Document ID: SEC-2010-0369-0001
Agency: sec
Document Type: Rule
Title: Amendments to Regulation SHO
Posted Date: 2010-03-10T05:00Z

[Federal Register: March 10, 2010 (Volume 75, Number 46)]
[Rules and Regulations]               
[Page 11231-11325]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr10-10]                         

[[Page 11231]]

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Part II

Securities and Exchange Commission

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17 CFR Part 242

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Amendments to Regulation SHO; Final Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-61595; File No. S7-08-09]
RIN 3235-AK35

 
Amendments to Regulation SHO

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to Regulation SHO under the Securities Exchange Act 
of 1934 (``Exchange Act''). We are adopting a short sale-related 
circuit breaker that, if triggered, will impose a restriction on the 
prices at which securities may be sold short (``short sale price test'' 
or ``short sale price test restriction''). Specifically, the Rule 
requires that a trading center establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the execution or 
display of a short sale order of a covered security at a price that is 
less than or equal to the current national best bid if the price of 
that covered security decreases by 10% or more from the covered 
security's closing price as determined by the listing market for the 
covered security as of the end of regular trading hours on the prior 
day. In addition, the Rule requires that the trading center establish, 
maintain, and enforce written policies and procedures reasonably 
designed to impose this short sale price test restriction for the 
remainder of the day and the following day when a national best bid for 
the covered security is calculated and disseminated on a current and 
continuing basis by a plan processor pursuant to an effective national 
market system plan. We believe it is appropriate at this time to adopt 
a short sale-related circuit breaker because, when triggered, it will 
prevent short selling, including potentially manipulative or abusive 
short selling, from driving down further the price of a security that 
has already experienced a significant intra-day price decline, and will 
facilitate the ability of long sellers to sell first upon such a 
decline. This approach establishes a narrowly-tailored Rule that will 
target only those securities that are experiencing significant intra-
day price declines. We believe that addressing short selling in 
connection with such declines in individual securities will help 
address erosion of investor confidence in our markets generally.
    In addition, we are amending Regulation SHO to provide that a 
broker-dealer may mark certain qualifying sell orders ``short exempt.'' 
In particular, if the broker-dealer chooses to rely on its own 
determination that it is submitting the short sale order to the trading 
center at a price that is above the current national best bid at the 
time of submission or to rely on an exception specified in the Rule, it 
must mark the order as ``short exempt.'' This ``short exempt'' marking 
requirement will aid surveillance by self-regulatory organizations 
(``SROs'') and the Commission for compliance with the provisions of 
Rule 201 of Regulation SHO.

DATES: Effective Date: May 10, 2010.
    Compliance Date: November 10, 2010.

FOR FURTHER INFORMATION CONTACT: Josephine J. Tao, Assistant Director; 
Victoria Crane, Branch Chief; Katrina Wilson, Staff Attorney; and 
Angela Moudy, Staff Attorney, Division of Trading and Markets, at (202) 
551-5720, at the Commission, 100 F Street, NE., Washington, DC 20549-
6628.

SUPPLEMENTARY INFORMATION: The Commission is amending Rules 200(g) and 
201 of Regulation SHO [17 CFR 242.200(g) and 17 CFR 242.201] under the 
Exchange Act.

Table of Contents

I. Executive Summary
II. Background on Short Sale Restrictions
    A. Short Selling and Its Market Impact
    B. History of Short Sale Price Test Restrictions in the U.S.
    C. Proposal To Adopt a Short Sale Price Test Restriction or 
Circuit Breaker
    D. Empirical Data Regarding Potential Market Impact of Short 
Sale Price Test Restrictions Submitted in Response to the Proposal 
and Re-Opening Release
III. Discussion of Rule 201 of Regulation SHO
    A. Operation of the Circuit Breaker Plus Alternative Uptick Rule
    1. Covered Securities
    2. Pricing Increment
    3. Alternative Uptick Rule
    4. Circuit Breaker Approach Generally
    5. Circuit Breaker Trigger Level and Duration
    6. Determination Regarding Securities Subject to Rule 201 and 
Dissemination of Such Information
    7. Policies and Procedures Approach
    B. ``Short Exempt'' Provisions of Rule 201
    1. Broker-Dealer Provision
    2. Seller's Delay in Delivery
    3. Odd Lot Transactions
    4. Domestic Arbitrage
    5. International Arbitrage
    6. Over-Allotments and Lay-Off Sales
    7. Riskless Principal Transactions
    8. Transactions on a Volume-Weighted Average Price Basis
    9. Decision Not To Adopt a Provision That a Broker-Dealer May 
Mark an Order ``Short Exempt'' in Connection With Bona Fide Market 
Making Activity
IV. Order Marking
V. Exemptive Procedures
VI. Overseas Transactions
VII. Rule 201 Implementation Period
VIII. Decision Not To Implement Rule 201 on a Pilot Basis
IX. Paperwork Reduction Act
    A. Background
    B. Summary
    1. Policies and Procedures Requirement Under Rule 201
    2. Policies and Procedures Requirement Under the Broker-Dealer 
and Riskless Principal Provisions
    3. Marking Requirements
    C. Use of Information
    1. Policies and Procedures Requirement Under Rule 201
    2. Policies and Procedures Requirement Under the Broker-Dealer 
and Riskless Principal Provisions
    3. Marking Requirements
    D. Respondents
    1. Policies and Procedures Requirement Under Rule 201
    2. Policies and Procedures Requirement Under the Broker-Dealer 
and Riskless Principal Provisions
    3. Marking Requirements
    E. Total Annual Reporting and Recordkeeping Burdens
    1. Policies and Procedures Requirement Under Rule 201
    2. Policies and Procedures Requirement Under the Broker-Dealer 
and Riskless Principal Provisions
    3. Marking Requirements
    F. Collection of Information Is Mandatory
    1. Policies and Procedures Requirements
    2. Marking Requirements
    G. Confidentiality
    1. Policies and Procedures Requirements
    2. Marking Requirements
    H. Record Retention Period
    1. Policies and Procedures Requirements
    2. Marking Requirements
X. Cost-Benefit Analysis
    A. Benefits
    1. Alternative Uptick Rule
    2. Circuit Breaker Approach
    3. Marking Requirements
    B. Costs
    1. Alternative Uptick Rule
    a. Impact on Market Quality
    b. Implementation and On-going Monitoring and Surveillance Costs
    i. Policies and Procedures Requirement Under Rule 201
    ii. Policies and Procedures Requirement Under the Broker-Dealer 
and Riskless Principal Provisions
    2. Circuit Breaker Approach
    a. Impact on Market Quality
    b. Implementation and On-going Monitoring and Surveillance Costs
    3. Implementation Period
    4. Marking Requirements
XI. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation
    A. Competition
    1. Market Structure for Trading Centers and Broker-Dealers
    2. Discussion of Impacts of Rules 200(g) and 201 on Competition
    B. Capital Formation
    C. Efficiency

