 3(a)(38) of the Exchange Act defines 

a ‘‘market maker,’’ and includes specialists. See 15 

U.S.C. 78c(a)(38). 

154See Securities Exchange Act Release No. 1645 

(Apr. 8, 1938). 

155See Securities Exchange Act Release No. 

42037 (Oct. 20, 1999), 64 FR 57996 (Oct. 28, 1999) 

(‘‘1999 Concept Release’’). 

156 1999 Concept Release, 64 FR at 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 Securities Exchange Act Release No. 15533 

(Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979) 

(interpretation concerning the application of 

Section 11(a)(1) to bona fide arbitrage). 

157See Securities Exchange Act Release No. 

15533 (Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979) 

(interpretation concerning the application of 

Section 11(a)(1) to bona fide arbitrage). 

158Proposed Rule 201(d)(3). 

159See 12 CFR 220.6. 

160Section 220.3(b) of Regulation T, titled 

‘‘Separation of accounts,’’ generally provides that 

requirements for an account may not be met by 

considering items in any other account. Further, 

Regulation T identifies three types of customer 

accounts—cash accounts, margin accounts and 

good faith accounts—in which customer 

transactions may be booked. A broker-dealer can 

extend credit to customers through a margin 

account or a good faith account. Generally, 

positions held in a good faith account are subject 

to good faith margin, whereas positions held in a 

margin account are subject to the margin 

requirements otherwise set forth in Regulation T 

and SRO margin requirements. 

161See Securities Exchange Act Release No. 2039 

(Mar. 10, 1939), 4 FR 1209 (Mar. 14, 1939). 

short sale order is by a market maker to 

off-set 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 would 

continue to be of utility under the 

proposed modified uptick rule because 

it would not be in conflict with the 

goals of the proposed rule. 

Thus, the provision in proposed Rule 

201(d)(2) parallels the exceptions in 

subsections (e)(3) and (e)(4) of former 

Rule 10a–1. In addition, however, we 

propose 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, we 

propose to broaden the provision in 

proposed Rule 201(d)(2) to all brokerdealers acting as ‘‘market makers’’ in 

odd lots.153

We believe that this provision would 

be appropriate. Because odd-lot 

transactions by market makers to 

facilitate customer orders are not of a 

size that could facilitate a downward 

movement in the market, we do not 

believe that proposed Rule 201(d)(2) 

would adversely affect the goals of short 

sale regulation that the proposed 

modified uptick rule 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, would be able to off-set 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 down-bid price. 

d. Domestic Arbitrage 

Proposed Rule 201(d)(3) would 

provide that a broker-dealer may mark 

‘‘short exempt’’ short sale orders 

associated with certain bona fide 

domestic arbitrage transactions. 

Subsection (e)(7) of former Rule 10a–1 

contained an exception related to 

domestic arbitrage.154 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.155 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.156 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 an 

equivalent number of securities of the 

securities sold short. We continue to 

believe that bona fide arbitrage activities 

are beneficial to the markets because 

they tend to reduce pricing disparities 

between related securities.157 Thus, 

bona fide arbitrage transactions promote 

market efficiency. 

Proposed Rule 201(d)(3) would 

parallel the exception in former Rule 

10a–1(e)(7). Specifically, proposed Rule 

201(d)(3) would provide 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 by a person who 

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 the 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.’’ 158

The domestic arbitrage exception in 

former Rule 10a–1 was intended to be 

consistent with the arbitrage provision 

of Regulation T.159 Thus, consistent 

with that provision, former Rule 10a– 

1(e)(7) referred to a ‘‘special arbitrage 

account’’ and not a ‘‘good faith 

account.’’ 160 The Federal Reserve Board 

amended Regulation T in 1998 to 

eliminate the ‘‘special arbitrage 

account’’ and allow the functions 

formerly effected in that account to be 

effected in a ‘‘good faith account.’’ Thus, 

proposed Rule 201(d)(3) also refers to a 

‘‘good faith account.’’ We note, 

however, that we request specific 

comment regarding whether or not the 

use of a ‘‘good faith account’’ or any 

other separate account continues to be 

appropriate or necessary for purposes of 

this proposed Rule 201(d)(3). 

Because allowing domestic arbitrage 

at a down-bid price would potentially 

promote market efficiency, the proposed 

modified uptick rule would include a 

limited provision to allow brokerdealers to mark short sale orders ‘‘short 

exempt’’ provided the broker-dealer has 

a reasonable basis to believe that the 

conditions in proposed Rule 201(d)(3) 

have been met. Thus, the proposed rule 

is designed to permit the execution or 

display on a down-bid price 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. 

e. International Arbitrage 

Proposed Rule 201(d)(4) would 

provide that a broker-dealer may mark 

‘‘short exempt’’ short sale orders 

associated with certain international 

arbitrage transactions. Former Rule 10a– 

1(e)(8) included an international 

arbitrage exception that was adopted in 

1939.161 In adopting the exception, the 

Commission stated that it was necessary 


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162See id. 

163Proposed Rule 201(d)(4). 

164Former 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 such foreign 

securities market and intends to accept such offer 

immediately.’’ 

165See supra note 161. 

166We 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 2003 

Regulation SHO Proposing Release, 68 FR at 62986. 

167See Securities Exchange Act Release No. 

11030 (Sept. 7, 1974), 39 FR 35570 (Oct. 2, 1974). 

168See, e.g., Securities 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. 

169 17 CFR 242.100 et seq. 

170See Securities 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). 

171See proposed Rule 201(d)(6). 

172See letter from James A. Brigagliano to Ira 

Hammerman, Senior Vice President and General 

Counsel, Securities Industry Association, dated July 

18, 2005 (‘‘Riskless Principal Letter’’). 

173See id. 

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.’’ 162 We believe likewise that 

such transactions would have utility 

under the proposed modified uptick 

rule. 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. Thus, we do not believe that 

permitting broker-dealers to mark these 

orders ‘‘short exempt’’ would 

undermine the goals of short sale price 

test regulation. 

Proposed Rule 201(d)(4) would 

parallel the exception contained in 

former Rule 10a–1(e)(8). Specifically, 

proposed Rule 201(d)(4) would provide 

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 

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.’’ 163

In proposed Rule 201(d)(4), we have 

simplified the language of former Rule 

10a–1(e)(8) to make it more 

understandable.164 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 proposed Rule 201(d)(3), 

this revision is necessary to make the 

proposed provision consistent with the 

arbitrage provision in Regulation T. We 

note, however, that we request specific 

comment regarding whether or not the 

use of a ‘‘good faith account’’ or any 

other separate account continues to be 

appropriate or necessary for purposes of 

proposed Rule 201(d)(4). 

In addition, 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).165 We likewise 

believe this language is appropriate and 

should be incorporated into proposed 

Rule 201(d)(4). We seek comment, 

however, regarding whether for 

purposes of the international arbitrage 

provision, a depository receipt for a 

security should be deemed to be the 

same security represented by the 

receipt. 

As with the exception in former Rule 

10a–1(e)(8), proposed Rule 201(d)(4) 

would apply only to bona fide arbitrage 

transactions. Thus, this provision would 

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 would 

have the effect of neutralizing the short 

sale. We believe proposed Rule 

201(d)(4) would be 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.166

f. Over-Allotments and Lay-Off Sales 

Proposed Rule 201(d)(5) would 

provide that a broker-dealer may mark 

‘‘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 with respect to layoff sales by such persons in connection 

with a distribution of securities through 

a rights or standby underwriting 

commitment. 

Former Rule 10a–1(e)(10) contained 

an exception for over-allotment and layoff sales.167 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.168 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,169 an anti-manipulation 

rule.170 In accordance with the longstanding Commission position regarding 

these sales, we are including through 

proposed Rule 201(d)(5) a provision for 

short sale orders in connection with 

over-allotment and lay-off sales that 

would parallel the exception in former 

Rule 10a–1(e)(10). 

g. Riskless Principal Transactions 

Proposed Rule 201(d)(6) would 

provide that a broker-dealer may mark 

‘‘short exempt’’ short sale orders where 

broker-dealers are facilitating customer 

buy orders or sell orders where the 

customer is net long, and the brokerdealer is net short but is effecting the 

sale as riskless principal.171

In 2005, the Commission 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.172 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.173

In addition, the Commission noted 

representations made in the letter 


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174See id. 175See id. 176See id. 177These 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). 178 In addition to being consistent with the 

conditions in the Riskless Principal Letter and Rule 

10b–18 of the Exchange Act, this definition is 

consistent with the definition of ‘‘riskless 

principal’’ in FINRA Rule 6642. 

179This requirement 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). 

180See proposed Rule 201(d)(6). 

181See e.g. letter from Larry E. Bergmann, Senior 

Associate Director, Division of Market Regulation, 

SEC, to Edith Hallahan, Counsel, Phlx, dated March 

24, 1999; letter from Larry E. Bergmann, Senior 

Associate Director, Division of Market Regulation, 

SEC, to Soo J. Yim, Wilmer, Cutler & Pickering, 

dated December 7, 2000; letter from James 

Brigagliano, Assistant Director, Division of Market 

Regulation, SEC, to Andre E. Owens, Schiff Hardin 

& Waite, dated March 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 

February 12, 2003. 

182See id. 

183See id. 

184See id. 

185See proposed Rule 201(b)(7). 

186See proposed Rule 201(d)(7). 

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.174 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.175

Thus, compliance with former Rule 

10a–1 would adversely affect a brokerdealer’s ability to provide best execution 

to a customer order.176

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 would be 

appropriate and would not undermine 

our goals in proposing short sale price 

test regulation. In particular, we note 

that such a provision would facilitate a 

broker-dealer’s ability to provide best 

execution to customer orders. 

Accordingly, taken together proposed 

Rules 201(a)(6) and (d)(6) would parallel 

the conditions for relief in the Riskless 

Principal Letter.177

Specifically, proposed Rule 201(a)(6) 

would define 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 

or, after having received an order to sell, 

sells the security as principal at the 

same price to satisfy the order to 

sell.’’ 178 Proposed Rule 201(d)(6) would 

provide that a broker-dealer 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 

and provided the sell order is given the 

same per-share price at which the 

broker-dealer bought shares to satisfy 

the facilitated order, exclusive of any 

explicitly disclosed markup or 

markdown, commission equivalent or 

other fee.179 In addition, proposed Rule 

201(d)(6) would require the brokerdealer, if it marks an order ‘‘short 

exempt’’ under this provision, to have 

policies and procedures in place to 

assure that, at a minimum: the customer 

order was received prior to the offsetting 

transaction; the offsetting transaction is 

allocated to a riskless principal or 

customer account within 60 seconds of 

execution; and that it has supervisory 

systems in place to produce records that 

enable the broker-dealer to accurately 

and readily reconstruct, in a timesequenced manner, all orders on which 

the broker-dealer relies pursuant to this 

provision.180

We believe that proposed Rule 

201(d)(6) would provide broker-dealers 

with additional flexibility to facilitate 

customer orders and provide best 

execution. In addition, we believe that 

the conditions set forth in proposed 

Rule 201(d)(6) would 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 would 

help ensure that broker-dealers are 

complying with proposed Rule 

201(d)(6). 

h. Transactions on a Volume-Weighted 

Average Price Basis 

Proposed Rule 201(d)(7) would 

provide that a broker-dealer may mark 

‘‘short exempt’’ certain sale orders 

executed on a volume-weighted average 

price (‘‘VWAP’’) basis. Under former 

Rule 10a–1, the Commission granted 

limited relief from that rule in 

connection with short sales executed on 

a VWAP basis.181 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.182 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.183 Moreover, 

the Commission stated that all trades 

used to calculate the day’s VWAP 

would continue to be subject to former 

Rule 10a–1.184

Consistent with the relief granted 

under former Rule 10a–1, we propose 

providing that a broker-dealer may mark 

‘‘short exempt’’ certain short sale orders 

executed at the VWAP. Proposed Rule 

201(d)(7) would differ from the relief 

granted under former Rule 10a–1, 

however, in that it would not be 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. We 

believe this restriction would not be 

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 

would be designed to prevent. In 

addition, in accordance with proposed 

Rule 201(d)(7), no short sale orders used 

to calculate the VWAP may be marked 

‘‘short exempt.’’ 185 This would help 

limit any potential for manipulation. 

Thus, pursuant to proposed 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: 186 (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 


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187 17 CFR 242.100(b). 

188See Securities Exchange Act Release No. 

11030 (Sept. 27, 1974), 39 FR 35570 (Oct. 2, 1974). 

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. 

189See id. 

190We note, however, that NASD’s bid test 

contained an exception for short sales executed by 

qualified market makers in connection with bona 

fide market making. When, however, the 

Commission approved NASD’s 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 

1994 NASD Bid Test Approval, 59 FR 34885. See 

also supra notes 125 and 136 (discussing NASD 

Rule 3350). 

191See proposed Rule 201(c) and 201(d). 

192See proposed Rule 201(b)(1)(ii). 

193See also McCormick, D. Timothy and Zeigler, 

Bram, 1997, The Nasdaq short sale rule: Analysis 

of market quality effects and the market maker 

exemption. Working paper, NASD Economic 

Research, p. 28 (finding that market makers’ short 

sales at the bid or below on down-bids amounted 

to only 1.17% of their trading). 

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) no short sales 

used to calculate the VWAP are marked 

‘‘short exempt’’; (4) 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; (5) 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 (6) 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 subject 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.187

Except as discussed above, the 

conditions set forth in proposed 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 

would be similarly effective in serving 

that function today and, therefore, 

should be incorporated into proposed 

Rule 201(d)(7). 

i. Decision Not To Propose That a 

Broker-Dealer May Mark an Order 

‘‘Short Exempt’’ in Connection With 

Bona Fide Market Making Activity 

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-the-counter, (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.’’ 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.188 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.189 In 

addition, former Rule 10a–1 did not 

contain a general exception for short 

selling in connection with bona fide 

market making activities.190

Consistent with former Rule 10a–1, 

the proposed modified uptick rule 

would not permit a broker-dealer to 

mark a short sale order ‘‘short exempt’’ 

if the broker-dealer is engaging in bona 

fide market making activity. By 

requiring trading centers to have 

policies and procedures reasonably 

designed to prevent the execution or 

display of a short sale order at a downbid price, the proposed modified uptick 

rule might help prevent short selling, 

including potentially abusive or 

manipulative short selling, from being 

used as a tool to drive down a market 

and from being used to accelerate a 

declining market by exhausting all 

remaining bids at one price level, and 

causing successively lower prices to be 

established by long sellers. By seeking 

to advance these goals, the proposed 

modified uptick rule might help restore 

investor confidence. 

As set forth above, paragraphs (c) and 

(d) of proposed Rule 201 would permit 

a broker-dealer to mark a short sale 

order ‘‘short exempt’’ under certain 

circumstances.191 Further, if an order is 

marked ‘‘short exempt,’’ proposed Rule 

201(b)(1)(ii) provides that a trading 

center’s policies and procedures must 

be reasonably designed to permit the 

execution or display of such order 

without regard to whether the order is 

at a down-bid price.192 We have 

proposed these provisions to facilitate 

the proposed modified uptick rule’s 

workability, while at the same time, not 

undermine our goals in proposing short 

sale price test restrictions. 

We believe that permitting brokerdealers to mark ‘‘short exempt’’ short 

sale orders in connection with bona fide 

market making activity may undermine 

the goals of our proposed short sale 

price test restrictions at this time. In 

particular, we believe that for the 

proposed modified uptick rule to have 

the effect of helping to prevent declines 

in securities prices and restore investor 

confidence, provisions relating to when 

a broker-dealer may mark an order 

‘‘short exempt’’ should be limited in 

scope. 

In addition, we note that the proposed 

provision that would allow brokerdealers to mark short sale orders as 

‘‘short exempt’’ in connection with 

riskless principal transactions would 

provide broker-dealers with flexibility 

to facilitate customer orders. A trading 

center’s policies and procedures would 

also be designed to permit the execution 

or display of short sale orders at the 

offer. Additionally, in an advancing 

market, in accordance with proposed 

Rule 201(b)(1), a trading center’s 

policies and procedures would be 

reasonably designed to permit the 

execution or display of short sale orders 

at the current national best bid and, 

therefore, in an advancing market, 

market makers could provide liquidity 

to the markets and meet purchasing 

demand.193 For all these reasons, we do 

not believe it would be appropriate to 

provide that a broker-dealer may mark 

an order ‘‘short exempt’’ where the short 


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194See, e.g., Rule 600(64) of Regulation NMS, 

defining the term ‘‘regular trading hours.’’ 195See 2003 Regulation SHO Proposing Release, 

68 FR at 62997 (stating that the Commission 

interprets former Rule 10a–1 to apply to all trades 

in listed securities whenever they occur). 196We note, however, that NASD did not extend 

its short sale price test rule to the after-hours 

market. See NASD Head Trader Alert #2000–55. 197See supra note 107. 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. 198See http://www.nyxdata.com/cta. 199See http://www.utpdata.com/docs/ 

UTP_PlanAmendment.pdf. 200See proposed Rule 201(e). 

201See supra Section II, discussing the history of 

short sale price test regulation in the United States 

and changes in market conditions and resulting 

erosion of investor confidence. 

202Proposed Rule 201(a)(3) provides that the term 

‘‘transaction reporting plan’’ shall have the same 

meaning as in § 242.600(22) of Regulation NMS. 

203Proposed Rule 201(b). 

sale order is in connection with bona 

fide market making activity. 

We seek comment, however, on the 

importance of a market maker provision 

in the context of a market maker’s role 

in providing liquidity, including the 

extent to which market makers would 

need to sell short at or below the current 

national best bid in their market making 

capacity. We also seek comment on the 

extent to which the proposed riskless 

principal provision, as well as any other 

proposed provisions, would address 

concerns regarding the need for a more 

general market maker provision. In 

addition, we seek comment regarding 

what conditions should apply if a 

general market maker provision were 

added to when a broker-dealer may 

mark an order ‘‘short exempt’’ under the 

proposed modified uptick rule. We also 

seek comment on whether a general 

market maker exception should be 

limited to registered market makers. 

3. Proposed Modified Uptick Rule and 

After-Hours Trading 

Regular trading hours in the U.S. are 

from 9:30 a.m. to 4 p.m. Eastern Time 

(‘‘ET’’).194 A high volume of trading 

occurs, however, outside of these 

regular trading hours. Accordingly, the 

Commission interpreted former Rule 

10a–1 to apply to all trades in covered 

securities, whenever they occurred.195

By its terms, former Rule 10a–1 used as 

a reference point the last sale price 

reported to the consolidated tape. Thus, 

after the consolidated tape ceased to 

operate, the rule prevented any person 

from effecting a short sale in a listed 

security at a price lower than the last 

sale reported to the consolidated 

tape.196 Although former Rule 10a–1 

applied in the after-hours market, we do 

not believe that the proposed modified 

uptick rule should apply to covered 

securities during periods that the 

national best bid is not collected, 

calculated and disseminated. 

As discussed above, market 

information for quotes in NMS stocks is 

disseminated pursuant to two different 

national market system plans, the CQ 

Plan, and Nasdaq UTP Plan.197

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.198

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.199

During the time periods in which 

these Plans do not operate, real-time 

quote information is not collected, 

calculated and disseminated. We do not 

believe that it would further the goals of 

short sale price test regulation to apply 

the proposed modified uptick rule when 

the national best bid is not being 

collected, calculated and disseminated 

on a real-time basis. Thus, the proposed 

modified uptick rule would only apply 

at times when quotation information 

and, therefore, the national best bid, is 

collected, processed, and disseminated 

pursuant to a national market system 

plan. Thus, proposed Rule 201(f) limits 

application of the proposed modified 

uptick rule to times when ‘‘a national 

best bid for [an] NMS stock is calculated 

and disseminated on a current and 

continuing basis by a plan processor 

pursuant to an effective national market 

system plan.’’ 200 However, we seek 

comment on these issues. 

B. Proposed Uptick Rule 

1. Operation of the Proposed Uptick 

Rule 

As an alternative to proposing a short 

sale price test based on the national best 

bid, we are proposing a modified 

version of former Rule 10a–1 to provide 

the public with an opportunity to 

comment on the utility of such a price 

test, especially in light of the recent 

changes in market conditions.201 The 

proposed uptick rule would use the last 

sale price as the reference point for 

short sale orders. 

Specifically, the proposed uptick rule 

would provide that ‘‘[n]o person shall, 

for his own account or for the account 

of any other person, effect a short sale 

of any covered security, if trades in such 

security are reported pursuant to an 

effective transaction reporting plan 202

and information as to such trades is 

made available in accordance with such 

plan on a real-time basis to vendors of 

market transaction information: (i) 

Below the price at which the last sale 

thereof, regular way, was reported 

pursuant to an effective transaction 

reporting plan; or (ii) At such price 

unless such price is above the next 

preceding different price at which a sale 

of such security, regular way, was 

reported pursuant to an effective 

transaction reporting plan.’’ 203 Thus, 

under the proposed uptick rule, no short 

sale order may be effected below the last 

sale price. Short sale orders may be 

effected at the last sale price only if the 

last sale price is above the last different 

price. Otherwise, all short sale orders 

must be effected above the last sale 

price. 

The following transactions illustrate 

the operation of the proposed uptick 

rule: 


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204 17 CFR 242.600(a)(47). 

205 17 CFR 242.600(a)(46). 

206See supra note 106. We note that former Rule 

10a–1(b) applied the restrictions of former Rule 

10a–1 to short sales on a national securities 

exchange in securities for which trades were not 

reported pursuant to an ‘‘effective transaction 

reporting plan,’’ as defined in Rule 600 of 

Regulation NMS, and for which information as to 

such trades was not made available in accordance 

with such plan on a real-time basis to vendors of 

market transaction information. Former Rule 10a– 

1(b) provided, in part: ‘‘No person shall, for his own 

account or for the account of any other person, 

effect on a national securities exchange a short sale 

of any security not covered by paragraph (a) of this 

rule, 1. below the price at which the last sale 

thereof, regular way, was effected on such 

exchange, or 2. at such price unless such price is 

above the next preceding different price at which 

a sale of such security, regular way, was effected on 

such exchange.’’ A similar provision would not be 

applicable to the proposed uptick rule because the 

proposed uptick rule applies to all NMS stocks, 

which, by definition, include only those stocks for 

which trades are collected, processed, and made 

available pursuant to an effective transaction 

reporting plan. See 17 CFR 242.600(b)(47) and 

(b)(46). 

207See 2006 Price Test Elimination Proposing 

Release, 71 FR at 75073. 

The first execution at 47.04 is a plus 

tick since it is higher than the previous 

last trade price of 47.00. The next 

transaction at 47.04 is a zero-plus tick 

since there is no change in trade price 

but the last change was a plus tick. 

Short sales could be executed at 47.04 

or above in both of these cases. The final 

two transactions at 47.00 are minus and 

zero-minus transactions, respectively. 

Short sales in these two circumstances 

would have to be effected at a price 

above 47.00 in order to comply with 

proposed uptick rule. 

Similar to the proposed modified 

uptick rule, the proposed uptick rule 

would apply to any ‘‘covered security,’’ 

which is defined as an ‘‘NMS stock’’ 

under Rule 600(a)(47) of Regulation 

NMS. Rule 600(a)(47) of Regulation 

NMS defines an ‘‘NMS stock’’ as ‘‘any 

NMS security other than an option.’’ 204

Rule 600(a)(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.’’ 205 As a result, the 

proposed uptick rule would effectively 

cover all securities, other than options, 

listed on a national securities exchange 

whether traded on an exchange or in the 

OTC market. It would not include nonNMS stocks quoted on the OTC Bulletin 

Board or elsewhere in the OTC market. 

We are not proposing to apply the 

proposed uptick rule to non-NMS stocks 

quoted on the OTC Bulletin Board or 

elsewhere in the OTC market because 

these securities were not subject to 

former Rule 10a–1. We recognize, 

however, that issuers of non-NMS 

stocks, which often are less actively 

traded securities than NMS stocks, may 

believe that they are particularly 

vulnerable to abusive short selling. 

Thus, we seek specific comment 

regarding whether the proposed uptick 

rule or some other form of price test 

should apply to these types of 

securities. 

As discussed above in connection 

with the proposed modified uptick rule, 

the scope of securities covered by the 

proposed uptick rule would be similar 

to the scope of securities covered by 

former Rule 10a–1. Former Rule 10a– 

1(a) 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 would also be 

subject to the proposed uptick rule. In 

addition, certain securities, such as 

securities traded on Nasdaq, that were 

not subject to former Rule 10a–1, would 

be subject to the proposed uptick 

rule.206

As discussed in more detail above, the 

Commission eliminated former Rule 

10a–1 and prohibited any SRO from 

having a price test in an effort in part 

to modernize and simplify short sale 

regulation in light of current trading 

systems and strategies used in the 

marketplace. In supporting its 

elimination of former Rule 10a–1, the 

Commission noted that the increased 

demand for exemptions from the Rule, 

and the disjointed application of short 

sale price tests had limited the reach of 

short sale price test restrictions, created 

confusion and compliance difficulties as 

well as an un-level playing field among 

market participants. In addition, the 

Commission noted that decimal 

increments had resulted in a rule that 

was no longer suited to the wide variety 

of trading strategies and systems used in 

the marketplace. The Commission also 

discussed that following its study of the 

effects of removing short sale price tests, 

OEA had found little empirical 

justification for maintaining former Rule 

10a–1 and that, on balance, elimination 

of short sale price test restrictions for 

pilot stocks had not had a deleterious 

effect on market quality based on the 

examination of transactions during the 

period covered by the Pilot.207

Similar to the proposed modified 

uptick rule, the proposed uptick rule is 

designed to allow relatively unrestricted 

short selling in an advancing market. In 

addition, it is designed to restrict short 

selling at successively lower prices and, 

thereby, might help prevent short 

selling, including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market by exhausting all 

remaining bids at one price level, 

causing successively lower prices to be 

established by long sellers. In addition, 

the proposed uptick rule, similar to the 

proposed modified uptick rule, would 

not result in the type of disparate short 

sale regulation that existed under former 

Rule 10a–1 because proposed Rule 

201(d) would include a requirement that 

no SRO shall have any rule that is not 

in conformity with, or conflicts with, 

the short sale price test requirements of 

the proposed uptick rule. Another 

potential advantage to the proposed 

uptick rule is that market participants 

would be familiar with the test because 

it would be based on former Rule 10a– 

1 which was in existence for almost 70 

years, and was only recently eliminated. 

At the same time, some of the reasons 

cited by the Commission for eliminating 

former Rule 10a–1, which are unique to 

the proposed uptick rule as a price test 

based on the last sale price, remain 

today. For example, as discussed in 

more detail below, as a short sale price 

test that is based on the last sale price, 

the proposed uptick rule includes a 

number of exceptions necessary to 

accommodate the various trading 

strategies and systems used in today’s 

marketplace. For example, the proposed 

uptick rule includes an exception for 

automated trading systems that utilize 

passive pricing and trading systems that 

offer price improvement based on the 

national best bid. The proposed uptick 

rule also includes an exception to allow 

market makers or specialists publishing 

two-sided quotes to sell short at the 

offer to facilitate customer market or 

marketable limit buy orders regardless 

of the last sale price. 

In addition, as noted above in 

connection with our discussion of the 

proposed modified uptick rule, we 

believe the spread of more fully 

automated markets may make a test 

based on the last sale price less effective 

at regulating short selling than a test 

based on the national best bid due to 

delays in reporting of last sale price 

information and because last sale price 

information is published in reporting 

sequence and not trade sequence. Such 

trade reporting may create up-ticks and 

down-ticks that may not accurately 


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18062 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

208 In connection with the elimination of former 

Rule 10a–1 and all short sale price test restrictions, 

we noted that commenters to the proposed 

amendments to eliminate all short sale price test 

restrictions discussed potential reprogramming 

costs that market participants may incur if the 

proposed amendments were not effective prior to 

the date for which all automated trading centers 

were required to have fully operational Regulation 

NMS-compliant trading systems, i.e., July 9, 2007 

(the ‘‘Regulation NMS Compliance Date’’). For 

example, we noted that the Securities Industry 

Financial Markets Assn. (‘‘SIFMA’’) urged the 

Commission to take steps to eliminate price test 

restrictions prior to the Regulation NMS 

Compliance Date to alleviate the need for firms to, 

in the course of instituting programming changes to 

meet the new requirements of Regulation NMS, 

program systems to comply with price test 

restrictions, only to be required to reverse such 

programming costs shortly thereafter. After 

considering these comments, we made the 

elimination of short sale price test restrictions 

immediately effective to provide market 

participants with sufficient notice and time prior to 

the Regulation NMS Compliance Date to reprogram 

their systems without regard to the then-current 

short sale price test restrictions. See 2007 Price Test 

Adopting Release, 72 FR at 36356, 36359. 

reflect price movements in the security 

for purposes of the proposed uptick 

rule. Because last trade prices can be 

reported out of sequence, for various 

reasons, we believe bids may be a more 

accurate reflection of current prices for 

a security. 

Although former Rule 10a–1 was only 

recently eliminated, we recognize that 

due to the extensive systems changes 

that have occurred in the last couple of 

years in response to Regulation NMS, 

programming systems for the proposed 

uptick rule may be burdensome. For 

example, we note that at the same time 

that we proposed and subsequently 

adopted amendments to eliminate 

former Rule 10a–1, market participants 

were programming their systems to 

comply with Regulation NMS. It is our 

understanding that some market 

participants may not have included in 

their programming coding that would 

have allowed for the application of short 

sale price test restrictions at that 

time.208

Although the proposed uptick rule 

does not take a policies and procedures 

approach, it is likely that market 

participants would use a policies and 

procedures approach as part of their 

efforts to comply with the proposed 

prohibition. As such, for either 

proposed approach (prohibition or 

policies and procedures), market 

participants could consider whether to 

build off the policies and procedures 

they already have in place under 

Regulation NMS. As discussed above in 

connection with the proposed modified 

uptick rule, trading centers have been 

required to develop policies and 

procedures in accordance with 

Regulation NMS that would be similar 

to the types of policies and procedures 

that would be required under the 

proposed modified uptick rule. 

The proposed uptick rule may be 

more burdensome to apply than the 

proposed modified uptick rule, 

however, because the prohibition 

approach of the proposed uptick rule 

would not allow any short sale at an 

impermissible price, even if in error or 

inadvertent, unless an exception 

applies. If the Commission were to 

decide to provide an exception for 

inadvertent errors, that could reduce the 

differences between the two proposed 

approaches. In addition, the proposed 

uptick rule could follow a policies and 

procedures approach similar to the 

approach discussed in connection with 

the proposed modified uptick rule. Such 

a policies and procedures approach 

would require that market participants 

continuously surveil for compliance and 

take prompt remedial steps to limit the 

execution or display of short sales at 

impermissible prices. 

As discussed above, we are proposing 

a short sale price test based on the last 

sale price, and, in particular, we are 

proposing a modernized version of 

former Rule 10a–1 to provide the public 

with the opportunity to comment on 

this test in light of changes that have 

occurred in market conditions and 

investor confidence since the 

elimination of former Rule 10a–1 in 

mid-2007. Because we want to provide 

the public with the opportunity to 

comment on a short sale price test 

similar to former Rule 10a–1, we are not 

proposing a policies and procedures 

type of approach in connection with the 

proposed uptick rule because this 

would be a substantial change from how 

former Rule 10a–1 was applied. We 

note, however, that some commenters 

may believe that a policies and 

procedures approach similar to the 

approach discussed under the proposed 

modified uptick rule that references the 

last sale price, rather than the national 

best bid, might be preferable to either 

the proposed modified uptick rule or 

the proposed uptick rule. Thus, we seek 

specific comment regarding such an 

approach. 

If we were to adopt the proposed 

uptick rule, we are proposing that there 

would be a three month implementation 

period such that market participants 

would have to comply with the 

proposed uptick rule three months 

following the effective date of the 

proposed uptick rule. We believe that a 

proposed implementation period of 

three months after the effective date 

would provide market participants with 

sufficient time in which to modify their 

systems and procedures in order to 

comply with the requirements of the 

proposed uptick rule. Among other 

things, we believe this period would be 

a reasonable period because market 

participants would be familiar with the 

changes to their trading systems 

necessary to implement the proposed 

uptick rule as the proposed uptick rule 

would be similar to former Rule 10a–1. 

The addition of an implementation 

period should help alleviate potential 

disruptive effects of the proposal. 

We realize, however, that a shorter or 

longer implementation period may be 

manageable or preferable. Thus, we seek 

specific comment as to what length of 

implementation period would be 

necessary or appropriate, and why, such 

that market participants would be able 

to meet the proposed short sale price 

test restrictions, if adopted. 

2. Exceptions to Proposed Uptick Rule 

Paragraph (c) of Rule 201 of the 

proposed uptick rule sets forth 

exceptions to the proposed rule to 

promote its workability. Rule 201(c) of 

the proposed uptick rule would include 

exceptions that parallel provision set 

forth in proposed Rule 201(d) of the 

proposed modified uptick rule pursuant 

to which a broker-dealer may mark an 

order ‘‘short exempt’’ for purposes of 

that proposed rule. Thus, proposed Rule 

201(c) of the proposed uptick rule 

would also include exceptions for: (i) A 

seller’s delay in delivery as set forth in 

Section III.A.2.b above; (ii) odd lots, as 

set forth in Section III.A.2.c. above; (iii) 

domestic arbitrage, as set forth in 

Section III.A.2.d. above; (iv) 

international arbitrage, as set forth in 

Section III.A.2.e. above; (v) overallotments and lay-off sales, as set forth 

in Section III.A.2.f. above; (vi) 

transactions on a VWAP basis, as set 

forth in Section III.A.2.h above; and (vii) 

riskless principal transactions as set 

forth in Section III.A.2.g. above. We 

believe that the rationale for these 

provisions under the proposed modified 

uptick rule would be equally applicable 

to the proposed uptick rule. Thus, we 

do not repeat the discussions of these 

provisions in connection with our 

discussion regarding the proposed 

uptick rule. 

The following discussion sets forth 

the rationale regarding exceptions that 

would be unique to the proposed uptick 

rule. The exceptions contained in 

paragraph (c) of proposed Rule 201 are 

based upon exceptions contained in 

former Rule 10a–1 and exemptive relief 

granted pursuant to that rule. These 

exceptions and exemptions, as 

applicable, had been in place under 

former Rule 10a–1 for several years. We 

are not aware of any reason that the 


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209Proposed Rule 201(c)(2). 

210See 17 CFR 242.200(g). 

211See Former Rule 10a–1 Adopting Release, 3 

FR 213. 

212 Knowledge may be inferred where a brokerdealer 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 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.’’). 

213See e.g., supra note 26. 

214See Proposed Rule 201(c)(8). 

215See 17 CFR 242.602. 

216At the time the Commission adopted former 

Rule 10a–1(e)(5)(ii), the Quote Rule was included 

in Rule 11Ac1–1 under the Exchange Act. The 

Quote Rule is now in Rule 602 of Regulation NMS. 

See 17 CFR 242.602. 

217A ‘‘trade-through’’ generally means the 

purchase or sale of a security at a price that is lower 

than a protected bid or higher than a protected 

offer. See 17 CFR 242.600(a)(77) (defining the term 

‘‘trade-through’’ for purposes of Regulation NMS). 

218The following example from the release 

adopting the exception illustrates the potential 

conflict: A market maker who currently has a short 

position in XYZ stock communicates an offer 

which, if executed against at that time, would be 

in compliance with Rule 10a–1, e.g., at a price of 

201⁄8 when the last trade price reported in the 

consolidated system is also 201⁄8. There is a ‘‘trade 

through’’ of the market maker’s offer on another 

trading venue that causes an up-tick to be reported 

in the consolidated system at 201⁄4. Finally, a buy 

order is sent to the market maker after the trade 

through at 201⁄4 has been reported. In order to 

ensure compliance with 10a–1, the market maker 

must refuse to execute the order at his offer of 201⁄8

because doing so would result in a short sale being 

effected on an impermissible minus tick, however, 

in refusing to effect the trade, he would arguably 

violate the ‘‘firm quote requirement’’ of the Quote 

Rule. In addition, when a market maker ‘‘backs 

away’’ from an order, he may, in effect be revealing 

that he had a short position in the security, thus 

Continued 

rationales underlying these exceptions 

and exemptions would not still hold 

true today. Moreover, due to the limited 

scope of the proposed exceptions and 

exemptions, we do not believe that they 

would undermine the Commission’s 

stated goals for proposing short sale 

price test restrictions. 

Thus, the exceptions in proposed 

Rule 201(c) parallel exceptions to and 

exemptive relief granted under former 

Rule 10a–1. As set forth in more detail 

below, however, we seek comment 

regarding each of these exceptions, 

including whether or not these 

exceptions would be appropriate or 

necessary under the proposed modified 

uptick rule particularly in light of 

trading systems and strategies used in 

today’s marketplace. 

a. Error in Marking a Short Sale 

Proposed Rule 201(c)(2) would 

provide an exception from the proposed 

uptick rule where a broker-dealer effects 

a sale order marked ‘‘long’’ by another 

broker-dealer, but the order was mismarked such that it should have been 

marked as a ‘‘short’’ sale order. 

Specifically, proposed Rule 201(c)(2) 

provides that the proposed uptick rule 

shall not apply to ‘‘[a]ny sale by a broker 

or dealer of a covered security for an 

account in which it has no interest, 

pursuant to an order marked long.’’ 209

The broker-dealer that marks the 

order ‘‘long’’ must comply with the 

order marking requirements of Rule 

200(g) of Regulation SHO.210 Subsection 

(e)(2) of former Rule 10a–1 contained an 

exception for mis-marked short sales. 

The exception was included in former 

Rule 10a–1 when the rule was adopted 

in 1938 and was provided to ‘‘avoid 

implicating in any violation of the rules 

a member whose participation in the 

violation [was] unwitting and 

unintentional.’’ 211 The exception in 

proposed Rule 201(c)(2) would avoid 

implicating the broker-dealer effecting 

the sale where the broker-dealer’s 

participation in the violation was 

neither knowing nor reckless.212

b. Electronic Trading Systems 

Proposed Rule 201(c)(8) would 

provide an exception from the proposed 

uptick rule for sales of securities in 

certain electronic trading systems that 

match and execute trades at various 

times and at independently-derived 

prices, such as at the mid-point of the 

NBBO. The Commission granted limited 

exemptive relief in connection with 

these systems under former Rule 10a–1 

because matches could potentially occur 

at a price below the last sale price.213

Similarly, under the proposed uptick 

rule, matches could potentially occur at 

a price below the last sale price and, 

therefore, violate the provisions of 

proposed Rule 201(b) prohibiting short 

sales on a minus or zero-minus tick, 

absent an exception. 

This exception provides that the 

proposed uptick rule shall not apply to 

any sale of a covered security in an 

electronic trading system that matches 

buying and selling interest at various 

times throughout the day if: (1) Matches 

occur at an externally derived price 

within the existing market and above 

the current national best bid; (2) sellers 

and purchasers are not assured of 

receiving a matching order; (3) sellers 

and purchasers do not know when a 

match will occur; (4) persons relying on 

the exception are not represented in the 

primary market offer or otherwise 

influence the primary market bid or 

offer at the time of the transaction; (5) 

transactions in the electronic trading 

system are not made for the purpose of 

creating actual, or apparent, active 

trading in, or depressing or otherwise 

manipulating the price of, any security; 

(6) the covered security qualifies as an 

‘‘actively-traded security’’ (as defined in 

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; and (7) during the 

period of time in which the electronic 

trading system may match buying and 

selling interest, there is no solicitation 

of customer orders, or any 

communication with customers that the 

match has not yet occurred.214

The conditions set forth in the 

exception in proposed Rule 201(c)(8) 

parallel the conditions provided in the 

exemptive relief granted under former 

Rule 10a–1. Consistent with the relief 

granted under former Rule 10a–1 and 

the rationales provided in granting such 

relief, we believe it is appropriate to 

propose an exception to the proposed 

uptick rule for short sales submitted to 

these electronic trading systems because 

such rationales still hold true today. In 

particular, we note that due to the 

passive nature of pricing and the lack of 

price discovery, trades executed through 

these systems generally would not 

involve the types of abuses that the 

proposed uptick rule would be designed 

to prevent. 

c. Trade-Throughs 

Proposed Rules 201(c)(10) and (11) 

would provide exceptions from the 

requirements of the proposed uptick 

rule that would help address any 

potential conflict between the proposed 

uptick rule and the Quote Rule under 

the Exchange Act.215 These exceptions 

parallel the exceptions contained in 

former Rule 10a–1(e)(5)(ii) and (e)(11), 

respectively. 