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XII. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the Rule
    B. Significant Issues Raised by Public Comment
    C. Small Entities Affected by the Rule
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
    F. Significant Alternatives
XIII. Statutory Authority
XIV. Text of the Amendments to Regulation SHO

I. Executive Summary

    In July 2007, the Commission eliminated all short sale price test 
restrictions. Prior to that time, short sale price test restrictions 
included Rule 10a-1 under the Exchange Act, also known as the ``uptick 
rule'' or ``tick test'' (``former Rule 10a-1''), that applied to 
exchange-listed securities,\1\ and the National Association of 
Securities Dealers, Inc.'s (``NASD'') \2\ bid test, Rule 3350 (``NASD's 
former bid test''), that applied to certain Nasdaq securities.\3\ The 
Commission's removal of short sale price test restrictions followed a 
careful, deliberative rulemaking process, carried out in multiple 
stages from 1999 through 2006, and was open to the public at every 
stage.
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    \1\ See infra note 41 and accompanying text.
    \2\ NASD is now known as the Financial Industry Regulatory 
Authority, Inc. (``FINRA'').
    \3\ See infra note 43 and accompanying text.
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    The Commission took a number of steps as part of that process, 
including seeking extensive public comment and conducting a 
comprehensive staff study to assess whether then-current short sale 
price test restrictions were appropriate. For example, beginning in 
1999, the Commission published a concept release in which it sought 
comment regarding short sale price test regulation, including comment 
on whether to eliminate such regulation.\4\ In 2004, the Commission 
initiated a year-long pilot (``Pilot'') to study the removal of short 
sale price tests for approximately one-third of the largest stocks.\5\ 
Short sale data was made publicly available during this Pilot to allow 
the public and Commission staff (the ``Staff'') to study the effects of 
eliminating short sale price test restrictions. The findings of third 
party researchers were presented and discussed in a public Roundtable 
in September 2006.\6\ In addition, the results of the Staff study of 
the Pilot data were made publicly available in draft form in September 
2006 and in final form in February 2007.\7\
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    \4\ See Exchange Act Release No. 42037 (Oct. 20, 1999), 64 FR 
57996 (Oct. 28, 1999) (``1999 Concept Release'').
    \5\ See Exchange Act Release No. 50104 (July 28, 2004), 69 FR 
48032 (Aug. 6, 2004) (``Pilot Release'').
    \6\ See http://www.sec.gov/about/economic/
shopilottrans091506.pdf (the ``Regulation SHO 2006 Roundtable'').
    \7\ See http://www.sec.gov/about/economic/shopilot091506/draft_
reg_sho_pilot_report.pdf and http://www.sec.gov/news/studies/
2007/regshopilot020607.pdf. See also infra notes 48 to 62 and 
accompanying text (discussing findings of the Staff study).
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    Since then, there has been significant market turmoil. Concurrent 
with the development of the subprime mortgage crisis and credit crisis 
in 2007, market volatility, including steep price declines, 
particularly in the stocks of certain financial services companies, 
increased markedly in the U.S. and in every major stock market around 
the world (including markets that continued to operate under short sale 
price test restrictions).\8\ As market conditions continued to worsen, 
investor confidence eroded, and the Commission received many requests 
from the public to consider imposing restrictions with respect to short 
selling, based in part on the belief that such action would help 
restore investor confidence.\9\
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    \8\ See Exchange Act Release No. 59748 (Apr. 10, 2009), 74 FR 
18042, 18043 (Apr. 20, 2009) (the ``Proposal'').
    \9\ See id.
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    We determined that it was appropriate to re-examine the 
appropriateness of short sale price test restrictions and seek comment 
on whether to restore any such restrictions. Thus, in April 2009 we 
proposed two approaches to restrictions on short selling, one that 
would apply on a permanent, market-wide basis and another that would 
apply to a particular security upon a significant decline in the price 
of that security (the ``proposed circuit breaker approach'' or 
``proposed circuit breaker rules'').\10\
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    \10\ See Proposal, 74 FR 18042.
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    With respect to the permanent, market-wide approach, we proposed 
two alternative price tests. The first alternative price test, in many 
ways similar to NASD's former bid test, would be based on the national 
best bid (the ``proposed modified uptick rule''). The second 
alternative price test, similar to former Rule 10a-1, would be based on 
the last sale price (the ``proposed uptick rule'').
    With respect to the proposed circuit breaker approach, we proposed 
two basic alternatives. First, we proposed a circuit breaker rule that, 
when triggered by a significant price decline in a particular security, 
would temporarily prohibit any person from selling short that security, 
subject to certain exceptions (``proposed circuit breaker halt rule''). 
Second, we proposed a circuit breaker rule that, when triggered by a 
significant price decline in a particular security, would trigger a 
temporary short sale price test for that security. In connection with 
this alternative, we proposed two short sale price tests. One was the 
modified uptick rule--that is, we proposed a circuit breaker rule that, 
when triggered by a significant price decline in a particular security, 
would temporarily impose the proposed modified uptick rule for that 
security (``proposed circuit breaker modified uptick rule''). The other 
was the uptick rule--that is, we proposed a circuit breaker rule that, 
when triggered by a significant market decline in a particular 
security, would temporarily impose the proposed uptick rule for that 
security (``proposed circuit breaker uptick rule'').
    In addition, in the Proposal we inquired whether a short sale price 
test restriction that would permit short selling at a price above the 
current national best bid (the ``alternative uptick rule''), would be 
preferable to the proposed modified uptick rule and the proposed uptick 
rule.\11\ We sought comment regarding the application of the 
alternative uptick rule as a market-wide permanent short sale price 
test restriction or in conjunction with a circuit breaker.\12\ As a 
supplement to our request for comment in the Proposal and to help 
ensure the public had a full opportunity to comment on, among other 
things, the alternative uptick rule, on August 20, 2009 we re-opened 
the comment period to the Proposal.\13\ In addition, on May 5, 2009, we 
held a Roundtable to Examine Short Sale Price Test and Circuit Breaker 
Restrictions (the ``May 2009 Roundtable'').\14\ Panelists included 
representatives of public issuers, investors, financial services firms, 
SROs and the academic community.\15\
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    \11\ See Proposal, 74 FR at 18072, 18081, 18082.
    \12\ See id.
    \13\ See Exchange Act Release No. 60509 (Aug. 17, 2009), 74 FR 
42033 (Aug. 20, 2009) (the ``Re-Opening Release'').
    \14\ See Exchange Act Release No. 59855 (May 1, 2009); Press 
Release No. 2009-101 (agenda and panelists included); Press Release 
No. 2009-88 (preliminary agenda included).
    \15\ See http://www.sec.gov/spotlight/shortsales/
roundtable050509/shortsalesroundtable050509-transcript.txt 
(unofficial transcript of May 2009 Roundtable).
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    Although in recent months there has been an increase in stability 
in the securities markets, we remain concerned that excessive downward 
price pressure on individual securities accompanied by the fear of 
unconstrained short selling can undermine investor confidence in our

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markets generally.\16\ In addition, we are concerned about potential 
future market turmoil, including significant increases in market 
volatility and steep price declines. Thus, as discussed in more detail 
below, after considering the comments, we have determined that it is 
appropriate at this time to adopt in Rule 201 a targeted short sale 
price test restriction that will apply the alternative uptick rule for 
the remainder of the day and the following day if the price of an 
individual security declines intra-day by 10% or more from the prior 
day's closing price for that security as determined by the covered 
security's listing market.
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    \16\ We note that investor confidence may include a number of 
different elements, such as investor perceptions about fundamental 
market risk, investor optimism about the economy, or investor trust 
in the fairness of financial markets as influenced by applicable 
regulatory protections. Although the latter can be directly 
influenced by Commission actions, the Commission does not have 
control over fundamental market risk and economic optimism. Thus, as 
used here, the term ``investor confidence'' refers to investor trust 
in the fairness of financial markets.
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    By not allowing short sellers to sell at or below the current 
national best bid while the circuit breaker is in effect, the short 
sale price test restriction in Rule 201 will allow long sellers, who 
will be able to sell at the bid, to sell first in a declining market 
for a particular security. As the Commission has noted previously in 
connection with short sale price test restrictions, a goal of such 
restrictions is to allow long sellers to sell first in a declining 
market.\17\ A short seller that is seeking to profit quickly from 
accelerated, downward market moves may find it advantageous to be able 
to short sell at the current national best bid. In addition, by making 
such bids accessible only by long sellers when a security's price is 
undergoing significant downward price pressure, Rule 201 will help to 
facilitate and maintain stability in the markets and help ensure that 
they function efficiently. It will also help restore investor 
confidence during times of substantial uncertainty because, once the 
circuit breaker has been triggered for a particular security, long 
sellers will have preferred access to bids for the security, and the 
security's continued price decline will more likely be due to long 
selling and the underlying fundamentals of the issuer, rather than to 
other factors.
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    \17\ See Exchange Act Release No. 48709 (Oct. 28, 2003), 68 FR 
62972, 62989 (Nov. 6, 2003) (``2003 Regulation SHO Proposing 
Release''); see also Exchange Act Release No. 30772 (June 3, 1992), 
57 FR 24415, 24416 (June 9, 1992) (stating that former Rule 10a-1 
was ``designed to limit short selling of a security in a declining 
market, by requiring, in effect, that each successive lower price be 
established by a long seller'').
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    In addition, combining the alternative uptick rule with a circuit 
breaker will strike the appropriate balance between our goal of 
preventing short selling, including potentially manipulative or abusive 
short selling, from being used as a tool to exacerbate a declining 
market in a security and the need to allow for the continued smooth 
functioning of the markets, including the provision of liquidity and 
price efficiency in the markets.\18\ The circuit breaker approach of 
Rule 201 will help benefit the market for a particular security by 
allowing participants, when a security is undergoing a significant 
intra-day price decline, an opportunity to re-evaluate circumstances 
and respond to volatility in that security. We also believe that a 
circuit breaker will better target short selling that may be related to 
potential bear raids \19\ and other forms of manipulation that may be 
used to exacerbate a price decline in a covered security.
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    \18\ Where we use the terms ``market efficiency'' and ``price 
efficiency'' in this adopting release we are using terms of art as 
used in the economic literature proceeding under the ``efficient 
markets hypothesis,'' under which financial prices are assumed to 