Former Rule 10a–1(e)(5)(ii) was added 

to former Rule 10a–1 to address a 

potential conflict between the operation 

of former Rule 10a–1 and the ‘‘firm 

quote requirement’’ of the Quote 

Rule 216 in situations where execution of 

an offer quotation by a broker-dealer 

would be rendered unlawful because of 

a trade-through,217 even though the offer 

had been at a price permitted under 

former Rule 10a–1 at the time that the 

broker-dealer had communicated it to 

its exchange or association for inclusion 

in the consolidated quotation system.218


sroberts on PROD1PC70 with PROPOSALS
18064 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

making it more difficult to liquidate that position 

at favorable prices. See Securities Exchange Act 

Release No. 17314 (Nov. 20, 1980), 45 FR 79018 

(Nov. 28, 1980). 219The Commission explained in the release that 

the scope of the exception in former Rule 10a– 

1(e)(11) was limited to the size of the brokerdealer’s displayed offer because the need for the 

exception only arises to the extent that the brokerdealer’s obligations under the Quote Rule may 

conflict with former Rule 10a–1. Because the firm 

quote requirement of the Quote Rule only applies 

to a broker-dealer’s displayed offer, it was deemed 

appropriate to limit the exception to the size of the 

displayed offer. See supra note 218 at n.20. 220This concern was illustrated in the release 

adopting the amendments with the following 

example: A specialist who is short XYZ stock 

quotes an offer for 1,000 shares at 201⁄8 at a time 

when the last sale reported in the consolidated 

system was such that the offer, if executed at that 

time, would be in compliance with Rule 10a–1. 

This offer for 1,000 shares consists of 300 shares 

offered by the specialist, a 400-share limit order in 

the specialist’s book, and an offer from the crowd 

at the specialist’s post for 300 shares, all at 201⁄8. 

A trade through of this offer occurs on another 

exchange and an up-tick is reported in the 

consolidated system at 201⁄4. A buy order for 1,000 

shares at 201⁄8 is then sent to the exchange—after 

the trade through at 201⁄4 is reported. Without 

(e)(11), filling the complete order for 1,000 shares 

would not be permissible, since (e)(5)(ii), by its 

terms, applied only to a sale by a market maker for 

its own account. See supra note 218 at n.18. 

221See Proposed Rule 201(c)(10) and (c)(11). 

222See Proposed Rule 201(c)(10). 

223See former NYSE Rule 440B. 

224See proposed Rule 201(c)(12). This exception 

parallels exemptive relief provided by the 

Commission under former Rule 10a–1. 

To resolve this potential conflict, the 

Commission adopted the exception in 

subsection (e)(5)(ii) of former Rule 10a– 

1 to permit market makers to execute 

transactions at their offer following a 

trade-through, and (e)(11) to permit nonmarket makers to effect a short sale at 

a price equal to the price associated 

with their most recently communicated 

offer up to the size of that offer 219

provided the offer was at a price, when 

communicated, that was permissible 

under former Rule 10a–1. The (e)(11) 

exception was added in response to 

several comments that, in addition to 

orders for their own account, specialists 

and other floor members also often 

represent as part of their displayed 

quotation orders of other market 

participants (e.g., public agency orders 

or proprietary orders of non-market 

makers) that also might be ineligible for 

execution under former Rule 10a–1 

following a trade-through in another 

market.220

We believe that the rationale for 

adopting the exceptions in former Rule 

10a–1(e)(5)(ii) and (e)(11) and proposed 

in subsections (c)(10) and (c)(11) of the 

proposed uptick rule, namely resolving 

a conflict between a short sale price test 

based on the last sale price and the 

Quote Rule would exist under the 

proposed uptick rule. Thus, the 

proposed exceptions would parallel the 

exceptions in former Rule 10a–1(e)(5)(ii) 

and (e)(11).221

Specifically, proposed Rule 201(c)(10) 

would provide that the restrictions of 

the proposed uptick rule shall not apply 

to: ‘‘[A]ny sale of a covered security 

(except a sale to a stabilizing bid 

complying with § 242.104 of Regulation 

M) 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-the-counter, (i) Effected at 

a price equal to the most recent offer 

communicated for the security by such 

registered specialist, registered 

exchange market maker or third market 

maker to an exchange or a national 

securities association (‘‘association’’) 

pursuant to § 242.602 of this chapter, if 

such offer, when communicated, was 

equal to or above the last sale, regular 

way, reported for such security pursuant 

to an effective transaction reporting 

plan. Provided, however, (ii) That any 

self-regulatory organization, by rule, 

may prohibit its registered specialist 

and registered exchange market makers 

from availing themselves of the 

exemption afforded by this paragraph 

(c)(10) if that self-regulatory 

organization determines that such 

action is necessary or appropriate in its 

market in the public interest or for the 

protection of investors.’’ 222

We believe that the rationale for 

adopting former Rule 10a–1(e)(5)(ii) still 

holds true today and, therefore, we have 

incorporated the language of that 

exception into proposed Rule 

201(c)(10). Consistent with former Rule 

10a–1(e)(5)(ii), the proposed exception 

would include language that would 

permit SROs to prohibit registered 

specialists and registered exchange 

market makers from availing themselves 

of this exception. We note that under 

former Rule 10a–1, SROs such as the 

NYSE prohibited registered specialists 

and registered exchange market makers 

from availing themselves of this 

exception.223 We believe it would be 

appropriate to continue to provide this 

option to SROs. 

Proposed Rule 201(c)(11) would 

provide that the restrictions of the 

proposed uptick rule shall not apply to: 

‘‘[A]ny sale of a covered security (except 

a sale to a stabilizing bid complying 

with § 242.104 of this chapter) by any 

broker or dealer, for his own account or 

for the account of any other person, 

effected at a price equal to the most 

recent offer communicated by such 

broker or dealer to an exchange or 

association pursuant to § 242.602 of this 

chapter in an amount less than or equal 

to the quotation size associated with 

such offer, if such offer, when 

communicated, was: (i) Above the price 

at which the last sale, regular way, for 

such security was reported pursuant to 

an effective transaction reporting plan; 

or (ii) At such last sale price, if such last 

sale price is above the next preceding 

different price at which a sale of such 

security, regular way, was reported 

pursuant to an effective transaction 

reporting plan.’’ We believe that the 

rationale for adopting former Rule 10a– 

1(e)(11) still holds true today and, 

therefore, we have incorporated the 

language of that exception into 

proposed Rule 201(c)(10). 

d. Facilitation of Customer Buy Orders 

Proposed Rule 201(c)(12) would 

provide for an exception from the 

proposed uptick rule for short sales by 

registered market makers or specialists 

publishing two-sided quotes to sell 

short at the offer to facilitate customer 

market and marketable buy limit orders 

regardless of the last sale price.224 We 

believe that this exception would be 

necessary because some third market 

makers in exchange-listed securities 

offer trade execution for eligible 

customer orders at a price equal to or 

better than the national best offer. Under 

the proposed uptick rule, if the national 

best offer were below the previous last 

reported sale in a security and the third 

market maker or specialist has a short 

position, sales at the national best offer 

would violate the proposed uptick rule. 

The proposed exception would provide 

limited relief in a decimals environment 

to registered market makers and 

specialists so that they could provide 

liquidity in response to customer buy 

limit orders. Because this relief is 

limited to short selling only at the 

national best offer and only in response 

to customer buy limit orders we believe 

that it would not undermine the goals 

of short sale price test regulation, 

including helping to prevent short 

selling from being used as a tool to drive 

the market down. 

3. Proposed Uptick Rule and AfterHours Trading 

As discussed above in connection 

with the proposed modified uptick rule, 

the Commission interpreted former Rule 

10a–1 to apply to all trades in covered 

securities, whenever they occurred. By 

its terms, former Rule 10a–1 used as a 

reference point the last sale price 

reported to the consolidated tape. Thus, 

after the consolidated tape ceased to 

operate, the rule prevented any person 

from effecting a short sale in a listed 


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225We note, however, that NASD did not extend 

its short sale price test rule to the after-hours 

market. See NASD Head Trader Alert #2000–55. 

226See supra Section III.A.2. (discussing our 

belief that the proposed modified uptick rule 

should not apply when the national best bid is not 

collected, processed, and disseminated on a realtime basis). 

227See 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. 

228See http://www.nyxdata.com/cta. 

229See proposed Rule 201(e). 

230See Securities 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’’). 

231See Securities Exchange Act Release No. 

26198 (Oct. 19, 1988), 53 FR 41637 (Oct. 24, 1988) 

(approving rules of the Amex, CBOE, NASD, 

NYSE). 

232See 1998 Release supra note 230. 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 percent, 20 

percent, and 30 percent from the previous day’s 

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

233See 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. 

234See, 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. 

235See Securities Exchange Act Release No. 

45956 (May 17, 2002), 67 FR 36740 (May 24, 2002). 

236See 15 U.S.C. 78l(k)(1). 

237See, e.g., FINRA Rule 6120. 

238For example, in addition to disseminating 

news of trading halts through the CMS, Nasdaq 

publishes a daily list of securities subject to trading 

halts indicating the name of the issuer, the time the 

halt was initiated, and where applicable, the times 

at which quoting and trading may resume. 

239See 1998 Release 63 FR 18477 supra note 230 

and accompanying text (The SRO Circuit Breakers, 

as adopted in 1988, called for a one-hour trading 

halt if the DJIA declined by 250 points from the 

previous day’s close, and a two-hour halt in the 

event of a 400 point decline.). See Securities 

Exchange Act Release No. 26198 (Oct. 19, 1988), 53 

FR 41637 (Oct.24, 1988) (approving rules of the 

Amex, CBOE, NASD, NYSE). The original circuit 

breaker parameters were amended in 1996 to limit 

the duration of trading halts, and again in 1997 after 

it was determined that the 250 and 400 point 

thresholds were too low given the substantial 

increase in the value of the DJIA in the years 

following implementation of 1988 policies. The 

1997 amendments increased the SRO Circuit 

Breakers’ ‘‘trigger values’’ to 350 and 500 points 

respectively for the one-hour and two-hour trading 

halt scenarios. See Securities Exchange Act Release 

No. 38221 (Jan. 31, 1997) 62 FR 5871 (Feb. 7, 1997). 

The Commission approved the various Exchanges’ 

circuit breaker revisions on a one year pilot basis. 

The SRO Circuit Breakers were revised again in 

1998 to put into place circuit breakers triggered by 

certain percentage declines. See Securities 

Continued 

security at a price lower than the last 

sale reported to the consolidated 

tape.225 Although former Rule 10a–1 

applied in the after-hours market, 

similar to the proposed modified uptick 

rule, we do not believe that the 

proposed uptick rule should apply to 

covered securities while last sale price 

information is not collected, processed, 

and disseminated.226

As discussed above, last sale price 

information for NMS stocks is 

disseminated pursuant to a national 

market system plan, the CTA Plan.227

The CTA Plan disseminates last sale 

price information during the hours in 

which any of its participants that 

regularly reports to the Plan is open for 

trading. In addition, the Plan 

disseminates last sale price information 

at other times during which any of its 

exchange participants is open for 

trading.228 During times in which the 

CTA Plan does not collect, process, and 

disseminate last sale price information, 

real-time last sale price information is 

not available. For the same reasons 

discussed in connection with the 

proposed modified uptick rule, we do 

not believe that it would further the 

goals of short sale price test regulation 

to apply the proposed uptick rule when 

last sale price information is not being 

collected and disseminated on a realtime basis. Thus, proposed Rule 201(e) 

limits application of the proposed 

uptick rule to times when ‘‘a last sale 

price for [an] NMS stock is collected 

and disseminated on a current and 

continuing basis by a plan processor 

pursuant to an effective national market 

system plan.’’ 229

C. The Proposed Circuit Breaker Rules 

We also are proposing for comment, 

as an alternative to the proposed price 

test restrictions, circuit breaker rules. 

The proposed circuit breaker halt rule 

would, when triggered by a specified 

decline in the price of a particular 

security, temporarily prohibit any 

person from selling short a particular 

NMS stock during severe market 

declines in that security, subject to 

certain exceptions. The proposed circuit 

breaker modified uptick rule would, 

when triggered by a specified decline in 

the price of a particular security, 

temporarily impose the proposed 

modified uptick rule for that security. 

As discussed above, questions persist 

about the reasons for the rapid speed of 

steep declines in the prices of securities. 

A short selling circuit breaker rule 

would be designed to target only those 

securities that experience rapid severe 

intraday 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. 

In line with the Commission’s 

position that market impediments 

should be minimized, a short selling 

circuit breaker when applied might 

benefit the market as a narrowly tailored 

response to extraordinary 

circumstances.230 Unlike the market 

wide circuit breakers that halt all 

trading, a short selling circuit breaker 

would apply only to those individual 

securities that are facing a severe 

intraday decline in share price. A short 

selling circuit breaker could be 

structured in a number of ways. We set 

forth below three forms of circuit 

breakers. 

1. Background on Circuit Breakers 

To protect investors and the markets, 

the Commission has approved proposals 

to restrict or halt trading if key market 

indexes fall by specified amounts. For 

example, the Commission approved 

such proposals from various exchanges 

(‘‘SRO Circuit Breakers’’) in response to 

the October 1987 market break. These 

measures were designed to permit brief, 

coordinated cross-market halts to 

provide opportunities during a severe 

market decline to re-establish 

equilibrium between buying and selling 

interests in an orderly fashion, and help 

to ensure that market participants have 

a reasonable opportunity to become 

aware of, and respond to, significant 

price movements.231

Currently, all stock exchanges and 

FINRA have rules or policies to 

implement coordinated circuit breaker 

halts.232 The options markets also have 

rules applying circuit breakers.233 The 

futures exchanges that trade index 

futures contracts have adopted circuit 

breaker halt procedures in conjunction 

with their price limit rules for index 

products.234 Finally, security futures 

products are required to have crossmarket circuit breaker regulatory halt 

procedures in place.235 In addition, the 

Commission has authority under 

Section 12(k)(1) of the Exchange Act to 

suspend trading in the securities of 

individual issuers.236 Moreover, SROs 

have rules or policies in place to 

coordinate individual security trading 

halts corresponding to significant news 

events.237 Information on the securities 

subject to SRO regulatory trading halts 

is disseminated to market participants 

through the Common Messaging System 

(‘‘CMS’’) and other electronic media.238

The current SRO Circuit Breakers 

impose percentage based triggers that 

result in trading halts of varying lengths, 

dependent on the DJIA’s rate of 

decline.239 Unlike the original SRO 


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Exchange Act Release No. 39846 (Apr. 9, 1998) 63 

FR 18477 (Apr. 15, 1998). 

240See id. 

241See 1998 Release, 63 FR 18477 supra note 230. 

242See Circuit Breaker Report by the Staff of the 

President’s Working Group on Financial Markets 

(Aug. 18, 1998) (Circuit Breaker Report), n. 33. 

243See supra Section II.C. (discussing investor 

confidence). 

244See 1998 Release, 63 FR 18477 supra note 230. 

245See proposed Rule 201(a)(1). 

246See 1998 Release, 63 FR 18477 supra note 230 

and accompanying text. 

247See National Exchanges letter, supra note 63. 

248See letter from Credit Suisse, supra note 122. 

249 ‘‘Regular trading hours’’ has the same meaning 

as in Rule 600(b)(64) of Regulation NMS. Rule 

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

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

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

the procedures established pursuant to 

§ 242.605(a)(2).’’ 

Circuit Breakers, which used set point 

values to determine when a trading halt 

should be imposed, the current SRO 

Circuit Breakers are governed by 

percentage based declines tied to 

specific point values that are calculated 

at the beginning of each calendar 

quarter using the average daily DJIA 

closing for the previous month.240

Under the current SRO Circuit 

Breakers, a 10% decline prior to 2 p.m. 

will result in a one hour trading halt. 

Should the 10% decline occur after 2 

p.m. but prior to 2:30 p.m., exchanges 

must halt trading for 30 minutes. If the 

10% threshold is crossed after 2:30 

p.m., trading will not be halted. A 20% 

decline in the DJIA will result in a twohour trading halt, if the decline occurs 

prior to 1 p.m. and a one-hour trading 

halt if the threshold is reached between 

1 p.m., and 2 p.m. If the DJIA declines 

by 20% after 2 p.m., under the current 

circuit breaker rules, trading will halt 

for the remainder of the day. Should the 

market decline by 30% at any point, 

trading will halt for the remainder of the 

day.241 The coordinated cross-market 

trading halts provided by the SRO 

Circuit Breakers operate only during 

significant market declines and are 

intended to substitute orderly, preplanned halts for the ad hoc and 

destabilizing halts which can occur 

when market liquidity is exhausted.242

The SRO Circuit Breakers focus on 

market indexes rather than on the 

market for an individual security. The 

SRO Circuit Breakers apply a marketwide trading halt, rather than a halt in 

an individual security, or a short selling 

halt. The proposed circuit breaker rules, 

in contrast, would temporarily restrict 

only short selling (and only) in an 

individual NMS security that suffers a 

severe price decline. 

We believe that either a short sale 

price test restriction or a circuit breaker 

rule may be appropriate to address the 

recent change in market conditions and 

erosion of investor confidence. As 

discussed above, investors have become 

increasingly concerned about sudden 

and excessive declines in prices that 

appear to be unrelated to issuer 

fundamentals.243 Circuit breakers that 

are triggered by severe declines in the 

price of individual securities may be a 

targeted response to address these 

concerns. 

2. Proposed Circuit Breaker Halt Rule 

We are proposing a short selling 

circuit breaker that, when triggered by a 

severe price decline in a particular 

security, would prohibit any person 

from selling short that security, 

wherever it is traded, while the circuit 

breaker is in effect, subject to certain 

exceptions. 

While the Commission does not favor 

market closings as a general matter, the 

proposed circuit breaker halt rule would 

not be as broad as a market-wide trading 

halt. Furthermore, the Commission has 

recognized that circumstances may 

infrequently call for a trading pause that 

allows participants to reassess 

conditions.244 We believe that a pause 

in short selling resulting from a 

significant decline in the price of an 

individual equity security might 

provide a similar measure of stability. 

We seek comment on whether it 

would be appropriate for the 

Commission to impose a circuit breaker 

that when triggered would halt all short 

selling in an individual equity security, 

wherever it is traded, for the remainder 

of the trading day if the price of the 

security has declined by at least 10% 

from the prior day’s closing price for 

that security, as measured by the closing 

price of the security on the consolidated 

system. Like the proposed modified 

uptick rule and the proposed uptick 

rule, we propose that it would apply to 

all NMS stocks as that term is defined 

under Rule 600(a)(47) of Regulation 

NMS.245 We seek comment regarding 

the scope of a potential circuit breaker’s 

application and to which securities it 

might most appropriately apply. 

We preliminarily believe that a 10% 

decline in a security’s price as measured 

from the prior day’s closing price, as 

reported in the consolidated system, 

would be an appropriate level at which 

to trigger a circuit breaker that results in 

a short selling halt. As discussed above, 

such a percentage decline would be 

consistent with the current SRO Circuit 

Breakers.246 The 10% threshold for a 

circuit breaker that, when triggered, 

results in a short selling halt in an 

individual security would reflect the 

format of current SRO Circuit Breakers 

and use a trigger based on a fluctuating 

value, the share price, to strike a balance 

between the need to halt short selling in 

moments of severe decline in a 

security’s price and the market 

participant’s expectation that its short 

selling strategy will be available in an 

efficient and open marketplace. We note 

that a group of national securities 

exchanges recommended a 10% decline 

threshold in connection with a short 

selling circuit breaker combined with a 

short sale price test restriction.247

Another commenter supported a 10% 

minimum threshold, but also 

recommended a ‘‘rolling’’ circuit 

breaker that when triggered would 

impose short selling halts of varying 

lengths, depending on the level of 

decline in the price of an individual 

equity security.248 We recognize that a 

lesser or greater percentage decline or 

some other measure of decline may be 

appropriate, and seek comment on that 

question. 

As described in more detail below, 

the price decline would be based on the 

security’s price during the trading day 

as reported in the consolidated system 

as compared to the prior day’s closing 

price as reported in the consolidated 

system. The prior day’s closing price 

would be the last price reported during 

regular trading hours 249 the prior day. 

The proposed circuit breaker halt rule 

would, once triggered by a 10% decline 

in the price of a security from the prior 

day’s closing price on any trading day, 

impose a short selling halt in the 

individual security at times when the 

last sale price is calculated and 

disseminated in the consolidated 

system. We based the time period on the 

calculation and dissemination of last 

sale price because the circuit breaker is 

triggered by a percentage decline in the 

security’s intra-day last sale price 

relative to the prior day’s last sale price 

at the end of regular trading hours on 

the prior day. 

In addition, 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 

an NMS security within thirty minutes 

of the end of regular trading hours. 

Former NYSE Rules 80A(a) and 80A(b) 

provided that a circuit breaker would 

not trigger program trading restrictions 

after 3:25 p.m., or approximately thirtyfive minutes before the close. We seek 

comment as to whether thirty minutes is 

an appropriate balance to ensure that 


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250See letter from Credit Suisse supra note 122. 

251See 1998 Release, 63 FR 18477. 

252See Brown Letter supra note 55. 

253See 1998 Release, 63 FR 18477 supra note 230. 

254See letter to Mary Schapiro, Chairman, from 

Direct Edge, dated March 30, 2009. 

255See letter from Credit Suisse supra note 122. 

256See Short Sale Ban Emergency Order, 73 FR 

55169–02 (Sept. 24, 2008). 

257See September 21, 2008 Amendment, 73 FR 

55556–01 (Sept. 25, 2008). 

258See id. 

259See 2004 Regulation SHO Adopting Release, 

69 FR at 48015, n. 66 (citing to Section 3(a)(38) of 

the Exchange Act). 

260See Exchange Act Release No. 32632 (July 14, 

1993), 58 FR 39072, 39074 (July 21, 1993). 

261See Exchange Act Release No. 58775 (Oct. 14, 

2008); 73 FR 61690 (Oct. 17, 2008). 

the goals of the proposed rule would be 

met while also reducing the potential 

for market disruption toward the close 

of regular trading hours. 

We believe that a short selling halt 

that persists at times when the last sale 

price is calculated and disseminated 

following a 10% decline in a security’s 

price might be appropriate. We are 

concerned that a short selling halt for a 

lesser time might not provide sufficient 

time to re-establish equilibrium between 

buying and selling interest in the 

individual security in an orderly 

fashion. We also believe that a short 

selling halt for this length of time might 

be necessary to help ensure that market 

participants have a reasonable 

opportunity to become aware of, and 

respond to, a significant decline in a 

security’s price. We seek comment 

below, however, regarding whether a 

longer or shorter short selling halt 

would be appropriate, or whether it 

would be appropriate to impose a short 

selling halt on a rolling basis as 

suggested by an industry commenter.250

We are also seeking comment on the 

potential costs and benefits of a short 

selling circuit breaker that when 

triggered results in a temporary halt on 

short selling. The Commission has 

previously noted that circuit breakers 

may benefit the market by allowing 

participants an opportunity to 

reevaluate circumstances and respond 

to volatility.251 Unlike the proposed 

modified uptick rule and the proposed 

uptick rule, this proposed circuit 

breaker halt rule would halt all short 

selling for an individual security for the 

specified period of time. 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.252 The 

Commission has long held the view that 

coordinated circuit breakers might 

restore investor confidence during times 

of substantial uncertainty.253 We believe 

the proposed circuit breaker halt rule 

might produce similar benefits. 

We recognize, however, that there are 

potential costs associated with 

implementation of a short selling circuit 

breaker that when triggered results in a 

temporary short selling halt. As 

discussed below, we anticipate that 

market participants charged with 

implementation of such a short selling 

circuit breaker would have to invest 

human and financial resources to 

update systems as necessary for 

compliance. Furthermore, 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 short selling halts 

could restrict otherwise legitimate short 

selling activity during periods of 

extreme volatility. 

We also understand there are 

concerns about a potential ‘‘magnet 

effect’’ that could arise as an unintended 

consequence of a circuit breaker that 

halts short selling and results in short 

sellers driving down the price of an 

equity security in a rush to execute 

short sales before the circuit breaker is 

triggered. One commenter noted that a 

short sale circuit breaker could 

exacerbate downward pressure on 

stocks as their value reached the 

threshold level.254 Another commenter, 

however, in discussing the issue of a 

‘‘magnet effect’’ cited empirical studies 

that question whether a circuit breaker 

would result in artificial pressure on the 

price of individual securities.255 We are 

also concerned about another type of 

‘‘magnet effect’’ in which short selling 

demand is built up until the circuit 

breaker is lifted. 

Similar to the short sale price test 

restrictions, the proposed circuit breaker 

halt rule would apply to NMS securities 

other than options. However, we seek 

comment below on whether such a rule 

should also apply to non-NMS 

securities. 

The proposed circuit breaker halt rule 

would include exceptions substantially 

identical to exceptions that were 

included in the Short Sale Ban 

Emergency Order,256 as amended by the 

Commission on September 21, 2008 

(‘‘September 21, 2008 Amended Order’’) 

(collectively, the ‘‘Short Sale Ban’’).257

We believe the proposed circuit breaker 

halt rule should include exceptions that 

mirror certain of the exceptions in the 

Short Sale Ban because the proposed 

rule shares the same goal of prohibiting 

short selling that might exacerbate a 

price decline during a period of sudden 

and excessive price declines, while 

being designed to maintain functions 

that, for example, would be necessary to 

help provide adequate liquidity. Short 

sales effected under these exceptions 

would be marked ‘‘short exempt.’’ 

The proposed circuit breaker halt rule 

could operate in place of, or in addition 

to, a short sale price test restriction. For 

instance, in addition to the imposition 

of a permanent, market-wide price test 

restriction, a circuit breaker halt rule 

could also prohibit any person from 

selling short any security that suffers a 

severe price decline. 

a. Market Makers and Options Market 

Makers Engaged in Bona Fide Market 

Making Activities 

The Short Sale Ban excepted 

registered market makers, block 

positioners, or other market makers 

obligated to quote in the over-thecounter market, if they were selling 

short a publicly traded security covered 

by the Short Sale Ban as part of bona 

fide market making in such security.258

The purpose of the exception was to 

permit market makers to continue to 

provide liquidity to the markets, 

facilitate orders including customer buy 

orders, and otherwise comply with their 

obligations as market makers. 

The term ‘‘market maker’’ includes 

any specialist permitted to act as a 

dealer, any dealer acting in the capacity 

of a block positioner, and any dealer 

who, with respect to a security, holds 

itself out (by entering quotations in an 

inter-dealer quotation system or 

otherwise) as being willing to buy and 

sell such security for its own account on 

a regular or continuous basis.259 As the 

Commission has stated previously, a 

market maker engaged in bona fide 

market making is a ‘‘broker-dealer that 

deals on a regular basis with other 

broker-dealers, actively buying and 

selling the subject security as well as 

regularly and continuously placing 

quotations in a quotation medium on 

both the bid and ask side of the 

market.’’ 260 We recently provided 

guidance on bona fide market making 

for purposes of Regulation SHO Rule 

203(b), and believe that such guidance 

would also be appropriate with regard 

to a market maker exception for the 

proposed circuit breaker halt rule.261

We believe it is appropriate to include 

a market maker exception for this 

proposed alternative because a halt in 

short selling in a security would, during 

the period of the halt, have far greater 

effects on liquidity and legitimate price 

discovery activity than the proposed 

modified uptick rule or proposed uptick 


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262See Short Sale Ban Emergency Order, 73 FR 

55169–02. 

263See id. 

264See September 21, 2008 Amendment, 73 FR 

55556–01. 

265See Short Sale Ban Emergency Order, 73 FR 

55169–02. 

266See id. 

267See September 21, 2008 Amendment, 73 FR 

55556–01. 

268See id. 

269See 17 CFR 242.200(g)(1). 

270See id. 

rule, which, as discussed above, are 

each based on a trading unit increment. 

b. Bona Fide Market Making in 

Derivatives 

The Short Sale Ban also included an 

exception for any person that is a 

market maker that effects a short sale as 

part of bona fide market making and 

hedging activity related directly to bona 

fide market making in derivatives on the 

publicly traded securities of any 

security covered by the Short Sale 

Ban.262 Under the Short Sale Ban, this 

exception applied to all market makers, 

including over-the-counter market 

makers, and to bona fide market making 

and hedging activity related directly to 

bona fide market making in exchange 

traded funds and exchange traded notes 

of which securities included in the 

Short Sale Ban were a component. We 

stated that the purpose of the exception 

was to permit market makers to 

continue to provide liquidity to the 

markets.263 Similarly, we believe such 

an exception would be appropriate for 

the proposed circuit breaker halt rule. 

During the period that the Short Sale 

Ban was effective, to help ensure that 

the exception would not result in 

increased short exposure in securities 

covered by the Short Sale Ban, we 

limited the exception so that if a 

customer or counterparty position in a 

derivative security based on the security 

was established after the effectiveness of 

the September 21 Amended Order, a 

market maker could not effect the short 

sale if the market maker knew that the 

customer’s or counterparty’s transaction 

would result in the customer or 

counterparty establishing or increasing 

an economic net short position (i.e., 

through actual positions, derivatives, or 

otherwise) in the issued share capital of 

a firm covered by the Short Sale Ban. 

This provision was included to address 

potential circumvention of the Short 

Sale Ban during the several weeks that 

it was in effect.264 However, we do not 

believe such a provision is necessary for 

the proposed circuit breaker halt rule 

because the rule as proposed only 

contemplates a one-day (or less than one 

day depending on when during the day 

the circuit breaker is triggered) 

prohibition on short selling of any NMS 

security that becomes subject to the 

circuit breaker. 

c. Options and Futures Contract 

Expiration 

The Short Sale Ban included an 

exception to allow short sales that 

occurred as a result of automatic 

exercise or assignment of an equity 

option held prior to effectiveness of the 

Short Sale Ban due to expiration of the 

option.265 It also allowed short sales 

that occurred as a result of the 

expiration of futures contracts held 

prior to effectiveness of the Short Sale 

Ban.266

We propose including a similar 

exception for the proposed circuit 

breaker halt rule for short sales that 

occur as a result of automatic exercise 

or assignment of an equity option held 

before a circuit breaker on a particular 

security is triggered and a short selling 

halt is imposed in that security due to 

expiration of the option. We are also 

proposing an exception to the proposed 

circuit breaker halt rule to allow short 

sales that occur as a result of the 

expiration of futures contracts held 

before a circuit breaker is triggered in a 

particular security. 

Persons that purchased or sold 

options prior to the effectiveness of a 

circuit breaker halt entered into such 

transactions with the expectation that 

they would be able to fulfill their 

contractual obligations and receive the 

benefits of their bargain in return. 

Generally, options contracts are 

purchased or sold prior to the day in 

which a circuit breaker might be 

triggered. Therefore, providing an 

exception to the proposed circuit 

breaker halt rule to allow such persons 

to continue to rely on their pre-existing 

transactions until completion does not 

raise the concerns that the proposed 

circuit breaker halt rule is intended to 

address. As with the Short Sale Ban, we 

propose to limit this exception to 

automatic exercises and assignments to 

prevent it from being abused by more 

discretionary options exercises. 

d. Exception for Assignment To Call 

Writers Upon Exercise of an Option 

To allow for creation of long call 

options, the Short Sale Ban included an 

exception to permit short sales that 

occur as a result of assignment to call 

writers upon exercise.267 When options 

are exercised, call writers may be 

required to sell short in order to satisfy 

their obligations. Because call writers do 

not have discretion, and because the 

short sales are effected in order to fill 

buying demand, we believe that 

including this exception in the 

proposed circuit breaker halt rule would 

benefit the markets while not opening 

the door to the abuses that the proposed 

rule is intended to address. 

e. Owned Securities 

The Short Sale Ban provided that 

sales of Rule 144 securities were 

excepted from its requirements because 

Rule 144 securities are owned securities 

and do not raise the concerns that the 

Short Sale Ban was designed to 

address.268 We believe a similar 

exception for securities that a seller is 

deemed to own under Rule 200(b) 

should be included in the proposal. 

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 physical 

possession or control by settlement of 

the transaction.269 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, 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.’’ 270 As a result, during a halt 

triggered by a circuit breaker, sellers 

would be permitted to sell 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 security to its 

broker-dealer prior to settlement based 

on circumstances outside the seller’s 

control. 

Although the Short Sale Ban only 

excepted Rule 144 securities, we believe 

that other securities considered 

‘‘deemed to own’’ for purposes of Rule 

200(b) should also be excepted from the 

proposed circuit breaker halt rule 

because these are owned securities that 

do not raise the same concerns that the 

proposed rule is designed to address. 

3. Proposed Circuit Breaker Price Test 

Rules 

We are also proposing a short selling 

circuit breaker that, when triggered by a 

severe decline in the price of a 

particular security, would impose short 

sale price restrictions for that security 


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271See 1998 Release, 63 FR 18477 supra note 230 

and accompanying text. 272See Section III.A. and III.B. (discussing the 

operation of the proposed modified uptick rule and 

the proposed uptick rule respectively). 273See Sections III.A.2. and III.B.2. (discussing 

the short exempt provisions of the proposed 

modified uptick rule and proposed uptick rule, 

respectively). 274 ‘‘Regular trading hours’’ has the same meaning 

as in Rule 600(b)(64) of Regulation NMS. Rule 

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

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

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

the procedures established pursuant to 

§ 242.605(a)(2).’’ 275See, e.g., Credit Suisse letter, supra note 122. 

wherever it is traded for the remainder 

of the trading day. Such a circuit 

breaker would be imposed in place of a 

permanent, market-wide short sale price 

test restriction. 

Similar to the reasons stated in the 

discussion above regarding the 

proposed circuit breaker halt rule, a 

circuit breaker price test rule would be 

triggered by a 10% intraday decline in 

the price of an individual equity 

security from the prior day’s closing 

price as reported in the consolidated 

system. We preliminarily believe that a 

10% decline in a security’s price as 

measured from the prior day’s closing 

price, as reported in the consolidated 

system, would be an appropriate level at 

which to trigger a circuit breaker that 

results in a short sale price test 

restriction. As discussed above, such a 

percentage decline would be consistent 

with the current SRO Circuit 

Breakers.271 We recognize that a lesser 

or greater percentage decline or some 

other measure of decline may be 

appropriate. 

We also seek comment regarding the 

form of the short sale price test 

restrictions that could be imposed when 

the proposed circuit breaker is triggered. 

Such a circuit breaker when triggered 

could impose a short sale price test 

restriction in the form of the proposed 

modified uptick rule based on the 

national best bid, or in the form of the 

proposed uptick rule based on the last 

sale price of the individual security. 

This would include the same proposed 

short sale price test and provisions that 

would be used in the proposed modified 

uptick and proposed uptick rules, 

permitting certain sales to occur 

notwithstanding the price limitations 

otherwise applicable under the two 

proposed rules.272 We believe these 

provisions would be justified for the 

same reasons described regarding the 

proposed modified uptick rule and the 

proposed uptick rule, respectively.273

As described in more detail below, 

the price decline would be based on the 

security’s price during the trading day 

as reported in the consolidated system 

as compared to the prior day’s closing 

price as reported in the consolidated 

system. The prior day’s closing price 

would be the last price reported during 

regular trading hours 274 the prior day. 

The proposed circuit breaker 

modified uptick rule would, once 

triggered by a 10% decline in the price 

of a security from the prior day’s closing 

price, impose the modified uptick rule 

in the individual security at times when 

the national best bid is calculated and 

disseminated in the consolidated 

system, for the remainder of the trading 

day. We based the time period on the 

calculation and dissemination of the 

national best bid in the consolidated 

system because the proposed modified 

uptick rule is based on the national best 

bid as calculated and disseminated in 

the consolidated system. 

Similarly, the proposed circuit 

breaker uptick rule would, once 

triggered by a 10% decline in the price 

of a security from the prior day’s closing 

price on any trading day, impose the 

uptick rule in the individual security at 

times when the last sale price is 

calculated and disseminated in the 

consolidated system. We based the time 

period on the calculation and 

dissemination of the last sale price 

because the proposed uptick rule is 

based on the last sale price as calculated 

and disseminated in the consolidated 

system. 

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 an NMS security within 

thirty minutes of the end of regular 

trading hours. Former NYSE Rules 

80A(a) and 80A(b) provided that a 

circuit breaker would not trigger 

program trading restrictions after 3:25 

p.m., or approximately thirty-five 

minutes before the close of regular 

trading hours. As with the proposed 

circuit breaker halt rule, we seek 

comment as to whether thirty minutes is 

an appropriate balance to ensure that 

the goals of the proposed rule would be 

met while also reducing the potential 

for market disruption toward the close 

of regular trading hours. 

We believe that the temporary 

imposition of the proposed modified 

uptick rule, after a circuit breaker is 

triggered, that operates at times when 

the national best bid is disseminated 

following a 10% decline in a security’s 

price might be appropriate. Similarly, 

we believe that the temporary 

imposition of the proposed uptick rule, 

after a circuit breaker is triggered, that 

operates at times when the last sale 

price is calculated and disseminated 

following a 10% decline in a security’s 

price might be appropriate. We seek 

comment below, however, regarding 

whether longer or shorter time periods 

would be appropriate. 

We are seeking comment on the 

potential benefits and costs of the 

proposed circuit breaker price test rule. 

We believe that such a rule might be a 

narrowly tailored means to help restore 

investor confidence and stabilize the 

market for individual securities. Such a 

rule might also help prevent short 

selling, including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market by exhausting all 

remaining bids at one price level, 

causing successively lower prices to be 

established by long sellers. Further, we 

note that allowing short selling to 

continue with price test restrictions 

once the circuit breaker is triggered 

might have a lesser impact on legitimate 

short selling and normal market activity 

including price discovery and the 

provision of liquidity than a circuit 

breaker that triggers a short selling halt. 

We also believe that a circuit breaker 

rule that triggers a price test restriction, 

because it is based on a trading 

increment of a penny as opposed to a 

short sale halt, may also alleviate some 

concerns over the possibility of artificial 

downward pressure that might arise 

from a ‘‘magnet effect’’ prior to reaching 

the trigger threshold. 

We recognize that a short selling 

circuit breaker that, when triggered, 

imposes short sale price test restrictions 

for the remainder of the trading day, 

would result in costs on market 

participants responsible for 

implementing and assuring compliance 

with the requirements of such 

restrictions. There might be significant 

operational costs associated with 

reprogramming systems to comply with 

short sale price test restrictions, and we 

anticipate that these costs might be 

greater than those required to comply 

with a short selling circuit breaker that, 

when triggered, imposes halts on short 

selling in individual securities. There 

might also be requirements for 

additional staff and costs associated 

with personnel hiring and training 

related to maintaining and ensuring 

compliance with any short sale price 

test restrictions.275

Further, we recognize that short sale 

price test restrictions imposed as a 

result of a circuit breaker might result in 

many of the same costs discussed in 

detail in Section IX pertaining to the 

implementation of market-wide short 


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18070 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

276See Section IX (discussing costs and benefits 

of the proposed modified uptick rule and the 

proposed uptick rule). 

277See Section IX.B. 278See Section II.C. 

279See id. 

280See Section II.A. 

281See id. 

sale price test restrictions.276 Those 

costs might include a reduction of the 

benefit of legitimate short selling and a 

subsequent reduction in the quantity of 

short selling, which we have noted 

might lead to a decrease in market 

quality and price discovery, less 

protection against upward stock price 

manipulations, a less efficient allocation 

of capital, an increase in trading costs, 

and a decrease in liquidity.277 We are 

seeking comment on the extent of these 

and other costs associated with a circuit 

breaker that when triggered imposes 

short sale price test restrictions. 

The proposed circuit breaker price 

test rule would result in either the 

proposed modified uptick rule or the 

proposed uptick rule, for the remainder 

of the trading day, as each proposed rule 

is described above. For instance, a 

circuit breaker resulting in the proposed 

modified uptick rule would require that 

trading centers establish, maintain, and 

enforce policies and procedures 

reasonably designed to prevent short 

selling on a downbid in a security 

where the circuit breaker has been 

triggered by a severe decline in the price 

of that NMS security. Broker-dealers 

could mark certain short sale orders 

‘‘short-exempt’’ under the conditions set 

forth above. A circuit breaker that 

resulted in the proposed uptick rule 

would, when triggered by a decline in 

the price of a particular security, 

prohibit any person from selling short 

that security on a downtick. This would 

be a more limited approach than a short 

sale price test rule that is in place at all 

times and thus might result in fewer of 

the potential disadvantages that would 

result from a short sale price test that 

was in place at all times. 

Under the proposed circuit breaker 

price test rule, a price test would not be 

in place on a permanent and marketwide basis for all securities. Under the 

proposed circuit breaker that results in 

the proposed modified uptick rule, 

trading centers would need to establish 

and maintain reasonable policies and 

procedures in advance so that they are 

able to comply with the proposed 

circuit breaker rule whenever triggered. 

It would not be reasonable for a trading 

center to wait until the circuit breaker 

is triggered to begin establishing 

policies and procedures to prevent the 

execution or display of the particular 

security on a downbid. Thus, a circuit 

breaker that triggers the proposed 

modified uptick rule would result in 

some immediate upfront costs to trading 

centers. 

In the Solicitation of Comments, we 

seek comment on whether the short sale 

price test restrictions should remain in 

place for a longer or shorter period of 

time, whether a 10% decline would be 

an appropriate trigger for the circuit 

breaker proposals, or if for example, a 

5% or 20% threshold might be more 

appropriate, and what additional costs 

may be associated with a proposed 

circuit breaker price test rule. 