reflect all available information and accordingly adjust quickly to 
reflect new information. See, e.g., Eugene F. Fama, 1991, Efficient 
capital markets: II, Journal of Finance; 46: 1575-1617; Eugene F. 
Fama and Kenneth R. French, 1992, The Cross-Section of Expected 
Stock Returns, Journal of Finance, 47: 427-465. It should be noted 
that economic efficiency and price efficiency are not identical with 
the ordinary sense of the word ``efficiency.''
    \19\ See infra note 36 and accompanying text.
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    At the same time, however, we recognize the benefits to the market 
of legitimate short selling, such as the provision of liquidity and 
price efficiency. Thus, by imposing a short sale price test restriction 
only when an individual security is undergoing significant downward 
price pressure, the short sale price test restrictions of Rule 201 will 
apply to a limited number of securities, rather than to all securities 
all the time. As discussed in more detail below,\20\ in response to our 
request for comment on an appropriate threshold at which to trigger the 
proposed circuit breaker short sale price test restrictions, commenters 
submitted estimates of the number of securities that would trigger a 
circuit breaker rule at a 10% threshold.\21\ While commenters' analyses 
(including the facts and assumptions used) and their resulting 
estimates varied,\22\ commenters' estimates reflect that a 10% circuit 
breaker threshold, on average, should affect a limited percentage of 
covered securities.\23\ Given the variations in the facts and 
assumptions underlying the estimates submitted by commenters, the Staff 
also looked at trading data to confirm the reasonableness of those 
estimates. The Staff found that, during the period covering April 9, 
2001 to September 30, 2009,\24\ the price test restrictions of Rule 201 
would have been triggered, on an average day, for approximately 4% of 
covered securities.\25\ The Staff also found that for a low volatility 
period, covering January 1, 2004 to December 31, 2006, the 10% trigger 
level of Rule 201 would have, on an average day, been triggered for 
approximately 1.3% of covered securities.\26\
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    \20\ See infra Section III.A.5. (discussing the circuit breaker 
trigger level).
    \21\ See, e.g., letter from Mary Lou Von Kaenel, Managing 
Director, Management Consulting, Jordan & Jordan, dated June 19, 
2009 (``Jordan & Jordan''); letter from John C. Nagel, Managing 
Director and Deputy General Counsel, Citadel Investment Group, John 
Liftin, Managing Director and General Counsel, The D.E. Shaw Group, 
and Mark Silber, Executive Vice President, Renaissance Technologies, 
dated June 19, 2009 (``Citadel et al. (June 2009)''); letter from 
Stuart J. Kaswell, Executive Vice President, Managing Director and 
General Counsel, Managed Funds Association, dated June 22, 2009 
(``MFA (June 2009)''); letter from Ira D. Hammerman, Senior Managing 
Director and General Counsel, Securities Industry and Financial 
Markets Association, dated June 19, 2009 (``SIFMA (June 2009)''); 
letter from Daniel Mathisson, Managing Director, Credit Suisse 
Securities (USA), LLC, dated Sept. 21, 2009 (``Credit Suisse (Sept. 
2009)'').
    \22\ See infra note 306.
    \23\ See infra note 307.
    \24\ See infra note 309.
    \25\ See infra note 310.
    \26\ See infra note 311.
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    Thus, Rule 201 is structured so that the circuit breaker generally 
will not be triggered for the majority of covered securities at any 
given time and, thereby, will not interfere with the smooth functioning 
of the markets for those securities, including when prices in such 
securities are undergoing minimal downward price pressure or are stable 
or rising. If the short sale price test restrictions of Rule 201 apply 
to a covered security it will be because and when that security is 
undergoing significant downward price pressure.
    In addition, to help ensure the Rule's workability, we are amending 
Rule 200(g) of Regulation SHO, substantially as proposed, to provide 
that, once the circuit breaker has been triggered for a covered 
security, if a broker-dealer chooses to rely on its own determination 
that it is submitting a short sale order to a trading center at a price 
that is above the current national best bid at the time of submission 
or to rely on an exception specified in the Rule, it must mark the 
order ``short

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exempt.'' \27\ The short sale price test restrictions of Rule 201 
generally will apply to a small number of securities for a limited 
duration, and will continue to permit short selling rather than, for 
example, halting short selling when the restrictions are in place. As 
such, we believe that the circumstances under which a broker-dealer may 
need to mark a short sale order ``short exempt'' under Rule 201 are 
limited.
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    \27\ We note that, as discussed in more detail below, unless a 
sale order is marked ``short exempt,'' a trading center's policies 
and procedures must be reasonably designed to prevent the execution 
or display of the order at a price that is less than or equal to the 
current national best bid.
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II. Background on Short Sale Restrictions

    Short selling involves a sale of a security that the seller does 
not own or a sale that is consummated by the delivery of a security 
borrowed by, or for the account of, the seller.\28\ In order to deliver 
the security to the purchaser, the short seller will borrow the 
security, usually from a broker-dealer or an institutional investor. 
Typically, the short seller later closes out the position by purchasing 
equivalent securities on the open market and returning the security to 
the lender. In general, short selling is used to profit from an 
expected downward price movement, to provide liquidity in response to 
unanticipated demand, or to hedge the risk of an economic long position 
in the same security or in a related security.\29\
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    \28\ See 17 CFR 242.200(a).
    \29\ See, e.g., Exchange Act Release No. 54891 (Dec. 7, 2006), 
71 FR 75068, 75069 (Dec. 13, 2006) (``2006 Price Test Elimination 
Proposing Release''); 2003 Regulation SHO Proposing Release, 68 FR 
at 62974. In this adopting release, we use the terms ``liquidity 
provider'' and ``liquidity taker,'' and correlative terms, in their 
technical sense in the literature of market microstructure. See, 
e.g., Larry Harris, Trading and Exchanges: Market Microstructure for 
Practitioners, at 70 (2003) (an introductory textbook to the 
economics of market microstructure). As used therein, a liquidity 
taker is a buyer or seller (including a short seller) who submits an 
order designed for immediate execution, such as a market order or a 
marketable limit order, while a liquidity provider is a more patient 
buyer or seller (including a short seller) who submits orders that 
may or may not be executed, and thus provides depth to the market. 
This usage differs from the usage of the term ``liquidity provider'' 
to refer to a bank, central bank, or other financial institution or 
investor who provides cash financing or otherwise increases the 
money supply.
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A. Short Selling and Its Market Impact

    Short selling provides the market with important benefits, 
including market liquidity and pricing efficiency.\30\ Market liquidity 
is often provided through short selling by market professionals, such 
as market makers (including specialists) and block positioners, who 
offset temporary imbalances in the buying and selling interest for 
securities. Short sales effected in the market add to the selling 
interest of stock available to purchasers and reduce the risk that the 
price paid by investors is artificially high because of a temporary 
imbalance between buying and selling interest. Short sellers covering 
their sales also may add to the buying interest of stock available to 
sellers.\31\
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    \30\ See id.; see also Exchange Act Release No. 29278 (June 7, 
1991), 56 FR 27280 (June 13, 1991); Exchange Act Release No. 50103 
(July 28, 2004), 69 FR 48008, 48009 n.6 (Aug. 6, 2004) (``2004 
Regulation SHO Adopting Release''); Ekkehart Boehmer and J. Julie 
Wu, Short Selling and the Informational Efficiency of Prices, 
Working Paper, Jan. 8, 2009.
    \31\ See, e.g., 2006 Price Test Elimination Proposing Release, 
71 FR at 75069; 2003 Regulation SHO Proposing Release, 68 FR at 
62974.
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    Short selling also can contribute to the pricing efficiency of the 
equities markets.\32\ When a short seller speculates or hedges against 
a downward movement in a security, his transaction is a mirror image of 
the person who purchases the security in anticipation that the 
security's price will rise or to hedge against such an increase. Both 
the purchaser and the short seller hope to profit, or hedge against 
loss, by buying the security at one price and selling at a higher 
price. The strategies primarily differ in the sequence of transactions. 
Market participants who believe a stock is overvalued may engage in 
short sales in an attempt to profit from a perceived divergence of 
prices from true economic values. Such short sellers add to stock 
pricing efficiency because their transactions inform the market of 
their evaluation of future stock price performance. This evaluation is 
reflected in the resulting market price of the security.\33\
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    \32\ See id.
    \33\ See 2006 Price Test Elimination Proposing Release, 71 FR at 
75069-75070; 2003 Regulation SHO Proposing Release, 68 FR at 62974. 
Arbitrageurs also contribute to pricing efficiency by utilizing 
short sales to profit from price disparities between a stock and a 
derivative security, such as a convertible security or an option on 
that stock. For example, an arbitrageur may purchase a convertible 
security and sell the underlying stock short to profit from a 
current price differential between two economically similar 
positions. See id.
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    Although short selling serves useful market purposes, it also may 
be used to drive down the price of a security or as a tool to 
accelerate a declining market in a security.\34\ In addition, short 
selling may be used to illegally manipulate stock prices.\35\ One 
example is the ``bear raid'' where an equity security is sold short in 
an effort to drive down the price of the security by creating an 
imbalance of sell-side interest.\36\ This unrestricted short selling 
could exacerbate a declining market in a security by increasing 
pressure from the sell-side, eliminating bids, and causing a further 
reduction in the price of a security by creating an appearance that the 
security's price is falling for fundamental reasons, when the decline, 
or the speed of the decline, is being driven by other factors.\37\
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    \34\ See, e.g., Proposal, 74 FR at 18065 (noting that a short 
selling circuit breaker rule would be designed to target only those 
securities that experience rapid severe intra-day price declines 
and, therefore, might help to prevent short selling from being used 
to drive the price of a security down or to accelerate the decline 
in the price of those securities).
    \35\ See, e.g., U.S. v. Russo, 74 F.3d 1383, 1392 (2d Cir. 1996) 
(short sales were sufficiently connected to the manipulation scheme 
as to constitute a violation of Exchange Act Section 10(b) and Rule 
10b-5); S.E.C. v. Gardiner, 48 S.E.C. Docket 811, No. 91 Civ. 2091 
(S.D.N.Y. Mar. 27, 1991) (alleged manipulation by sales 
representative by directing or inducing customers to sell stock 
short in order to depress its price).
    \36\ Many people blamed ``bear raids'' for the 1929 stock market 
crash and the market's prolonged inability to recover from the 
crash. See, e.g., Steve Thel, $850,000 in Six Minutes--The Mechanics 
of Securities Manipulation, 79 Cornell L. Rev. 219, 295-296 (1994); 
Jonathan R. Macey, Mark Mitchell & Jeffry Netter, Restrictions on 
Short Sales: An Analysis of the Uptick Rule and its Role in View of 
the October 1987 Stock Market Crash, 74 Cornell L. Rev. 799, 801-802 
(1989).
    \37\ See 2006 Price Test Elimination Proposing Release, 71 FR at 
75070; 2003 Regulation SHO Proposing Release, 68 FR at 62974.
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B. History of Short Sale Price Test Restrictions in the U.S.