IV. Request for Comment 

In addition to the specific requests for 

comment found throughout this 

proposing release, we seek comment 

generally from all members of the public 

on all aspects of the proposed 

amendments to Rules 200(g) and 201 of 

Regulation SHO. We request that 

commenters provide empirical data to 

support their views and arguments 

related to these proposals. In addition to 

the questions set forth above, 

commenters are welcome to offer their 

views on any other matter raised by the 

proposed amendments to Regulation 

SHO. Specifically, are there any other 

possible restrictions on short selling that 

the Commission should consider, 

particularly ones that might be helpful 

in a severe market decline? 

Questions Regarding Proposed Short 

Sale Price Tests Generally 

1. Should short sales be subject to a 

short sale price test restriction, or 

should we continue to rely on current 

short sale regulations and anti-fraud and 

anti-manipulation provisions of the 

securities laws to address potentially 

abusive short selling? 

2. We note that our decision to 

propose a short sale price test was 

based, in part, on the recent changes in 

market conditions and investor 

confidence.278 To what extent, if any, 

would a short sale price test, such as the 

proposed modified uptick rule or the 

proposed uptick rule, be necessary or 

appropriate in light of recent changes in 

market conditions? Please explain and 

provide empirical data in support of any 

arguments and/or analyses. How would 

the proposed modified uptick rule or 

the proposed uptick rule affect market 

conditions today? Please explain and 

provide empirical data in support of any 

arguments and/or analyses. 

3. How effective would the proposed 

modified uptick rule or the proposed 

uptick rule be in allowing relatively 

unrestricted short selling in an 

advancing market? Please explain and 

provide empirical data in support of any 

arguments and/or analyses. How 

effective would the proposed modified 

uptick rule or proposed uptick rule be 

at helping to prevent short selling, 

including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market by exhausting all 

remaining bids at one price level, 

causing successively lower prices to be 

established by long sellers? Please 

explain and provide empirical data in 

support of any arguments and/or 

analyses. Could the proposed modified 

uptick rule or proposed uptick rule be 

modified to better meet these goals? If 

so, how? Please explain and provide 

empirical data in support of any 

arguments and/or analyses. 

4. We also note our concern regarding 

investor confidence based on the 

numerous requests for reinstatement of 

short sale price test restrictions.279

Would reinstating a short sale price test 

restriction such as the proposed 

modified uptick rule or proposed uptick 

rule help restore investor confidence? If 

so, why? If not, why not? Please explain 

and provide empirical data or other 

specific information in support of any 

arguments and/or analyses. 

5. In addition to investor confidence 

and market volatility, we have stated 

that we are concerned about potentially 

abusive short selling. Would the 

proposed modified uptick rule or 

proposed uptick rule help address 

potentially abusive short selling? If so, 

how? If not, why not? Please explain 

and provide empirical data in support of 

any arguments and/or analyses. 

6. We note that short selling provides 

the market with important benefits, 

including market liquidity and pricing 

efficiency.280 What effect, if any, would 

the proposed modified uptick rule or 

proposed uptick rule have on market 

liquidity? Please explain and provide 

empirical data in support of any 

arguments and/or analyses. What effect, 

if any, would the proposed modified 

uptick rule or proposed uptick rule have 

on pricing efficiency? Please provide 

empirical data in support of any 

arguments and/or analyses. 

7. We also note that short selling may 

be used to illegally manipulate stock 

prices.281 What impact, if any, would 

the proposed modified uptick rule or 

proposed uptick rule have on ‘‘bear 

raids’’? Please explain and provide 

empirical data in support of any 

arguments and/or analyses. To what 

extent, if any, does unrestricted short 


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selling exacerbate a declining market? 

Please explain and provide empirical 

data in support of any arguments and/ 

or analyses. 

8. Is there a need for short sale price 

test restrictions? If there is a need for a 

short sale price test, would the proposed 

modified uptick rule be the best test? If 

so, why? If not, why not? Would the 

proposed uptick rule be the best test? If 

so, why? If not, why not? What are the 

costs and benefits of the proposed 

modified uptick rule versus the 

proposed uptick rule? What would be 

the general costs and benefits of short 

sales being subject to the proposed 

modified uptick rule? What would be 

the general costs and benefits of short 

sales being subject to the proposed 

uptick rule? Should we consider other 

forms of short sale price tests? If so, 

what forms? What would be the costs 

and benefits of any alternative forms of 

short sale price tests? Please explain and 

provide empirical data in support of any 

arguments and/or analyses. 

9. Would the proposed modified 

uptick rule or proposed uptick rule be 

an appropriate short sale price test in 

the current decimals environment? 

Would the proposed modified uptick 

rule or proposed uptick rule be more 

suitable in a decimals environment with 

multiple trading centers? Please explain 

and provide empirical data in support of 

any arguments and/or analyses. 

10. Should the proposed modified 

uptick rule or proposed uptick rule be 

limited to specific sectors or industries, 

such as financials, due to the unique 

harms or susceptibility to harms to 

those industries or sectors from the 

potential adverse effect of short selling 

in a declining market? If so, please 

describe the types of industries or 

sectors that should be covered and the 

unique harms or susceptibility to harm 

to which they are subject. Please also 

describe the mechanisms or criteria that 

should be used to determine which 

entities fall within these industries or 

sectors. 

11. 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 

because the application of short sale 

price tests had become disjointed with 

different price tests applying to the 

same securities trading in different 

markets. Under both proposed rules, all 

covered securities, wherever traded, 

would be subject to one short sale price 

test. What are the advantages or 

disadvantages of having a uniform short 

sale price test in the covered securities 

across all markets? Please explain. 

12. How would trading systems and 

strategies used in today’s marketplace 

be impacted by the proposed modified 

uptick rule or proposed uptick rule? 

How might market participants alter 

their trading systems and strategies in 

response to either proposed rule, if 

adopted? To further the goal of having 

a uniform short sale price test, both the 

proposed modified uptick rule and 

proposed uptick rule would provide 

that no SRO shall have any rule that is 

not in conformity with, or conflicts with 

either proposed rule. Is this prohibition 

necessary or appropriate? Would there 

ever be a need for an SRO to institute 

its own short sale price test? If so, why? 

13. One of the reasons for the 

elimination of former Rule 10a–1 was 

that the disjointed application of the 

rule resulted in an un-level playing field 

among market participants. Could 

implementation of a short sale price test 

through a policies and procedures 

approach applicable to a ‘‘trading 

center’’ lead to disproportionate burden 

among market participants? In what 

way? Would a straight prohibition 

implementation approach be preferable 

in this regard? To what extent could the 

proposed exceptions to either 

alternative rule contribute to a 

disproportionate burden on certain 

market participants? What effect might 

there be on relative competitive 

advantages of different market 

participants if the short sale price test 

were based on an increment larger than 

a penny? 

14. What impact, if any, would the 

trading requirements of Regulation NMS 

have on implementing the proposed 

modified uptick rule or proposed uptick 

rule? 

15. To what extent does the ability to 

obtain a short position through the use 

of derivative products such as options, 

futures, contracts for difference, 

warrants, credit default swaps or other 

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

or other instruments (such as inverse 

leveraged exchange traded funds) 

undermine the goals of short sale price 

test restrictions, such as the proposed 

modified uptick rule and the proposed 

uptick rule? Will synthetic short sales 

increase if the Commission adopts 

either alternative short sale price test? 

What effects might such an increase 

have on market liquidity and pricing 

efficiency? Please explain. 

16. Before determining whether to 

adopt a short sale price test restriction 

on a permanent basis, should we adopt 

a rule that would apply, on a pilot basis, 

the operation of a short sale price test 

restriction for specified securities? Such 

an approach would allow us to study 

the effects on, among other things, 

market volatility, price efficiency, and 

liquidity during the recent changes in 

market conditions. What would be other 

benefits of taking this approach? What 

would be the costs of taking this 

approach? Would the costs associated 

with programming systems to apply a 

short sale price test restriction on 

specified securities outweigh any 

benefits of having a pilot? If we were to 

take this approach, how long would it 

take to program systems to apply a short 

sale price test restriction to specified 

securities? Similar to the Pilot 

conducted immediately prior to the 

elimination of former Rule 10a–1, the 

securities that could be subject to the 

pilot could be comprised of a subset of 

the Russell 3000 index, or such other 

securities as necessary or appropriate in 

the public interest and consistent with 

the protection of investors after giving 

due consideration to the security’s 

liquidity, volatility, market depth and 

trading market. Would it be appropriate 

for such a pilot to be comprised of a 

subset of the Russell 3000 index? How 

should the securities that would 

comprise a pilot be selected? Please 

explain the reasons for any suggested 

selection method. Such a pilot could 

remain in effect for one or two years. 

Would a one or two year pilot be an 

appropriate period of time? If so, why? 

If not, why not? Please provide specific 

reasons to support any views in favor of 

establishing another time period. Please 

provide any additional details regarding 

how a pilot could be structured in terms 

of the securities to be selected, the timeframe of the pilot, and the types of 

restrictions that could be placed on 

short selling of such securities. 

17. In connection with the Pilot 

conducted immediately prior to our 

elimination of former Rule 10a–1, SROs 

publicly released transactional short 

selling data so that data would be 

available to the public to encourage 

independent researchers to study the 

Pilot. If we were to adopt a rule that 

would apply, on a pilot basis, a short 

sale price test restriction on specified 

securities, we would expect to make 

information obtained during any such 

pilot publicly available. In addition, we 

would expect SROs to again make data 

available to the public during any such 

pilot. Would there be any costs 

associated with making short selling 

data available to the public during the 

period of a pilot? What would be the 

benefits of making such data available to 

the public? 

18. Commenters have stated that the 

Pilot conducted prior to the elimination 

of former Rule 10a–1 was insufficient, 

in part, because it only covered a period 


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282See Brown Letter supra note 55. 

283See id. 

of relative market stability 282 and that 

the Pilot should have lasted longer to 

‘‘ensure at least one bear market was 

involved in the study.’’ 283 Did the Pilot 

cover a sufficient period of time? 

19. The proposed implementation 

period for both of the proposed rules 

would be three months from the 

effective date of the proposed rule, if 

adopted. Would a three month 

implementation period be appropriate 

for the proposed modified uptick rule? 

Would a three month implementation 

period be appropriate for the proposed 

uptick rule? Should there be a shorter or 

longer implementation period for either 

proposed rule? Please explain. 

Questions Regarding Proposed Modified 

Uptick Rule 

1. The proposed modified uptick rule 

would define the term ‘‘down-bid price’’ 

to mean a price that is less than the 

current national best bid or, if the last 

differently priced national best bid was 

greater than the current national best 

bid, a price that is less than or equal to 

the current national best bid. Should 

this definition be altered? If the last 

differently priced national best bid was 

greater than the current national best 

bid, should short selling be restricted to 

a cent above the current national best 

bid, or a higher or lower increment? If 

so, why? If a specific increment is 

suggested, please describe what impact 

such increment would have on short 

selling. What increment, if any, would 

be tantamount to a ban on short selling? 

Please provide empirical data in support 

of any arguments and/or analyses. 

2. The proposed modified uptick rule 

would allow short selling at the current 

national best bid in an advancing 

market. Should the proposed modified 

uptick rule instead require a trading 

center to have policies and procedures 

reasonably designed to permit short 

selling only at a price above the current 

national best bid such that short selling 

would occur only at a higher price than 

the current national best bid, and only 

on a passive basis? Would such an 

approach be more effective at 

preventing short selling, including 

potentially manipulative or abusive 

short selling, from being used as a tool 

to drive down the market or from being 

used to accelerate a declining market 

than the approach set forth in the 

proposed modified uptick rule or 

proposed uptick rule? If so, how? If not, 

why not? What effect would an 

approach that allows short selling only 

at a price above the current national best 

bid have on the benefits of short selling, 

such as providing price efficiency and 

liquidity? Would this approach be easier 

to program into trading and surveillance 

systems than the approach in the 

proposed modified uptick rule or 

proposed uptick rule? If so, why? If not, 

why not? Should an approach that 

allows short selling only at a price 

above the current national best bid be 

combined with a policies and 

procedures approach similar to that 

discussed under the proposed modified 

uptick rule or a prohibition approach 

similar to that discussed under the 

proposed uptick rule? What would be 

the advantages and disadvantages, 

including costs and benefits of each of 

these approaches as combined with a 

short sale price test that permits short 

selling only at a price above the current 

national best bid? 

3. The proposed modified uptick rule 

would apply to a ‘‘covered security’’ 

which is defined to mean an NMS stock 

as that term is defined in Regulation 

NMS. Is it appropriate for the proposed 

modified uptick rule to apply only to 

NMS stocks? Should the definition of a 

‘‘covered security’’ instead be a security 

that is registered on, or admitted to 

unlisted trading privileges on, a national 

securities exchange? If so, why? If not, 

why not? Should the definition of 

‘‘covered security’’ be expanded to 

include all NMS securities, including 

options? If so, why? If not, why not? 

4. Should the proposed modified 

uptick rule be extended to Non-NMS 

stocks, such as stocks quoted on the 

OTC Bulletin Board and Pink Sheets? 

How would a national best bid be 

determined for sales of such securities? 

5. The proposed modified uptick rule 

has as its reference point for a 

permissible short sale the current 

national best bid in relation to the last 

differently priced national best bid. To 

what extent would the sequence of bids 

play a role in determining when short 

sales can be executed or displayed by 

trading centers, or submitted by brokerdealers relying on the exception to the 

proposed modified uptick rule in 

proposed Rule 201(c)? Are there any 

regulatory or operational reasons to 

allow markets to use their own bid 

information in regulating short sales 

under the proposed modified uptick 

rule? Would allowing markets to use 

their own bid information affect the 

operation or effectiveness of the 

proposed modified uptick rule? If so, 

how? If trading centers and brokerdealers marking orders ‘‘short exempt’’ 

pursuant to proposed Rule 201(c) take 

snapshots of the market at the time of 

execution, display, or submission of the 

short sale order, as applicable, would 

such snapshots address any concerns 

regarding the sequence of bids? If not, 

what other policies and procedures 

could trading centers and broker-dealers 

put in place to address these concerns? 

6. The proposed modified uptick rule 

would require trading centers to 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to prevent the execution or 

display by the trading center of 

impermissibly priced short sale orders. 

Are the proposed modified uptick rule’s 

requirements for what trading centers’ 

policies and procedures would be 

required to include appropriate? Please 

explain. Pursuant to proposed Rule 

201(b)(1)(ii) 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 

down-bid price. Thus, a trading center’s 

policies and procedures must be able to 

recognize an order marked ‘‘short 

exempt.’’ Is the inclusion of this 

requirement in a trading center’s 

policies and procedures appropriate? 

Please explain. 

7. Proposed Rule 201(b)(2) would 

require that trading centers regularly 

surveil to ascertain the effectiveness of 

the policies and procedures required by 

proposed Rule 201(b)(1) and promptly 

take action to remedy deficiencies in 

such policies and procedures. Would all 

trading centers readily be able to 

monitor on a real-time basis the national 

best bid and the last differently priced 

national best bid? Are there other ways 

to surveil that would not be on a realtime basis that would be equally or 

more effective? Please explain. What 

systems and surveillance changes by 

trading centers would be necessary to 

meet the requirements of the proposed 

modified uptick rule? Should additional 

requirements be placed on trading 

centers that execute or display short sale 

orders in covered securities? If so, what 

should such requirements be? Is a 

policies and procedures approach 

preferable to a prohibition (as was the 

case under former Rule 10a–1) on any 

person executing a short sale on a 

down-bid price? What would be the 

costs and benefits of a policies and 

procedures approach as compared to 

such a prohibition? Should the 

Commission consider instead a 

prohibition with regard to some or all of 

the entities regulated by the 

Commission, rather than one on ‘‘any 

person,’’ as was the case under former 

Rule 10a–1? What about an approach 

that imposed a policies and procedures 

requirement on some or all of the 

entities regulated by the Commission 

and a prohibition on ‘‘any person’’? 


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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 18073 

What would be the costs and benefits of 

an approach that used both a 

prohibition and a policies and 

procedures requirement on some or all 

of the entities regulated by the 

Commission? What would be the costs 

and benefits of each of these 

approaches? 

8. Under the proposed modified 

uptick rule, a trading center or brokerdealer, as applicable, would need to 

take such steps as would be necessary 

to enable it to enforce its policies and 

procedures effectively. For example, 

trading centers and broker-dealers, as 

applicable, could establish policies and 

procedures that could include regular 

exception reports to evaluate their 

trading practices. Should the proposed 

modified uptick rule require trading 

centers and broker-dealers subject to the 

policies and procedures requirements of 

the rule to have exception reports? 

Please explain. What would be the costs 

and benefits of such a requirement? 

Would such costs and benefits differ 

depending on the size of the trading 

center or broker-dealer? 

9. Under the proposed modified 

uptick rule, if an order is impermissibly 

priced, the trading center could re-price 

the order at the lowest permissible price 

and hold it for later execution at its new 

price or better. As quoted prices change, 

the proposed modified uptick rule 

would allow a trading center to 

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 effect, what would be the 

consequences of the proposed modified 

uptick rule? What would be the impact 

of the proposed modified uptick rule on 

speed of executions, transaction costs, 

and order flow? In addition, if a trading 

center were not to re-price an order, 

what would be the impact on speed of 

executions, transaction costs, and order 

flow? 

10. Proposed Rule 201(b)(1)(i) 

provides that a trading center’s policies 

and procedures must be reasonably 

designed to permit the execution of a 

displayed short sale order of a covered 

security if, at the time of display of the 

short sale order, the order was not at a 

down-bid price. Is it appropriate that 

the proposed modified uptick rule 

would not preclude execution of a short 

sale order that was not priced in 

accordance with proposed Rule 

201(b)(1) provided that the short sale 

order complied with the requirements of 

proposed Rule 201(b)(1) at the time it 

was displayed? If so, why? If not, why 

not? Please explain. 

11. Proposed Rule 201(c) provides 

that a broker-dealer may mark an order 

‘‘short exempt’’ provided the brokerdealer complies with the requirements 

of that paragraph of the proposed rule. 

Would it be appropriate to permit a 

broker-dealer to mark a short sale order 

‘‘short exempt’’ if it complies with the 

requirements of paragraph (c) of the 

proposed rule? Should this provision 

apply to entities other than, or in 

addition to, broker-dealers? Would the 

determination of the down-bid price for 

certain orders at the time of submission 

and others at the time of execution or 

display cause unnecessary confusion in 

the market? What systems and 

surveillance changes by broker-dealers 

would be necessary to meet the 

requirements of this provision? 

12. The proposed modified uptick 

rule would not apply at times the 

national best bid is not collected, 

processed, and disseminated. Is this 

appropriate? Would this result in a 

substantial portion of short selling 

moving to times when the national best 

bid is not collected, processed, and 

disseminated? Would this undermine 

the effectiveness of 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 drive down markets or to accelerate 

a price decline? Should the proposed 

modified uptick rule apply even at 

times the national best bid is not 

collected, processed, and disseminated? 

If so, why? If not, why not? If it were 

to apply during trading sessions when 

the national best bid is not collected, 

processed, and disseminated, how 

should it apply (e.g., using the national 

best bid at the end of the trading 

session)? What would be the costs and 

benefits of applying the proposed 

modified uptick rule at times the 

national best bid is not collected, 

processed, and disseminated, including 

the impact on liquidity and price 

efficiency? What would be the costs and 

benefits of applying the proposed 

modified uptick rule at times the 

national best bid is collected, processed, 

and disseminated, including the impact 

on liquidity and price efficiency? 

13. The proposed modified uptick 

rule includes a number of provisions 

that would permit a broker-dealer to 

mark a short sale order ‘‘short exempt.’’ 

Pursuant to proposed Rule 201(b)(1)(ii) 

a trading center’s policies and 

procedures must be reasonably designed 

to permit the execution or display of a 

short sale order marked ‘‘short exempt’’ 

without regard to whether the order is 

at a down-bid price. In addition to the 

provisions under paragraphs (c) and (d) 

of the proposed modified uptick rule 

regarding when a broker-dealer may 

mark an order ‘‘short exempt,’’ are there 

other provisions that the proposed 

modified uptick rule should include? 

Should the proposed modified uptick 

rule permit a broker-dealer to make a 

short sale order ‘‘short exempt’’ in 

connection with short selling activity 

and electronic trading systems that 

match and execute customer orders at 

random times within specific time 

intervals, and at independently derived 

prices? If so, please explain. If such a 

provision would be appropriate or 

necessary, what conditions should 

apply? Should such a provision include 

conditions similar to the conditions set 

forth in Rule 201(c)(8) of the proposed 

uptick rule? Should the proposed 

modified uptick rule permit a brokerdealer to mark a short sale order ‘‘short 

exempt’’ in connection with locked or 

crossed markets? If so, please explain 

how a conflict could arise in connection 

with the proposed modified uptick rule 

and locked or crossed markets and what 

should be the conditions of any such 

provision. Should the proposed 

modified uptick rule permit a brokerdealer to make a short sale order ‘‘short 

exempt’’ when the broker-dealer is 

fulfilling specific obligations? If so, 

please explain. 

14. Would any of the provisions 

under paragraph (c) or (d) under the 

proposed modified uptick rule be 

susceptible to abuse? If so, how? Are 

there conditions that would address this 

concern? 

15. Proposed Rule 201(d)(1) would 

permit a broker-dealer to mark a short 

sale order of a covered security ‘‘short 

exempt’’ if the seller owns the security 

sold and intends to deliver the security 

as soon as all restrictions on delivery 

have been removed. Would this 

provision be necessary or appropriate? 

Should any conditions or limitations 

apply? If so, why? If not, why not? 

16. Proposed Rule 201(d)(2) would 

permit a broker-dealer to mark a short 

sale order of a covered security ‘‘short 

exempt’’ in connection with certain odd 

lot transactions. Is this provision 

necessary or appropriate? Should 

proposed Rule 201(d)(2) apply to all 

market makers in odd-lots or should it 

be more limited? If so, why and how? 

17. Proposed Rule 201(d)(3) would 

permit a broker-dealer to mark a short 

sale order of a covered security ‘‘short 

exempt’’ in connection with certain 

bona fide domestic arbitrage 

transactions. Would this provision be 

necessary or appropriate? Should the 

provision be narrowed or broadened? If 

so, state specifically why, and how it 

should be restructured in relation to the 

purposes of the proposed modified 

uptick rule. Proposed Rule 201(d)(3) 


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18074 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

284See also 17 CFR 242.611(7). 285See, e.g., 2003 Proposing Release at 62988. 

parallels the exception in former Rule 

10a–1(e)(7) which, consistent with 

Regulation T at the time, referred to a 

‘‘special arbitrage account.’’ Because 

Regulation T no longer refers to a 

‘‘special arbitrage account’’ but instead 

refers to a ‘‘good faith account’’, 

proposed Rule 201(d)(3) would also 

refer to a ‘‘good faith account.’’ Should 

proposed Rule 201(d)(3) refer to a 

‘‘special arbitrage account’’ or a ‘‘good 

faith account’’? Please explain. Is a 

separate account, whether a ‘‘special 

arbitrage account’’ or ‘‘good faith 

account,’’ necessary or appropriate for 

this provision? If so, why? If not, why 

not? 

18. Proposed Rule 201(d)(4) would 

permit a broker-dealer to mark a short 

sale order of a covered security ‘‘short 

exempt’’ in connection with certain 

international arbitrage transactions. 

Would this provision be necessary or 

appropriate? Should the provision be 

narrowed or broadened? If so, state 

specifically why, and how it should be 

restructured in relation to the purposes 

of the proposed modified uptick rule. 

Proposed Rule 201(d)(4) parallels the 

exception in former Rule 10a–1(e)(8) 

which, consistent with Regulation T at 

the time, referred to a ‘‘special 

international arbitrage account.’’ 

Because Regulation T no longer refers to 

a ‘‘special international arbitrage 

account’’ but instead refers to a ‘‘good 

faith account,’’ proposed Rule 201(d)(4) 

would also refer to a ‘‘good faith 

account.’’ Should proposed Rule 

201(d)(4) refer to a ‘‘special 

international arbitrage account’’ or a 

‘‘good faith account’’? Please explain. Is 

a separate account, whether a ‘‘special 

arbitrage account’’ or ‘‘good faith 

account,’’ necessary or appropriate for 

this provision? If so, why? If not, why 

not? Should proposed Rule 201(d)(4) be 

combined with proposed Rule 

201(d)(3)? If so, why? If not, why not? 

Should depository receipts of a security 

be deemed the same security as the 

security represented by such depository 

receipt? Why or why not? 

19. Proposed Rule 201(d)(5) would 

permit a broker-dealer to mark a short 

sale order of a covered security ‘‘short 

exempt’’ in connection with sales by 

underwriters or syndicate members 

participating in a distribution in 

connection with over-allotments, and 

lay-off sales by such persons in 

connection with a distribution of 

securities. Would this provision be 

necessary or appropriate for both and/or 

either over-allotments and lay-off sales? 

Under what circumstances would an 

underwriter or syndicate member price 

an offering below the national best bid? 

What market impact, if any, would there 

be if the provision were extended to 

short sales below the national best bid? 

20. Proposed Rule 201(d)(6) would 

permit a broker-dealer to mark a short 

sale order of a covered security ‘‘short 

exempt’’ where a broker-dealer is 

facilitating customer buy or long sale 

orders on a riskless principal basis. 

Would this provision be appropriate or 

necessary? Are the conditions set forth 

in proposed Rule 201(d)(6) appropriate? 

Should the conditions be narrowed or 

broadened in any way? Please explain. 

21. Proposed Rule 201(d)(7) would 

permit a broker-dealer to mark a short 

sale order of a covered security ‘‘short 

exempt’’ in connection with certain 

VWAP transactions. Would this 

provision be necessary or appropriate? 

Should the proposed provision be 

modified in any way? If so, please 

explain. Are all of the proposed 

conditions appropriate, or should any 

be eliminated or modified? Should any 

other conditions be added? In place of 

a provision limited to VWAP 

transactions, would it be more 

appropriate to permit a broker-dealer to 

mark a short sale order of a covered 

security ‘‘short exempt’’ in connection 

with ‘‘any short sale at a price that is not 

based, directly or indirectly, on the 

quoted price of the covered security at 

the time of execution and for which the 

material terms were not reasonably 

determinable at the time the 

commitment to execute the order was 

made’’? 284 If this provision would be 

more appropriate, please explain why. 

What types of benchmark orders would 

such a provision capture? If we were to 

use this alternative language, how 

should we determine the ‘‘material 

terms’’ of the short sale? Should there be 

any conditions on the use of this 

alternative proposed provision? 

22. Should the proposed modified 

uptick rule include a ‘‘short exempt’’ 

marking provision specific to the daily 

opening of trading at each trading 

center, particularly given that there are 

multiple trading centers with nonsynchronous opening auctions? Please 

explain. Should there be a ‘‘short 

exempt’’ marking provision specific to 

the opening of trading after a trading 

halt? Please explain. Should there be a 

‘‘short exempt’’ marking provision 

specific to short selling at the closing of 

trading at each trading center? Please 

explain. 

23. Should the proposed modified 

uptick rule include a ‘‘short exempt’’ 

marking provision for transactions in 

exchange traded funds and similar 

products? If so, what should be the 

qualifications and/or conditions related 

to such provision? We note the 

Commission previously exempted ETFs 

from Rule 10a–1, subject to various 

conditions.285

24. Should the proposed modified 

uptick rule include a ‘‘short exempt’’ 

marking provision for short sale orders 

that are not pursuant to a ‘‘regular way’’ 

contract? 

25. The proposed modified uptick 

rule does not contain a ‘‘short exempt’’ 

marking provision in connection with 

market makers engaged in bona fide 

market making activity. Should there be 

such a provision to facilitate market 

making activity by broker-dealers? If so, 

why? What consequences would there 

be, if any, to the markets if brokerdealers are not permitted to mark such 

orders ‘‘short exempt’’? Please describe. 

If the proposed modified uptick rule 

were to permit broker-dealers to mark 

short sale orders pursuant to bona fide 

market making activity as ‘‘short 

exempt’’ what qualifications and/or 

conditions should apply? 

26. When the Commission repealed 

short sale price tests in 2007, it also 

provided that no SRO could have or 

adopt its own short sale price test. One 

reason for removing short sale price 

tests was the existence of different types 

of prices tests (e.g., the tick test of Rule 

10a–1 and the NASD bid test). Should 

the proposed modified uptick rule be an 

SRO rule? 

27. Under a straight prohibition, any 

person is liable for an impermissible 

short sale, even if the sale is the product 

of an error. Should we include an 

exception for inadvertent errors, if the 

person can demonstrate that the error 

was inadvertent? When would an 

inadvertent error occur? How could a 

person demonstrate that the noncompliant short sale was an inadvertent 

error? 

28. The short sales that qualify for the 

‘‘broker-dealer’’ provision in proposed 

Rule 201(c) are still subject to the 

provisions of the proposed modified 

uptick rule and would be required to be 

marked as ‘‘short exempt.’’ Should these 

short sales be marked as ‘‘short exempt’’ 

or is another mark more appropriate? 

What effect, if any, would marking these 

short sales as ‘‘short exempt’’ have on 

compliance or surveillance relative to 

another mark? What would be the costs 

associated with implementing a mark 

especially for these short sales? 

Questions Regarding Proposed Uptick 

Rule 

1. Should the proposed uptick rule 

have a policies and procedures 

approach for some or all of the entities 


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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 18075 

286See Securities Exchange Act Release No. 

11276 (Mar. 5, 1975), 54 FR 12522 (Mar. 19, 1975) 

(release proposing subparagraph (a)(2) in response 

to stated operational and other difficulties 

associated with complying with Rule 10a–1); see 

also Securities Exchange Act Release No. 11468 

(June 12, 1975), 40 FR 25442 (June 16, 1975) 

(adoption of proposed changes adding 

subparagraph (a)(2)). 

regulated by the Commission similar to 

the approach under the proposed 

modified uptick rule? If so, why? If not, 

why not? Or, should the Commission 

also adopt a prohibition on ‘‘any 

person’’ for the proposed uptick rule, in 

addition to a policies and procedures 

requirement on some or all of the 

entities regulated by the Commission? 

What would be the costs and benefits of 

a policies and procedures requirement, 

as compared to the proposed 

prohibition? What would be the costs 

and benefits of an approach that used 

both a prohibition and a policies and 

procedures requirement on some or all 

of the entities regulated by the 

Commission? 

2. The proposed uptick rule would 

apply to a ‘‘covered security’’ which is 

defined as an NMS security, other than 

an option, in which trades in such 

securities are reported pursuant to an 

effective transaction reporting plan and 

for which information as to such trades 

is made available in accordance with 

such plan on a real-time basis to 

vendors of market transaction 

information. Should the definition of a 

‘‘covered security’’ be changed to apply 

to a security registered on, or admitted 

to unlisted trading privileges on, a 

national securities exchange, if trades in 

such securities are reported pursuant to 

an effective transaction reporting plan 

and information as to such trades is 

made available in accordance with such 

plan on a real-time basis to vendors of 

market transaction information? If so, 

why? Would such a definition result in 

securities other than NMS stocks being 

subject to the proposed uptick rule? If 

so, please describe those types of 

securities and the costs and benefits of 

applying the proposed uptick rule to 

such securities. Should the definition of 

‘‘covered security’’ be expanded to 

include all NMS securities, including 

options? If so, why? If not, why not? 

3. The proposed uptick rule would 

apply to NMS stocks quoted in the OTC 

market, but not to non-NMS stocks 

quoted in the OTC market. What form 

of price test, if any, should apply to 

non-NMS stocks quoted in the OTC 

market, and why? If a price test should 

apply to non-NMS stocks, to what types 

of non-NMS stocks should it apply? 

Please explain. How should such a price 

test be implemented? In addition, we 

seek comment regarding whether the 

market is structured in a manner that 

would make regulation of non-NMS 

stocks practical. 

4. Could any operational concerns 

regarding implementation of the 

proposed uptick rule be remedied by 

market participants taking snapshots of 

the market at the time of effecting a 

short sale? Such snapshots could 

provide a record of the last sale price 

and the direction of the market for a 

particular security at the time of 

effecting the short sale. Would any 

additional exceptions be necessary to 

address time lags in the receipt of last 

sale price information from data feeds? 

If so, please explain, including 

providing any suggested language for 

such an exception. 

5. The proposed uptick rule would 

not apply to short sales in covered 

securities while last sale price 

information is not collected, calculated 

and disseminated on a real-time basis. 

Would this result in a substantial 

portion of short selling moving to times 

when last price information is not 

collected, calculated, and disseminated 

on a real-time basis? Would this 

undermine the effectiveness of 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 drive down markets or 

to accelerate a price decline? Would it 

be appropriate to apply the proposed 

uptick rule while last sale price 

information is not collected, calculated 

and disseminated on a real-time basis? 

Please explain. What would be the costs 

and benefits of applying the proposed 

uptick rule during after-hours trading 

sessions, including the impact on 

liquidity and price efficiency? Please 

explain. What would be the costs and 

benefits of not applying the proposed 

uptick rule during after-hours trading 

sessions, including the impact on 

liquidity and price efficiency? Please 

explain. 

6. Former Rule 10a–1 included a 

provision that permitted markets to use 

the last sale prices on their own markets 

as the reference point for measuring the 

permissibility of short sales. 

Specifically, former Rule 10a–1(a)(2) 

provided: ‘‘* * * any exchange, by rule, 

may require that no person shall, for his 

own account or the account of any other 

person, effect a short sale of any such 

security on that exchange (i) below the 

price at which the last sale thereof, 

regular way, was effected on such 

exchange, or (ii) at such price unless 

such price is above the next preceding 

different price at which a sale of such 

securities, regular way, was effected on 

such exchange, if that exchange 

determines that such action is necessary 

or appropriate in its market in the 

public interest or for the protection of 

investors; and, if an exchange adopts 

such a rule, no person shall, for his own 

account or for the account of any other 

person, effect a short sale of any such 

security on such exchange otherwise 

than in accordance with such rule 

* * *.’’ This provision was added to 

former Rule 10a–1 in response to certain 

SROs asserting that the last trade price 

on the consolidated system should not 

be the reference point for the tick test of 

former Rule 10a–1 because last trade 

price data was not available in a timely 

manner and because the principal 

exchanges did not have adequate 

information retrieval systems on their 

floors to ensure adherence with former 

Rule 10a–1.286 Should the proposed 

uptick rule include a similar provision? 

With the spread of fully automated 

markets and the advances in the 

dissemination of market information, is 

such a provision necessary or desirable 

in today’s markets? Please explain the 

costs and benefits of permitting each 

market to use the last sale price in its 

market as the reference point under the 

proposed uptick rule. 

7. Former Rule 10a–1(a)(3) included a 

provision that allowed for an 

adjustment to the sale price of a security 

after the security went ex-dividend, exright, or ex any other distribution when 

determining the price at which a short 

sale may be effected. Specifically, 

former Rule 10a–1(a)(3) provided: ‘‘In 

determining the price at which a short 

sale may be effected after a security goes 

ex-dividend, ex-right, or ex-any other 

distribution, all sale prices prior to the 

‘‘ex’’ date may be reduced by the value 

of such distribution.’’ Would this 

provision be necessary under the 

proposed uptick rule? Please explain. 

8. Former Rule 10a–1(e)(6) contained 

an ‘‘equalizing exception’’ that applied 

to securities registered on, or admitted 

to unlisted trading privileges on, a 

national securities exchange, for which 

trades in such securities were not 

reported to an effective transaction 

reporting plan and for which 

information as to such trades was not 

made available in accordance with such 

plan on a real-time basis to vendors of 

market transaction information. For 

such securities, it allowed short sales to 

be effected on a national securities 

exchange (provided the exchange 

approved the sale), if such sale was 

necessary to equal the price of the 

security on that exchange with the price 

of the security on the principal 

exchange for the security. The 

Commission stated that this exception 


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18076 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

287See Securities Exchange Act Release No. 

11468 (June 12, 1975), 40 FR 25442 (June 16, 1975) 

(adopting amendments to Rule 10a–1 and 

discussing the operation of Rule 10a–1(e)(6) as in 

effect prior to and after amendment). 288See id. 

289See supra note 188. 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. 

290See former NYSE Rule 440B. 

291See supra Section III.A.2.i. (discussing our 

decision not to propose that a broker dealer may 

mark an order ‘‘short exempt’’ in connection with 

bona fide market making activity). 

292See, e.g., letter re: Off-Hours Trading by the 

Amex, [1991] Fed. Sec. L. Rep. (CCH) ¶ 79,802 

(Aug. 5, 1991); letter re: Operation of Off-Hours 

Trading by the NYSE, [1991] Fed. Sec. L. Rep. 

(CCH) ¶ 79,736 (June 13, 1991). 293See, e.g., letter re: Burlington Capital Markets 

(July 1, 2003); letter re: Bear, Stearns & Co., Inc. 

(Jan. 19, 1996); Letter re: AZX, Inc. (Nov. 15, 1995); 

letter re: Instinet Corporation Crossing Network, 

[1992] Fed. Sec. L. Rep. (CCH) ¶ 76,290 (July 1, 

1992); letter re: Portfolio System for Institutional 

Trading, [1991–1992] Fed. Sec. L. Rep. (CCH) 

¶ 76,097 (Dec. 31, 1991). 294The relief was generally subject to the 

conditions that: (1) Short sales of a security in the 

after-hours matching session shall not be effected at 

prices lower than the closing price of the security 

on its primary exchange; (2) persons relying on 

these exemptions shall not directly or indirectly 

effect any transactions designed to affect the closing 

price on the primary exchange for any security 

traded in the after-hours matching session; and (3) 

transactions effected in the after-hours matching 

session shall not be made for the purpose of 

creating actual, or apparent, active trading in or 

otherwise affecting the price of any security. 

was afforded to persons on regional 

exchanges to enhance the liquidity on 

those exchanges with respect to orders 

naturally flowing to those exchanges.287

The Commission also noted, however, 

that the exception may have resulted in 

providing an incentive to divert orders 

from the principal exchange market to 

avoid the impact of former Rule 10a–1, 

because it allowed short sales to be 

effected on regional exchanges at prices 

below the last sale price on the 

principal exchange.288 We have 

determined not to include this 

exception in the proposed uptick rule 

because we believe it would not make 

sense in light of the proposed reference 

point (the last sale reference point in the 

consolidated system). The exception in 

former Rule 10a–1(e)(6) was originally 

adopted in 1938 when the permissibility 

of short sales under former Rule 10a–1 

was determined for each particular 

exchange by comparing the price of the 

proposed short sale to the immediately 

preceding price of the security to be 

sold short on that exchange. The 

exception was modified, but retained, 

following amendments to former Rule 

10a–1 to reference the last trade price 

reported to the consolidated system or 

in a particular exchange market. The 

proposed uptick rule uses as the 

reference price the last sale price 

reported pursuant to an effective 

transaction reporting plan only. Thus, 

we believe a similar exception to the 

exception contained in former Rule 

10a–1(e)(6) would not be necessary. Are 

there any reasons to include in the 

proposed uptick rule a similar exception 

to that contained in former Rule 10a– 

1(e)(6)? Please explain. 

9. As discussed in detail above under 

Section III.B.2.c. we have incorporated 

into proposed Rule 201(c)(10) and 

(c)(11), proposed exceptions to address 

any potential conflict between the 

proposed uptick rule and the Quote 

Rule arising from a trade-through. These 

exceptions are substantially in the form 

in which they were included in 

subsections (e)(5)(ii) and (e)(11) of 

former Rule 10a–1. Are these exceptions 

appropriate or necessary? Should these 

exceptions be revised in any way? If so, 

please provide suggested language. 

Proposed Rule 201(c)(10) would allow 

an SRO, by rule, to prohibit its 

registered specialists and registered 

exchange market makers from availing 

themselves of the exemption afforded by 

paragraph (c)(10) if that SRO determines 

that such action is necessary or 

appropriate in its market in the public 

interest or for the protection of 

investors. Is this provision appropriate 

or necessary? Would any SRO avail 

itself of this provision? If not, why not? 

If so, why and how? 

10. Former Rule 10a–1 contained an 

exception in paragraph (e)(5)(i) that 

permitted market makers to effect short 

sales at the same price as the last sale 

price even if the last sale price was on 

a zero-minus tick. Specifically, former 

Rule 10a–1(e)(5)(i) provided an 

exception for: ‘‘Any sale of a security 

* * * (except a sale to a stabilizing bid 

complying within Rule 104 of 

Regulation M) 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-the-counter, 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.’’ 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.289 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.290 Thus, 

we have determined not to include a 

similar exception in the proposed 

uptick rule.291 Would a similar 

exception under the proposed uptick 

rule for registered market makers be 

appropriate or necessary? If the 

proposed uptick rule were to include a 

similar exception, should the exception 

be substantially in the form in which it 

was included in former Rule 

10a–1(e)(5)(i)? If so, why? If not, why 

not? Please explain any recommended 

changes. 

11. The proposed uptick rule would 

include a number of exceptions. In 

addition to the exceptions contained in 

the proposed uptick rule, are there other 

exceptions that should be included? For 

example, should the Commission 

provide an exception from the proposed 

uptick rule for transactions in exchange 

traded funds? If so, what should be the 

qualifications and/or conditions for 

relief? If not, please explain why not. In 

addition, we note that under former 

Rule 10a–1 the Commission granted 

conditional relief to allow requesting 

exchanges 292 and broker-dealers 293 to 

execute short sales in after-hours 

crossing sessions at a price equal to the 

closing price of the security.294 Absent 

relief, such short sales could have 

violated former Rule 10a–1 in that the 

matching price (the closing price) of a 

security could have been on a minus or 

zero-minus tick with respect to the last 

sale in the consolidated transaction 

reporting system. In granting this 

conditional relief, the Commission 

noted that short sale transactions 

executed at the closing price generally 

do not represent the type of abusive 

practices that former Rule 10a–1 was 

designed to prevent. In particular, the 

Commission stated that short sale orders 

entered in the after-hours crossing 

sessions cannot influence the matching 

price, but rather are priced by unrelated 

order flow and transactions occurring 

during the primary trading session, 

which are subject to former Rule 

10a–1. Should we codify the exemptive 


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295See also 17 CFR 242.611(a)(7). 

relief granted under former Rule 10a–1 

as an exception from the proposed 

uptick rule? Under current market 

conditions, do closing price transactions 

create potentially manipulative 

incentives for broker-dealers, such that 

they should not be granted an 

exception? 

12. Proposed Rule 201(c)(1) would 

provide an exception to allow short 

sales to be submitted without regard to 

the proposed uptick rule if the seller 

owns the security sold and the seller 

intends to deliver the security as soon 

as all restrictions on delivery have been 

removed. Would this exception be 

necessary or appropriate? Should any 

conditions or limitations apply to the 

exception? If so, why? If not, why not? 

13. Proposed Rule 201(c)(2) would 

provide 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.’’ 

Would this exception be appropriate or 

necessary? Should any conditions or 

limitations apply to the exception? If so, 

why? If not, why not? 

14. Proposed Rule 201(c)(3) would 

provide a limited exception for odd lot 

transactions. Would this exception be 

appropriate or necessary? Should the 

proposed exception apply to all market 

makers in odd-lots or should the 

exception be more limited? Would this 

exception be susceptible to abuse? If so, 

how? Should all odd-lot transactions 

have an exception from the proposed 

uptick rule? Would providing an 

exception for all odd-lot transactions 

result in a risk of increased short sale 

manipulation, e.g., would traders break 

up trades into 99 share odd-lots in order 

to avoid the proposed uptick rule? 

15. Proposed Rule 201(c)(4) would 

provide an exception from the proposed 

uptick rule for certain bona fide 

domestic arbitrage transactions. Should 

the exception be narrowed or 

broadened? If so, state specifically why, 

and how it should be restructured in 

relation to the purposes of the proposed 

uptick rule. Proposed Rule 201(c)(4) 

parallels the exception in former Rule 

10a–1(e)(7) which, consistent with 

Regulation T at the time, referred to a 

‘‘special arbitrage account.’’ Because 

Regulation T no longer refers to a 

‘‘special arbitrage account’’ but instead 

refers to a ‘‘good faith account’’, 

proposed Rule 201(c)(4) would also 

refer to a ‘‘good faith account.’’ Should 

proposed Rule 201(c)(4) refer to a 

‘‘special arbitrage account’’ or a ‘‘good 

faith account’’? Please explain. 

16. Proposed Rule 201(c)(5) would 

provide an exception from the proposed 

uptick rule for certain international 

arbitrage transactions. Should the 

proposed exception be narrowed or 

broadened? If so, state specifically why, 

and how it should be restructured in 

relation to the purposes of the proposed 

uptick rule. Proposed Rule 201(c)(5) 

parallels the exception in former Rule 

10a–1(e)(8) which, consistent with 

Regulation T at the time, referred to a 

‘‘special international arbitrage 

account.’’ Because Regulation T no 

longer refers to a ‘‘special international 

arbitrage account’’ but instead refers to 

a ‘‘good faith account’’, proposed Rule 

201(c)(5) would also refer to a ‘‘good 

faith account.’’ Should proposed Rule 

201(c)(5) refer to a ‘‘special international 

arbitrage account’’ or a ‘‘good faith 

account’’? Please explain. Should 

proposed Rule 201(c)(4) be combined 

with proposed Rule 201(c)(5)? If so, 

why? If not, why not? Should 

depository receipts of a security be 

deemed the same security as the 

security represented by such depository 

receipt? Why or why not? 

17. Proposed Rule 201(c)(6) would 

provide an exception from the proposed 

uptick rule for sales by underwriters or 

syndicate members participating in a 

distribution in connection with overallotments and lay-off sales by such 

persons in connection with a 

distribution of securities. Under what 

circumstances would an underwriter or 

syndicate member price an offering 

below the last sale? What market 

impact, if any, would there be if the 

exception were extended to short sales 

below the last sale? 

18. Would the exception for VWAP 

transactions contained in proposed Rule 

201(c)(7) be appropriate or necessary? 

Are all of the proposed conditions 

appropriate, or should any be 

eliminated or modified? Should any 

other conditions be added? Should the 

proposed exception be modified in any 

way? If so, please explain. Would the 

following exception be more 

appropriate for excepting transactions 

such as short sale orders on a VWAP 

basis: The provisions of the proposed 

uptick rule shall not apply to ‘‘any short 

sale at a price that was not based, 

directly or indirectly, on the quoted 

price of the covered security at the time 

of execution and for which the material 

terms were not reasonably determinable 

at the time the commitment to execute 

the order was made’’? 295 If this 

exception would be more appropriate, 

please explain why. What types of 

benchmark orders would such an 

exception capture? If we were to use 

this alternative language, how should 

we determine the ‘‘material terms’’ of 

the short sale? Should there be any 

conditions on the use of this alternative 

proposed exception? 

19. Would the exception for 

transactions pursuant to certain 

electronic trading systems that match 

buying and selling interest in proposed 

Rule 201(c)(8) be appropriate? Should 

the proposed exception be modified in 

any way? If so, please explain. 

20. Proposed Rule 201(c)(9) would 

provide an exception from the proposed 

uptick rule for broker-dealers facilitating 

customer buy or long sale orders on a 

riskless principal basis. Are the 

conditions set forth in proposed Rule 

201(c)(9) in connection with the 

‘‘riskless principal’’ exception 

appropriate? Should the conditions be 

narrowed or broadened in any way? 

Please explain. 

21. Proposed Rule 201(c)(12) would 

provide for an exception from the 

proposed uptick rule for short sales by 

registered market makers or specialists 

publishing two-sided quotes to sell 

short to facilitate customer market and 

marketable limit orders regardless of the 

last sale price. Would this proposed 

exception be appropriate? Should 

additional qualifications and/or 

conditions be placed on such a 

proposed exception? If so, please 

describe any such qualifications and/or 

conditions including the purpose of 

such qualifications and/or conditions. Is 

this proposed exception necessary in 

highly liquid securities where there is 

likely to be sufficient selling interest 

without the specialist’s or market 

maker’s quote? Should this proposed 

exception be limited in some way? 

Please explain. 

22. Should there be an exception 

specific to the daily opening of trading 

at each trading center, particularly given 

that there are multiple trading centers 

with non-synchronous opening 

auctions? Please explain. Should there 

be an exception specific to the opening 

of trading after a trading halt? Please 

explain. Should there be an exception 

specific to short selling at the closing of 

trading at each trading center? Please 

explain. 

23. Under the proposed uptick rule, 

short sales could not be executed at a 

price below the last sale price of a 

security. In addition, short sale orders 

could be executed at the last sale price 

only if it is higher than the last different 

price for the security. Is a one-cent 

trading increment appropriate for the 

proposed uptick rule? Why or why not? 

If a higher increment is suggested, 

please describe what impact such 

increment would have on short selling. 

What increment, if any, would be 

tantamount to a ban on short selling? 


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18078 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

Please provide empirical data in support 

of any arguments and/or analyses. 

24. When the Commission repealed 

short sale price tests in 2007, it also 

provided that no SRO could have or 

adopt its own short sale price test. One 

reason for removing short sale price 

tests was the existence of different types 

of prices tests (e.g., the tick test of Rule 

10a–1 and the NASD bid test). Should 

the proposed uptick rule be an SRO 

rule? 

Questions Regarding Circuit Breakers 

Generally 

1. The Commission believes that the 

erosion of investor confidence and 

questions concerning the volatility in 

the securities markets necessitate review 

of various alternatives with respect to 

short selling restrictions. Would a short 

selling circuit breaker be more 

appropriate than a market-wide short 

sale price test restriction in current 

market conditions? If so, why? If not, 

why not? Would a short selling circuit 

breaker provide more potential benefit 

to the market than a market-wide short 

sale price test restriction? Please 

explain. For example, would a short 

selling circuit breaker be a more 

appropriate means for the Commission 

to achieve the objective of helping to 

prevent short selling from being used as 

a tool to drive down the market? Please 

explain. Would a short selling circuit 

breaker rule help to address the 

Commission’s concerns regarding 

investor confidence? If so, why and 

how? If not, why not? 

2. Would implementation of a circuit 

breaker be less or more costly than the 

implementation of a market-wide short 

sale price test restriction? The proposed 

circuit breaker rules would, when 

triggered, impose short selling 

restrictions for the trading day on which 

the circuit breaker is triggered. Should 

the circuit breaker rules instead impose 

short sale price tests for multiple days? 

How many days? Would there be any 

additional costs associated with a 

circuit breaker that persisted for 

multiple trading days? Would a circuit 

breaker that when triggered imposed a 

temporary halt on short selling be more 

or less costly than one that resulted in 

a short sale price test restriction? Please 

explain. Would a short selling circuit 

breaker be generally easier to implement 

in a Regulation NMS environment than 

a market-wide short sale price test 

restriction such as the proposed 

modified uptick rule, or the proposed 

uptick rule. 

3. To which securities should a short 

selling circuit breaker apply? Should a 

short selling circuit breaker apply to all 

NMS stocks? If so, why? If not, why not 

and to which securities should a short 

selling circuit breaker apply? Should a 

short selling circuit breaker also apply 

to securities traded over-the-counter? 

4. The Commission is seeking 

comment on the potential impacts of a 

short selling circuit breaker on market 

function and efficiency. What would be 

the impact of a short selling circuit 

breaker when triggered on the liquidity 

of individual securities? What would be 

the impact of a short selling circuit 

breaker on capital formation? What 

would be the impact of a short selling 

circuit breaker on price discovery? 

Would different circuit breaker 

alternatives have different impacts on 

liquidity, capital formation and price 

discovery? Would a multiple day circuit 

breaker pose any unique costs? Please 

explain. 

5. Would circuit breakers pose any 

unique issues related to the daily 

opening of trading, the opening of 

trading after a trading halt, or the 

closing of trading? Please explain. 

6. Should a short selling circuit 

breaker be limited in its application to 

specific industry sectors that are 

historically susceptible to extreme 

volatility or disproportionately high 

levels of short selling? If so, why? If not, 

why not? If a circuit breaker should be 

limited to apply only to certain sectors, 

what sectors should be included? Please 

explain. For example, should a circuit 

breaker apply only to the financial 

sector? If so, how should the financial 

sector be defined for purposes of 

determining which issuers’ securities 

are subject to the circuit breaker 

thresholds? Please explain. 

7. Currently, the marketwide circuit 

breaker rules are SRO rules. Should a 

short selling circuit breaker be a SRO 

rule or a Commission rule? Who should 

be responsible for implementing a short 

selling circuit breaker? Should trading 

centers be responsible for implementing 

a short selling circuit breaker when 

triggered? Should any person effecting a 

short sale be responsible for 

implementing a short selling circuit 

breaker? Should market participants be 

responsible for programming their own 

systems to prevent submission of a short 

sale order in violation of the circuit 

breaker? Please explain. 

8. Who should be responsible for 

monitoring the price declines of 

individual securities that may trigger 

the short selling circuit breaker (e.g., 

broker-dealers, SROs)? Please explain. 

How should information about the 

triggering of a circuit breaker in an 

individual security be disseminated to 

the market? Who should be responsible 

for disseminating that information? For 

example, the CMS is the primary means 

of dissemination for the current SRO 

Circuit Breakers and regulatory halts. 

Should the CMS be the primary means 

by which participants are made aware 

that a short selling circuit breaker has 

been triggered with respect to an 

individual security? Please explain. 

Should the exchanges be responsible for 

publishing daily lists of the individual 

securities subject to the restrictions of a 

short selling circuit breaker? What cost 

would be associated with dissemination 

of circuit breaker notifications and what 

entities would bear expense in 

upgrading systems to ensure compliance 

with a short selling circuit breaker? 

Please explain. 

9. What would be the advantages and 

disadvantages of a short selling circuit 

breaker combined with a short selling 

halt versus those of a short selling 

circuit breaker combined with short sale 

price test restrictions? Please explain. 

10. What would be the advantages 

and disadvantages of short selling 

circuit breakers in general? Please 

explain. 

11. To what extent would market 

participants’ ability to create short 

positions through the use of derivatives 

or other instruments undermine the 

effectiveness of a short selling circuit 

breaker? If this would occur, would it be 

more or less significant in the context of 

a short selling circuit breaker as 

compared to a short sale price test 

restriction? What effects would any 

increase in ‘‘synthetic short sales’’ after 

a circuit breaker is reached during a 

rapid market decline have on market 

volatility, liquidity, and price 

efficiency? Would a short selling circuit 

breaker create an unlinking of equity 

markets from derivatives market prices? 

12. Would a short selling circuit 

breaker result in exacerbated downward 

pressure as the trigger was approached, 

creating a ‘‘magnet effect’’? Would any 

such ‘‘magnet effect’’ differ between a 

circuit breaker that when triggered 

imposed a short selling halt, and a 

circuit breaker that when triggered 

imposed a short sale price test 

restriction? Please explain and provide 

empirical data and analysis where 

appropriate to support the explanation. 

13. Before determining whether to 

adopt a short selling circuit breaker on 

a permanent basis, should we adopt a 

rule that would apply, on a pilot basis, 

the operation of a short selling circuit 

breaker on individual securities? If so, 

what variation of a short selling circuit 

breaker should be applied on a pilot 

basis? Should the pilot circuit breaker 

when triggered result in short selling 

halts in individual securities, or rather 

should such a pilot circuit breaker 

impose short sale price test restrictions 


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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 18079 

296See Sections III.A.3 and III.B.3. discussing the 

after-hours trading with regard to the proposed 

modified uptick rule and the proposed uptick rule, 

respectively. 

297See supra note 274. 

on individual securities? Please explain. 

Such an approach would allow us to 

study the effects on, among other things, 

market volatility, price efficiency, and 

liquidity during the recent changes in 

market conditions. What would be other 

benefits of taking this approach? What 

would be the costs of taking this 

approach? Would the costs associated 

with programming systems to apply a 

short selling circuit breaker on specified 

individual securities outweigh any 

benefits of having a pilot? If we were to 

take this approach, how long would it 

take to program systems to apply a short 

selling circuit breaker in specified 

individual securities? Would it take 

longer or be more difficult to implement 

a short selling circuit breaker that when 

triggered imposed short selling halts? 

Would it take longer or be more difficult 

to implement a short selling circuit 

breaker that when triggered imposed 

short sale price test restrictions? Please 

explain. Similar to the Pilot conducted 

immediately prior to the elimination of 

former Rule 10a–1, the securities that 

could be subject to the pilot could be 

comprised of a subset of the Russell 

3000 index, or such other securities as 

necessary or appropriate in the public 

interest and consistent with the 

protection of investors after giving due 

consideration to the security’s liquidity, 

volatility, market depth and trading 

market. Would it be appropriate for 

such a pilot to be comprised of a subset 

of the Russell 3000 index? How should 

the securities that would comprise a 

pilot be selected? Please explain the 

reasons for any suggested selection 

method. Such a pilot could remain in 

effect for one or two years. Would a one 

or two year pilot be an appropriate 

period of time? If so, why? If not, why 

not? Please provide specific reasons to 

support any views in favor of 

establishing another time period. 

14. In connection with the Pilot 

conducted immediately prior to our 

elimination of former Rule 10a–1, SROs 

publicly released transactional short 

selling data so that data would be 

available to the public to encourage 

independent researchers to study the 

Pilot. If we were to adopt a rule that 

would apply, on a pilot basis, a short 

selling circuit breaker on individual 

securities, we would expect to make 

information obtained during any such 

pilot publicly available. In addition, we 

would expect SROs to again make data 

available to the public during any such 

pilot. Would there be any costs 

associated with making short selling 

data available to the public during the 

period of a pilot? What would be the 

benefits of making such data available to 

the public? 

15. The proposed circuit breaker rules 

would not be triggered if there is a 

severe decline in the price of any NMS 

security within 30 minutes of the end of 

regular trading hours on any trading 

day. As noted above, former NYSE Rule 

80A provided that a circuit breaker 

would not trigger program trading 

restrictions after 3:25 p.m., or 

approximately 35 minutes before the 

close. Is 30 minutes an appropriate time 

to limit the proposed circuit breaker 

rules? Is 35 minutes more appropriate? 

At what point during the trading day 

would it be too disruptive to implement 

a circuit breaker rule? Is a 30 minute 

period sufficient to avoid major 

disruptions to the markets? Do thinly 

traded NMS securities raise additional 

concerns? If a circuit breaker would 

otherwise be triggered toward the end of 

the trading day, what alternative short 

sale restriction would be helpful in 

addressing a severe market decline in 

the price of a particular NMS security? 

Please provide any data if available. 

16. Should a circuit breaker be based 

on an intra-day decline from that day’s 

opening price? For instance, should the 

circuit breaker be triggered by a 10% 

decline from the opening price during 

regular trading hours? 

17. As proposed, the proposed circuit 

breaker rules, once triggered, would 

impose a short selling halt or a short 

sale price test restriction in the 

individual security until the close of the 

consolidated system.296 Should the 

short selling halt or short sale price test 

restriction conclude at the end of 

regular trading hours (which are from 

9:30 a.m. until 4 p.m. EST)? 297 Should 

we consider extending the short selling 

halt or short sale price test, when 

triggered, for a longer period of time? 

Should the halt be extended until the 

opening of regular trading hours on the 

next trading day? Please explain. 

Questions Regarding Proposed Circuit 

Breaker Halt Rule 

1. If a short selling circuit breaker was 

to be imposed, should short selling in 

individual securities be halted entirely 

during a period of severe decline in the 

price of the security? If so, why? If not, 

why not? Please explain. 

2. If short selling should be halted 

during periods of severe decline in the 

price of an individual security, how 

should the decline be measured? Should 

the decline be tied to a market index or 

the price of an individual security? 

Should illiquidity in the market for an 

individual security be a factor in 

measuring a decline in the price of a 

security for purposes of determining 

whether to halt short selling in a 

particular security? Please explain. 

3. If short selling should be halted 

during periods of severe decline in the 

price of an individual security, on what 

price should the decline be based? 

Should the decline be based on the 

previous day’s closing price? If the 

decline is measured by the prior day’s 

closing price at the end of regular 

trading hours, should it be based on the 

closing price reported in the 

consolidated system, or some other 

widely disseminated price? Please 

explain. 

4. The proposed circuit breaker rules 

would impose a short sale halt on any 

security that declines in price 10% or 

more relative to the prior day’s closing 

price for that security. We note that a 

low trigger level may result in more 

securities becoming subject to a halt or 

some securities becoming subject to a 

halt more frequently, resulting in 

potential increases in costs, decreases in 

liquidity, and decreases in market 

quality for the affected security. Also, 

the impact of a lower trigger level may 

be greater for thinly traded securities 

and higher volatility securities than for 

other securities. However, if a high level 

is established, more securities may face 

severe price declines for longer periods 

before a halt is imposed. This also may 

affect thinly traded securities more than 

other securities. Is 10% an appropriate 

trigger for a circuit breaker rule that 

results in short sale halt? If not, at what 

level should a halt take place? Should 

the trigger be different for thinly traded 

or higher volatility securities? Should 

the halt take place after a 10% decline, 

or a higher/lower level? Should the 

initial halt take place after a 5% decline, 

or a 15% decline, or a 20% decline, or 

some other decline? Please explain. 

Should the decline be measured as a 

percentage of the individual security’s 

price or should another value be used? 

Please explain. For example, should the 

decline measurement for the circuit 

breaker threshold be based on the dollar 

amount of the decline, i.e., $5? If so, 

how should the thresholds be 

determined in relation to the price level 

of the individual stock? Should the 

percentage decline be linked to the 

stock’s price level such that stocks with 

lower prices must experience a greater 

percentage decline before the circuit 

breaker is triggered? If so, what 

thresholds are appropriate? Please 

explain. If the percentage decline is 

linked to price level, what additional 


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18080 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

298See 1998 Release supra note 230 and 

accompanying text (discussing that SRO Circuit 

Breaker rules vary the length of the trading halt 

depending on the time of day the halt is triggered 

and the amount of the decline triggering the halt). 

operational burdens would be 

experienced if stock values were 

required to be continuously monitored 

due to frequent fluctuation? Please 

explain. What costs and benefits may 

accrue from having the decline based on 

a dollar amount rather than a value 

derived from a percentage of the share 

value? What potential problems or 

benefits may arise from pegging a short 

selling circuit breaker threshold to a 

decline in a stock’s dollar amount? 

Please explain. 

5. The proposed circuit breaker halt 

rule would impose a short selling halt 

for the trading day following the 

triggering of the circuit breaker. Is this 

an appropriate length of time? If so, 

why? If not, why not, and how long 

should the halt persist? Should the 

length of the halt vary depending on the 

time during the day that the circuit 

breaker is triggered? 298 We note that 

increasing the length of a halt to an 

additional day or multiple additional 

days may increase costs, reduce market 

quality, and reduce liquidity in that 

security. This may affect thinly traded 

securities and higher volatility 

securities more than other securities. 

However, decreasing the period of time 

to less than a trading day, such as 

limiting the halt to an hour or a few 

hours following the trigger, may reduce 

the effectiveness of the halt. Would it be 

more beneficial for a 10% intraday 

decline to trigger a periodic halt in short 

selling rather than a halt for the trading 

day? Should it result in a multiple day 

halt in short selling? Please explain. 

How disruptive to normal trading would 

a multiple day halt be compared to a 

halt for one trading day? If short selling 

is halted after the circuit breaker is 

triggered in the wake of a 10% intraday 

decline, and the value of the stock 

continues to decline throughout the day 

to the point where it is down 20% at 

closing, should short selling be allowed 

to resume the following trading day? If 

so, why? If not, why not? Please explain. 

Should a 20% or greater intraday 

decline result in a halt on short selling 

for multiple trading days? For example, 

would it be appropriate for a 20% 

intraday decline on the day the circuit 

breaker is triggered to result in a 3-day 

halt in short selling, a 5-day halt in 

short selling, or a 10-day halt in short 

selling? Specifically, what length of a 

short selling halt would be appropriate 

for the various levels of decline in 

excess of 10%? Should volatility of the 

individual security be considered? 

Please explain. 

6. Should different stocks be subject 

to different levels of decline before the 

circuit breaker is triggered? For 

example, should a higher trigger level 

apply to more liquid stocks than to less 

liquid stocks? Should different trigger 

levels be based on market capitalization 

or volatility of individual securities? If 

so, what parameters should apply and 

what criteria should be used to 

determine those parameters? Please 

explain. 

7. Would a circuit breaker that when 

triggered halts short selling in a 

particular security result in increased 

selling pressure by short sellers in 

anticipation of the halt for securities 

experiencing large price declines? 

Please explain and provide data and 

analysis to support the explanation. 

What provisions, if any, would facilitate 

an orderly re-entry of a security after a 

halt on short selling? Please explain. 

8. What benefits would be associated 

with a short selling circuit breaker that 

when triggered imposes short selling 

halts? Could such a short selling halt 

help stabilize the market for the 

individual security? If so, why? If not, 

why not? Could the short selling halt 

benefit investors by allowing the market 

to ‘‘cool off’’ with respect to that 

individual security? Please explain. 

Could a temporary short selling halt 

imposed by a circuit breaker result in an 

increase in investor confidence? Please 

explain. 

9. What costs would be associated 

with implementing a short selling 

circuit breaker for individual securities 

that when triggered imposed a halt on 

short selling? Please explain. What 

would it cost to update systems in a 

manner necessary to ensure compliance 

with such a circuit breaker? Would the 

expenditure necessary to ensure 

compliance be primarily an ‘‘up-front’’ 

cost? Would the expenditure necessary 

to ensure compliance require long-term 

investment? Please explain. What 

technological challenges would be 

encountered in updating systems to 

ensure compliance with a short selling 

circuit breaker that applied to 

individual securities and when triggered 

imposed halts on short selling? Please 

explain. How long would it take to 

update systems in a manner that 

ensured compliance with such a short 

selling circuit breaker? Please explain. 

10. Should a short selling circuit 

breaker that when triggered imposed a 

halt on short selling contain exceptions? 

If so, why? If not, why not? Please 

explain. Should the circuit breaker 

contain an exception for bona fide 

market making? If so, why? If not, why 

not? Should such an exception apply to: 

Registered market makers, block 

positioners, other market makers 

obligated to quote in the over-thecounter market, in each case that are 

selling short the individual securities 

subject to the short selling halt? If so, 

why? If not, why not, and what entities 

should be excepted under a bona fide 

market making exception? Should the 

circuit breaker provide an exception 

that would allow short sales that occur 

as a result of automatic exercise or 

assignment of an equity option held 

prior to the effectiveness of the short 

selling halt due to expiration of the 

option? If so, why? If not, why not? 

Please explain. Should the circuit 

breaker contain an exception for options 

market makers selling short as part of 

bona fide market making and hedging 

activities related directly to bona fide 

market making in derivatives on the 

individual security subject to the halt? 

If so, why? If not, why not? Please 

explain. The circuit breaker halt rule as 

proposed includes an exception for 

hedging activity by market makers 

engaged in bona fide market making, but 

it does not provide an exception for 

hedging of convertible securities or for 

convertible arbitrage activities by 

persons who are not market makers 

engaged in bona fide market making 

activities at the time of the short sale. 

Should we consider exceptions for 

convertible arbitrage and/or the hedging 

of convertible securities by persons who 

are not market makers engaged in bona 

fide market making? Would such 

exceptions reduce the effectiveness of 

the rule? How often would this 

exception be used? Please explain and 

provide empirical data to support 

explanations/analyses. 

11. What other exceptions should be 

considered or included in such a circuit 

breaker? Please explain. 

12. What would be an appropriate 

implementation period for the circuit 

breaker? Would a three-month 

implementation period be appropriate 

for a circuit breaker that when triggered 

imposed short selling halts on 

individual securities? Is more or less 

time necessary? Please explain. 

13. Should the exception for owned 

securities be limited to Rule 144 

securities, similar to the Short Sale Ban, 

or expanded to include other securities 

that a seller is deemed to own but are 

not included under Rule 200(b) of 

Regulation SHO? 

14. We are proposing to include an 

exception for marker makers, including 

over-the-counter market makers, that 

sell short as part of bona fide market 

making and hedging activity directly 

related to bona fide market making in 


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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 18081 

derivative securities based on covered 

securities or exchange traded funds and 

exchange traded notes of which covered 

securities are a component. Similar to 

the Short Sale Ban, should we also 

provide that this exception would not 

apply to any market maker that knows 

that the customer’s or counterparty’s 

transaction would result in the customer 

or counterparty establishing or 

increasing an economic net short 

position (i.e., through actual positions, 

derivatives, or otherwise) in a covered 

security? Do the same concerns apply 

for a short sale halt that would only be 

in place for one trading day? What if the 

proposed circuit breaker halt rule 

prohibits short selling in a particular 

security for longer than one trading day 

when triggered? How long of a period 

would necessitate including such a 

provision? 

15. Should the proposed circuit 

breaker halt rule be adopted in addition 

to a permanent, marketwide short sale 

price test restriction rule? Thus, while a 

short sale price test restriction rule 

would be in place as a permanent, 

marketwide rule, a circuit breaker 

would also trigger a short selling halt in 

any security that suffers a severe price 

decline. 

16. Should the proposed circuit 

breaker halt rule apply to non-NMS 

securities? Would a 10% trigger level 

cause some non-NMS securities to be 

halted too frequently? Should we 

consider a different trigger for non-NMS 

securities? 

17. As an alternative to a circuit 

breaker rule that prohibits short selling 

at any price after the trigger price is 

reached, should we consider instead a 

price limit rule that would prohibit 

short selling in a particular NMS 

security at a price lower than 10% 

below the prior day’s close? Unlike a 

circuit breaker rule, a price limit rule 

would continue to allow short selling at 

prices above the limit price after the 

limit has been reached. Would 10% be 

the appropriate limit? Should it be 

higher or lower? Please explain. 

18. We propose including an 

exception for sales of securities that the 

seller is deemed to own pursuant to 

Rule 200(b) of Regulation SHO because 

these are sales of owned securities. Are 

broker-dealers able to identify short 

sales as sales of Rule 200(b) owned 

securities on an intra-day basis so that 

the exception would be useful when a 

circuit breaker is triggered? 

Questions Regarding Circuit Breaker 

Price Test Rule 

1. Should a short selling circuit 

breaker impose a short sale price test 

restriction on individual equity 

securities, rather than halt short selling 

for individual securities when triggered? 

For example, following a 10% decline 

in a security’s price, as measured from 

the prior day’s closing price, should a 

circuit breaker result in a temporary 

short sale price test restriction in the 

form of the proposed modified uptick 

rule or the proposed uptick rule? Please 

explain. 

2. Should we consider a circuit 

breaker rule that, when triggered, would 

prohibit short selling in a particular 

NMS security on a downbid unless the 

short sale is effected at a price that is 

more than 10% greater than the prior 

day’s closing price? Would 10% be an 

appropriate requirement? Should it be 

higher or lower? Should we have 

different percentages for different types 

of securities (e.g., based on volatility, 

market capitalization, volume traded)? 

Please explain. 

3. The proposed circuit breaker rules 

would impose a short sale price test on 

any security that suffers a decline in 

price of 10% or more relative to the 

prior day’s closing price for that 

security. We note that a low trigger level 

may result in more securities becoming 

subject to a short sale price test or some 

securities becoming subject to a short 

sale price test more frequently, resulting 

in potential increases in costs, decreases 

in liquidity, and decreases in market 

quality for the affected security. Also, 

the impact of a lower trigger level may 

be greater for thinly traded securities or 

higher volatility securities than for other 

securities. However, if a high level is 

established, more securities may face 

severe price declines for longer periods 

before the short sale price test is 

imposed. This also may affect thinly 

traded securities more than other 

securities. Unlike a circuit breaker that 

results in a halt, however, a circuit 

breaker that results in a short sale price 

test would not prohibit short selling but 

would restrict short selling to a rising 

market. Also, the short sale price test 

would be limited to a trading unit 

increment, which may result in fewer 

costs and reduced loss of liquidity than 

a short sale halt. Is 10% an appropriate 

trigger for a circuit breaker rule that 

results in short sale price test? If not, at 

what percentage trigger level should 

short sale price test restrictions be 

imposed? Would a 10% trigger level be 

appropriate? Would a higher or lower 

trigger level be appropriate? Should the 

trigger be different for thinly traded or 

higher volatility stocks? Should we 

consider market capitalization in 

determining different trigger levels? 

4. What short sale price test 

restrictions would be most appropriate 

in combination with a short selling 

circuit breaker? Should the circuit 

breaker when triggered result in a short 

sale price test based on the national best 

bid, similar to the proposed modified 

uptick rule? Please explain. Should the 

circuit breaker when triggered result in 

a short sale price test based on the last 

sale price, similar to the proposed 

uptick rule? Please explain. Should the 

circuit breaker when triggered result in 

a short sale price test that requires short 

sale orders to be initiated only at a price 

above the highest prevailing national 

best bid by posting a quote for a short 

sale order above the national bid? If so, 

why? If not, why not? If the circuit 

breaker when triggered results in a short 

sale price test restriction based on the 

national best bid (the proposed 

modified uptick rule), should short 

selling be restricted to a specific 

increment above the current national 

best bid, such as one cent above the 

national best bid? Or should a higher or 

lower increment apply? Please explain. 

If a specific increment is suggested, 

what impact would such an increment 

have on short selling in the individual 

security? Please explain. What 

increment, if any, would be tantamount 

to a halt on short selling during the 

period in which the circuit breaker is in 

effect? Please explain and provide 

empirical data and analysis in support 

of any arguments and/or analyses. 

5. The proposed circuit breaker halt 

rule would impose a short sale price test 

for the trading day following the 

triggering of the circuit breaker. Is this 

an appropriate length of time? If so, 

why? If not, why not, and how long 

should the short sale price test persist? 

We note that increasing the length of a 

halt to an additional days or multiple 

additional days may increase costs, 

reduce market quality, and reduce 

liquidity in that security. This may 

affect thinly traded securities or higher 

volatility securities more than other 

securities. However, decreasing the 

period of time to less than the trading 

day, such as limiting the short sale price 

test to an hour or a few hours following 

the trigger, may reduce the effectiveness 

of the short sale price test. Would it be 

more beneficial for a 10% intraday 

decline to trigger a short sale price test 

in short selling for a few hours rather 

than for the trading day? Should it 

result in a multiple day short sale price 

test? Please explain. How disruptive to 

normal trading would a multiple day 

short sale price test be compared to a 

halt for one trading day? If short selling 

is restricted by a price test after the 

circuit breaker is triggered in the wake 

of a 10% intraday decline, and the value 

of the stock continues to decline 


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18082 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

299See National Exchanges Letter, supra note 63. 

300See 17 CFR 242.200(g). 

301See 2004 Regulation SHO Adopting Release, 

69 FR 48008. 

302See 2007 Price Test Adopting Release, 72 FR 

36348. 

throughout the day to the point where 

it is down 20% at closing, should short 

selling be allowed to resume the 

following trading day? If so, why? If not, 

why not? Please explain. Should a 20% 

or greater intraday decline result in a 

short sale price test for multiple trading 

days? For example, would it be 

appropriate for a 20% intraday decline 

on the day the circuit breaker is 

triggered to result in a 3-day price test 

restriction in short selling, a 5-day 

restriction on short selling, or a 10-day 

restriction on short selling? Specifically, 

what length of a restriction would be 

appropriate for the various levels of 

decline in excess of 10%? Should we 

consider a different period for higher 

volatility stocks? Should we consider 

market capitalization in determining 

different trigger levels? Please explain. 

6. What benefits would be associated 

with a short selling circuit breaker that 

when triggered imposed short sale price 

test restrictions? Could the short sale 

price test restrictions help stabilize the 

market for the individual security? If so, 

why? If not, why not? Could the short 

sale price test restrictions benefit 

investors by allowing the market to 

‘‘cool off’’ with respect to that 

individual security? Please explain. 

Could a circuit breaker that when 

triggered imposes short sale price test 

restrictions result in an increase in 

investor confidence? Please explain. 

7. What are the benefits, if any, of a 

circuit breaker that when triggered 

imposes short sale price test restrictions, 

versus a permanent, market-wide short 

sale price test such as the modified 

uptick rule or the proposed uptick rule? 

Please explain and support explanations 

with data and analysis where 

appropriate. 

8. What costs would be associated 

with implementing a short selling 

circuit breaker that when triggered 

imposed short sale price test 

restrictions? Please explain. What 

would be the degree of financial 

expenditure involved in updating 

systems in a manner necessary to ensure 

compliance with such a circuit breaker? 

Would the expenditure necessary to 

ensure compliance be primarily an ‘‘upfront’’ cost? Would the expenditure 

necessary to ensure compliance require 

long-term investment? Please explain. 

How would the costs of a circuit breaker 

that when triggered imposes short sale 

price test restrictions compare with the 

costs of a permanent short sale price test 

such as the proposed modified uptick 

rule or the proposed uptick rule? Please 

explain. 

9. What technological challenges 

would be encountered in updating 

systems to ensure compliance with a 

short selling circuit breaker that when 

triggered imposed short sale price test 

restrictions on individual securities? 

Please explain. How long would it take 

to update systems in a manner that 

ensured compliance? Please explain. 

Would a short selling circuit breaker 

that when triggered imposed short sale 

price test restrictions impede the 

efficient functioning of the equity 

markets? If so, why? If not, why not? 

Please explain. Are there any other 

operational challenges that may arise 

from implementing a short selling 

circuit breaker that when triggered 

imposed short sale price test 

restrictions? Please explain. Would the 

operational challenges presented 

impede the effectiveness of such a short 

selling circuit breaker? Please explain. 

10. Are there other short sale price 

test restrictions that should be 

considered in combination with a short 

selling circuit breaker? Please explain. 

11. Should a circuit breaker that when 

triggered imposed short sale price test 

restrictions include exceptions? Please 

explain. If such a circuit breaker is 

based on the proposed modified uptick 

rule, should it contain the same 

exceptions as those contemplated in the 

proposed modified uptick rule? If so, 

why? If not, why not? If other or 

different exceptions are warranted for 

such a circuit breaker, what should they 

be? Please explain. If a circuit breaker is 

based on the proposed uptick rule, 

should it contain the same exceptions as 

those contemplated in the proposed 

uptick rule? If so, why? If not, why not? 

If other or different exceptions are 

warranted for such a circuit breaker, 

what should they be? Please explain. 

12. Should a circuit breaker that when 

triggered imposed short sale price test 

restrictions contain a general market 

maker exception? If so, why? If not, why 

not? If so, should the market maker 

exemption be limited to registered 

market makers, exchange-based market 

makers, or apply to over-the-counter 

market makers as well? Should upstairs 

customer facilitation be exempted from 

a short selling circuit breaker? Should 

parties involved in delta neutral 

hedging be excepted from a short selling 

circuit breaker? Should parties involved 

with index arbitrage be excepted from a 

short selling circuit breaker that when 

triggered imposed short sale price test 

restrictions? What other exceptions may 

be appropriate? Please explain. 

13. What implementation period 

would be necessary for the circuit 

breaker? Would a three month 

implementation period be appropriate 

for a circuit breaker that when triggered 

imposed short sale price test restrictions 

on individual securities? Is more or less 

time necessary? Please explain. 

14. One commenter suggested a 

circuit breaker that, when triggered, 

would prohibit any person from selling 

short except at an upbid.299 Should a 

circuit breaker that triggers a bid-based 

price restriction for a particular security 

be expanded to prohibit short sales both 

on a downbid and at the bid? Thus, 

once triggered, short sales in the 

particular security could only be 

executed or displayed, or effected, at an 

upbid. We note that such a rule would 

be stricter than the proposed circuit 

breaker modified uptick rule, which 

would permit short sales at the bid 

unless the bid is on a downbid. As a 

result, this proposal may result in 

additional costs, reduce liquidity, and 

reduce market quality. However, this 

proposed rule may also establish a 

longer ‘‘break’’ before short selling 

resumes. Would it be appropriate to 

change the proposed circuit breaker 

modified uptick rule to require that, 

following the trigger of the circuit 

breaker, short sales could only be 

effected at an upbid? Please explain 

why this may be more appropriate. 

15. Would it be more appropriate for 

the resulting price test to be based on a 

policies and procedures rule or a 

straight prohibition? For instance, a 

circuit breaker that triggers a policies 

and procedures rule would require 

trading centers to incur immediate 

upfront costs to establish policies and 

procedures that would be implemented 

and enforced once a circuit breaker is 

triggered for a particular security. 

Would a circuit breaker that triggers a 

straight prohibition incur fewer costs? 

Please explain. 

V. Marking 

Rule 200(g) of Regulation SHO 

provides that a broker-dealer must mark 

all sell orders of any security as ‘‘long’’ 

or ‘‘short.’’ 300 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.’’ 301 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–1.302


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303See proposed Rule 200(g) of the proposed 

modified uptick rule and of the proposed uptick 

rule. 

304See proposed Rule 200(g)(2) of the proposed 

modified uptick rule. 

305See Proposed Rule 200(g)(2). 

306The improper marking of a short sale order as 

‘‘short exempt’’ by the broker-dealer would be a 

violation of proposed Rule 200(g)(2) and Exchange 

Act Section 10(a). In addition, the improper 

marking of a short sale order as ‘‘short exempt’’ 

could, in some circumstances, result in liability 

under the antifraud provisions of the federal 

securities laws; the liability of the broker-dealer that 

marked the order, and of the trading center that 

displayed or executed the order, would turn on 

whether those entities acted with the mental state 

required under the applicable antifraud provisions. 

307See Securities 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 Securities Exchange Act Release No. 

21958 (Apr. 18, 1985), 50 FR 16302 (Apr. 25, 1985) 

at n. 48 (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 an SRO rule 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 Securities Exchange 

Act Release No. 28899 (Feb. 20, 1991), 56 FR 8377 

(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 7 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. 

308See 2004 Regulation SHO Adopting Release, 

69 FR at 48104, n. 54. 

In conjunction with the proposed 

amendments to Rule 201 of Regulation 

SHO to add a short sale price test or a 

circuit breaker rule, we are proposing to 

amend Rule 200(g) of Regulation SHO to 

again impose a ‘‘short exempt’’ marking 

requirement. Specifically, proposed 

Rule 200(g) would provide that ‘‘[a] 

broker or dealer must mark all sell 

orders of any equity security as ‘‘long,’’ 

‘‘short,’’ or ‘‘short exempt.’’ 303

In addition, proposed Rule 200(g)(2) 

of the proposed modified uptick rule 

would provide that a sale order shall be 

marked ‘‘short exempt’’ only if the 

provisions of paragraph (c) or (d) of 

proposed Rule 201 are met.304 This 

‘‘short exempt’’ marking requirement 

would provide a record that a brokerdealer is availing itself of the provisions 

of paragraph (c) or (d) of the proposed 

modified uptick rule. 