    Section 10(a) of the Exchange Act \38\ gives the Commission plenary 
authority to regulate short sales of securities registered on a 
national securities exchange, as necessary or appropriate in the public 
interest or for the protection of investors.\39\ After conducting an 
inquiry into the effects of concentrated short selling during the 
market break of 1937,\40\ the Commission adopted former Rule 10a-1 in 
1938 to restrict short selling in a declining market.\41\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78j(a).
    \39\ See id.; see also 2006 Price Test Elimination Proposing 
Release, 71 FR at 75068; 2003 Regulation SHO Proposing Release, 68 
FR at 62973.
    \40\ The study covered two weekly periods, that of September 7-
13, 1937, and that of October 18-23, 1937. See Exchange Act Release 
No. 1548 (Jan. 24, 1938), 3 FR 213 (Jan. 26, 1938) (``Former Rule 
10a-1 Adopting Release'').
    \41\ See 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).
---------------------------------------------------------------------------

    The core provisions of former Rule 10a-1 remained virtually 
unchanged for almost seventy years. Over the years, however, in 
response to changes in the securities markets, including changes in 
trading strategies and systems used in

[[Page 11236]]

the marketplace, the Commission added exceptions to former Rule 10a-1 
and granted numerous written requests for relief from the Rule's 
restrictions. These market changes included decimalization, the 
increased use of matching systems that execute trades at independently-
derived prices during random times within specific time intervals,\42\ 
and the spread of fully automated markets. In addition, market 
developments over the years led to the application of different price 
tests to securities trading in different markets.\43\
---------------------------------------------------------------------------

    \42\ See, e.g., letter from Larry E. Bergmann, Senior Associate 
Director, Division of Market Regulation, SEC, to Andre E. Owens, 
Schiff Hardin & Waite, dated Apr. 23, 2003 (granting exemptive 
relief from former Rule 10a-1 for trades executed through an 
alternative trading system (``ATS'') that matches buying and selling 
interest among institutional investors and broker-dealers at various 
set times during the day).
    \43\ See, e.g., Exchange Act Release No. 55245 (Feb. 5, 2007), 
72 FR 6635 (Feb. 12, 2007). Former Rule 10a-1 applied only to short 
sale transactions in exchange-listed securities. In 1994, the 
Commission granted temporary approval to NASD to apply its own short 
sale rule, known as the ``bid test,'' on a pilot basis that was 
renewed annually until the Commission repealed short sale price 
tests. NASD's former bid test prohibited short sales in Nasdaq 
Global Market securities (then known as Nasdaq National Market 
securities) at or below the current (inside) bid when the current 
best (inside) bid was below the previous best (inside) bid in a 
security. As a result, until the Commission eliminated former Rule 
10a-1, and prohibited any SRO from having a short sale price test in 
July 2007, Nasdaq Global Market securities traded on Nasdaq or the 
over-the-counter (``OTC'') market and reported to a NASD facility 
were subject to a bid test. Nasdaq securities traded on exchanges 
other than Nasdaq were not subject to any price test. In addition, 
many thinly-traded securities, such as Nasdaq Capital Market 
securities and securities quoted on the OTC Bulletin Board and Pink 
Sheets, were not subject to any price test wherever traded. 
According to the Staff, in 2005, prior to the start of the Pilot, 
NASD's former bid test applied to approximately 2,800 securities, 
while former Rule 10a-1 applied to approximately 4,000 securities.
---------------------------------------------------------------------------

    In July 2004, the Commission adopted Rule 202T of Regulation 
SHO,\44\ which established procedures for the Commission to temporarily 
suspend short sale price tests for a prescribed set of securities so 
that the Commission could study the effectiveness of these tests.\45\ 
Pursuant to the process established in Rule 202T, the Commission issued 
an order creating the Pilot, which temporarily suspended the tick test 
of former Rule 10a-1 and any price test of any national securities 
exchange or national securities association for short sales of certain 
securities.\46\ The Pilot was designed to assist the Commission in 
assessing whether changes to short sale price test regulation were 
appropriate at that time in light of then-current market practices and 
the purposes underlying short sale price test regulation.\47\
---------------------------------------------------------------------------