Proposed Rule 200(g)(2) of the 

proposed uptick rule or the proposed 

circuit breaker rules would provide that 

a sale order shall be marked ‘‘short 

exempt’’ only if the seller is relying on 

an exception from the price test of 

§ 242.201.305 This ‘‘short exempt’’ 

marking requirement would provide a 

record that short sellers are availing 

themselves of the various exceptions to 

the application of the restrictions of the 

proposed uptick rule.306

The records provided pursuant to the 

‘‘short exempt’’ marking requirements of 

proposed Rule 200(g) of the proposed 

short sale price test rules and the 

proposed circuit breaker rules would 

aid surveillance by SROs and the 

Commission for compliance with the 

provisions of either of those short sale 

price test restrictions. In addition, if the 

Commission were to adopt a policies 

and procedures approach, such as is 

proposed in conjunction with the 

proposed modified uptick rule, the 

proposed ‘‘short exempt’’ marking 

requirement would provide an 

indication to a trading center regarding 

whether it must execute or display a 

short sale order with regard to whether 

the short sale order is at a down-bid 

price. 

If we were to adopt the proposed 

‘‘short exempt’’ marking requirement of 

proposed Rule 200(g) of the proposed 

short sale price test rules or the 

proposed circuit breaker rules, we are 

proposing an implementation period 

under which market participants would 

have to comply with this requirement 

three months following the effective 

date of the proposed marking 

requirement. We believe that this 

proposed implementation period would 

provide market participants with 

sufficient time in which to modify their 

systems and procedures in order to 

comply with the proposed marking 

requirements. We realize, however, that 

a shorter or longer implementation 

period may be manageable or preferable. 

Thus, we seek specific comment as to 

what length of implementation period 

would be necessary or appropriate, and 

why, such that market participants 

would be able to meet the proposed 

marking requirements, if adopted. 

Request for Comment 

We seek comment generally on all 

aspects of the proposed amendment to 

Rule 200(g) of Regulation SHO. In 

addition, we seek comment on the 

following: 

1. What type of costs, if any, would 

be associated with requiring sell orders 

to be marked ‘‘short exempt’’ when 

relying on an exception under proposed 

Rule 201? What types of costs, if any, 

would be associated with not requiring 

sell orders to be marked ‘‘short exempt’’ 

when relying on an exception under 

proposed Rule 201? 

2. Should the proposed rule require a 

broker-dealer marking a sell order 

‘‘short exempt’’ to identify the specific 

provision on which the broker-dealer is 

relying in marking the order ‘‘short 

exempt’’? If not, why not? 

3. What would be a sufficient 

implementation period for making any 

systems changes necessary to allow sell 

orders to be marked ‘‘short exempt’’? 

4. Please describe any anticipated 

difficulties in complying with a ‘‘short 

exempt’’ marking requirement. 

5. The ‘‘short exempt’’ marking has 

historically been used only for short 

sales that are excepted from a short sale 

price test. For instance, the ‘‘short 

exempt’’ marking was not available for 

short sales that were excepted from the 

Regulation SHO locate requirement of 

Rule 203(b). We are, however, proposing 

to require short sales that are excepted 

from the proposed circuit breaker halt 

rule, when triggered, to be marked 

‘‘short exempt.’’ Would a ‘‘short 

exempt’’ marking be needed for the 

proposed circuit break rules if circuit 

breakers operate in place of short sale 

price test restrictions? 

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.307 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.308 For 

example, a U.S. money manager decides 

to sell a block of 500,000 shares in an 

NMS stock. The money manager 

negotiates a price with a U.S. brokerdealer, who sends the order ticket to its 

foreign trading desk for execution. In 

our view, this trade occurred in the 

United States as much as if the trade 

had been executed by the broker-dealer 


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309See proposed Rule 201(e) of the proposed 

uptick rule; proposed Rule 201(f) of the proposed 

modified uptick rule; proposed Rule 201(g) of the 

proposed circuit breaker halt rule and proposed 

circuit breaker uptick rule; and proposed Rule 

201(h) of the proposed circuit breaker modified 

uptick rule. 

310 44 U.S.C. 3501 et seq. 

311See proposed Rule 201. 

312See proposed Rule 201. 

313See proposed Rules 200(g) and 200(g)(2). 

314The discussion of the PRA as it applies to the 

proposed modified uptick rule applies equally to 

the proposed circuit breaker modified uptick rule. 

315Proposed Rule 201(b)(1). A ‘‘down bid’’ is 

defined as ‘‘a price that is less than the current 

national best bid or, if the last differently priced 

national best bid was greater than the current 

national best bid, a price that is less than or equal 

to the current national best bid.’’ Proposed Rule 

201(a)(2). 

316See proposed Rule 201(b)(1)(ii). See also 

Section V, above, regarding the proposed ‘‘short 

exempt’’ marking requirement. 

317See proposed Rule 200(g)(2). The brokerdealer marking the order ‘‘short exempt’’ would 

have responsibility for being able to identify on 

which provision to the proposed modified uptick 

rule it was relying in marking the order ‘‘short 

exempt.’’ 

at a U.S. trading desk. Under either the 

proposed short sale price test rules or 

the proposed circuit breaker rules, if the 

short sale is agreed to in the U.S., it 

must be effected in accordance with the 

requirements of those proposed rules, 

unless otherwise excepted. 

Request for Comment 

1. Would the proposed modified 

uptick rule, proposed uptick rule, or 

circuit breaker rules, if adopted, result 

in sellers transacting short sales in 

foreign markets where they would not 

be subject to a short sale price test rather 

than in U.S. markets? If so, please 

explain. 

2. For short sales agreed to in the 

United States and executed overseas, 

would the time the short sale is agreed 

to in the U.S. be the appropriate time to 

be used to establish the price against 

which the proposed uptick rule, 

proposed modified uptick rule, or 

circuit breaker rule, would be 

determined? 

3. Please identify any challenges or 

difficulties that could arise in applying 

the proposed modified uptick rule or 

proposed uptick rule to short sales 

agreed to in the United States and 

executed overseas? 

4. Would the proposed modified 

uptick rule, proposed uptick rule, 

circuit breaker proposals, or any other 

restriction on short sales, be easier to 

implement and enforce for short sales 

agreed to in the United States but 

executed overseas? Please explain. 

5. What would be the costs and 

benefits of applying the proposed 

modified uptick rule, proposed uptick 

rule, the alternative circuit breaker 

rules, or any other restriction on short 

sales to short sales agreed to in the 

United States and executed overseas? 

VII. Exemptive Procedures 

The proposed alternative short sale 

price test rules and the alternative 

circuit breaker rules would establish 

procedures for the Commission, upon 

written request or its own motion, to 

grant an exemption from the rules’ 

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.309

Pursuant to this provision, we would 

consider and act upon appropriate 

requests for relief from the proposed 

short sale price tests’ provisions and the 

proposed short sale circuit breakers’ 

provisions, if adopted, and would 

consider the particular facts and 

circumstances relevant to each such 

request and any appropriate conditions 

to be imposed as part of the exemption. 

We solicit comment regarding including 

a provision for exemptive procedures in 

the proposed short sale price test rules 

and the proposed circuit breaker rules. 

VIII. Paperwork Reduction Act 

A. Background 

Certain provisions of the proposed 

amendments to Regulation SHO would 

impose new ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).310 We have submitted the 

collection of information to 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. OMB has not yet assigned a 

control number to the new collection of 

information. 

We are proposing amendments to 

Rules 201 and 200(g) of Regulation SHO 

under the Exchange Act. The proposed 

amendments to Rule 201 include two 

alternative price tests that would 

impose restrictions on the prices at 

which certain securities would be able 

to be sold short.311 The first alternative 

short sale price test would be a 

proposed modified uptick rule. The 

second alternative short sale price test 

would be a proposed uptick rule. We are 

also proposing alternative circuit 

breaker rules that would establish 

limitations on short selling in a 

particular security during severe market 

declines in the price of that security.312

The first alternative circuit breaker rule 

would be the proposed circuit breaker 

halt rule. The second alternative circuit 

breaker rule would be the proposed 

circuit breaker modified uptick rule. 

The third alternative circuit breaker rule 

would be the proposed circuit breaker 

uptick rule. In addition, we are 

proposing to amend Rule 200(g) of 

Regulation SHO to impose a ‘‘short 

exempt’’ marking requirement and to 

also require that a broker-dealer mark a 

sell order ‘‘short exempt’’ only if the 

provisions in proposed Rule 201(c) or 

(d) of the proposed modified uptick rule 

(or the proposed circuit breaker 

modified uptick rule) are met, or if a 

seller is relying on an exception in 

proposed Rule 201(c) of the proposed 

uptick rule (or the proposed circuit 

breaker uptick rule), or if a seller is 

relying on an exception in proposed 

Rule 201(c) of the proposed circuit 

breaker halt rule.313

B. Summary 

As detailed below, several provisions 

under the proposed amendments to 

Regulation SHO would impose a new 

‘‘collection of information’’ within the 

meaning of the PRA. 

1. Policies and Procedures Requirement 

Under Proposed Modified Uptick Rule 

The proposed modified uptick rule 

would impose a new ‘‘collection of 

information’’ within the meaning of the 

PRA.314 Under the proposed modified 

uptick rule, a trading center would be 

required 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 down-bid price.315 In addition, a 

trading center would be required to 

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 

down-bid price.316 Thus, upon 

acceptance of a short sale order, a 

trading center’s policies and procedures 

would have to be reasonably designed to 

permit the trading center to be able to 

determine whether or not the short sale 

order is priced in accordance with the 

provisions of proposed Rule 201(b)(1) 

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 on a down-bid price.317

At a minimum, a trading center’s 

policies and procedures would need to 

enable a trading center to monitor, on a 

real-time basis, the national best bid, 


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318 Id. 319This provision would reinforce the ongoing 

maintenance and enforcement requirements of 

proposed 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 proposed 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). 

320See proposed Rule 201(c)(1). 

321See proposed Rule 201(c)(1). As part of its 

written policies and procedures, a broker-dealer 

also would be required to regularly surveil to 

ascertain the effectiveness of its policies and 

procedures and take prompt remedial steps. See 

proposed Rule 201(c)(2). This provision is intended 

to reinforce the ongoing maintenance and 

enforcement requirements of the provision 

contained in proposed 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. 

322The discussion of the PRA as it applies to the 

proposed uptick rule applies equally to the 

proposed circuit breaker uptick rule. 

323See proposed Rule 201(d)(6). As a result, a 

trading center’s policies and procedures would 

need to be reasonably designed to permit the 

execution or display of such orders without regard 

to whether the order is at a down-bid price. See 

proposed Rule 201(b)(1)(ii). 

324See proposed Rule 201(c)(9) of the proposed 

uptick rule and Rule 201(d)(6) of the proposed 

modified uptick rule. 

325 17 CFR 242.200(g). 

326See proposed Rule 200(g). See also Section V 

above discussing proposed Rule 200(g). 

327See proposed Rule 200(g)(2). 

and whether the current national best 

bid is an up- or down-bid from the last 

differently priced 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 would need to have 

policies and procedures governing how 

to recognize and handle orders that a 

trading center receives as marked ‘‘short 

exempt’’ pursuant to proposed Rule 

200(g)(2).318 A trading center’s policies 

and procedures also would be required 

to address latencies in obtaining data 

regarding the national best bid. In 

addition, to the extent such latencies 

occur, a trading center would be 

required to implement reasonable steps 

in its policies and procedures to 

monitor such latencies on a continuing 

basis and take appropriate steps to 

address a problem should one develop. 

A trading center would also need to 

take such steps as would be necessary 

to enable it to enforce its policies and 

procedures effectively. As part of its 

written policies and procedures, a 

trading center also would be required to 

regularly surveil to ascertain the 

effectiveness of its policies and 

procedures and take prompt remedial 

steps.319 The nature and extent of the 

policies and procedures that a trading 

center would be required to establish to 

comply with these requirements would 

depend upon the type, size, and nature 

of the trading center. 

2. Identification of Short Sale Orders 

and Policies and Procedures 

Requirement Under the Proposed 

‘‘Broker-Dealer’’ and ‘‘Riskless 

Principal’’ Provisions 

The proposed modified uptick rule 

contains a ‘‘broker-dealer’’ provision 

that would require a new ‘‘collection of 

information’’ under the PRA. Proposed 

Rule 201(c)(1) provides that a broker 

dealer may mark a short sale order of a 

covered security ‘‘short exempt’’ if a 

broker-dealer that submits a short sale 

order to a trading center has identified 

that the short sale order is not on a 

down-bid price at the time of 

submission of the order to the trading 

center.320 This provision would require 

a new ‘‘collection of information’’ in 

that a broker-dealer marking an order 

‘‘short exempt’’ under proposed Rule 

201(c)(1) must identify both a short sale 

order as priced in accordance with the 

requirements of proposed Rule 201(c)(1) 

and 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 proposed Rule 

201(c)(1).321

While the proposed uptick rule itself 

does not contain a ‘‘collection of 

information’’ requirement within the 

meaning of the PRA, the proposed 

uptick rule does contain a ‘‘riskless 

principal’’ exception that would require 

a new ‘‘collection of information’’ under 

the PRA.322 The proposed modified 

uptick rule also contains a ‘‘riskless 

principal’’ provision that would require 

a new ‘‘collection of information’’ under 

the PRA. Specifically, proposed Rule 

201(d)(6) of the proposed modified 

uptick rule and Rule 201(c)(9) of the 

proposed uptick rule would allow a 

broker-dealer to mark short sale orders 

of a covered security ‘‘short exempt’’ 

where a broker-dealer 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.323

Proposed Rules 201(d)(6) of the 

proposed modified uptick rule and 

201(c)(9) of the proposed uptick rule 

would require a new ‘‘collection of 

information’’ in that each would require 

a broker-dealer marking an order ‘‘short 

exempt’’ under these provisions to have 

written policies and procedures in place 

to assure that, at a minimum, the 

customer order was received prior to the 

offsetting transaction; the offsetting 

transaction is allocated to a riskless 

principal account within 60 seconds of 

execution; and that it has supervisory 

systems in place to produce records that 

enable the broker-dealer to accurately 

and readily reconstruct, in a timesequenced manner, all orders on which 

the broker-dealer relies pursuant to this 

provision.324

3. Proposed 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,’’ 325 would remain in effect, 

proposed Rule 200(g) would add a new 

marking requirement of ‘‘short 

exempt.’’ 326 In addition, the proposed 

amendments to Rule 200(g)(2) would 

require that a broker-dealer mark a sell 

order ‘‘short exempt’’ only if the 

provisions in paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraph (c) or (d) of the proposed 

circuit breaker modified uptick rule) are 

met, or if the seller is relying on an 

exception in paragraph (c) of the 

proposed uptick rule (or paragraph (c) of 

the proposed circuit breaker uptick 

rule), or if the seller is relying on an 

exception in paragraph (c) of the 

proposed circuit breaker halt rule.327

The proposed ‘‘short exempt’’ marking 

requirements would impose a new 

‘‘collection of information.’’ 

C. Proposed Use of Information 

1. Policies and Procedures Requirement 

Under Proposed Modified Uptick Rule 

The information that would be 

collected under the proposed modified 

uptick rule’s written policies and 

procedures requirement would 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 would also provide trading 

centers with flexibility in determining 

how to comply with the requirements of 

the proposed modified uptick rule. The 

information collected also would aid the 

Commission and SROs that regulate 

trading centers in monitoring 

compliance with the price test’s 

requirements. It also would aid trading 

centers and broker-dealers in complying 

with the rule’s requirements. 


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328See proposed Rule 200(g). 

329See proposed Rule 200(g)(2) of the proposed 

modified uptick rule (and the proposed circuit 

breaker modified uptick rule). Paragraphs (c) and 

(d) of the proposed modified uptick rule (and the 

proposed circuit breaker modified uptick rule) set 

forth when a broker-dealer may mark a short sale 

order ‘‘short exempt.’’ See proposed Rules 201(c) 

and (d). 

330See proposed Rule 200(g)(2) of the proposed 

uptick rule (and the proposed circuit breaker uptick 

rule). Paragraph (c) of the proposed uptick rule (and 

paragraph (c) of the proposed circuit breaker uptick 

rule) sets forth when a broker-dealer may mark a 

short sale order ‘‘short exempt’’ in accordance with 

the proposed uptick rule (or the proposed circuit 

breaker uptick rule). See proposed Rule 201(c). 

331See proposed Rule 200(g)(2) of the proposed 

circuit breaker halt rule. Paragraph (c) of the 

proposed circuit breaker halt rule sets forth when 

a broker-dealer may mark a short sale order ‘‘short 

exempt’’ in accordance with the proposed circuit 

breaker halt rule. See proposed Rule 201(c). 

332See proposed Rule 201(b)(1). 

333See 17 CFR 242.600(b)(78). 

334There are 10 national securities exchanges 

(BX, BATS, CBOE, CHX, ISE, NASDAQ, NSX, 

NYSE, NYSE Amex, and NYSE Arca) and one 

national securities association (FINRA) that operate 

an SRO trading facility for NMS stocks and thus 

would be subject to the Rule. 

335This number includes the 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 the 47 ATSs that operate 

trading systems that trade NMS stocks. 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. 

336This number is based on OEA’s review of 2007 

FOCUS Report filings reflecting registered brokerdealers, including introducing broker-dealers. This 

number does not include broker-dealers that are 

delinquent on FOCUS Report filings. 

337See id. 

2. Identification of Short Sale Orders 

and Policies and Procedures 

Requirement Under the Proposed 

‘‘Broker-Dealer’’ and ‘‘Riskless 

Principal’’ Provisions 

Proposed Rule 201(c)(1) of the 

proposed modified uptick rule would 

include a ‘‘broker-dealer’’ provision that 

would permit a broker-dealer to mark a 

short sale order in a covered security 

‘‘short exempt’’ if the broker-dealer has 

identified the order as not being at a 

down-bid price at the time of 

submission of the order to the trading 

center. This provision would include a 

policies and procedures requirement 

that would be designed to help prevent 

incorrect identification of orders for 

purposes of the proposed modified 

uptick rule’s broker-dealer provision. 

Moreover, the information collection 

under the written policies and 

procedures requirement in the ‘‘riskless 

principal’’ exception in proposed Rule 

201(c)(9) of the proposed uptick rule 

and the ‘‘riskless principal’’ provision in 

proposed Rule 201(d)(6) of the proposed 

modified uptick rule would help assure 

that broker-dealers comply with the 

requirements of these proposed 

provisions. The information collected 

would also enable the Commission and 

SROs to examine for compliance with 

the requirements of these proposed 

provisions. 

3. Proposed Marking Requirements 

Proposed Rule 200(g) would impose a 

‘‘short exempt’’ marking requirement.328

In addition, proposed Rule 200(g)(2) 

would require that a sale order be 

marked ‘‘short exempt’’ only if the 

provisions in paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraph (c) or (d) of the proposed 

circuit breaker modified uptick rule) are 

met,329 or if the seller is relying on an 

exception in paragraph (c) of the 

proposed uptick rule (or paragraph (c) of 

the proposed circuit breaker uptick 

rule),330 or if the seller is relying on an 

exception in paragraph (c) of the 

proposed circuit breaker halt rule.331

The purpose of the information 

collected would be to enable the 

Commission and SROs to monitor 

whether a person entering a sell order 

covered by the proposed amendments to 

Rule 201 is acting in accordance with 

one of the provisions contained in 

paragraph (c) or (d) of the proposed 

modified uptick rule (or paragraph (c) or 

(d) of the proposed circuit breaker 

modified uptick rule), or if the seller is 

relying on an exception in paragraph (c) 

of the proposed uptick rule (or 

paragraph (c) of the proposed circuit 

breaker uptick rule), or if the seller is 

relying on an exception in paragraph (c) 

of the proposed circuit breaker halt rule. 

In particular, the ‘‘short exempt’’ 

marking requirement would provide a 

record that would aid in surveillance for 

compliance with the provisions of 

proposed Rule 201. It also would 

provide an indication to a trading center 

regarding whether or not it must execute 

or display a short sale order in 

accordance with the price test 

restrictions of the proposed modified 

uptick rule (or the proposed circuit 

breaker modified uptick rule). It also 

would help a trading center determine 

whether its policies and procedures 

were reasonable and whether its 

surveillance was 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 proposed amendments to Rules 

200(g) and 201 of Regulation SHO. The 

Commission requests comment on the 

accuracy of these figures. 

1. Policies and Procedures Requirement 

Under Proposed Modified Uptick Rule 

The proposed modified uptick rule 

would require 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 at a downbid price.332 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 brokerdealer that executes orders internally by 

trading as principal or crossing orders as 

agent.’’ 333 Because the proposed 

modified uptick rule would apply to 

any trading center that executes or 

displays a short sale order in a covered 

security, the proposed modified uptick 

rule would apply to 10 registered 

national securities exchanges that trade 

NMS stocks and one national securities 

association (or ‘‘SRO trading 

centers’’),334 and approximately 372 

broker-dealers (including ATSs) 

registered with the Commission (or 

‘‘non-SRO trading centers’’).335

2. Identification of Short Sale Orders 

and Policies and Procedures 

Requirements Under the Proposed 

‘‘Broker-Dealer’’ and ‘‘Riskless 

Principal’’ Provisions 

The collection of information that 

would be required in the proposed 

‘‘broker-dealer’’ provision in proposed 

Rule 201(c)(1) of the proposed modified 

uptick rule, the ‘‘riskless principal’’ 

provision in proposed Rule 201(d)(6) of 

the proposed modified uptick rule, and 

the ‘‘riskless principal’’ exception in 

proposed Rule 201(c)(9) of the proposed 

uptick rule would apply to all the 

5,561 336 registered brokers-dealers 

submitting short sale orders in reliance 

on these proposed provisions. 

3. Proposed Marking Requirements 

The collection of information that 

would be required pursuant to the 

proposed ‘‘short exempt’’ marking 

requirements would apply to all the 

5,561 337 registered brokers-dealers 

submitting short sale orders marked 

‘‘short exempt’’ in accordance with the 

provisions contained in paragraph (c) or 

(d) of the proposed modified uptick rule 

(or paragraph (c) or (d) of the proposed 


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338See proposed Rule 201(b)(1). This would 

include a trading center taking such steps as would 

be necessary to enable it to enforce its policies and 

procedures effectively, including the proposed 

requirement to regularly surveil to ascertain the 

effectiveness of its policies and procedures and 

taking prompt remedial steps. See proposed Rule 

201(b)(2). 

339See proposed Rule 201(b)(1)(ii). See also 

Sections III.A. and V, above, discussing short sale 

orders marked ‘‘short exempt.’’ 

340See proposed Rule 201(b)(1)(ii). 

341For purposes of this 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 would need to do to comply with the 

proposed modified uptick rule. See Securities 

Exchange Act Release No. 51808 (June 9, 2005), 70 

FR 37496 (June 29, 2005). 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. 

342Based on experience and estimates provided 

in connection with Regulation NMS, we anticipate 

that of the 220 hours we preliminarily estimate 

would be spent to establish the required policies 

and procedures, 70 hours would be spent by legal 

personnel, 105 hours would be spent by compliance 

personnel, 20 hours would be spent by information 

technology personnel and 25 hours would be spent 

by business operations personnel of the SRO 

trading center. 

343Based on experience and the estimates 

provided in connection with Regulation NMS, we 

anticipate that of the 160 hours we preliminarily 

estimate would be spent to establish policies and 

procedures, 37 hours would be spent by legal 

personnel, 77 hours would be spent by compliance 

personnel, 23 hours would be spent by information 

technology personnel and 23 hours would be spent 

by business operations personnel of the non-SRO 

trading center. 

344As 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 would need to do to comply with the 

proposed modified uptick rule. 

345The estimated 2,420 burden hours necessary 

for SRO trading centers to establish policies and 

procedures are calculated by multiplying 11 times 

220 hours (11 × 220 hours = 2,420 hours). 

346The estimated 59,520 burden hours necessary 

for non-SRO trading centers to establish policies 

and procedures are calculated by multiplying 372 

times 160 hours (372 × 160 hours = 59,520 hours). 

347Proposed Rule 201(b)(1). Proposed Rule 

201(b)(1) requires 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 at a downbid price.’’ 

348This figure was calculated as follows: (50 legal 

hours × $400 × 11 SRO trading centers) + (50 legal 

hours × $400 × 372 non-SRO trading centers) = 

$7,660,000. Based on industry sources, OEA 

estimates that the average hourly rate for 

outsourced legal services in the securities industry 

is $400. 

349This 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. 

350This 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 preliminary burden 

estimate of 336 hours is based on experience and 

what was estimated for Regulation NMS regarding 

similarly required ongoing monitoring and 

surveillance for and enforcement of trading in 

compliance with that regulation’s policies and 

procedures requirement. 

circuit breaker modified uptick rule), or 

in reliance on an exception contained in 

paragraph (c) of the proposed uptick 

rule (or paragraph (c) of the proposed 

circuit breaker uptick rule), or in 

reliance on an exception contained in 

paragraph (c) of the proposed circuit 

breaker halt rule. 

E. Total Annual Reporting and 

Recordkeeping Burdens 

1. Policies and Procedures Requirement 

under Proposed Modified Uptick Rule 

The proposed modified uptick rule 

would require 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 down-bid price.338 In 

addition, a trading center would need to 

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 

down-bid price.339 Thus, trading centers 

would be required to develop written 

policies and procedures reasonably 

designed to permit the trading center to 

be able to determine whether or not the 

short sale order is priced in accordance 

with the provisions of proposed Rule 

201(b)(1) 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 on a down-bid 

price in accordance with proposed Rule 

201(b)(1)(ii).340 A trading center’s 

policies and procedures would 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 the proposed 

modified uptick rule. 

Although the exact nature and extent 

of the policies and procedures that a 

trading center would be required to 

establish likely would vary depending 

upon the nature of the trading center 

(e.g., SRO vs. non-SRO, full service 

broker-dealer vs. market maker), we 

preliminarily estimate that it initially 

would take an SRO trading center 

approximately 220 hours 341 of legal, 

compliance, information technology and 

business operations personnel time,342

and a non-SRO trading center 

approximately 160 hours of legal, 

compliance, information technology and 

business operations personnel time,343

to develop the required policies and 

procedures. 

In addition to this estimate (of 220 

hours for SRO respondents and 160 

hours for non-SRO respondents), we 

expect that SRO and non-SRO 

respondents may 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 preliminarily estimate that 

on average, each trading center would 

outsource 50 hours of legal time in order 

to establish policies and procedures in 

accordance with the proposed 

amendments.344

We estimate that there would be an 

initial one-time burden of 220 (not 

including the outsourced 50 hours of 

legal time) burden hours per SRO 

trading center or 2,420 hours,345 and 

160 (not including the outsourced 50 

hours of legal time) burden hours per 

non-SRO trading center 346 or 59,520 

hours, for a total of 61,940 burden hours 

to establish the required written policies 

and procedures.347 We estimate a cost of 

approximately $7,660,000 for both SRO 

and non-SRO trading centers resulting 

from outsourced legal work.348

Once a trading center has established 

the required written policies and 

procedures, we preliminarily estimate 

that it would take the average SRO and 

non-SRO trading center each 

approximately two hours per month of 

ongoing internal legal time and three 

hours of ongoing internal compliance 

time to ensure that its written policies 

and procedures are up-to-date and 

remain in compliance with the 

proposed amendments to Rule 201, or a 

total of 60 hours annually per 

respondent.349 In addition, we 

preliminarily estimate that it would take 

the average SRO and non-SRO trading 

center each approximately 16 hours per 

month of ongoing compliance time, 8 

hours per month of ongoing information 

technology time, and 4 hours per month 

of ongoing legal time associated with 

ongoing monitoring and surveillance for 

and enforcement of trading in 

compliance with the proposed modified 

uptick rule, or a total of 336 hours 

annually per respondent.350

As mentioned above, we realize that 

the exact nature and extent of the 

policies and procedures that a trading 


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351See proposed Rule 201(c)(1). 

352This would include the proposed requirement 

that broker-dealer regularly surveil to ascertain the 

effectiveness of its policies and procedures and 

taking prompt remedial steps. See proposed Rule 

201(c)(2). 

353We base this estimate of 160 hours on the 

estimated burden hours we preliminarily believe it 

would take a non-SRO trading center (which would 

include broker-dealers) to develop similarly 

required policies and procedures, since the policies 

and procedures required under the proposed 

broker-dealer provisions would be similar to those 

required for non-SRO trading centers in complying 

with paragraph (b) of the proposed modified uptick 

rule. 

354Based on experience and the estimates 

provided in connection with Regulation NMS, we 

anticipate that of the 160 hours we estimate would 

be spent to establish policies and procedures; 37 

hours would be spent by legal personnel, 77 hours 

would be spent by compliance personnel, 23 hours 

would be spent by information technology 

personnel and 23 hours would be spent by business 

operations personnel of the broker-dealer. 

355As 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 would need to do to comply with the 

policies and procedures required under the 

proposed broker-dealer provision of the proposed 

modified uptick rule. 

356As discussed above, we base this estimate of 

160 hours on the estimated burden hours we 

preliminarily believe it would take a non-SRO 

trading center (which would include brokerdealers) to develop similarly required policies and 

procedures since the policies and procedures 

required under the proposed broker-dealer 

provisions would be similar to those required for 

non-SRO trading centers in complying with 

paragraph (b) of the proposed modified uptick rule. 

The estimated 889,760 burden hours necessary 

for a broker-dealer to establish policies and 

procedures are calculated by multiplying 5,561 

times 160 hours (5,561 × 160 hours = 889,760 

hours). 

357This figure was calculated as follows: (50 legal 

hours × $400 × 5,561 broker-dealers) = 

$111,220,000. Based on industry sources, OEA 

estimates that the average hourly rate for 

outsourced legal services in the securities industry 

is $400. 

358This 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 

center would be required to establish 

likely would vary depending upon the 

type, size, and nature of the trading 

center. Thus, while we have based our 

burden estimates, in part, on the burden 

estimates provided in connection with 

the adoption of Regulation NMS, we 

note 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 the 

proposed modified uptick rule. We 

realize, however, that these estimates 

may be on the low end for smaller 

trading centers with less familiarity 

with having had to establish policies 

and procedures in connection with 

Regulation NMS’s order protection rule. 

Thus, we seek specific comment as to 

whether the proposed burden estimates 

are appropriate or whether such 

estimates should be increased or 

reduced, and for which entities. If they 

should be increased or decreased, please 

address by how much, in order to be 

able to comply with the proposed 

modified uptick rule’s required policies 

and procedures, if adopted. 

2. Identification of Short Sale Orders 

and Policies and Procedures 

Requirements Under the Proposed 

‘‘Broker-Dealer’’ and ‘‘Riskless 

Principal’’ Provisions 

To rely on the proposed modified 

uptick rule’s Rule 201(c)(1) ‘‘brokerdealer’’ provision, a broker-dealer 

marking a short sale order in a covered 

security ‘‘short exempt’’ under proposed 

Rule 201(c)(1) must identify the order as 

not being a down-bid price at the time 

the order is submitted 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 

not being submitted to the trading 

center at a down-bid price.351 At a 

minimum, the broker-dealer’s policies 

and procedures would need to be 

reasonably designed to enable a brokerdealer to monitor, on a real-time basis, 

the national best bid, and whether the 

current national best bid is an up- or 

down-bid from the last differently 

priced national best bid, so as to 

determine the price at which the brokerdealer may submit a short sale order to 

a trading center in compliance with the 

requirements of proposed Rule 

201(c)(1). In addition, a broker-dealer 

would also need to take such steps as 

would be necessary to enable it to 

enforce its policies and procedures 

effectively.352

To rely on proposed Rule 201(d)(6)’s 

‘‘riskless principal’’ provision under the 

proposed modified uptick rule or Rule 

201(c)(9)’s ‘‘riskless principal’’ 

exception to the proposed uptick rule, a 

broker-dealer would be required to have 

written policies and procedures in place 

to assure that, at a minimum, the 

customer order was received prior to the 

offsetting transaction and 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 a broker-dealer relies pursuant to 

these provisions. 

Although the exact nature and extent 

of the required policies and procedures 

that a broker-dealer would be required 

to establish under the ‘‘broker-dealer’’ or 

the ‘‘riskless principal’’ provisions 

likely would vary depending upon the 

nature of the broker-dealer (e.g., full 

service broker-dealer vs. market maker), 

we preliminarily estimate that it 

initially would take a broker-dealer 

approximately 160 hours 353 of legal, 

compliance, information technology and 

business operations personnel time,354

to develop the required policies and 

procedures. In addition to this estimate 

of 160 hours, we expect that brokerdealers may 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 preliminarily estimate that 

on average, each broker-dealer would 

outsource 50 hours 355 of legal time in 

order to establish policies and 

procedures in accordance with the 

‘‘broker-dealer’’ provision in proposed 

Rule 201(c)(1) of the proposed modified 

uptick rule, the ‘‘riskless principal’’ 

exception in 201(c)(9) of the proposed 

uptick rule, and the ‘‘riskless principal’’ 

provision in 201(d)(6) of the proposed 

modified uptick rule. 

We preliminarily estimate that there 

would be an initial one-time burden of 

160 burden hours per broker-dealer or 

889,760 hours 356 to establish policies 

and procedures that would be required 

to rely on the proposed modified uptick 

rule’s ‘‘broker-dealer’’ provision in 

proposed Rule 201(c)(1), the ‘‘riskless 

principal’’ exception in Rule 201(c)(9) of 

the proposed uptick rule, or the 

‘‘riskless principal’’ provision in 

201(d)(6) of the proposed modified 

uptick rule. We preliminarily estimate a 

cost of approximately $111,220,000 for 

broker-dealers resulting from 

outsourced legal work.357

Once a broker-dealer has established 

written policies and procedures that 

would be required so that it could rely 

on proposed 201(c)(1) of the proposed 

modified uptick rule, 201(c)(9) of the 

proposed uptick rule, or 201(d)(6) of the 

proposed modified uptick rule, we 

preliminarily estimate that it would take 

the average 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 upto-date and remain in compliance with 

proposed 201(c)(1) of the proposed 

modified uptick rule, 201(c)(9) of the 

proposed uptick rule, or 201(d)(6) of the 

proposed modified uptick rule, or a total 

of 60 hours annually per respondent.358


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estimated for a Regulation NMS respondent to 

ensure that its written policies and procedures were 

up-to-date and remained in compliance. 359This 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 preliminary burden 

estimate of 336 hours is based on experience and 

what was estimated for Regulation NMS for 

similarly required ongoing monitoring and 

surveillance for and enforcement of trading in 

compliance with that regulation’s policies and 

procedures requirement. 360See proposed Rule 200(g). 

361See proposed Rule 200(g)(2). 362We also note that, because the proposed 

circuit breaker halt rule, if adopted, would not be 

in place at all times or for all securities and because 

there would be fewer exceptions that would be 

available and they would apply only when the 

restrictions of the proposed circuit breaker halt rule 

are triggered, the frequency and, therefore, the 

estimate burden of marking ‘‘short exempt’’ would 

be expected to be lower under the proposed circuit 

breaker halt rule. 363There are approximately 45.4 billion short sale 

orders entered annually. OEA calculates that there 

were about 263 million short sale trades during 

August 2008 for Amex, FINRA, Nasdaq, NYSEArca, 

and NYSE market centers. We gross up 263 million 

by 14.4 which is the ratio of orders to trades. The 

ratio is derived from Rule 605 reports from the three 

largest market centers during August 2008. This 

yields 3.8 billion short sale orders during August 

2008 or an annualized figure of 45.4 billion. OEA 

believes that August 2008 data is representative of 

a normal month of trading. 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. 

364This figure was calculated as follows: 12.9 

billion ‘‘short exempt’’ orders divided by 5,561 

broker-dealers. 

365This estimate is based on the same time 

estimate for marking sell orders ‘‘long’’ or ‘‘short’’ 

under current Rule 200(g) under Regulation SHO. 

See 2004 Regulation SHO Adopting Release, 69 FR 

at 48023; see also 2003 Regulation SHO Proposing 

Release, 68 FR at 63000 n. 232. 

In addition, we preliminarily estimate 

that it would take the average brokerdealer each approximately 16 hours per 

month of ongoing compliance time, 8 

hours per month of ongoing information 

technology time, and 4 hours per month 

of ongoing legal time associated with 

ongoing monitoring and surveillance for 

and enforcement of trading in 

compliance with the proposed modified 

uptick rule, or a total of 336 hours 

annually per respondent.359

As mentioned above, we realize that 

the exact nature and extent of the 

policies and procedures that a brokerdealer would be required to establish 

likely would vary depending upon the 

type, size, and nature of the brokerdealer. Thus, 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), 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 

proposed broker-dealer provision of the 

modified uptick rule, or the riskless 

principal provisions under the proposed 

modified uptick rule and the proposed 

uptick rule. We realize, however, that 

these estimates may be on the low end 

for some broker-dealers with less 

familiarity with having had to establish 

policies and procedures in connection 

with Regulation NMS’s order protection 

rule. Thus, we seek specific comment as 

to whether the proposed burden 

estimates are appropriate or whether 

such estimates should be increased or 

reduced, and for which broker-dealers. 

If they should be increased or 

decreased, please address by how much, 

in order to be able to comply with the 

proposed provisions’ required policies 

and procedures, if adopted. 

3. Proposed Marking Requirements 

Proposed Rule 200(g) would impose a 

‘‘short exempt’’ marking requirement.360

In addition, proposed Rule 200(g)(2) 

would require a broker-dealer to mark 

all sell orders of a covered security 

‘‘short exempt’’ only if the provisions 

contained in paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraph (c) or (d) of the proposed 

circuit breaker modified uptick rule) are 

met, or if the seller is relying on one of 

the exceptions contained in paragraph 

(c) of the proposed uptick rule (or 

paragraph (c) of the proposed circuit 

breaker uptick rule), or if the seller is 

relying on one of the exceptions 

contained in paragraph (c) of the 

proposed circuit breaker halt rule.361

While not all broker-dealers likely 

would enter sell orders in securities 

covered by the proposed amendments to 

Rules 200(g) and 201 in a manner that 

would subject them to this collection of 

information, we estimate, for purposes 

of the PRA, that all of the approximately 

5,561 registered broker-dealers would 

do so.362 For purposes of the PRA, the 

Commission staff has estimated that a 

total of approximately 12.9 billion 

‘‘short exempt’’ orders would be entered 

annually.363

This would be an average of 

approximately 2,319,727 annual 

responses by each respondent.364 Each 

response of marking sell orders ‘‘short 

exempt’’ would take approximately 

.000139 hours (.5 seconds) to 

complete.365 We base this estimate on 

the fact that, in accordance with the 

current marking requirements of Rule 

200(g) of Regulation SHO, brokerdealers are already required to mark a 

sell order either ‘‘long’’ or short’’; the 

fact that 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 the fact that 

broker-dealers would be able to 

continue to use the same mechanisms, 

processes and procedures to comply 

with proposed Rules 200(g) and 

200(g)(2). 

Thus, the total approximate estimated 

annual hour burden per year would be 

1,793,100 burden hours (12,900,000,000 

orders marked ‘‘short exempt’’ @ 

0.000139 hours/order marked ‘‘short 

exempt’’). Our estimate for the 

paperwork compliance for the proposed 

amendments order marking requirement 

for each broker-dealer would be 

approximately 322 burden hours 

(2,319,727 responses @ 0.000139 hours/ 

responses) or (a total of 1,793,100 

burden hours/5,561 respondents). 

F. Collection of Information Is 

Mandatory 

1. Proposed Policies and Procedures 

Requirements 

The collection of information that 

would be required under the proposed 

modified uptick rule’s (and proposed 

circuit breaker modified uptick rule’s) 

policies and procedures requirement in 

proposed Rule 201(b)(1) would be 

mandatory for trading centers executing 

and displaying short sale orders in 

covered securities. The collection of 

information that would be required 

under the proposed modified uptick 

rule’s (and proposed circuit breaker 

modified uptick rule’s) policies and 

procedures requirements in connection 

with the proposed broker-dealer 

provision in proposed Rule 201(c)(1) 

and the ‘‘riskless principal’’ provision in 

proposed Rule 201(d)(6), and the 

collection of information that would be 

required under the proposed uptick 

rule’s (and proposed circuit breaker 

uptick rule’s) policies and procedure 

requirement in connection with the 

proposed ‘‘riskless principal’’ exception 

in proposed Rule 201(c)(9) would be 

mandatory for broker-dealers relying on 

these provisions. 

2. Proposed Marking Requirements 

The collection of information would 

be mandatory for all broker-dealers 

submitting sell orders marked ‘‘short 

exempt’’ in reliance on one of the 

proposed provisions contained in 

paragraph (c) or (d) of the proposed 

modified uptick rule (or paragraph (c) or 


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366 17 CFR 240.17a–4. 

367See proposed Rule 201. 

368See proposed Rule 201. 

369The proposed circuit breaker halt rule could 

be imposed in place of, or in addition to, a short 

sale price rule. 

(d) of the proposed circuit breaker 

modified uptick rule), or in reliance on 

an exception in paragraph (c) of the 

proposed uptick rule (or paragraph (c) of 

the proposed circuit breaker uptick 

rule), or in reliance on an exception in 

paragraph (c) of the proposed circuit 

breaker halt rule. 

G. Confidentiality 

1. Proposed Policies and Procedures 

Requirements 

We expect that the information 

collected pursuant to the proposed 

modified uptick rule’s (and the 

proposed circuit breaker modified 

uptick rule’s) required policies and 

procedures would be communicated to 

the members, subscribers, and 

employees (as applicable) of all trading 

centers. To the extent this information 

is made available to the Commission, it 

would not be kept confidential. The 

information collected pursuant to the 

proposed modified uptick rule’s (or 

proposed circuit breaker modified 

uptick rule’s) ‘‘broker-dealer’’ provision 

and the ‘‘riskless principal’’ provisions 

under the proposed short sale price tests 

(or under the proposed circuit breaker 

price tests) would be retained and 

would be available to the Commission 

and SRO examiners upon request, but 

not subject to public availability. 

2. Proposed Marking Requirements 

The information collected pursuant to 

the ‘‘short exempt’’ marking 

requirements in proposed Rules 200(g) 

and 200(g)(2) would be submitted to 

trading centers and would be available 

to the Commission and SRO examiners 

upon request. 

H. Record Retention Period 

1. Proposed Policies and Procedures 

Requirements 

Any records generated in connection 

with the proposed short sale price tests’ 

requirements to establish written 

policies and procedures and the 

proposed circuit breaker rules would be 

required to be preserved in accordance 

with, and for the periods specified in, 

Exchange Act Rules 17a–1 for SRO 

trading centers and 17a–4(e)(7) for nonSRO trading centers. 

2. Proposed Marking Requirements 

The proposed amendments to Rule 

200(g) and 200(g)(2) do not contain any 

new record retention requirements. All 

registered broker-dealers that would be 

subject to the proposed amendments are 

currently required to retain records in 

accordance with Rule 17a–4(e)(7) of the 

Exchange Act.366

I. Request for Comment 

We invite comment on these 

estimates. Pursuant to 44 U.S.C. 

3506(c)(2)(B), we request comment in 

order to: (a) Evaluate whether the 

collection of information is necessary 

for the proper performance of our 

functions, including whether the 

information will have practical utility; 

(b) evaluate the accuracy of our estimate 

of the burden of the collection of 

information; (c) determine whether 

there are ways to enhance the quality, 

utility and clarity of the information to 

be collected; and (d) evaluate whether 

there are ways to minimize the burden 

of the collection of information on those 

who respond, including through the use 

of automated collection techniques or 

other forms of information technology. 

Persons submitting comments on the 

collection of information requirements 

should direct them to the Office of 

Management and Budget, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should also 

send a copy of their comments to 

Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090, with reference to File No. 

[S7–08–09]. Requests for materials 

submitted to OMB by the Commission 

with regard to this collection of 

information should be in writing, with 

reference to File No. [S7–08–09], and be 

submitted to the Securities and 

Exchange Commission, Records 

Management, 100 F Street, NE., 

Washington, DC 20549. As OMB is 

required to make a decision concerning 

the collections of information between 

30 and 60 days after publication, a 

comment to OMB is best assured of 

having its full effect if OMB receives it 

within 30 days of publication. 

IX. Cost-Benefit Analysis 

We are sensitive to the costs and 

benefits of our rules. We request 

comment on the costs and benefits 

associated with the proposed 

amendments. In particular, we request 

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, brokers or 

dealers, other securities industry 

professionals, regulators, and others. We 

also request 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. 

Commenters should provide analysis 

and data to support their views on the 

costs and benefits associated with the 

proposed amendments to Rules 200(g) 

and 201. 

A. Benefits 

As discussed above, we believe it is 

appropriate at this time to examine and 

seek comment on whether to restore 

short sale price test restrictions or adopt 

circuit breaker rules in light of the 

extreme market conditions that we are 

currently facing and the resulting 

deterioration in investor confidence. 

The proposed amendments to Rule 

201 include two alternative price tests 

that would place restrictions on the 

prices at which certain securities would 

be able to be sold short.367 The first test 

would be the proposed modified uptick 

rule that would be based on the national 

best bid and would require trading 

centers to have policies and procedures 

reasonably designed to prevent the 

execution or display of short sales at 

impermissible prices. The second test 

would be the proposed uptick rule that 

would be based on the last sale price, 

similar to the tick test under former 

Rule 10a–1, and would prohibit any 

person from effecting short sales at 

impermissible prices. 

We are also proposing circuit breaker 

rules that would establish limitations on 

short selling in a particular security 

during severe market declines in the 

price of that security.368 The proposed 

circuit breaker halt rule, when triggered 

by a severe price decline in a particular 

security, would temporarily prohibit 

any person from selling short that 

security during the effectiveness of the 

circuit breaker.369 The proposed circuit 

breaker modified uptick rule, when 

triggered by a severe market decline in 

a particular security, would temporarily 

impose the proposed modified uptick 

rule, as described in detail above, for 

that security. The proposed circuit 

breaker uptick rule, when triggered by a 

severe market decline in a particular 

security, would temporarily impose the 


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370A circuit breaker that triggers a short sale price 

test rule would be adopted in place of a short sale 

price test rule. 

371See, e.g., supra note 56 (citing comment letters 

suggesting that reinstatement of short price test 

restrictions in some format would help restore 

investor confidence in the market). 

372See supra note 35 (referencing OEA Staff’s 

Summary Pilot Report, at 55 n. 61–63 and 

supporting text). 

373See supra note 37 (referencing OEA Staff’s 

Summary Pilot Report, at 55 n. 61–63 and 

supporting text). 

374See proposed Rule 201. 

375See 1998 Release, 63 FR 18477 (April 15, 

1998) supra note 230. 

376See id. 

377See id. 

378See 1998 Release, 63 FR 18477. 

379For instance, a circuit breaker resulting in the 

proposed modified uptick rule would require that 

trading centers implement and enforce policies and 

procedures reasonably designed to prevent short 

Continued 

proposed uptick rule, as described in 

detail above, for that security.370

In addition, we are proposing 

amendments to Rule 200(g) of 

Regulation SHO to impose a ‘‘short 

exempt’’ marking requirement and to 

Rule 200(g)(2) of Regulation SHO to 

require broker-dealers to mark a sell 

order ‘‘short exempt’’ only if the 

provisions in paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraph (c) or (d) of the proposed 

circuit breaker modified uptick rule) are 

met, or if the seller is relying on an 

exception in paragraph (c) of the 

proposed uptick rule (or paragraph (c) of 

the proposed circuit breaker uptick 

rule), or if the seller is relying on an 

exception in paragraph (c) of the 

proposed circuit breaker halt rule. 

1. Proposed Short Sale Price Tests 

The two alternative short sale price 

tests proposed would be designed to 

allow relatively unrestricted short 

selling in an advancing market. In 

addition, the proposed short sale price 

tests would be designed to restrict short 

selling at successively lower prices and, 

thereby, help prevent short selling, 

including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market by exhausting all 

remaining bids at one price level, 

causing successively lower prices to be 

established by long sellers. Further, the 

two alternative short sale price tests 

would be designed to help restore 

investor confidence in the securities 

markets.371

In particular, by requiring trading 

centers to have policies and procedures 

reasonably designed to prevent the 

execution or display of short sale orders 

at a down-bid price, unless the order is 

marked ‘‘short exempt,’’ and by 

requiring them to regularly surveil to 

ascertain the effectiveness of the 

policies and procedures and to take 

prompt remedial action to remedy 

deficiencies in such policies and 

procedures, the proposed modified 

uptick rule might help to prevent short 

selling, including potentially abusive or 

manipulative short selling, from driving 

the market down and from being used 

as a tool to accelerate a declining 

market. Similarly, for the proposed 

uptick rule, by prohibiting the execution 

of short sale orders below the last sale 

price, unless an exception applies, the 

alternative proposed uptick rule might 

also help to prevent short selling, 

including potentially abusive or 

manipulative short selling, from being 

used as a tool to drive the market down 

and accelerate a declining market. 

At the same time, the proposed short 

sale price tests might help to preserve 

instant execution and liquidity, by 

allowing relatively unrestricted short 

selling in an advancing market. As 

discussed above, one of the benefits of 

legitimate short selling is that it may 

provide market liquidity by, for 

example, adding to the selling interest 

of stock available to purchasers, and, 

when sellers are covering their short 

sales, adding to the buying interest of 

stock available to sellers. 

In seeking to advance these goals, the 

proposed short sale price tests might 

help address the erosion of investor 

confidence in our markets. Bolstering 

investor confidence in the markets 

should help to encourage investors to be 

more willing to invest in the market, 

thus adding depth and liquidity to the 

markets. Moreover, as discussed above, 

prior research on the uptick rule 

indicates that price test restrictions 

might help improve market depth, 

especially at the offer, and could also 

dampen intraday volatility.372 For 

example, as discussed above, OEA 

found that price test restrictions 

resulted in an increase in the quote 

depths.373

2. Proposed Circuit Breaker Halt Rule 

The proposed circuit breaker halt 

rule, when triggered by a severe price 

decline in a particular security, would 

temporarily prohibit any person from 

selling short a particular NMS stock 

during a severe decline in the price of 

that security.374 By targeting only those 

securities that experience severe 

intraday declines, the proposed circuit 

breaker halt rule would be designed to 

help prevent short selling, including 

potentially abusive or manipulative 

short selling, from being used to drive 

the price of a security down, or to 

accelerate the decline in the price of 

those securities when needed most. By 

applying only to those individual 

securities that are facing a severe 

intraday decline in share price, the 

proposed circuit breaker halt rule might 

benefit the market as a narrowly tailored 

response to extraordinary 

circumstances.375 It also might benefit 

the market by allowing participants an 

opportunity to reevaluate circumstances 

and respond to volatility.376

We believe that the proposed circuit 

breaker halt rule also would be narrowly 

tailored to help restore investor 

confidence and stabilize the market for 

individual securities during times of 

substantial uncertainty.377 By halting 

short selling for the remainder of the 

trading day following a significant 

decline in a security’s price, we believe 

the proposed circuit breaker halt rule 

might provide sufficient time to reestablish equilibrium between buying 

and selling interests in the individual 

security in an orderly fashion. It might 

also help to ensure that market 

participants have a reasonable 

opportunity to become aware of, and 

respond to, a significant decline in a 

security’s price. By providing a pause in 

short selling resulting from a significant 

decline in the price of an individual 

equity security, we believe the proposed 

circuit breaker halt rule might provide 

a measure of stability to the markets. We 

believe that the proposed circuit breaker 

halt rule might help to restore investor 

confidence during times of substantial 

uncertainty. 

Moreover, unlike the proposed short 

sale price test restrictions, the proposed 

circuit breaker halt rule would halt all 

short selling for an individual security 

only for a specified period of time. 

Thus, the proposed circuit breaker halt 

rule would also be narrowly tailored to 

help address the issue of ‘‘bear raids’’ 

while limiting the potential negative 

market quality impact that may arise 

from the proposed short sale price test 

restrictions.378

3. Proposed Circuit Breaker Price Test 

Rules 

The alternative proposed circuit 

breaker price test rules, when triggered 

by a severe market decline in a 

particular security, would temporarily 

impose either the proposed circuit 

breaker modified uptick rule or the 

proposed circuit breaker uptick rule, as 

each rule is described above, for a 

particular NMS stock during a severe 

market decline in that security, and 

would remain in place for the remainder 

of the trading day.379


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selling at a down-bid price in a particular security, 

when triggered by a decline in the price of that 

security. Broker-dealer could mark certain short 

sale orders ‘‘short-exempt’’ under the conditions set 

forth above. A circuit breaker resulting in the 

proposed uptick rule would, once triggered by a 

decline in the price of a particular security, prohibit 

any person from selling short on a downtick. 

380See, e.g., letter from Credit Suisse (discussing 

‘‘magnet effect’’). 

381As 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 36 (referencing 

OEA Staff’s Summary Pilot Report at 8). 

382See proposed Rule 201(b)(1). 

We believe that the proposed circuit 

breaker price test rules would be 

narrowly tailored to help restore 

investor confidence and stabilize the 

market for individual securities. The 

proposed circuit breaker price test rules 

might also help prevent short selling, 

including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market by exhausting all 

remaining bids at one price level, 

causing successively lower prices to be 

established by long sellers. Further, we 

also believe that allowing short selling 

to continue with price test restrictions 

once a circuit breaker is triggered might 

also have less impact on legitimate short 

selling and normal market activity 

including price discovery and the 

provision of liquidity than a circuit 

breaker that halts short selling. To that 

end, we believe that the proposed 

circuit breaker price test rules might 

also alleviate some concerns over the 

possibility of artificial downward 

pressure that might arise from a 

‘‘magnet effect’’ prior to reaching the 

trigger threshold.380

4. Proposed Marking Requirements 

In addition, the ‘‘short exempt’’ 

marking requirements under Rule 

200(g)(2) would provide a record that a 

broker-dealer is availing itself of the 

provisions of paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraphs (c) or (d) of the proposed 

circuit breaker modified uptick rule), or 

that short sellers are availing themselves 

of the various exceptions to the 

application of the restrictions of the 

proposed uptick rule (or the proposed 

circuit breaker uptick rule), or that short 

sellers are availing themselves of the 

various exceptions to the application of 

the proposed circuit breaker halt rule. 

Thus, the records created pursuant to 

the ‘‘short exempt’’ marking 

requirements of proposed Rule 200(g) of 

the proposed short sale price test rules 

or the proposed circuit breaker rules 

would aid surveillance by SROs and the 

Commission for compliance with the 

provisions of those short sale price tests 

or circuit breaker rules. In addition, if 

the Commission were to adopt a policies 

and procedures approach, such as is 

proposed in conjunction with the 

proposed modified uptick rule (or 

proposed circuit breaker modified 

uptick rule), the proposed ‘‘short 

exempt’’ marking requirement would 

provide an indication to a trading center 

regarding whether it must execute or 

display a short sale order with regard to 

whether the short sale order is at a 

down-bid price. 

B. Costs 

1. Proposed Short Sale Price Test 

Restrictions 

We recognize that the proposed 

amendments, if adopted, would impose 

costs on market participants to 

implement and assure compliance with 

the proposed short sale price test 

requirements. These costs could, in 

sum, increase the costs of legitimate 

short selling. We believe, however, that 

such costs might be justified by the 

design of the proposed short sale price 

tests to restrict short selling at 

successively lower prices and, thereby, 

help prevent short selling, including 

potentially abusive or manipulative 

short selling, from being used as a tool 

for driving the market down or from 

being used to accelerate a declining 

market by exhausting all remaining bids 

at one price level, causing successively 

lower prices to be established by long 

sellers. Further, by seeking to advance 

these goals, the proposed price test 

restrictions might help restore investor 

confidence in the securities markets. 

We recognize that, to the extent that 

the proposed short sale price test 

restrictions could result in increased 

costs of short selling in NMS stocks, it 

might lessen some of the benefits of 

legitimate short selling and, thereby, 

could result in a reduction in short 

selling generally. Such a reduction 

might lead to a decrease in market 

efficiency and price discovery, less 

protection against upward stock price 

manipulations, a less efficient allocation 

of capital, an increase in trading costs, 

and a decrease in liquidity. Restricting 

short selling may also reduce ‘‘long’’ 

activity where it is part of the same 

strategy, thus adversely affecting 

liquidity. Thus, we believe there might 

be potential costs associated with the 

proposed short sale price tests in terms 

of potential impact of such price tests 

on quote depths, spread widths, and 

market liquidity. 

We also believe costs might be 

incurred in terms of execution and 

pricing inefficiencies. For example, 

allowing all short sales to be executed 

or displayed at or above the best bid (or 

last sale price) in an advancing market, 

and above the best bid (or last sale 

price) in a declining market might slow 

the speed of executions and impose 

additional costs on market participants, 

including buyers.381

In addition, we recognize that 

imposing short sale price restrictions 

when, currently, there is an absence of 

any short sale price test restrictions may 

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 would likely result in 

immediate implementation costs for 

trading centers and SROs and other 

market participants associated with 

reprogramming trading and surveillance 

systems to now account for price test 

restrictions based on either last sale or 

best bid information, as discussed in 

more detail below. We also believe the 

proposed amendments may impose 

costs to trading centers and SROs and 

other market participants related to 

systems changes to computer hardware 

and software, reprogramming costs, and 

surveillance and compliance costs, as 

well as staff time and technology 

resources, associated with monitoring 

compliance with the proposed short sale 

price test restrictions, as discussed 

below. 

Moreover, imposing price test 

restrictions when there are currently no 

short sale price restrictions in place also 

could mean that staff (compliance 

personnel, associated persons, etc.) 

might need to be trained or re-trained 

regarding rules related to price test 

restrictions. Also, trading centers and 

SROs and other market participants 

could be required to hire additional staff 

(and train or re-train them) to comply 

with the proposed rules related to short 

sale price test restrictions. As such, we 

believe the proposed amendments, if 

adopted, might impose training and 

compliance costs for trading centers, 

SROs, and other market participants. 

a. Proposed Modified Uptick Rule 

The proposed modified uptick rule, in 

particular, would require 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 at a down-bid price.382 In 

addition, a trading center would be 

required to have policies and 

procedures reasonably designed to 


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383See proposed Rule 201(b)(1)(ii). See also 

Sections III.A.2. and V, above, discussing short sale 

orders marked ‘‘short exempt.’’ 

384This figure was calculated by adding 

$18,733,412 and $7,660,000 (for outsourced legal 

work). The $18,733,412 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 × 11 SROs = $735,680 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 × 372 broker-dealers = 

$17,997,732 total cost for broker-dealers; $735,680 

+ $17,997,732 = $18,733,412. The $7,660,000 figure 

for outsourced legal work was calculated as follows: 

(50 legal hours × $400 × 11 SROs) + (50 legal hours 

× $400 × 372 broker-dealers) = $7,660,000. 

Based on industry sources, OEA estimates 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 by Commission staff 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, OEA estimates that the 

average hourly rate for an assistant compliance 

director, a senior computer programmer, 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 by Commission 

staff to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, 

employee benefits and overhead. 

385This figure was calculated as follows: (2 legal 

hours × 12 months × $305) × (11 + 372) + (3 

compliance hours × 12 months × $313) × (11 + 372) 

= $7,119,204. 

386We preliminarily estimate that each trading 

center would incur an average annual ongoing 

compliance cost of $102,768 for a total annual cost 

of $39,360,144 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 × 383 trading centers = $39,360,144. 

As discussed above, we base our burden hour 

estimates on the estimates used for Regulation NMS 

because it requires similar ongoing 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 by Commission 

staff 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, OEA 

estimates that the average hourly rate for an 

assistant compliance director, a senior computer 

programmer, a senior operations manager, in the 

securities industry is approximately $313, $292, 

$273 per hour, respectively. These figures are from 

SIFMA’s Management & Professional Earnings in 

the Securities Industry 2008, modified by 

Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. 

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 down-bid 

price.383 A trading center’s policies and 

procedures would 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 the proposed modified 

uptick rule. In addition, trading centers 

also would be required to surveil the 

effectiveness of their written policies 

and procedures and take prompt action 

to remedy any deficiencies in their 

policies and procedures. 

As detailed in the PRA section, VIII, 

above, although the exact nature and 

extent of the required policies and 

procedures that a trading center would 

be required to establish likely would 

vary depending upon the nature of the 

trading center (e.g., SRO vs. non-SRO, 

full service broker-dealer vs. market 

maker), we preliminarily estimate a total 

one-time initial cost of $26,393,412 384

for all trading centers subject to the 

proposed modified uptick rule to 

establish the written policies and 

procedures reasonably designed to help 

prevent the execution or display of short 

sale orders not priced in accordance 

with the provisions of proposed Rule 

201(b)(1). 

Once a trading center has established 

written policies and procedures 

reasonably designed to help prevent the 

execution or display of a short sale 

order at a down-bid price, we 

preliminarily estimate a total annual 

ongoing cost of $7,119,204 385 for all 

trading centers subject to the proposed 

modified uptick rule to ensure that their 

written policies and procedures are upto-date and remain in compliance with 

the proposed amendments to Rule 201. 

In addition, with regard to ongoing 

monitoring for and enforcement of 

trading in compliance with the 

proposed modified uptick rule, as 

detailed in the PRA section, VIII, above, 

we preliminary believe that, once the 

tools necessary to carry out on-going 

monitoring have been put in place, a 

trading center would be able to 

incorporate ongoing 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 would not be cost-free, and 

that trading centers would incur some 

additional annual costs associated with 

ongoing compliance, including 

compliance costs of reviewing 

transactions. We preliminarily estimate 

that each trading center would incur an 

average annual ongoing compliance cost 

of $102,768, for a total annual cost of 

$39,360,144 for all trading centers.386

As detailed in the PRA section, VIII, 

above, we realize that the exact nature 

and extent of the policies and 

procedures that a trading center would 

be required to establish would likely 

vary depending upon the type, size, and 

nature of the trading center. Thus, while 

we have based our estimates on the 

burden estimates provided in 

connection with the adoption of 

Regulation NMS, we note 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 the proposed modified 

uptick rule. We realize, however, that 

these estimates may be on the low end 

for some trading centers. Thus, we seek 

specific comment as to whether these 

estimates are appropriate or whether 

such estimates should be increased or 

reduced and for which entities. If they 

should be increased or decreased, please 

address by how much, in order to be 

able to comply with the proposed 

modified uptick rule’s required policies 

and procedures, if adopted. 

As detailed in the PRA section, VIII, 

above, although the exact nature and 

extent of the required policies and 

procedures that a broker-dealer would 

be required to establish under the 

‘‘broker-dealer’’ provision in proposed 

Rule 201(c)(1) of the proposed modified 

uptick rule, as well as under the 

‘‘riskless principal’’ provision in 

proposed Rule 201(d)(6) of the proposed 

modified uptick rule and the ‘‘riskless 

principal’’ exception in proposed Rule 

201(c)(9) of the proposed uptick rule, 

likely would vary depending upon the 

nature of the broker-dealer (e.g., full 

service broker-dealer vs. market maker), 

we preliminarily estimate a total onetime initial cost of $380,266,741 for all 

broker-dealers relying on the brokerdealer provision in proposed Rule 

201(c)(1) of the proposed modified 

uptick rule; the ‘‘riskless principal’’ 

provisions in proposed Rules 201(d)(6) 

of the proposed modified uptick rule; or 

201(c)(9) of the proposed uptick rule, to 

establish the 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’’ 

provisions, to assure that, at a 

minimum, the customer order was 

received prior to the offsetting 

transaction and to assure the brokerdealer has supervisory systems in place 


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387This figure was calculated by adding 

$269,046,741 and $111,220,000 (for outsourced 

legal work). The $269,046,741 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 × 5,561 broker-dealers = 

$ 269,046,741 total cost for broker-dealers. The 

$111,220,000 figure was calculated as follows: (50 

legal hours × $400 × 5,561) = $111,220,000. 

Based on industry sources, OEA estimates 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 by 

Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. In 

addition, OEA estimates that the average hourly rate 

for an assistant compliance director, a senior 

computer programmer, a senior operations manager, 

in the securities industry is approximately $313, 

$292, $273 per hour, respectively. These figures are 

from SIFMA’s Management & Professional Earnings 

in the Securities Industry 2008, modified by 

Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. 

388This figure was calculated as follows: (2 legal 

hours × 12 months × $305) × 5,561 + (3 compliance 

hours × 12 months × $313) × 5,561 = $103,367,868. 

389We estimate that each broker-dealer would 

incur an average annual ongoing compliance cost of 

$102,768 for a total annual cost of $571,492,848 for 

all broker-dealers. This figure was calculated as 

follows: (16 compliance hours × $313) + (8 

information technology hours × $292) + (4 legal 

hours × $305) × 12 months = $102,768 per brokerdealer × 5,561 broker-dealers = $571,492,848. As 

discussed above, we base our estimate of burden 

hours on the estimates used for Regulation NMS 

because it requires similar ongoing 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 by Commission 

staff 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, OEA 

estimates that the average hourly rate for an 

assistant compliance director, a senior computer 

programmer, a senior operations manager, in the 

securities industry is approximately $313, $292, 

$273 per hour, respectively. These figures are from 

SIFMA’s Management & Professional Earnings in 

the Securities Industry 2008, modified by 

Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits and overhead. 

390For instance, to implement the proposed 

modified uptick rule would require that each ATS 

reprogram their trading engine, as would any 

broker-dealer who executes trades as an OTC 

market maker. Moreover, one commenter indicated 

that programming costs across sell-side firms could 

range from $200,000 to $2 million. See, e.g., 2007 

Price Test Adopting Release, 72 FR at 36350 n. 113 

(citing comment letter from SIFMA stating that cost 

estimates for firms to program for the changes that 

were necessary to meet the policies and procedures 

requirements of Regulation NMS varied, from as 

low as approximately $200,000 for some firms to as 

high as $2 million for others. See also supra note 

46 (citing to 2007 SIFMA letter) and text 

accompanying note 208. Additionally, because they 

might require trading centers and other market 

participants a significant amount of time in which 

to reprogram and test their systems to comply with 

the proposed amendments, these systems and 

programming costs might be higher without a 

sufficient implementation period. For example, this 

same commenter indicated that it would take six to 

nine months to implement a new version of the bid 

test. See id. 

See letter from Credit Suisse (discussing need for 

a longer implementation period, particularly for 

smaller broker-dealers, in terms of having to build 

systems to be able to track upticks or upbids in their 

smart order routers in accordance with any new 

rules and then preserve this history so that 

regulators can audit it). According to this 

commenter, ‘‘[b]uilding such systems would likely 

be as expensive and challenging as Reg NMS 

implementation was from 2005–2007, and would 

likely take more than a year to implement * * * It 

is also likely that the compliance costs would 

disproportionately burden smaller BDs, who would 

likely be forced to route their order flow through 

a handful of larger brokers, impeding competition 

and adding to systemic risk as flow is consolidated 

among fewer players’’. Id. 

We also recognize that the proposed 

amendments, if adopted, would require the 

commitment of resources associated with 

compliance oversight, market surveillance, and 

enforcement, with attendant opportunity costs. 

391See Regulation NMS Adopting Release, 70 FR 

37496. See also 17 CFR 242.611. 

to produce records that enable the 

broker-dealer to accurately and readily 

reconstruct, in a time-sequenced 

manner, all orders on which a brokerdealer relies pursuant to these 

provisions of the proposed price 

tests.387

Once a broker-dealer has established 

written policies and procedures that 

would be required so that it could rely 

on the proposed modified uptick rule’s 

‘‘broker-dealer provision’’ in proposed 

Rule 201(c)(1); the ‘‘riskless principal’’ 

exception in proposed Rule 201(c)(9) of 

the proposed uptick rule; or the 

‘‘riskless principal’’ provision in 

proposed Rule 201(d)(6) of the proposed 

uptick rule, we estimate a total annual 

on-going cost of $103,367,868 for all 

broker-dealers relying on any of these 

three provisions to ensure that its 

written policies and procedures are upto-date and remain in compliance with 

the proposed amendments to Rule 

201.388 In addition, with regard to 

ongoing monitoring for and enforcement 

of trading in compliance with the 

proposed modified uptick rule’s 

‘‘broker-dealer’’ provision in proposed 

Rule 201(c)(1), as detailed in the PRA 

section, VIII, above, we preliminary 

believe that, once the tools necessary to 

carry out on-going monitoring would 

have been put in place, a broker-dealer 

would be able to incorporate ongoing 

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 would not be costfree, and that broker-dealers would 

incur some additional annual costs 

associated with ongoing compliance, 

including compliance costs of reviewing 

transactions. We estimate that each 

broker-dealer would incur an average 

annual ongoing compliance cost of 

$102,768, for a total annual cost of 

$571,492,848 for all broker-dealers.389

As discussed above in connection 

with the PRA, we realize that the exact 

nature and extent of the policies and 

procedures that a broker-dealer would 

be required to establish likely would 

vary depending upon the type, size, and 

nature of the broker-dealer. Thus, while 

we have based our estimates on the 

burden estimates provided in 

connection with the adoption of 

Regulation NMS, we note that these 

estimates may be on the high end 

because broker-dealers 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 proposed modified uptick rule’s 

‘‘broker-dealer’’ provision’s policies and 

procedures requirement in proposed 

Rule 201(c)(1). We realize, however, that 

these estimates may be on the low end 

for some broker-dealers that may have 

less familiarity with a policies and 

procedures approach. Thus, we seek 

specific comment as to whether these 

estimates are appropriate or whether 

such estimates should be increased or 

reduced. If they should be increased or 

decreased, please address by how much, 

in order to be able to comply with the 

proposed modified uptick rule’s 

required policies and procedures, if 

adopted. 

In addition, we anticipate that each 

trading center would incur initial upfront costs associated with taking action 

necessary to implement the written 

policies and procedures it has 

developed, which would include 

surveillance and reprogramming costs 

for enforcing, monitoring, and updating 

their trading, execution management, 

and surveillance systems under the 

proposed modified uptick rule, systems 

changes to computer hardware and 

software, as well as staff time and 

technology resources.390 However, we 

note that the policies and procedures 

that would be required to be 

implemented are similar to those that 

are required under Regulation NMS.391

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 the policies and procedures 


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392See id. 

393We also believe some trading centers may 

have retained personnel familiar with the former 

SRO bid tests, which may make the proposed 

modified uptick rule less burdensome to 

implement. See, e.g., supra note 125 and 

accompanying text. 

394For example, if a trading center received a 

short sale order priced at $47.00 when the current 

national best bid in the security is $47.00, but the 

immediately preceding national best bid was $47.01 

(i.e., the current bid is below the previous bid), 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. 

395See supra Section II discussing the history of 

short sale price test regulation in the United States 

and the changes in market conditions and resulting 

erosion of investor confidence. 

396See, e.g., 2007 Price Test Adopting Release, 72 

FR at 36350 n. 113 (citing to comment letter from 

SIFMA stating that cost estimates for firms to 

program for the changes that were necessary to meet 

the policies and procedures requirements of 

Regulation NMS varied, from as low as 

approximately $200,000 for some firms to as high 

as $2 million for others. See SIFMA Letter. 

Additionally, because they might require trading 

centers, SROs, and other market participants a 

significant amount of time in which to reprogram 

and test their systems to comply with a price test 

restriction, these systems and programming costs 

might be higher without a sufficient 

implementation period. For example, one 

commenter indicated that it would take six to nine 

months to implement a new version of the price 

test. See id. (discussing SIFMA comment letter) and 

see also supra note 208. 

397Likewise, we believe some market participants 

may have retained personnel familiar with former 

SRO bid tests. See, e.g., supra note 125 and 

accompanying text. 

for the proposed modified uptick 

rule.392 Thus, we believe trading centers 

may 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. 

We believe this familiarity may 

reduce the implementation costs of the 

proposed modified uptick rule on 

trading centers and may make the 

proposed modified uptick rule 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 

the proposed modified uptick rule.393

Thus, while we believe there would 

be costs associated with systems 

modifications and training staff that 

would be affected by these systems 

modifications, because most trading 

centers would already have in place 

systems, written policies and 

procedures in order to comply with 

Regulation NMS’s order protection rule, 

we believe trading centers would 

already be familiar with establishing, 

maintaining, and enforcing tradingrelated policies and procedures, 

including programming their trading 

and surveillance systems in accordance 

with such policies and procedures. 

Moreover, the proposed modified 

uptick rule’s written policies and 

procedures requirement are designed to 

provide trading centers with significant 

flexibility in determining how to 

comply with the requirements of the 

proposed modified uptick rule. For 

example, the proposed modified uptick 

rule 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 down-bid 

price, re-price the order at the lowest 

permissible price and hold it for later 

execution at its new price or better.394

As quoted prices change, the proposed 

modified uptick rule would allow a 

trading center to 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). Because 

a trading center could re-price and 

display a previously impermissibly 

priced short sale order, the proposed 

modified uptick rule may allow for the 

more efficient functioning of the 

markets because trading centers would 

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. 

Moreover, while latencies in 

obtaining data regarding the national 

best bid from consolidated market data 

feeds, as discussed in detail above, 

could impact implementation costs 

associated with the proposed modified 

uptick rule, a trading center could have 

policies and procedures that could 

provide a snapshot of the market to 

identify the current national best bid at 

the time of execution or display of a 

short sale order. Such snapshots may 

cause a reduction in costs for trading 

centers by helping to verify whether a 

short sale order was executed or 

displayed at a permissible price. 

b. Proposed Uptick Rule 

The alternative proposed uptick rule 

would be based on the last sale price, 

rather than the national best bid, as the 

reference point for short sale orders, 

similar to former Rule 10a–1. However, 

the proposed uptick rule would not 

include an explicit policies and 

procedures requirement. Instead, the 

proposed uptick rule would prohibit 

any person from effecting a short sale 

below the last sale price, unless an 

exception applies. Because the proposed 

uptick rule would be a modernized 

version of the former Rule 10a–1, it 

would also provide the public with an 

opportunity to comment on the utility of 

such a price test, especially in light of 

recent changes in market conditions.395

We recognize that due to the 

extensive systems changes that have 

occurred in the last couple of years in 

response to Regulation NMS, 

programming systems for the proposed 

uptick rule could be burdensome.396 In 

particular, because the proposed uptick 

rule does not take a policies and 

procedures approach, market 

participants would not be able to rely to 

the same extent on the policies and 

procedures they already have in place 

under Regulation NMS. Instead, the 

proposed uptick rule would prohibit 

any person from effecting a short sale in 

contravention of the rule’s limitations. 

However, because the proposed uptick 

rule would apply to any person effecting 

a short sale, rather than just to trading 

centers, the proposed uptick rule might 

impose costs on more market 

participants than the proposed modified 

uptick rule. However, the proposed 

uptick rule, which is similar to the price 

test of former Rule 10a–1, would be 

familiar to many market participants 

because it would be based on a rule 

which was in existence for almost 70 

years, and was only recently eliminated. 

We believe this familiarity may help to 

reduce the implementation costs of the 

proposed uptick rule on market 

participants and, therefore, should 

decrease the costs of implementation of 

the proposed uptick. For example, we 

believe some market participants may 

have retained personnel familiar with 

former Rule 10a–1,397 and may also 

have in place some of the systems and 

surveillance mechanisms used in 

connection with former Rule 10a–1 that 

could be used to comply with the 

proposed uptick rule. We believe, 

however, that most market participants 

would incur costs associated with 

having to implement or modify their 

trading systems and surveillance 


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398See, e.g., supra note 346. 

399As discussed above, unlike the former Rule 

10a–1, the proposed short sale price test 

restrictions, if adopted, would apply a uniform rule 

to trades in the same securities that occur in 

multiple, dispersed, and diverse markets. Under the 

proposed short sale price test restrictions, all 

covered securities, wherever traded, would be 

subject to the same short sale price test. 

400See supra note 27 (discussing the different 

tests under former Rule 10a–1). 

401See proposed Rule 201(e) of the proposed 

modified uptick rule, and proposed Rule 201(d) of 

the proposed uptick rule. 

402See supra note 390 and accompanying text 

(discussing letters from SIFMA and Credit Suisse, 

respectively, regarding cost estimates and the need 

for a longer implementation period, particularly for 

smaller broker-dealers). 

mechanisms in order to comply with the 

proposed uptick rule, including a period 

of time in which to make such 

changes.398 However, we believe 

familiarity with a price test that would 

be based on a modernized version of 

former Rule 10a–1 might more readily 

help address investor confidence in our 

markets. 

c. Additional Mitigating Price Test Costs 

Features 

While we recognize that either 

proposed price test alternatives would 

create costs for trading centers that 

execute or display short sale orders in 

covered securities, as well as other 

market participants that engage in short 

selling, we believe there are several 

additional mitigating costs features that 

might help to reduce costs associated 

with a proposed price test if adopted. 

First, we believe that the fact that 

either proposed price test alternative, if 

adopted, would apply a uniform price 

test 399 might help to reduce compliance 

costs for market participants. For 

example, by applying a uniform price 

test, the proposed short sale price test 

restrictions would be designed so as to 

not result in the type of disparate short 

sale regulation that existed under former 

Rule 10a–1, in which different price 

tests were applied in different markets, 

resulting in confusion, compliance 

difficulties, regulatory arbitrage, and an 

un-level playing field among market 

participants.400 Moreover, subsection (e) 

of proposed Rule 201 of the proposed 

modified uptick rule and subsection (d) 

of proposed Rule 201 of the proposed 

uptick rule, if adopted, would include a 

requirement that no SRO may have any 

rule that is not in conformity with, or 

conflicts with, the proposed short sale 

price test requirements.401 Thus, we 

believe a uniform rule might reduce 

compliance costs, and also could reduce 

regulatory arbitrage. Also, there might 

be a reduction in costs associated with 

systems and surveillance mechanisms 

that would have to be programmed to 

consider only a single test based on the 

national best bid (or on the last sale 

price if the proposed uptick rule is 

adopted) instead of different tests for 

different markets. 

Second, the proposed three month 

implementation period would be 

designed to provide trading centers and 

market participants with a sufficient 

amount of time in which to modify their 

systems and procedures in order to 

comply with the requirements of a 

proposed short sale price test if adopted 

and, thus, might help reduce some of 

the costs and help to alleviate some of 

the potential disruptions that might be 

associated with implementing either 

proposed price test. We recognize, 

however, that a longer implementation 

period may be more manageable or 

preferable, particularly to smaller 

broker-dealers that might be 

disproportionately burdened by any 

implementation and compliance costs 

associated with the proposed short sale 

price test restrictions, as well as 

competitively disadvantaged in terms of 

reduced order flow as a result.402 Thus, 

we seek comment as to what length of 

implementation period would be 

necessary or appropriate, and why, such 

that trading centers would be able to 

meet the proposed short sale price test 

restrictions, if adopted. 

Third, as described below, we believe 

the ‘‘broker-dealer’’ provision in 

proposed Rule 201(c)(1) of the proposed 

modified uptick rule and the provisions 

contained in paragraph (d) of the 

proposed modified uptick rule, as well 

as the exceptions contained in 

paragraph (c) of the proposed uptick 

rule might also help to minimize any 

potential price distortions or costs 

associated with the proposed short sale 

price restrictions. These provisions also 

would be designed to help promote the 

workability of the proposed price tests, 

while at the same time furthering the 

Commission’s stated goals of short sale 

price test regulation. 

For example, as discussed above, 

proposed Rule 201(c)(1) of the proposed 

modified uptick rule would provide that 

a broker-dealer may mark a short sale 

order in a covered security ‘‘short 

exempt’’ and send it to a trading center 

if the broker-dealer has identified the 

order as not being at a down-bid price 

at the time of submission of the order to 

the trading center. This provision would 

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. In addition, we note that 

this provision would not undermine the 

Commission’s goals for short sale 

regulation because any broker-dealer 

marking an order ‘‘short exempt’’ in 

accordance with this provision would 

have to ensure that its short sale order 

was not on a down-bid price at the time 

of submission of the order to a trading 

center. We believe that this provision 

also might help to preserve instant 

execution and liquidity by allowing 

relatively unrestricted short selling in 

an advancing market. 

Proposed Rule 201(d)(1) of the 

proposed modified uptick rule would 

provide an exception if the seller owns 

a security and would provide that a 

short sale order of a covered security 

may be marked ‘‘short exempt,’’ thereby 

allowing it to be displayed or executed 

at a down-bid price, if the broker-dealer 

has a reasonable basis to believe that the 

seller owned the security being sold and 

that the seller intended to deliver the 

security as soon as all the restrictions on 

delivery have been removed. Similarly, 

proposed Rule 201(c)(1) of the proposed 

uptick rule would provide an exception 

for sales of owned securities. As a 

result, these provisions would allow for 

sales of securities that although owned, 

were subject to the provisions of 

Regulation SHO governing short sales 

due solely to the seller being unable to 

deliver the security to its broker-dealer 

prior to settlement due to circumstances 

outside the seller’s control. 

Proposed Rule 201(d)(2) of the 

proposed modified uptick rule would 

allow a broker-dealer to mark a short 

sale order ‘‘short exempt’’ if the brokerdealer has a reasonable basis to believe 

that the short sale order is by a market 

maker to off-set a customer odd-lot 

order or to liquidate an odd-lot position 

by a single round lot sell order that 

changed such broker-dealer’s position 

by no more than a unit of trading and, 

thereby, may be permitted to be 

executed or displayed at a down-bid 

price. Similarly, in proposed Rule 

201(c)(3) of the proposed uptick rule we 

would provide an exception for sales 

related to odd-lot orders. These 

provisions would allow market makers 

to facilitate customer orders that are not 

of a size that could facilitate a 

downward price movement in the 

market. 

Proposed Rule 201(d)(3) of the 

proposed modified uptick would permit 

qualifying short sale orders associated 

with certain bona fide domestic 

arbitrage transactions to be marked 

‘‘short exempt,’’ and thereby permit 

them to be executed or displayed at a 

down-bid price. This provision would 

allow broker-dealers to engage in 

transactions that tend to reduce pricing 

disparities between securities. 