    \44\ 17 CFR 242.202T.
    \45\ See 17 CFR 242.202T; see also 2004 Regulation SHO Adopting 
Release, 69 FR at 48012-48013.
    \46\ See Pilot Release, 69 FR 48032.
    \47\ See id. In the 2004 Regulation SHO Adopting Release, we 
noted that ``the purpose of the [P]ilot is to assist the Commission 
in considering alternatives, such as: (1) Eliminating a 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.
---------------------------------------------------------------------------

    The Staff gathered the data made public during the Pilot, analyzed 
the data and provided the Commission with a summary report on the Pilot 
(``Staff's Summary Pilot Report'').\48\ The Staff's Summary Pilot 
Report, which was made public, examined several aspects of market 
quality including the overall effect of then-current price tests on 
short selling, liquidity, volatility and price efficiency.\49\ The 
Pilot was also designed to allow the Commission and members of the 
public to examine whether the effects of the then-current short sale 
price tests were similar across stocks.\50\
---------------------------------------------------------------------------

    \48\ See http://www.sec.gov/about/economic/shopilot091506/
draft_reg_sho_pilot_report.pdf and http://www.sec.gov/news/
studies/2007/regshopilot020607.pdf.
    \49\ See Staff's Summary Pilot Report at 40-47; see also id. at 
22-24 (discussing the selection of securities included in the Pilot 
and the control group).
    \50\ In the 2004 Regulation SHO Adopting Release, the Commission 
stated its expectation that data on trading during the Pilot would 
be made available to the public to encourage independent researchers 
to study the Pilot. See 2004 Regulation SHO Adopting Release, 69 FR 
at 48009, n.9. Accordingly, nine SROs began publicly releasing 
transactional short selling data on Jan. 3, 2005. The nine SROs at 
that time were the Amex, ARCA, BSE, CHX, NASD, Nasdaq, National 
Stock Exchange, NYSE and Phlx. The SROs agreed to collect and make 
publicly available trading data on each executed short sale 
involving equity securities reported by the SRO to a securities 
information processor (``SIP''). The SROs published the information 
on a monthly basis on their Internet Web sites.
---------------------------------------------------------------------------

    As set forth in the Staff's Summary Pilot Report, the Staff found 
little empirical justification at that time for maintaining then-
current short sale price test restrictions, especially for actively 
traded securities. Amongst its results, the Staff found that such short 
sale price tests did not have a significant impact on daily volatility. 
However, the Staff also found some evidence that the short sale price 
tests dampened intra-day volatility for smaller stocks.\51\
---------------------------------------------------------------------------

    \51\ See Staff's Summary Pilot Report at 55-56.
---------------------------------------------------------------------------

    In addition, the Staff found that the Pilot data provided limited 
evidence that then-current price test restrictions distorted a 
security's price.\52\ The Staff also found that the price test 
restrictions resulted in an increase in quote depths.\53\ Realized 
liquidity levels, however, were unaffected by the removal of such short 
sale price test restrictions.\54\ The Pilot data also provided evidence 
that the short sale price test restrictions reduced the volume of 
executed short sales to total volume and, therefore, acted as a 
constraint on short selling.\55\ The Staff did not find, however, a 
significant difference in short interest positions between those 
securities subject to a short sale price test versus those securities 
that were not subject to such a test during the Pilot.\56\
---------------------------------------------------------------------------

    \52\ 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 Staff's Summary Pilot Report at 8.
    \53\ See Staff's Summary Pilot Report at 55.
    \54\ This conclusion is based on the result that changes in 
effective spreads were not economically significant (less than a 
basis point) and that the changes in the bid and ask depth appear 
not to affect the transaction costs paid by investors. Arguably, the 
changes in bid and ask depth appeared to affect the intra-day 
volatility. However, the Staff concluded that overall, the Pilot 
data did not suggest a deleterious impact on market quality or 
liquidity. See Staff's Summary Pilot Report at 40-42, 55.
    \55\ See Staff's Summary Pilot Report at 35.
    \56\ See id.
---------------------------------------------------------------------------

    In addition, the Commission encouraged outside researchers to 
examine the Pilot data. In response to this request, the Commission 
received four completed studies (the ``Academic Studies'') from outside 
researchers that specifically examined the Pilot data.\57\ The 
Commission also held the Regulation SHO 2006 Roundtable \58\ that 
focused on the empirical evidence learned from the Pilot data (the 
Staff's Summary Pilot Report, Academic Studies, and Regulation SHO 2006 
Roundtable are referred to collectively herein as the ``Pilot 
Results'').\59\ The Pilot Results contained a variety of observations, 
which the Commission considered in determining whether or not to 
propose removal of then-current short sale price test restrictions and 
subsequently whether or not to eliminate such restrictions. For 
example, one study concluded that former Rule 10a-1 had little or no 
effect on price efficiency.\60\ Another study found no evidence that 
former Rule

[[Page 11237]]

10a-1 negatively impacted price discovery.\61\
---------------------------------------------------------------------------

    \57\ See Karl B. Diether, Kuan Hui Lee and Ingrid M. Werner, 
2009, It's SHO Time! Short-Sale Price-Tests and Market Quality, 
Journal of Finance 64:37-73; Gordon J. Alexander and Mark A. 
Peterson, 2008, The Effect of Price Tests on Trader Behavior and 
Market Quality: An Analysis of Reg. SHO, Journal of Financial 
Markets 11:84-111; J. Julie Wu, Uptick Rule, short selling and price 
efficiency, Aug. 14, 2006; Lynn Bai, 2008, The Uptick Rule of Short 
Sale Regulation--Can it Alleviate Downward Price Pressure from 
Negative Earnings Shocks? Rutgers Business Law Journal 5:1-63.
    \58\ See supra note 6.
    \59\ See id.
    \60\ See J. Julie Wu, Uptick Rule, short selling and price 
efficiency, Aug. 14, 2006.
    \61\ See 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.
---------------------------------------------------------------------------