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403See supra note 181 (citing to VWAP relief 

letters under former Rule 10a–1). 

404See proposed Rule 201(d)(2). 

405 Id. 

406See 17 CFR 242.602. 

407See Section IX.B. (discussing costs of the 

proposed modified uptick rule and proposed uptick 

rule). 

Moreover, to facilitate arbitrage 

transactions in which a short position 

was taken in a security on the U.S. 

market, and which was to be 

immediately covered on a foreign 

market, Rule 201(d)(4) of the proposed 

modified uptick rule would permit short 

sale orders associated with certain 

international arbitrage transactions to be 

marked ‘‘short exempt,’’ and thereby 

permit such orders to be executed or 

displayed at a down-bid price. 

Similarly, proposed Rules 201(c)(4) and 

201(c)(5) of the proposed uptick rule 

would provide exceptions related to 

domestic and international arbitrage 

transactions. 

In addition, proposed Rule 201(d)(5) 

of the proposed modified uptick rule is 

intended to facilitate distributions of 

securities by providing an exception for 

any sales of covered securities by 

underwriters or members of a syndicate 

or group participating in the 

distribution of a security in connection 

with an over-allotment of securities, and 

any lay-off sales by such persons in 

connection with a distribution of 

securities through a rights or standby 

underwriting commitment. By 

permitting short sales in connection 

with an over-allotment or lay-off sales at 

or below the national best bid to be 

marked ‘‘short exempt,’’ and thereby 

permit them to be executed or displayed 

at a down-bid price, this provision 

would enable an underwriter to reduce 

its risk by pricing an offering at or below 

the current national best bid or last sale 

price, as applicable. Similarly, proposed 

Rule 201(c)(6) of the proposed uptick 

rule would provide an exception for 

sales in connection with over-allotments 

and lay-off sales. 

As discussed above, proposed Rule 

201(d)(6) of the proposed modified 

uptick rule would allow a broker-dealer 

to mark short sale orders of a covered 

security ‘‘short exempt,’’ and thereby 

allow for their execution or display at a 

down-bid price where a broker-dealer 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 met. 

Similarly, proposed Rule 201(c)(9) of 

the proposed uptick rule would provide 

an exception for certain transactions on 

a riskless principal basis. These 

provisions would provide brokerdealers with additional flexibility to 

facilitate customer orders. 

Proposed Rule 201(d)(7) of the 

proposed modified uptick rule would 

permit certain short sale orders 

executed on a VWAP basis to be marked 

‘‘short exempt,’’ and, as a result, to be 

executed or displayed at a down-bid 

price.403 Similarly, proposed Rule 

201(c)(7) of the proposed uptick rule 

would provide an exception for certain 

transactions on a VWAP basis. These 

provisions might help provide an 

additional source of liquidity for 

investors’ VWAP orders and might help 

enable investors to achieve their 

objective of obtaining an execution at 

the VWAP. 

In addition, the proposed uptick rule 

would include cost-mitigating 

provisions that would be unique to the 

proposed uptick rule, designed to allow 

its proper functioning in today’s 

markets, while at the same time being 

designed to further the purposes of our 

proposing short sale price test 

restrictions at this time. For example, 

proposed Rule 201(c)(2) of the proposed 

uptick rule would provide an exception 

for errors in marking a short sale order, 

such as when a broker-dealer effected a 

sale marked ‘‘long’’ by another brokerdealer, but the sale was mis-marked 

such that it should have been marked as 

a ‘‘short’’ sale.404 This exception might 

help promote liquidity by avoiding 

implicating the broker-dealer effecting 

the sale where the broker-dealer’s 

participation in the violation was 

neither knowing nor reckless.405

Proposed Rule 201(c)(8) of the 

proposed uptick rule would provide an 

exception from the proposed uptick rule 

for any sale of a covered security in an 

electronic trading system that matches 

buying and selling interest at various 

times throughout the day as long as 

such sales meet certain criteria. This 

exception might help promote market 

efficiency and liquidity by 

accommodating the increased use of 

automated trading systems and 

alternative strategies used in today’s 

marketplace. It might also help provide 

an additional source of liquidity for 

investors’ passively priced orders and 

better enable investors to engage in 

alternative trading strategies to achieve 

their investment objectives. 

Proposed Rule 201(c)(10) and (c)(11) 

of the proposed uptick rule might also 

help promote market efficiency and 

liquidity by providing exceptions to the 

requirements of the proposed uptick 

rule to help address conflicts between 

the proposed uptick rule and the Quote 

Rule under Rule 602 of Regulation 

NMS.406

Proposed Rule 201(c)(12) of the 

proposed uptick rule would provide an 

exception from the proposed uptick rule 

for any sale of a security at the offer by 

a registered market maker or specialist 

publishing two-sided quotes to sell 

short to facilitate customer market and 

marketable limit orders to buy 

regardless of the last sale price. This 

exception is intended to help provide 

relief in a decimals environment to 

registered market makers and specialists 

so that they could provide liquidity in 

response to customer buy orders. 

2. Proposed Circuit Breaker Halt Rule 

We recognize that the proposed 

circuit breaker halt rule, if adopted, 

would impose costs on market 

participants to implement and assure 

compliance with the proposed circuit 

breaker halt rule’s requirements. These 

costs could, in sum, increase the costs 

of legitimate short selling. For example, 

the proposed circuit breaker halt rule, 

when triggered, would impose a short 

selling halt that might restrict otherwise 

legitimate short selling activity during 

periods of extreme volatility. As such, 

we recognize that the proposed circuit 

breaker halt rule might result in a 

reduction of the benefits of legitimate 

short selling and, thereby, could result 

in a subsequent reduction in short 

selling generally. Such a reduction 

might lead to a decrease in market 

efficiency and price discovery, less 

protection against upward stock price 

manipulations, a less efficient allocation 

of capital, an increase in trading costs, 

and a decrease in liquidity.407 Thus, we 

believe there might be potential costs 

associated with the proposed circuit 

breaker halt rule in terms of potential 

impact of such a halt on quote depths, 

spread widths, and market liquidity. 

In addition, we recognize that 

imposing a circuit breaker halt rule 

when, currently, there is an absence of 

a short selling halt may 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 would 

likely result in immediate 

implementation costs for market 

participants associated with 

reprogramming trading and surveillance 

systems to now account for the 

requirements of the proposed circuit 

breaker halt, if adopted. We also believe 

the proposed circuit breaker halt rule 

may impose costs to market participants 

related to systems changes to computer 

hardware and software, reprogramming 

costs, and surveillance and compliance 

costs, as well as staff time and 

technology resources, associated with 


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408See id. 409See, e.g., 2007 Price Test Adopting Release, 72 

FR at 36350 n. 113 (citing comment letter from 

SIFMA stating that cost estimates for firms to 

program for the changes that were necessary to meet 

the requirements of Regulation NMS varied, from as 

low as approximately $200,000 for some firms to as 

high as $2 million for others. See also letter from 

Credit Suisse. 

410See Regulation NMS Adopting Release, 70 FR 

37496. See also 17 CFR 242.611. 

411See letter from Credit Suisse (stating that 

‘‘[i]mplementation could be fast and costs would be 

modest’’ and that ‘‘listing exchanges already 

disseminate real-time status conditions as part of 

existing price feeds. By generalizing the existing 

‘‘Regulatory Halt’’ flag to include a ‘‘Do Not Short’’ 

condition, both away trading venues and brokerdealers could react to the circuit breaker condition 

in real-time with very little coding and testing’’). 

412See Securities 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’’). See also 

NYSE Rule 80B. The circuit breaker procedures call 

for cross-market trading halts when the DJIA 

declines by 10 percent, 20 percent, and 30 percent 

from the previous day’s closing value. See e.g., 

BATS Exchange Rule 11.18. 

413See, e.g., FINRA Rule 6120. 

414For example, in addition to disseminating 

news of trading halts through the CMS, Nasdaq 

publishes a daily list of securities subject to trading 

halts indicating the name of the issuer, the time the 

halt was initiated, and where applicable, the times 

at which quoting and trading may resume. 

415See letter to Mary Schapiro, Chairman, from 

Direct Edge, dated March 30, 2009. 

416See letter from Credit Suisse (discussing 

potential costs associated with short sale price test 

restrictions and circuit breaker rules). 

417See Section III, above (discussing exceptions 

to proposed circuit breaker halt rule). See also 

Securities Exchange Act Release No. 58592 (Sept. 

18, 2008), 73 FR 55169–02 (Sept. 24, 2008) 

(regarding exceptions to the Short Sale Ban). 

monitoring compliance with the 

proposed circuit breaker halt rule.408

Moreover, imposing a circuit breaker 

halt rule when there are currently no 

short sale halts in place also could mean 

that staff (compliance personnel, 

associated persons, etc.) might need to 

be trained or re-trained regarding rules 

related to the circuit breaker 

requirements. Also, market participants 

could be required to hire additional staff 

(and train or re-train them) to comply 

with the proposed circuit breaker halt 

rule. As such, we believe the proposed 

circuit breaker halt rule, if adopted, 

might impose training and compliance 

costs for market participants. 

While we recognize that market 

participants would incur initial up-front 

costs associated with having to update 

their systems, including systems 

changes to computer hardware and 

software, as well as staff time and 

technology resources to update their 

systems and surveillance mechanisms 

in order to ensure compliance with the 

requirements of the proposed circuit 

breaker halt rule,409 we believe that 

many of the systems changes that would 

be required to be implemented are 

similar to what was already required for 

implementation under Regulation 

NMS.410 Thus, we believe market 

participants may already have 

developed or programmed their trading 

and surveillance systems in accordance 

with the requirements of Regulation 

NMS which may help to reduce any 

implementation costs associated with 

the proposed circuit breaker halt rule 

and, therefore, may make the proposed 

circuit breaker halt rule less 

burdensome to implement. 

Thus, while we believe there would 

be costs associated with systems 

modifications and training staff that 

would be affected by these systems 

modifications, because most market 

participants would already have in 

place systems in order to comply with 

Regulation NMS, market participants 

may already have in place most of the 

infrastructure and processes necessary 

to comply with the proposed circuit 

breaker halt rule. Moreover, because the 

proposed circuit breaker halt rule might 

require less substantial modifications to 

existing systems, the implementation 

and compliance costs may not be 

significant.411 As discussed above, 

currently, all stock exchanges and 

FINRA have rules or policies to 

implement coordinated circuit breaker 

halts.412 Moreover, SROs have rules or 

policies in place to coordinate 

individual security trading halts 

corresponding to significant news 

events.413 Information on the securities 

subject to SRO regulatory trading halts 

is disseminated to market participants 

through the CMS and other electronic 

media.414 We, however, seek comment 

as to whether the time and 

implementation costs associated with 

the proposed circuit breaker halt rule 

may be lower than other alternatives 

proposed. 

We, however, recognize that there 

may be concerns about a potential 

‘‘magnet effect’’ that could arise as an 

unintended consequence of the 

proposed circuit breaker halt rule that 

could halt short selling and result in 

short sellers driving down the price of 

an equity security in a rush to execute 

short sales before the circuit breaker 

would be triggered. As discussed above, 

one commenter noted that a short sale 

circuit breaker could exacerbate 

downward pressure on stocks as their 

value reached the threshold level.415

Another commenter, however, in 

discussing the issue of a ‘‘magnet effect’’ 

cited empirical studies that question 

whether a circuit breaker would result 

in artificial pressure on the price of 

individual securities.416

In addition, we note that the proposed 

circuit breaker halt rule would include 

exceptions substantially identical to 

exceptions in the Short Sale Ban that 

would be designed to allow its proper 

functioning in today’s markets and 

allow broker-dealer to provide liquidity 

to the market, while at the same time 

being designed to further the purposes 

of our proposing the alternative circuit 

breaker halt rule at this time.417

We believe the proposed circuit 

breaker halt rule should include 

exceptions that mirror certain of the 

exceptions in the Short Sale Ban 

because the proposed rule shares the 

same goal of prohibiting short selling 

that might exacerbate a price decline 

during a period of sudden and excessive 

price declines. For example, the 

proposed circuit breaker halt would 

include a bona fide market maker 

exception, which would allow market 

makers to effect a short sale as part of 

bona fide market making and hedging 

activity related directly to bona fide 

market making in derivatives on the 

publicly traded securities of a covered 

security. This proposed exception 

would permit market makers to 

continue to provide liquidity to the 

markets, facilitate orders, and otherwise 

comply with their obligations as market 

makers. This proposed exception would 

also apply to options market makers that 

sell short equity securities to hedge 

options positions. 

The proposed exception for short 

sales that occur as a result of automatic 

exercise or assignment of an equity 

option held before a circuit breaker on 

a particular security is triggered and a 

short selling halt is imposed in that 

security due to expiration of the option 

would allow short sales that occur as a 

result of the expiration of options 

contracts held before a circuit breaker is 

triggered in a particular security. This 

would allow persons that purchased or 

sold options prior to the effectiveness of 

a circuit breaker halt entered into such 

transactions with the expectation that 

they would be able to fulfill their 

contractual obligations and receive the 

benefits of their bargain in return. 

Providing this proposed exception to 

the circuit breaker halt rule would not 

raise the concerns that a circuit breaker 

rule is intended to address. 

To allow for creation of long call 

options, the proposed exception would 

permit short sales that occur as a result 

of assignment to call writers upon 

exercise. When options are exercised, 

call writers may be required to sell short 

in order to satisfy their obligations. 

Because call writers do not have 

discretion, and because the short sales 

are effected in order to fill buying 


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418See also Sections IX.B.1. (discussing costs of 

the proposed modified uptick rule and proposed 

uptick rule). 

419See, e.g., letter from Credit Suisse (discussing 

potential costs associated with short sale price 

restrictions and circuit breaker rules). See also 

Section IX.B. (discussing costs associated with 

proposed modified uptick rule and proposed uptick 

rule). 

420See Section IX.B.1. (discussing costs and 

benefits of the proposed modified uptick rule and 

the proposed uptick rule). See also Section IX.B.1.a. 

(discussing burden hour estimates, for purposes of 

the PRA, in connection with the proposed policies 

and procedure requirements under the modified 

uptick rule, the riskless principal exception to the 

proposed uptick rule, and the proposed marking 

requirements). 

421See Section IX.B.1. (discussing costs of the 

proposed modified uptick rule and proposed uptick 

rule). 

422See id. 

423See id. 

424As discussed above, unlike the former Rule 

10a–1, the proposed short sale price test 

restrictions, if adopted, would apply a uniform rule 

to trades in the same securities that occur in 

multiple, dispersed, and diverse markets. Under the 

proposed short sale price test restrictions, all 

covered securities, wherever traded, would be 

subject to the same short sale price test. 

425See letter from Credit Suisse supra note 122 

(discussing need for a much longer implementation 

period, particularly for smaller broker-dealers). 

According to this commenter, compliance costs 

associated with a bid or tick test would 

disproportionately burden smaller broker-dealers, 

who would likely be forced to route their flow 

through a handful of larger broker-dealers, 

impeding competition and adding to systemic risk 

as flow is consolidated among fewer players). 

demand, we believe that including this 

exception in the proposed circuit 

breaker halt rule would benefit the 

markets while not opening the door to 

the abuses that the proposed rule is 

intended to address. 

The proposed exception for securities 

that a seller is deemed to own under 

Rule 200(b) (because Rule 144 securities 

are owned securities and do not raise 

the concerns that a short sale circuit 

breaker halt would be designed to 

address) would, during a halt triggered 

by a circuit breaker, allow sellers to sell 

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 

security to its broker-dealer prior to 

settlement based on circumstances 

outside the seller’s control. 

We seek comment regarding any 

benefits or costs associated with the 

above described exceptions to the 

proposed circuit breaker halt rule. 

3. Proposed Circuit Breaker Price Test 

Rules 

We also recognize that the proposed 

circuit breaker price test restrictions 

would result in costs on market 

participants responsible for 

implementing and assuring compliance 

with such requirements. We anticipate 

that there might be significant 

operational costs associated with 

reprogramming systems to comply with 

the proposed circuit breaker price test 

rules. We also anticipate that these costs 

might be greater than those required to 

comply with the proposed circuit 

breaker halt rule described above, which 

would, when triggered, impose a halt on 

short selling in individual NMS stocks 

rather than impose specific price test 

restrictions.418 In addition, we believe 

there might also be costs incurred for 

additional staff and costs associated 

with personnel hiring and training 

related to maintaining and ensuring 

compliance with the proposed circuit 

breaker price test rules.419

Further, we recognize that short sale 

price test restrictions that would be 

imposed as a result of the proposed 

circuit breaker price test rules being 

triggered might result in many of the 

same costs discussed in detail in 

Section IX.B.1 pertaining to the 

implementation of market-wide short 

sale price test restrictions.420 Those 

costs might include a reduction of the 

benefit of legitimate short selling and a 

subsequent reduction in the quantity of 

short selling, which we recognize might 

lead to a decrease in market efficiency 

and price discovery, less protection 

against upward stock price 

manipulations, a less efficient allocation 

of capital, an increase in trading costs, 

and a decrease in liquidity.421

Although under the proposed circuit 

breaker price test rules, a price test 

would not be in place full-time or for all 

securities, if the proposed circuit 

breaker modified uptick rule is adopted, 

trading centers would need to establish 

reasonable policies and procedures in 

advance to ensure compliance whenever 

a circuit breaker, and thus the proposed 

circuit breaker modified uptick rule, is 

triggered. We note that it would not be 

reasonable for a trading center to wait 

until the circuit breaker is triggered to 

begin establishing reasonable policies 

and procedures to prevent the execution 

or display of the particular NMS stock 

on a down-bid. Thus, we recognize that 

both of the proposed circuit breaker 

price tests would result in immediate 

upfront costs to trading centers.422

However, while we recognize that 

either proposed circuit breaker price test 

would create costs for trading centers 

that execute or display short sale orders 

in covered securities, as well as other 

market participants that engage in short 

selling, we note that the proposed 

circuit breaker price tests would include 

the same cost-mitigating provisions 

discussed in Section IX(B)(1)(c) 

pertaining to the market-wide short sale 

price test restrictions that might help to 

reduce costs associated with the 

proposed circuit breaker price tests, 

while at the same time being designed 

to further the purposes of our proposing 

the alternative circuit breaker price test 

restrictions at this time.423 For example, 

we believe that the fact that either 

proposed circuit breaker price test, if 

adopted, would apply a uniform price 

test 424 might help to reduce compliance 

costs for market participants associated 

with systems and surveillance 

mechanisms that would have to be 

programmed to consider only a single 

circuit breaker price test instead of 

different tests for different markets. 

Second, the proposed three month 

implementation period would be 

designed to provide trading centers and 

market participants with a sufficient 

amount of time in which to modify their 

systems and procedures in order to 

comply with the requirements of either 

proposed circuit breaker price test, if 

adopted, and, thus, might help reduce 

some of the costs and help to alleviate 

some of the potential disruptions that 

might be associated with implementing 

either proposed circuit breaker price 

test. We recognize, however, that a 

longer implementation period may be 

more manageable or preferable, 

particularly to smaller broker-dealers 

that might be disproportionately 

burdened by any implementation and 

compliance costs associated with the 

proposed circuit breaker price test 

restrictions, as well as competitively 

disadvantaged in terms of reduced order 

flow as a result.425 Thus, we seek 

comment as to what length of 

implementation period would be 

necessary or appropriate, and why, such 

that trading centers would be able to 

meet the proposed circuit breaker price 

test restrictions, if adopted. 

Third, as described below, we believe 

the ‘‘broker-dealer’’ provision in 

proposed Rule 201(c)(1) of the proposed 

circuit breaker modified uptick rule and 

the provisions contained in paragraph 

(d) of the proposed circuit breaker 

modified uptick rule, as well as the 

exceptions contained in paragraph (c) of 

the proposed circuit breaker uptick rule 

might also help to minimize any 

potential price distortions or costs 

associated with the proposed circuit 

breaker price restrictions. These 

provisions also would be designed to 

help promote the workability of the 

proposed circuit breaker price tests, 

while at the same time furthering the 


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426See Section IX.B.1.c. (discussing costmitigating features of proposed modified uptick 

rule and proposed uptick rule in detail). 

427See 2004 Regulation SHO Adopting Release, 

69 FR at 48023. 

Commission’s stated goals of short sale 

price test regulation.426

4. Proposed Marking Requirements 

We do not anticipate that the ‘‘short 

exempt’’ marking requirements would 

impose significant costs on brokerdealers. For example, such brokerdealers might incur a one-time cost 

associated with implementation and 

reprogramming. In connection with 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 $125,000.427

In addition, we do not believe the 

proposed order marking requirements 

would impose significant ongoing 

monitoring and surveillance costs for 

broker-dealers. 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, thus, would 

likely continue to use such systems, 

processes and procedures to comply 

with the proposed ‘‘short exempt’’ 

marking requirements in proposed 

Rules 200(g) and 200(g)(2). 

We recognize that there would be an 

ongoing paperwork burden cost 

associated with adding the ‘‘short 

exempt’’ marking requirements. For 

example, as discussed in detail in 

Section VIII, above, for purposes of the 

PRA, we estimate that it would take 

each broker-dealer no more than 

approximately .000139 hours (.5 

seconds) to mark a sell order ‘‘short 

exempt.’’ In addition, we estimate that 

the total annual hour burden per year 

for each broker-dealer subject to the 

proposed ‘‘short exempt’’ marking 

requirements would be 322 hours. 

If we were to adopt the proposed 

‘‘short exempt’’ marking requirements of 

proposed Rules 200(g) of the proposed 

modified uptick rule (or the proposed 

circuit breaker modified uptick rule) or 

the proposed uptick rule (or the 

proposed circuit breaker uptick rule), or 

the proposed circuit breaker halt rule, 

we are proposing an implementation 

period under which market participants 

would have to comply with these 

requirements three months following 

the effective date of the proposed 

marking requirements. We believe that 

this proposed implementation period 

would provide market participants with 

sufficient time in which to modify their 

systems and procedures in order to 

comply with the proposed ‘‘short 

exempt’’ marking requirements. We 

realize, however, that a shorter or longer 

implementation period may be 

manageable or preferable. Thus, we seek 

specific comment as to what length of 

implementation period would be 

necessary or appropriate, and why, such 

that market participants would be able 

to meet the proposed marking 

requirements, if adopted. 

C. Request for Comment 

We are sensitive to the costs and 

benefits of the proposed amendments, 

and encourage commenters to discuss 

any additional costs or benefits beyond 

those discussed herein, as well as any 

reduction in costs. Commenters should 

provide analysis and data to support 

their views of the costs and benefits 

associated with the proposed 

amendments. 

Questions Regarding Proposed Short 

Sale Price Test Restrictions 

1. The Commission believes that the 

erosion of investor confidence and 

questions concerning the volatility in 

the securities markets necessitate review 

of various alternatives with respect to 

short selling restrictions. Would the 

proposed market-wide short sale price 

test restrictions be more appropriate 

than the proposed circuit breaker rules 

in current market conditions? If so, 

why? If not, why not? Would the 

proposed market-wide short sale price 

test restrictions provide more potential 

benefit to the market than the proposed 

circuit breaker rules? Please explain. For 

example, would the proposed marketwide short sale price test restrictions be 

a more appropriate means for the 

Commission to achieve the objective 

helping to prevent short selling from 

being used as a tool to drive down the 

market? Please explain. Would the 

proposed market-wide short sale price 

test restrictions help to address the 

Commission’s concerns regarding 

investor confidence? If so, why and 

how? If not, why not? 

2. What would be the costs and 

benefits of the proposed modified 

uptick rule versus the proposed uptick 

rule? Is a policies and procedures 

approach preferable to a prohibition on 

executing a short sale on a down-bid 

price? Why or why not? What would be 

the costs and benefits of a policies and 

procedures approach as compared to 

such a prohibition? Should we consider 

other forms of short sale price tests? 

What would be the costs and benefits of 

any alternative forms of short sale price 

tests? 

3. What would be the costs and 

benefits of short sales being subject to 

the proposed modified uptick rule? 

What would be the costs and benefits of 

short sales being subject to the proposed 

uptick rule? What would be the costs 

and benefits of having a uniform short 

sale price test in the covered securities 

across all markets? Please explain. 

4. What, if any, additional benefits, 

beyond those discussed herein, would 

result from the proposed modified 

uptick rule? What, if any, additional 

benefits, beyond those discussed herein, 

would result from the proposed uptick 

rule? Should either proposed price test 

be modified in any way to increase the 

benefits of a short sale price test? If so, 

how? 

5. What, if any, additional costs, 

beyond those discussed herein, would 

result from the proposed modified 

uptick rule? What, if any, additional 

costs, beyond those discussed herein, 

would result from the proposed uptick 

rule? What would be the types of costs, 

and what would be the amounts? 

Should the proposed short sale price 

tests be modified in any way to mitigate 

costs? If so, how? 

6. How would trading systems and 

strategies used in today’s marketplace 

be impacted by the proposed modified 

uptick rule? How might market 

participants alter their trading systems 

and strategies in response to the 

proposed modified uptick rule, if 

adopted? 

7. Would the proposed modified 

uptick rule create any additional 

implementation or operational costs 

associated with systems (including 

computer hardware and software), 

surveillance, procedural, recordkeeping, 

or personnel modifications, beyond 

those discussed herein? Would the 

proposed uptick rule create any 

additional implementation or 

operational costs associated with 

systems (including computer hardware 

and software), surveillance, procedural, 

recordkeeping, or personnel 

modifications, beyond those discussed 

herein? 

8. Would smaller trading centers and 

other market participants be 

disproportionately impacted by any 

additional implementation or 

operational costs associated with 

systems (including computer hardware 

and software), surveillance, procedural, 

recordkeeping, or personnel 

modification as a result of the proposed 

short sale price test restrictions? If so, in 

what way. Please explain. 

9. To comply with the proposed 

modified uptick rule, broker-dealers 


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428See Section II.A. 

might be required to purchase new 

systems or implement changes to 

existing systems. Would changes to 

existing systems be significant? What 

would be the costs and benefits 

associated with acquiring new systems 

or making changes to existing systems? 

What, if any, changes would need to be 

made to existing recordkeeping 

systems? What would be the costs and 

benefits associated with any changes? 

How might smaller broker-dealers be 

impacted by having to purchase new 

systems or implement changes to 

existing systems in order to comply 

with the proposed modified uptick rule, 

if adopted? 

10. To comply with the proposed 

uptick rule, broker-dealers might be 

required to purchase new systems or 

implement changes to existing systems. 

Would changes to existing systems be 

significant? What would be the costs 

and benefits associated with acquiring 

new systems or making changes to 

existing systems? What, if any, changes 

would need to be made to existing 

records? What would be the costs and 

benefits associated with any changes? 

11. What would be the costs and 

benefits of requiring trading centers to 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to prevent the execution or 

display by the trading center of 

impermissibly priced short sale orders? 

What would be the costs and benefits of 

requiring trading centers to 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 

down-bid price? 

12. What would be the costs and 

benefits of requiring that trading centers 

regularly surveil to ascertain the 

effectiveness of the policies and 

procedures required by proposed Rule 

201(b)(1) and promptly take action to 

remedy deficiencies in such policies 

and procedures? What systems and 

surveillance changes by trading centers 

would be necessary to meet the 

requirements of the proposed modified 

uptick rule? 

13. Would the proposed modified 

uptick rule’s compliance and 

surveillance requirements 

disproportionately burden smaller 

broker-dealers? If so, in what way? 

Please explain. 

14. How much, if any, would the 

proposed price test restrictions affect 

compliance costs (e.g., personnel or 

system changes) for each category of 

broker-dealers: small, medium, and 

large? 

15. Would the proposed modified 

uptick rule affect different trading 

centers differently? If so, how? If not, 

why? 

16. Would there be any increases in 

staffing and associated overhead costs 

for trading centers and broker-dealers? 

Would other resources need to be rededicated to comply with the proposed 

modified uptick rule or proposed uptick 

rule? 

17. What, if any, impact on 

competition would the proposed price 

test restrictions have on smaller brokerdealers, e.g., due to systems 

modifications and implementation 

costs. Please explain. 

18. We solicit comment on whether 

any costs associated with the proposed 

modified uptick rule and proposed 

uptick rule would be incurred on a onetime or ongoing basis, as well as cost 

estimates. In addition, we seek comment 

as to whether the exceptions to the 

proposed modified uptick rule or 

proposed uptick rule would decrease or 

increase any costs for any market 

participants. We seek comment about 

any other costs and cost reductions 

associated with the proposed 

amendments. 

19. Would the proposed short sale 

price tests increase the costs of 

legitimate short selling and lessen some 

of the benefits of legitimate short 

selling, which, in turn, could result in 

a reduction of short selling? To what 

extent, if any, would the proposed short 

sale price tests impact legitimate short 

selling and market efficiency? 

20. We seek comment regarding types 

of entities that would be affected, and 

the manner in which they would be 

affected, by the proposed amendments. 

21. We seek specific comments on the 

costs associated with systems changes 

for trading centers and broker-dealers, 

including the type of systems changes 

necessary and quantification of costs 

associated with changing the systems, 

including both start-up costs and 

maintenance. We request comments on 

the types of jobs and staff that would be 

affected by systems modifications and 

training with respect to the proposed 

modified uptick rule or proposed uptick 

rule, the number of labor hours that 

would be required to accomplish these 

matters, and the compensation rates of 

these staff members. 

22. Would reinstating a short sale 

price test restriction such as the 

proposed modified uptick rule or 

proposed uptick rule help restore 

investor confidence? If so, why? If not, 

why not? We note that short selling 

provides the market with important 

benefits, including market liquidity and 

pricing efficiency.428 What effect, if any, 

would the proposed modified uptick 

rule have on market liquidity? What 

effect, if any, would the proposed 

modified uptick rule have on pricing 

efficiency? Please provide empirical 

data in support of any arguments and/ 

or analyses. 

23. Should short sales be subject to a 

short sale price test restriction, or 

should we continue to rely on current 

short sale regulations, as well as antifraud and anti-manipulation provisions 

of the securities laws to address issues 

raised by potentially abusive short 

selling? What would be the costs and 

benefits of subjecting short sales to a 

short sale price test restriction versus 

the current short sale regulations, as 

well as anti-fraud and anti-manipulation 

provisions of the securities laws? 

24. We request comments on whether 

the pricing of securities affected by any 

short sale price test would be more or 

less efficient. 

25. We request comments on whether 

the pricing of securities affected by the 

proposed modified uptick rule would be 

more or less efficient. 

26. We request comments on whether 

the pricing of securities affected by the 

proposed uptick rule would be more or 

less efficient. 

27. If a short sale price test restriction 

were introduced, the rule would require 

some commitment of resources 

associated with compliance oversight, 

market surveillance, and enforcement. 

What would be the associated 

opportunity costs? What level of 

additional resources would be needed 

for that oversight, surveillance, and 

enforcement? 

Questions Regarding Proposed Circuit 

Breaker Halt Rule 

1. The Commission believes that the 

erosion of investor confidence and 

questions concerning the volatility in 

the securities markets necessitate review 

of various alternatives with respect to 

short selling restrictions. Would the 

proposed circuit breaker halt rule be 

more appropriate than a market-wide 

short sale price test restriction in 

current market conditions? If so, why? 

If not, why not? Would the proposed 

circuit breaker halt rule provide more 

potential benefit to the market than a 

market-wide short sale price test 

restriction? Please explain. For example, 

would the proposed circuit breaker halt 

rule be a more appropriate means for the 

Commission to achieve the objective, 

helping to prevent short selling from 

being used as a tool to drive down the 

market? Please explain. Would the 


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proposed circuit breaker halt rule help 

to address the Commission’s concerns 

regarding investor confidence? If so, 

why and how? If not, why not? 

2. Would implementation of the 

proposed circuit breaker halt rule be 

less or more costly than the 

implementation of a market-wide short 

sale price test restriction? Would the 

proposed circuit breaker halt rule that, 

when triggered, would impose a 

temporary halt on short selling be more 

or less costly than one that resulted in 

a short sale price test restriction? Please 

explain. Would the proposed circuit 

breaker halt rule be generally easier to 

implement in a post-Regulation NMS 

environment than a market-wide short 

sale price test restriction such as the 

proposed modified uptick rule, or the 

proposed uptick rule? Are there any 

additional costs associated with 

multiple day circuit breakers when 

compared to same day circuit breakers? 

3. Should the proposed circuit breaker 

halt rule be adopted in addition to a 

permanent, market-wide short sale price 

test restriction rule? Thus, while a short 

sale price test restriction rule would be 

in place as a permanent, market-wide 

rule, a circuit breaker would also trigger 

a short selling halt in any security that 

suffers a severe price decline. Please 

describe the advantages and 

disadvantages of such an approach. 

4. What would be the relative 

advantages and disadvantages of a short 

sale price test combined with a circuit 

breaker halt rule versus those of a short 

selling circuit breaker with short sale 

price test restrictions? Please explain. 

5. The Commission is seeking 

comment on the potential impact of the 

proposed circuit breaker halt rule on 

market function and efficiency. What 

would be the impact of the proposed 

circuit breaker halt rule, when triggered, 

on the liquidity of individual securities? 

What would be the impact of the 

proposed circuit breaker halt rule on 

capital formation? What would be the 

impact of the proposed circuit breaker 

halt rule on price discovery? Would 

different circuit breaker alternatives 

have different impacts on liquidity, 

capital formation and price discovery? 

Would a multiple circuit breaker impose 

any unique costs? Please explain. 

6. Should the percentage decline be 

linked to the stock’s price level such 

that stocks with lower prices must 

experience a greater percentage decline 

before the circuit breaker is triggered? If 

so, what thresholds are appropriate? 

Please explain. If the percentage decline 

is linked to price level, what additional 

operational burdens would be 

experienced if stock values were 

required to be continuously monitored 

due to frequent fluctuation? Please 

explain. What costs and benefits may 

accrue from having the decline based on 

a dollar amount rather than a value 

derived from a percentage of the share 

value? What potential problems or 

benefits may arise from pegging a short 

selling circuit breaker threshold to a 

decline in a stock’s dollar amount? 

Please explain. 

7. What other benefits, beyond those 

discussed herein, would be associated 

with the proposed circuit breaker halt 

rule? Would the proposed circuit 

breaker halt rule help stabilize the 

market for the individual security? If so, 

why? If not, why not? Would the 

proposed circuit breaker halt rule 

benefit investors by allowing the market 

to ‘‘cool off’’ with respect to that 

individual security? Please explain. 

Would the proposed circuit breaker halt 

rule result in an increase in investor 

confidence? Please explain. 

8. What costs, beyond those discussed 

herein, would be incurred in terms of 

implementing the proposed circuit 

breaker halt rule? Please explain. What 

would it cost to update systems in a 

manner necessary to ensure compliance 

with the proposed circuit breaker halt 

rule? Would the expenditure necessary 

to ensure compliance be primarily an 

‘‘up-front’’ cost? Would the expenditure 

necessary to ensure compliance require 

long-term investment? Please explain. 

What technological challenges would be 

encountered in updating systems to 

ensure compliance with the proposed 

circuit breaker halt rule? Please explain. 

How long would it take to update 

systems in a manner that ensured 

compliance with the proposed circuit 

breaker halt rule? Please explain. 

9. What would be the costs and 

benefits associated with the proposed 

bona fide market making exception to 

the proposed circuit breaker halt rule? 

Please explain. What would be the costs 

and benefits associated with the 

proposed exception that would allow 

short sales that occur as a result of 

automatic exercise or assignment of an 

equity option held prior to the 

effectiveness of the short selling halt 

due to expiration of the option? Please 

explain. What would be the costs and 

benefits associated with the proposed 

exception for options market makers 

selling short as part of bona fide market 

making and hedging activities related 

directly to bona fide market making in 

derivatives on the individual security 

subject to the halt? Please explain. 

Questions Regarding Proposed Circuit 

Breaker Price Test Rules 

1. What benefits, beyond those 

discussed herein, would be associated 

with the proposed circuit breaker price 

test rules? Would the proposed circuit 

breaker price test rules help stabilize the 

market for the individual security? If so, 

why? If not, why not? Would the 

proposed circuit breaker price test rules 

benefit investors by allowing the market 

to ‘‘cool off’’ with respect to that 

individual security? Please explain. 

Would the proposed circuit breaker 

price test rules result in an increase in 

investor confidence? Please explain. 

2. What would be the benefits of the 

proposed circuit breaker price test rules 

versus a permanent, market-wide short 

sale price test such as the modified 

uptick rule or the proposed uptick rule? 

Please explain and support explanations 

with data and analysis where 

appropriate. 

3. What costs would be associated 

with implementing the proposed circuit 

breaker modified uptick rule? Please 

explain. What costs would be associated 

with implementing the proposed circuit 

breaker uptick rule? What would be the 

degree of financial expenditure involved 

in updating systems in a manner 

necessary to ensure compliance with 

each proposed circuit breaker price test 

rule? Would the expenditure necessary 

to ensure compliance be primarily an 

‘‘up-front’’ cost? Would the expenditure 

necessary to ensure compliance require 

long-term investment? Please explain. 

How would the costs of each of the 

proposed circuit breaker price test rules 

compare with the costs of permanent 

short sale price tests such as the 

proposed modified uptick rule or the 

proposed uptick rule? Please explain. 

4. What technological challenges 

would be encountered in updating 

systems to ensure compliance with each 

of the proposed circuit breaker price test 

rules on individual securities? Please 

explain. How long would it take to 

update systems in a manner that 

ensured compliance? Please explain. 

Would either of the proposed circuit 

breaker price test rules impede the 

efficient functioning of the equity 

markets? If so, why? If not, why not? 

Please explain. Are there any other 

operational challenges that may arise 

from implementing either of the 

proposed circuit breaker price test 

rules? Please explain. Would the 

operational challenges presented 

impede the effectiveness of the 

proposed circuit breaker modified 

uptick rule? Please explain. Would the 

operational challenges presented 

impede the effectiveness of the 

proposed circuit breaker uptick rule? 

Please explain. 

5. Are there other short sale price test 

restrictions, beyond those discussed 

herein, that should be considered in 


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429 15 U.S.C. 78c(f). 

430 15 U.S.C. 78w(a)(2). 

431See supra Section II.C., above (discussing 

restoring investor confidence). 

combination with proposed circuit 

breaker price test rules? Please explain. 

6. What would be the benefits and 

costs associated with the proposed 

exceptions to the proposed circuit 

breaker modified uptick rule? Please 

explain. What would be the benefits and 

costs associated with the proposed 

exceptions to the proposed circuit 

breaker uptick rule? Please explain. 

7. What would be the benefits and 

costs associated with a circuit breaker 

rule that, when triggered, would 

prohibit short selling in a particular 

NMS security on a down-bid unless the 

short sale is effected at a price that is 

more than 10% greater than the prior 

day’s closing price? Please explain. 

Questions Regarding Proposed Marking 

Requirements 

1. What, if any, additional benefits or 

costs, beyond those discussed herein, 

would result from complying with the 

‘‘short exempt’’ marking requirements 

under the proposed amendments to 

Rules 200(g) and 200(g)(2)? What would 

be the types of additional benefits, and 

what would be the amounts? What 

would be the types of additional costs, 

and what would be the amounts? Who 

would bear these costs? Should the 

proposed ‘‘short exempt’’ marking 

requirements be modified in any way to 

mitigate costs? If so, how? 

2. Would there be any operational or 

compliance concerns associated with 

the proposed ‘‘short exempt’’ marking 

requirements? 

3. What types of costs, if any, would 

be associated with requiring sell orders 

be marked ‘‘short exempt’’ only if the 

provisions of paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraph (c) or (d) of the proposed 

circuit breaker modified uptick rule) are 

met? What type of costs, if any, would 

be associated with requiring sell orders 

to be marked ‘‘short exempt’’ when 

relying on an exception to the proposed 

uptick rule (or the proposed circuit 

breaker uptick rule)? What type of costs, 

if any, would be associated with 

requiring sell orders to be marked ‘‘short 

exempt’’ when relying on an exception 

to the proposed circuit breaker halt 

rule? 

4. What would be a sufficient 

implementation period for making any 

systems changes necessary to allow sell 

orders to be marked ‘‘short exempt’’? 

5. Please describe any anticipated 

difficulties in complying with ‘‘short 

exempt’’ marking requirements. 

6. The short sales that qualify for the 

‘‘broker-dealer’’ provision in proposed 

Rule 201(c) are still subject to the 

provisions of the proposed modified 

uptick rule and would be required to be 

marked as ‘‘short exempt.’’ Should these 

short sales be marked as ‘‘short exempt’’ 

or is another mark more appropriate? 

What effect, if any, would marking these 

short sales as ‘‘short exempt’’ have on 

compliance or surveillance relative to 

another mark? What would be the costs 

associated with implementing a mark 

especially for these short sales? 

X. 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 whether the action 

would promote efficiency, competition, 

and capital formation.429 In addition, 

Section 23(a)(2) of the Exchange Act 

requires the Commission, when making 

rules under the Exchange Act, to 

consider the impact such rules would 

have on competition.430 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. 

We believe the proposed amendments 

might have minimal impact on the 

promotion of price efficiency and 

capital formation. The two alternative 

short sale price tests proposed are 

designed to allow relatively unrestricted 

short selling in an advancing market. In 

addition, the short sale price tests 

would restrict short selling at 

successively lower prices and, thereby, 

might help prevent short selling, 

including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market by exhausting all 

remaining bids at one price level, 

causing successively lower prices to be 

established by long sellers. Further, by 

seeking to advance these goals, the two 

alternative short sale price tests might 

help restore investor confidence in the 

securities markets.431

If the proposed short sale price test 

restrictions help address the erosion of 

investor confidence in our markets, the 

proposed amendments might help to 

facilitate and maintain stability in the 

markets and help ensure that they 

function efficiently. Bolstering investor 

confidence in the markets could help to 

encourage investors to be more willing 

to invest in the market, thus adding 

depth and liquidity to the markets and 

promoting the ability of listed 

companies to raise capital. 

In particular, by proposing to require 

trading centers to establish, maintain, 

and enforce written policies and 

procedures reasonably designed to help 

prevent the execution or display of a 

short sale order at a down-bid price, in 

the case of the proposed modified 

uptick rule, or prohibiting persons from 

effecting short sales below the last sale 

price, in the case of the proposed uptick 

rule, the proposed short sale price test 

restrictions might help prevent short 

selling, including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market by exhausting all 

remaining bids at one price level, 

causing successively lower prices to be 

established by long sellers. By doing so, 

the proposed amendments might help to 

facilitate and maintain stability to the 

markets and help ensure that they 

function efficiently. 

In addition, the proposed short sale 

price tests might help preserve instant 

execution and liquidity, by allowing 

relatively unrestricted short selling in 

an advancing market. As discussed 

above, one of the benefits of legitimate 

short selling is that it provides market 

liquidity by, for example, adding to the 

selling interest of stock available to 

purchasers, and, when sellers are 

covering their short sales, adding to the 

buying interest of stock available to 

sellers. Thus, the proposed short sale 

price tests are designed to help reduce 

the potential harm toward the useful 

market purposes served by short selling 

by allowing relatively unrestricted short 

selling in an advancing market. 

Moreover, unlike the former short sale 

price tests (including former Rule 10a– 

1), the proposed short sale price test 

restrictions would apply a uniform rule 

to trades in the same securities that 

occur in multiple, dispersed, and 

diverse markets. Under the proposed 

short sale price test restrictions, all 

covered securities, wherever traded, 

would be subject to the same short sale 

price test. As such, the proposed short 

sale price test restrictions would not 

result in the type of disparate short sale 

regulation that existed under former 

Rule 10a–1 (in which different price 

tests were applied in different markets, 

potentially resulting in confusion, 

compliance difficulties, regulatory 

arbitrage, and an un-level playing field 


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432See supra note 27 (discussing disparate short 

sale regulation under former Rule 10a–1). 

433For example, if a trading center received a 

short sale order priced at $47.00 when the current 

national best bid in the security was $47.00, but the 

immediately preceding national best bid was $47.01 

(i.e., the current bid was below the previous bid), 

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. 

434See supra Section II.C. above (discussing 

restoring investor confidence). 

435See letter from Credit Suisse (discussing need 

for a much longer implementation period, 

particularly for smaller broker-dealers, and how 

compliance costs of a bid or tick test would likely 

disproportionately burden smaller broker-dealers 

and impede competition by forcing these smaller 

broker-dealers to route their flow through a handful 

of larger broker-dealers). 

436See id. 

among market participants).432 This 

might help to avoid undermining 

competition and efficiency in the 

market. 

In addition, the proposed short sale 

price tests include a number of 

provisions that are designed to help 

promote market efficiency and liquidity, 

while at the same time helping to 

promote the goals of our proposing at 

this time short sale price test restrictions 

and alternative circuit breaker rules. 

Moreover, the proposed modified uptick 

rule (and proposed circuit breaker 

modified uptick rule) 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. For example, if an order is 

impermissibly priced, a trading center 

could re-price the order at the lowest 

permissible price, execute the order 

immediately if the order is marketable at 

its new price, or hold it for later 

execution at its new price or better.433

As quoted prices change, the proposed 

rule would allow a trading center to 

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). Permitting a trading center to reprice an impermissibly priced short sale 

order might help to allow for the more 

efficient functioning of the markets 

because trading centers would 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. 

In addition, the proposed circuit 

breaker rules would be designed to 

target only those securities that 

experience severe intraday declines and, 

therefore, might also help prevent short 

selling, including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market where needed most. 

By doing so, the proposed circuit 

breaker rules might help restore 

confidence in the securities markets 434

and, in turn, might help stabilize the 

market for individual securities during 

times of substantial uncertainty and 

help ensure that the markets function 

efficiently. Bolstering investor 

confidence in the markets might help to 

encourage investors to be more willing 

to invest in the market during times of 

substantial uncertainty, thus adding 

depth and liquidity to the markets and 

promoting capital formation. 

For example, by halting short selling 

for the remainder of the trading day 

following a significant decline in a 

security’s price, we believe the 

proposed circuit breaker halt rule, in 

particular, would be designed to 

provide sufficient time to re-establish 

equilibrium between buying and selling 

interests in the individual security in an 

orderly fashion. It would also be 

designed to help ensure that market 

participants have a reasonable 

opportunity to become aware of, and 

respond to, a significant decline in a 

security’s price. By providing a pause in 

short selling resulting from a significant 

decline in the price of an individual 

equity security, we believe the proposed 

circuit breaker halt rule might provide 

a measure of stability to the markets. 

However, by allowing short selling to 

continue with price test restrictions 

once a circuit breaker was triggered, the 

proposed circuit breaker price test rules 

might have less impact on legitimate 

short selling and normal market activity 

including price discovery and the 

provision of liquidity than a circuit 

breaker with halt on short selling. 

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. As such, the 

proposed circuit breaker rules might 

help preserve instant execution and 

liquidity. As discussed above, one of the 

benefits of legitimate short selling is that 

it provides market liquidity by, for 

example, adding to the selling interest 

of stock available to purchasers, and, 

when sellers are covering their short 

sales, adding to the buying interest of 

stock available to sellers. Thus, the 

proposed circuit breaker rules are 

designed to help reduce the potential 

harm toward the useful market purposes 

served by short selling by targeting only 

those securities that experience severe 

intraday declines. 

In addition, the proposed amendment 

to Rule 200(g)(2) of Regulation SHO to 

require broker-dealers to mark a sale 

order as ‘‘short exempt’’ if the 

provisions of paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraph (c) or (d) of the proposed 

circuit breaker modified uptick rule) are 

met, or if the seller is relying on an 

exception in paragraph (c) of the 

proposed uptick rule (or paragraph (c) of 

the proposed circuit breaker uptick 

rule), or if the seller is relying on an 

exception in paragraph (c) of the 

proposed circuit breaker halt rule, could 

help to promote price efficiency by 

helping to preserve instant execution 

and liquidity of such orders. 

In addition, we believe that the 

proposed amendments would not 

impose any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act. We 

believe the proposed short sale price 

test restrictions and the proposed circuit 

breaker rules might help to avoid 

undermining competition by imposing a 

uniform price test on all similarly 

situated entities or individuals subject 

to the proposed amendments. We 

recognize, however, that the proposed 

three-month implementation period for 

the proposed short sale price test 

restrictions may not be sufficient for 

certain smaller broker-dealers and that 

any potential compliance costs 

associated with the short sale price test 

restrictions could likely 

disproportionately burden these smaller 

broker-dealers in terms of reduced order 

flow, thereby impeding competition.435

However, we believe the proposed 

circuit breaker halt rule, in particular, 

might help to avoid undermining 

competition in that it may require less 

time and significantly less costs for 

implementation and compliance with 

its requirements.436 In addition, the 

proposed ‘‘short exempt’’ marking 

requirements would apply to all NMS 

stocks wherever traded, thereby 

providing a uniform practice designed 

to ensure consistency within the equity 

markets. Moreover, the proposed 

amendments could help to address any 

possibility that abusive or manipulative 

short selling might be contributing to 

the disruption in the markets and, 

therefore, could help to address the 

erosion of investor confidence in the 

markets. 

We request comment on whether the 

proposed amendments would likely 

promote efficiency, capital formation, 

and competition. 


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437Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C. and 

as a note to 5 U.S.C. 601). 

438 5 U.S.C. 603. 

439The proposed circuit breaker halt rule could 

be imposed in place of, or in addition to, a 

permanent short sale price restriction rule. 

440A circuit breaker that triggers a short sale price 

test rule would be adopted in place of a short sale 

price test rule. 

441See proposed Rule 201(b)(1). 

442See 17 CFR 242.600(b)(78). 

443 17 CFR 242.601. 

444See 17 CFR 240.0–10(e) and 13 CFR 121.201. 

XI. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 437 we must advise 

the Office of Management and Budget as 

to whether the proposed regulation 

constitutes a ‘‘major’’ rule. Under 

SBREFA, a rule is considered ‘‘major’’ 

where, if adopted, it results or is likely 

to result in: 

• An annual effect on the economy of 

$100 million or more (either in the form 

of an increase or a decrease); 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effect on 

competition, investment or innovation. 

If a rule is ‘‘major,’’ its effectiveness will 

generally be delayed for 60 days 

pending Congressional review. We 

request comment on the potential 

impact of the proposed amendments on 

the economy on an annual basis. 

Commenters are requested to provide 

empirical data and other factual support 

for their view to the extent possible. 

XII. Initial Regulatory Flexibility 

Analysis 

The Commission has prepared an 

Initial Regulatory Flexibility Analysis 

(‘‘IRFA’’), in accordance with the 

provisions of the Regulatory Flexibility 

Act,438 regarding the proposed 

amendments to Rules 200(g) and 201 of 

Regulation SHO under the Exchange 

Act. 

A. Reasons for the Proposed Action 

We are proposing to amend 

Regulation SHO to impose a short sale 

price test that would restrict the prices 

at which certain securities may be sold 

short. We are also proposing as 

alternatives to a full-time price short 

sale price test two alternative circuit 

breaker rules. As discussed above, we 

believe it is appropriate at this time to 

examine and seek comment on whether 

to restore short sale price tests in light 

of the extreme market conditions that 

we are currently facing and the resulting 

deterioration in investor confidence. 

We are proposing two alternative 

short sale price tests. The first test 

would be the proposed modified uptick 

rule that would be based on the national 

best bid. The second test would be the 

proposed uptick rule that would be a 

modernized version of the tick test 

under former Rule 10a–1, and would be 

based on a last sale price. We are also 

proposing, as alternatives to a full-time 

short sale price test, circuit breaker rules 

that would establish limitations on short 

selling in a particular security during 

severe market declines in the price of 

that security. The proposed circuit 

breaker halt rule, when triggered by a 

severe price decline in a particular 

security, would temporarily prohibit 

any person from selling short that 

security during the effectiveness of the 

circuit breaker.439 The proposed circuit 

breaker price test rules, when triggered 

by a severe market decline in a 

particular security, would temporarily 

establish either the proposed modified 

uptick rule or the proposed uptick rule, 

as each are described in detail above, for 

that security.440

In addition, we are proposing 

amendments to Rule 200(g) of 

Regulation SHO to impose a ‘‘short 

exempt’’ marking requirement and to 

Rule 200(g)(2) of Regulation SHO to 

require broker-dealers to mark a sell 

order ‘‘short exempt’’ only if the 

provisions in paragraph (c) or (d) of the 

proposed modified uptick rule (or 

paragraph (c) or (d) of the proposed 

circuit breaker modified uptick rule) are 

met, or if a seller is relying on an 

exception in paragraph (c) of the 

proposed uptick rule (or paragraph (c) of 

the proposed circuit breaker uptick 

rule), or if a seller is relying on an 

exception in paragraph (c) of the 

proposed circuit breaker halt rule. 

B. Objectives 

The two alternative short sale price 

tests proposed are designed to allow 

relatively unrestricted short selling in 

an advancing market. In addition, the 

short sale price tests are designed to 

restrict short selling at successively 

lower prices and, thereby, might help 

prevent short selling, including 

potentially abusive or manipulative 

short selling, from being used as a tool 

for driving the market down or from 

being used to accelerate a declining 

market by exhausting all remaining bids 

at one price level, causing successively 

lower prices to be established by long 

sellers. Further, by seeking to advance 

these goals, the two alternative short 

sale price tests would also be designed 

to help restore investor confidence in 

the securities markets. 

Moreover, the proposed alternative 

circuit breaker rules would be designed 

to target only those securities that 

experience severe intraday declines and, 

therefore, might also help prevent short 

selling, including potentially abusive or 

manipulative short selling, from being 

used as a tool for driving the market 

down or from being used to accelerate 

a declining market when needed most. 

C. Legal Basis 

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 

proposing amendments to §§ 242.200 

and 242.201 of Regulation SHO. 

D. Small Entities Subject to the 

Proposed Amendments 

The proposed modified uptick rule 

and proposed circuit breaker modified 

uptick rule would require 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 at a down-bid price.441 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-dealer that executes orders 

internally by trading as principal or 

crossing orders as agent.’’ 442

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; 443 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 0–10.444 No national 

securities exchanges are small entities 

because none meet these criteria. There 

is one national securities association 

(FINRA) that would be subject to the 

proposed modified uptick rule. FINRA 

is not a small entity as defined by 13 

CFR 121.201. Thus, the current national 

securities exchanges and one national 

securities association that would be 

subject to the proposed modified uptick 

rule are not considered ‘‘small entities’’ 

for purposes of the Regulatory 

Flexibility Act. 

The remaining non-SRO trading 

centers that would be subject to the 

proposed modified uptick rule or the 

proposed circuit breaker modified 


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445See supra note 10. 

446 17 CFR 240.0–10(c)(1). 

447This number was derived from OEA’s review 

of 2007 FOCUS Report filings and discussion with 

SRO staff. 

448These numbers are based on OEA’s review of 

2007 FOCUS Report filings reflecting registered 

broker-dealers, including introducing brokerdealers. This number does not include brokerdealers that are delinquent on FOCUS Report 

filings. 

449 17 CFR 240.0–10(e). 

450See letter from Credit Suisse. See also supra 

note 122 and accompanying text. 

451See 17 CFR 242.200(g). 

uptick rule are registered broker-dealers. 

The Commission has preliminarily 

determined that approximately 372 

broker-dealers registered with the 

Commission that could meet the 

proposed definition of a trading 

center,445 which includes broker-dealers 

operating as equity ATSs, broker-dealers 

registered as market makers or 

specialists in NMS stocks, and any 

broker-dealer that is in the business of 

executing orders internally in NMS 

stocks. Pursuant to Rule 0–10(c) under 

the Exchange Act, 17 CFR 240.0–10(c), 

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.446 Of these 372 non-SRO trading 

centers, only five 447 are considered 

small for purposes of the Regulatory 

Flexibility Act pursuant to the standards 

of Rule 0–10(c) under the Exchange Act. 

The entities covered by the proposed 

uptick rule, the proposed circuit breaker 

uptick rule, the proposed circuit breaker 

halt rule, and the proposed ‘‘short 

exempt’’ marking requirements, would 

include small entities that are small 

broker-dealers, small businesses, and 

any investor who effected a short sale 

that qualifies as a small entity. Although 

we are not aware of data that is available 

to permit us to quantify every type of 

small entity covered by the proposed 

amendments, 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 pursuant to 

§ 240.17a–5(d); and is not affiliated with 

any person (other than a natural person) 

that is not a small business or small 

organization. We estimate that as of 

2007 there were approximately 896 

broker-dealers that qualified as small 

entities as defined above.448

As mentioned above, paragraph (e) of 

Rule 0–10 under the Exchange Act 449

states 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 11Aa3– 

1 under the Exchange Act; 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. As mentioned 

above, no U.S. registered exchange is a 

small entity because none meets these 

criteria. Any business, however, 

regardless of industry, could be subject 

to the proposed uptick rule and the 

proposed provisions contained in 

paragraph (c) and (d) of the proposed 

modified uptick rule (or paragraph (c) or 

(d) of the proposed circuit breaker 

modified uptick rule), or the exceptions 

contained in paragraph (c) of the 

proposed uptick rule (or paragraph (c) of 

the proposed circuit breaker uptick 

rule), or the exceptions contained in 

paragraph (c) of the proposed circuit 

breaker halt rule if it effects a short sale. 

The Commission believes that, except 

for the broker-dealers discussed above, 

it is not possible to estimate the number 

of small entities that would fall under 

the proposed amendments because we 

are not aware of data, including the 

number of investors, who do or will 

engage in short selling. 

E. Projected Reporting, Recordkeeping 

and Other Compliance Requirements 

The proposed amendment may 

impose some new or additional 

reporting, recordkeeping, or compliance 

costs on trading centers and other 

broker-dealers that are small entities. 

The proposed modified uptick rule 

would focus 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 on a down-bid price. In 

addition, the proposed modified uptick 

rule’s ‘‘broker-dealer’’ provision (and 

the proposed circuit breaker modified 

uptick rule’s ‘‘broker-dealer’’ provision) 

would include a policies and 

procedures requirement to help prevent 

incorrect identification of orders for 

purposes of the proposed ‘‘brokerdealer’’ provision. In order to comply 

with Regulation NMS when it became 

effective in 2005, entities were required 

to modify their systems and surveillance 

mechanisms in order to comply with the 

order protection rule’s policies and 

procedures requirement. Thus, the five 

non-SRO trading centers that would 

qualify as small entities may already 

have in place most of the infrastructure 

necessary to comply with the proposed 

modified uptick rule (or the proposed 

circuit breaker modified uptick rule), if 

adopted. 

In addition, in order to implement 

and comply with former Rule 10a–1, 

entities were required to modify their 

systems and surveillance mechanisms. 

Thus, the small entities that would be 

subject to the proposed uptick rule (or 

proposed circuit breaker uptick rule or 

proposed circuit breaker halt rule) may 

already be familiar with, and may have 

retained systems, that would aid in their 

implementation and compliance with 

the proposed uptick rule (or proposed 

circuit breaker uptick rule or proposed 

circuit breaker halt rule). Small entities, 

however, may still need to make some 

modifications to their systems and 

surveillance mechanisms to implement 

and ensure compliance with the 

proposed uptick rule (or proposed 

circuit breaker uptick rule or proposed 

circuit breaker halt rule), if adopted.450

In addition, the proposed amendment 

to Rule 200(g)(2) that would require that 

a sale order be marked ‘‘short exempt’’ 

only if the provisions of proposed Rule 

201(c) or (d) of the proposed modified 

uptick rule (or proposed Rule 201(c) or 

(d) of the proposed circuit breaker 

modified uptick rule) are met, or if the 

seller is relying on an exception from 

the proposed uptick rule (or the 

proposed circuit breaker uptick rule), 

could impose some new or additional 

reporting, recordkeeping, or compliance 

costs on broker-dealers that are small 

entities. We believe, however, that such 

costs would not be significant. Rule 

200(g) currently requires that brokerdealers mark all sell orders of any equity 

security as either ‘‘long’’ or ‘‘short.’’ 451

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 proposed ‘‘short 

exempt’’ marking requirement if 

adopted. 

F. Duplicative, Overlapping, or 

Conflicting Federal Rules 

We believe that there are no rules that 

duplicate, overlap, or conflict with the 

proposed amendments to Rules 200(g) 

and 201 of Regulation SHO. 


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452See 5 U.S.C. 603(c). 

G. 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.452 In connection with the 

proposed amendments, 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. 

A primary goal of the proposed 

amendments is to help restore investor 

confidence by restricting short selling at 

successively lower prices and, thereby, 

help prevent short selling, including 

potentially abusive or manipulative 

short selling, from being used as a tool 

for driving the market down or from 

being used to accelerate a declining 

market by exhausting all remaining bids 

at one price level, while at the same 

time allowing relatively unrestricted 

short selling in an advancing market. As 

such we believe that imposing different 

compliance requirements, and possibly 

a different timetable for implementing 

compliance requirements, for small 

entities would undermine the goal of 

restoring investor confidence. It also 

could create confusion in the market if 

some sellers were not required to 

comply. Further, it could undermine the 

goals of the proposed short sale price 

test restrictions or the proposed circuit 

breaker rules because it could provide 

an avenue for short sellers to evade the 

proposed amendments. In addition, we 

have concluded similarly that it is not 

consistent with the primary goal of the 

proposals to further clarify, consolidate 

or simplify the proposals for small 

entities. Finally, the proposals would 

impose performance standards rather 

than design standards. 

H. General Request for Comments 

We solicit written comments 

regarding our IRFA analysis. In 

particular, the Commission seeks 

comment on the number of small 

entities that would be affected by the 

proposed amendments. We request that 

commenters provide empirical data to 

quantify the number of small entities 

that could be affected by the proposed 

amendments. We request comment on 

whether the proposed amendments 

would have any effects that we have not 

discussed. We also request that 

commenters describe the nature of any 

impact on small entities and provide 

empirical data to support the extent of 

the impact. 

XIII. Additional Request for Comment 

In addition to the specific requests for 

comment found throughout this 

proposing release, we seek comment 

generally from all members of the public 

on all aspects of the proposed 

amendments to Rules 200(g) and 201 of 

Regulation SHO. We request that 

commenters provide empirical data to 

support their views and arguments 

related to these proposals. In addition to 

the questions set forth above, 

commenters are welcome to offer their 

views on any other matter raised by the 

proposed amendments to Regulation 

SHO. Specifically, are there any other 

possible restrictions on short selling that 

the Commission should consider, 

particularly ones that might be helpful 

in a severe market decline? 

XIV. 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 

proposing amendments to §§ 242.200 

and 242.201 of Regulation SHO. 

XV. 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 

proposed to be 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: 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 proposing amendments to 

§§ 242.200 and 242.201 of Regulation SHO. 

Alternative I—Price Tests 

A. Modified Uptick Rule 

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 Price test. 

(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 down-bid price shall 

mean a price that is less than the current 

national best bid or, if the last 

differently priced national best bid was 

greater than the current national best 

bid, a price that is less than or equal to 

the current national best bid. 

(3) The term national best bid shall 

have the same meaning as in 

§ 242.600(b)(42). 

(4) The term national market system 

plan shall have the same meaning as in 

§ 242.600(b)(43). 

(5) The term odd lot shall have the 

same meaning as in § 242.600(b)(49). 

(6) 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 or, after having received an 

order to sell, sells the security as 

principal at the same price to satisfy the 

order to sell. 

(7) 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 

prevent the execution or display of a 

short sale order of a covered security at 

a down-bid price. Provided, however, 

(i) The policies and procedures must 

be reasonably designed to permit the 

execution of a displayed short sale order 

of a covered security by a trading center 

if, at the time of display of the short sale 

order, the order was not at a down-bid 

price. 

(ii) The 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 down-bid 

price. 


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(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. 

(c) A broker or dealer may mark a 

short sale order of a covered security 

‘‘short exempt’’ if the broker or dealer 

that submits the order identifies that the 

order is not on a down-bid price at the 

time of submission of the order to the 

trading center. Provided, however, 

(1) The broker or dealer that identifies 

a short sale order of a covered security 

in accordance with this paragraph 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) of 

this section and shall take prompt 

action to remedy deficiencies in such 

policies and procedures. 

(d) 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: 

(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 off-set 

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 by 

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 

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 section, 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) Any short sale order with respect 

to 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; provided, 

however, the purchase or sell order must 

be given the same per-share price at 

which the broker or dealer sold shares 

to satisfy the facilitated order, exclusive 

of any explicitly disclosed markup or 

markdown, commission equivalent or 

other fee. In addition, for purposes of 

this section, a broker or dealer must 

have written policies and procedures in 

place to assure that, at a minimum: The 

customer order was received prior to the 

offsetting transaction; the offsetting 

transaction is allocated to a riskless 

principal or customer account within 60 

seconds of execution; and 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) No short sales used to calculate 

the VWAP are marked ‘‘short exempt.’’ 

(iv) The VWAP matched security: 

(A) Qualifies as an ‘‘actively-traded 

security’’; 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 five 

percent of the value of the basket traded. 

(v) The transaction is not effected for 

the purpose of creating actual, or 

apparent, active trading in or otherwise 

affecting the price of any security. 

(vi) 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) The provisions of this section shall 

apply to short sale orders in a covered 

security at times 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. 

(g) 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. 

B. Uptick Rule 

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’’ if the seller is relying on 

an exception from the price test of 

§ 242.201. 

* * * * * 


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3. Section 242.201 is revised to read 

as follows: 

§ 242.201 Price test. 

(a) Definitions. For the purposes of 

this section: 

(1) The term actively traded security 

shall have the same meaning as in 

§ 242.101(c)(1). 

(2) The term average daily trading 

volume shall have the same meaning as 

in § 242.100(b). 

(3) The term national market system 

plan shall have the same meaning as in 

§ 242.600(b)(43). 

(4) The term covered security shall 

mean any NMS stock as defined in 

§ 242.600(b)(47). 

(5) The term odd lot shall have the 

same meaning as in § 242.600(b)(49). 

(6) 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 or, after having received an 

order to sell, sells the security as 

principal at the same price to satisfy the 

order to sell. 

(b) No person shall, for his own 

account or for the account of any other 

person, effect a short sale of any covered 

security, if trades in such security are 

reported pursuant to an effective 

national market system plan and 

information as to such trades is made 

available in accordance with such plan 

on a real-time basis to vendors of market 

transaction information: 

(1) Below the price at which the last 

sale thereof, regular way, was reported 

pursuant to an effective national market 

system plan; or 

(2) At such price unless such price is 

above the next preceding different price 

at which a sale of such security, regular 

way, was reported pursuant to an 

effective national market system plan. 

(c) The provisions of paragraph (b) of 

this section shall not apply to: 

(1) Any sale by any person of a 

covered security that the person is 

deemed to own pursuant to § 242.200, 

provided that the person intends to 

deliver the security as soon as all 

restrictions on delivery have been 

removed. 

(2) Any sale by a broker or dealer of 

a covered security for an account in 

which it has no interest, pursuant to an 

order marked long. 

(3) Any sale of a covered security by 

a market maker to off-set customer oddlot orders or to liquidate an odd-lot 

position which changes such broker’s or 

dealer’s position by no more than a unit 

of trading. 

(4) Any sale of a covered security for 

a good faith account by 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. 

(5) Any sale of a covered security for 

a good faith account 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 section, a 

depository receipt of a security shall be 

deemed to be the same security as the 

security represented by such receipt. 

(6)(i) Any sale of a covered security 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) Any 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. 

(7) Any 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) No short sales used to calculate 

the VWAP are marked ‘‘short exempt’’; 

(iv) The VWAP matched security: 

(A) Qualifies as an ‘‘actively-traded 

security’’; 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 five 

percent of the value of the basket traded. 

(v) The transaction is not effected for 

the purpose of creating actual, or 

apparent, active trading in or otherwise 

affecting the price of any security. 

(vi) 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. 

(8) Any sale of a covered security in 

an electronic trading system that 

matches buying and selling interest at 

various times throughout the day that 

meets the following criteria: 

(i) Matches occur at an externally 

derived price within the existing market 

and above the current national best bid; 

(ii) Sellers and purchasers are not 

assured of receiving a matching order; 

(iii) Sellers and purchasers do not 

know when a match will occur; 

(iv) Persons relying on the exception 

contained in paragraph (c)(8) of this 

section shall not be represented in the 

primary market offer or otherwise 

influence the primary market bid or 

offer at the time of the transaction; 

(v) Transactions shall not be made for 

the purpose of creating actual, or 

apparent, active trading in, or 

depressing or otherwise manipulating 

the price of, any security; 

(vi) The covered security: 

(A) Qualifies as an ‘‘actively-traded 

security’’; 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 five 

percent of the value of the basket traded; 

and 

(vii) During the period of time in 

which the electronic trading system may 

match buying and selling interest, there 

can be no solicitation of customer 

orders, or any communication with 

customers that the match has not yet 

occurred. 

(9) Any sale of a covered security 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; provided, 

however, the purchase or sell order must 

be given the same per-share price at 

which the broker or dealer sold shares 

to satisfy the facilitated order, exclusive 

of any explicitly disclosed markup or 

markdown, commission equivalent or 

other fee. In addition, for purposes of 


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this section, a broker or dealer must 

have written policies and procedures in 

place to assure that, at a minimum: The 

customer order was received prior to the 

offsetting transaction; the offsetting 

transaction is allocated to a riskless 

principal or customer account within 60 

seconds of execution; and 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. 

(10) Any sale of a covered security 

(except a sale to a stabilizing bid 

complying with § 242.104) 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-the-counter: 

(i) Effected at a price equal to the most 

recent offer communicated for the 

security by such registered specialist, 

registered exchange market maker or 

third market maker to an exchange or a 

national securities association 

(‘‘association’’) pursuant to § 242.602, if 

such offer, when communicated, was 

equal to or above the last sale, regular 

way, reported for such security pursuant 

to an effective national market system 

plan. Provided, however, 

(ii) That any self-regulatory 

organization, by rule, may prohibit its 

registered specialist and registered 

exchange market makers from availing 

themselves of the exemption afforded by 

this paragraph (c)(10) if that selfregulatory organization determines that 

such action is necessary or appropriate 

in its market in the public interest or for 

the protection of investors. 

(11) Any sale of a covered security 

(except a sale to a stabilizing bid 

complying with § 242.104) by any 

broker or dealer, for his own account or 

for the account of any other person, 

effected at a price equal to the most 

recent offer communicated by such 

broker or dealer to an exchange or 

association pursuant to § 242.602 in an 

amount less than or equal to the 

quotation size associated with such 

offer, if such offer, when communicated, 

was: 

(i) Above the price at which the last 

sale, regular way, for such security was 

reported pursuant to an effective 

national market system plan; or 

(ii) At such last sale price, if such last 

sale price is above the next preceding 

different price at which a sale of such 

security, regular way, was reported 

pursuant to an effective national market 

system plan. 

(12) Any sale of a security by a 

registered market maker or specialist 

publishing two-sided quotes to facilitate 

customer market or marketable limit 

buy orders. 

(d) No self-regulatory organization 

shall have any rule that is not in 

conformity with, or conflicts with this 

section. 

(e) The provisions of this section shall 

apply to short sale orders in a covered 

security at times when a last sale price 

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. 

(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. 

Alternative II—Circuit Breaker Rules 

A. Circuit Breaker Halt Rule 

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’’ if the seller is relying on 

an exception from the prohibition 

against short selling of § 242.201. 

* * * * * 

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 regular trading hours 

shall have the same meaning as in 

§ 242.600(b)(64). 

(3) The term national market system 

plan shall have the same meaning as in 

§ 242.600(b)(43). 

(b) If the price of a covered security, 

as reported in the consolidated system, 

decreases by ten percent or more from 

that covered security’s last price 

reported during regular trading hours 

the prior day, as reported in the 

consolidated system, no person shall, 

for his own account or for the account 

of any other person, effect a short sale 

of that covered security, wherever 

traded, at times when a last sale price 

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, for the remainder of the 

day. 

(c) The provisions of paragraph (b) of 

this section shall not apply if the 

decrease in the price of a covered 

security occurs within thirty minutes 

from the end of regular trading hours. 

(d) The provisions of paragraph (b) of 

this section shall not apply to: 

(1) Any sale of a covered security by 

a registered market maker, block 

positioner, or other market maker 

obligated to quote in the over-thecounter market, in each case that are 

selling short a covered security as part 

of bona fide market making in such 

covered security. 

(2) Any sale of a covered security by 

any person as a result of automatic 

exercise or assignment of an equity 

option, or in connection with a futures 

contract, that is held prior to the trigger 

event identified in paragraph (b) of this 

section due to expiration of the option 

or futures contract. 

(3) Any sale of a covered security by 

any person that is the writer of a call 

option if the sale is as a result of 

assignment following exercise by the 

holder of the call. 

(4) Any 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. 

(5) Any sale of a covered security by 

any 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. 

(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 


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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 18111 

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. 

B. Circuit Breaker With Modified Uptick 

Rule 

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(d) or (e) 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 regular trading hours 

shall have the same meaning as in 

§ 242.600(b)(64). 

(3) The term down-bid price shall 

mean a price that is less than the current 

national best bid or, if the last 

differently priced national best bid was 

greater than the current national best 

bid, a price that is less than or equal to 

the current national best bid. 

(4) The term national best bid shall 

have the same meaning as in 

§ 242.600(b)(42). 

(5) The term national market system 

plan shall have the same meaning as in 

§ 242.600(b)(43). 

(6) The term odd lot shall have the 

same meaning as in § 242.600(b)(49). 

(7) 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 or, after having received an 

order to sell, sells the security as 

principal at the same price to satisfy the 

order to sell. 

(8) 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 

prevent, when the price of a covered 

security decreases by ten percent or 

more from that covered security’s last 

price reported during regular trading 

hours the prior day, as reported in the 

consolidated system, the execution or 

display of a short sale order of that 

covered security at a down-bid price at 

times 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, for the remainder of the 

day. Provided, however, 

(i) The policies and procedures must 

be reasonably designed to permit the 

execution of a displayed short sale order 

of a covered security by a trading center 

if, at the time of display of the short sale 

order, the order was not at a down-bid 

price. 

(ii) The 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 down-bid 

price. 

(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. 

(c) The provisions of paragraph (b) of 

this section shall not apply if the 

decrease in the price of a covered 

security occurs within thirty minutes 

from the end of regular trading hours. 

(d) A broker or dealer may mark a 

short sale order of a covered security 

‘‘short exempt’’ if the broker or dealer 

that submits the order identifies that the 

order is not on a down-bid price at the 

time of submission of the order to the 

trading center. Provided, however, 

(1) The broker or dealer that identifies 

a short sale order of a covered security 

in accordance with this paragraph 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) of 

this section and shall take prompt 

action to remedy deficiencies in such 

policies and procedures. 

(e) 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: 

(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 off-set 

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 by 

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 

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 section, 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) Any short sale order with respect 

to 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; provided, 

however, the purchase or sell order must 

be given the same per-share price at 

which the broker or dealer sold shares 

to satisfy the facilitated order, exclusive 

of any explicitly disclosed markup or 

markdown, commission equivalent or 

other fee. In addition, for purposes of 

this section, a broker or dealer must 

have written policies and procedures in 

place to assure that, at a minimum: The 

customer order was received prior to the 

offsetting transaction; the offsetting 


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18112 Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 

transaction is allocated to a riskless 

principal or customer account within 60 

seconds of execution; and 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) No short sales used to calculate 

the VWAP are marked ‘‘short exempt.’’ 

(iv) The VWAP matched security: 

(A) Qualifies as an ‘‘actively-traded 

security’’; 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 five 

percent of the value of the basket traded. 

(v) The transaction is not effected for 

the purpose of creating actual, or 

apparent, active trading in or otherwise 

affecting the price of any security. 

(vi) 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. 

(f) No self-regulatory organization 

shall have any rule that is not in 

conformity with, or conflicts with, this 

section. 

(g) 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. 

C. Circuit Breaker With Uptick Rule 

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’’ if the seller is relying on 

an exception from the price test of 

§ 242.201. 

* * * * * 

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 regular trading hours 

shall have the same meaning as in 

§ 242.600(b)(64). 

(3) The term actively traded security 

shall have the same meaning as in 

§ 242.101(c)(1). 

(4) The term average daily trading 

volume shall have the same meaning as 

in § 242.100(b). 

(5) The term national market system 

plan shall have the same meaning as in 

§ 242.600(b)(43). 

(6) The term odd lot shall have the 

same meaning as in § 242.600(b)(49). 

(7) 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 or, after having received an 

order to sell, sells the security as 

principal at the same price to satisfy the 

order to sell. 

(b) If the price of a covered security, 

as reported in the consolidated system, 

decreases by ten percent or more from 

that covered security’s last price 

reported during regular trading hours 

the prior day, as reported in the 

consolidated system, no person shall, 

for his own account or for the account 

of any other person, effect a short sale 

of that covered security, wherever 

traded, at times when a last sale price 

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, for the remainder of the 

day, if trades in such security are 

reported pursuant to an effective 

national market system plan and 

information as to such trades is made 

available in accordance with such plan 

on a real-time basis to vendors of market 

transaction information: 

(1) Below the price at which the last 

sale thereof, regular way, was reported 

pursuant to an effective national market 

system plan; or 

(2) At such price unless such price is 

above the next preceding different price 

at which a sale of such security, regular 

way, was reported pursuant to an 

effective national market system plan. 

(c) The provisions of paragraph (b) of 

this section shall not apply if the 

decrease in the price of a covered 

security occurs within thirty minutes 

from the end of regular trading hours. 

(d) The provisions of paragraph (b) of 

this section shall not apply to: 

(1) Any sale by any person of a 

covered security that the person is 

deemed to own pursuant to § 242.200, 

provided that the person intends to 

deliver the security as soon as all 

restrictions on delivery have been 

removed. 

(2) Any sale by a broker or dealer of 

a covered security for an account in 

which it has no interest, pursuant to an 

order marked long. 

(3) Any sale of a covered security by 

a market maker to off-set customer oddlot orders or to liquidate an odd-lot 

position which changes such broker’s or 

dealer’s position by no more than a unit 

of trading. 

(4) Any sale of a covered security for 

a good faith account by 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. 

(5) Any sale of a covered security for 

a good faith account 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 section, a 


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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules 18113 

depository receipt of a security shall be 

deemed to be the same security as the 

security represented by such receipt. 

(6)(i) Any sale of a covered security 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) Any 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. 

(7) Any 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) No short sales used to calculate 

the VWAP are marked ‘‘short exempt.’’ 

(iv) The VWAP matched security: 

(A) Qualifies as an ‘‘actively-traded 

security’’; 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 five 

percent of the value of the basket traded. 

(v) The transaction is not effected for 

the purpose of creating actual, or 

apparent, active trading in or otherwise 

affecting the price of any security. 

(vi) 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. 

(8) Any sale of a covered security in 

an electronic trading system that 

matches buying and selling interest at 

various times throughout the day that 

meets the following criteria: 

(i) Matches occur at an externally 

derived price within the existing market 

and above the current national best bid; 

(ii) Sellers and purchasers are not 

assured of receiving a matching order; 

(iii) Sellers and purchasers do not 

know when a match will occur; 

(iv) Persons relying on the exception 

contained in paragraph (c)(8) of this 

section shall not be represented in the 

primary market offer or otherwise 

influence the primary market bid or 

offer at the time of the transaction; 

(v) Transactions shall not be made for 

the purpose of creating actual, or 

apparent, active trading in, or 

depressing or otherwise manipulating 

the price of, any security; 

(vi) The covered security: 

(A) Qualifies as an ‘‘actively-traded 

security’’; 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 five 

percent of the value of the basket traded; 

and 

(vii) During the period of time in 

which the electronic trading system may 

match buying and selling interest, there 

can be no solicitation of customer 

orders, or any communication with 

customers that the match has not yet 

occurred. 

(9) Any sale of a covered security 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; provided, 

however, the purchase or sell order must 

be given the same per-share price at 

which the broker or dealer sold shares 

to satisfy the facilitated order, exclusive 

of any explicitly disclosed markup or 

markdown, commission equivalent or 

other fee. In addition, for purposes of 

this section, a broker or dealer must 

have written policies and procedures in 

place to assure that, at a minimum: the 

customer order was received prior to the 

offsetting transaction; the offsetting 

transaction is allocated to a riskless 

principal or customer account within 60 

seconds of execution; and 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. 

(10) Any sale of a covered security 

(except a sale to a stabilizing bid 

complying with § 242.104) 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-the-counter: 

(i) Effected at a price equal to the most 

recent offer communicated for the 

security by such registered specialist, 

registered exchange market maker or 

third market maker to an exchange or a 

national securities association 

(‘‘association’’) pursuant to § 242.602, if 

such offer, when communicated, was 

equal to or above the last sale, regular 

way, reported for such security pursuant 

to an effective national market system 

plan. Provided, however, 

(ii) That any self-regulatory 

organization, by rule, may prohibit its 

registered specialist and registered 

exchange market makers from availing 

themselves of the exemption afforded by 

this paragraph (d)(10) if that selfregulatory organization determines that 

such action is necessary or appropriate 

in its market in the public interest or for 

the protection of investors. 

(11) Any sale of a covered security 

(except a sale to a stabilizing bid 

complying with § 242.104) by any 

broker or dealer, for his own account or 

for the account of any other person, 

effected at a price equal to the most 

recent offer communicated by such 

broker or dealer to an exchange or 

association pursuant to § 242.602 in an 

amount less than or equal to the 

quotation size associated with such 

offer, if such offer, when communicated, 

was: 

(i) Above the price at which the last 

sale, regular way, for such security was 

reported pursuant to an effective 

national market system plan; or 

(ii) At such last sale price, if such last 

sale price is above the next preceding 

different price at which a sale of such 

security, regular way, was reported 

pursuant to an effective national market 

system plan. 

(12) Any sale of a security by a 

registered market maker or specialist 

publishing two-sided quotes to facilitate 

customer market or marketable limit 

buy orders. 

(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. 

By the Commission. 

Dated: April 10, 2009. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–8730 Filed 4–17–09; 8:45 am] 

BILLING CODE 


sroberts on PROD1PC70 with PROPOSALS