    Generally, the Pilot Results supported removal of the short sale 
price test restrictions that were in effect at that time.\62\ In 
addition to the Pilot Results, thirteen other analyses by SEC staff and 
various third party researchers were conducted between 1963 and 2004 
addressing price test restrictions.\63\ Among these were several 
studies that evaluated short sale price tests during times of 
significant market decline, including the market break of May 28, 1962, 
the market decline of September and October 1976, the market break of 
October 19, 1987, and the Nasdaq market decline of 2000-2001. The 
results of these studies were mixed, but generally the studies found 
that former Rule 10a-1 did not prevent short sales in extreme down 
markets and did limit short selling in up markets, and the studies 
provided additional support for the removal of the permanent, market-
wide short sale price test restrictions in existence at that time.
---------------------------------------------------------------------------

    \62\ See 2006 Price Test Elimination Proposing Release, 71 FR at 
75072-75075 (discussing the Pilot Results).
    \63\ See Staff's Summary Pilot Report at 14, 17-22 (discussing 
the thirteen studies).
---------------------------------------------------------------------------

    In December 2006, the Commission proposed to eliminate former Rule 
10a-1 by removing restrictions on the execution prices of short sales, 
as well as prohibiting any SRO from having a short sale price test.\64\ 
The Commission received twenty-seven comment letters in response to its 
proposal to eliminate former Rule 10a-1 and prohibit any SRO from 
having a short sale price test. The comments in response to the 
proposed amendments varied. Most commenters (including individual 
traders, an academic, broker-dealers, SROs and trade associations) 
advocated removing all short sale price test restrictions.\65\ 
Generally, these commenters believed that short sale price test 
restrictions were no longer necessary due to increased market 
transparency and the existence of real-time regulatory surveillance 
that could monitor for and detect any potential short sale 
manipulation.\66\
---------------------------------------------------------------------------

    \64\ See 2006 Price Test Elimination Proposing Release, 71 FR 
75068.
    \65\ See, e.g., letter from Howard Teitelman, CSO, Trillium 
Trading, dated Feb. 6, 2007; letter from S. Kevin An, Deputy General 
Counsel, E*TRADE, dated Feb. 9, 2007 (``E*TRADE (Feb. 2007)''); 
letter from Carl Giannone, dated Feb. 11, 2007 (``Giannone (Feb. 
2007)''); letter from David Schwarz, dated Feb. 12, 2007; letter 
from John G. Gaine, President, Managed Funds Association, dated Feb. 
12, 2007; letter from Lisa M. Utasi, Chairman of the Board, John C. 
Giesea, President and CEO, Security Traders Association, dated Feb. 
12, 2007 (``STA (Feb. 2007)''); letter from Gerard S. Citera, 
Executive Director, U.S. Equities, UBS, dated Feb. 14, 2007 (``UBS 
(Feb. 2007)''); letter from Mary Yeager, Assistant Secretary, NYSE 
Euronext, dated Feb. 14, 2007 (``NYSE Euronext (Feb. 2007)''); 
letter from James J. Angel, PhD, CFA, Associate Professor of 
Finance, McDonough School of Business, Georgetown University, dated 
Feb. 14, 2007; letter from Ira D. Hammerman, Senior Managing 
Director and General Counsel, Securities Industry and Financial 
Markets Association, dated Feb. 16, 2007; see also Exchange Act 
Release No. 55970 (June 28, 2007), 72 FR 36348, 36350-36351 (July 3, 
2007) (``2007 Price Test Adopting Release'') (discussing the comment 
letters).
    \66\ See, e.g., letter from Giannone (Feb. 2007); letter from 
E*TRADE (Feb. 2007); letter from STA (Feb. 2007); letter from UBS 
(Feb. 2007); see also 2007 Price Test Adopting Release, 72 FR at 
36350-36351 (discussing the comment letters).
---------------------------------------------------------------------------

    Two commenters (both individual investors) opposed the proposed 
amendments, noting the need for short sale price tests to prevent 
``bear raids.'' \67\ One commenter, although generally in support of 
removing all short sale price test restrictions, stated the belief that 
at some level unrestricted short selling should be collared.\68\ This 
commenter supported having a 10% circuit breaker to prevent panic in 
the event there is a major market collapse.\69\ The New York Stock 
Exchange (``NYSE'') also noted its concern about unrestricted short 
selling during periods of unusually rapid and large market declines. 
The NYSE stated that the effects of an unusually rapid and large market 
decline could not be measured or analyzed during the Pilot because such 
decline did not occur during the period studied.\70\
---------------------------------------------------------------------------

    \67\ See, e.g., letter from Jim Ferguson, dated Dec. 19, 2006; 
letter from David Patch, dated Jan. 1, 2007; letter from David 
Patch, dated Jan. 12, 2007.
    \68\ See letter from Giannone (Feb. 2007).
    \69\ See id.
    \70\ See letter from NYSE Euronext (Feb. 2007).
---------------------------------------------------------------------------

    Effective July 3, 2007, the Commission eliminated former Rule 10a-1 
and added Rule 201 of Regulation SHO, prohibiting any SRO from having a 
short sale price test.\71\ The Commission stated that it determined to 
eliminate all short sale price test restrictions after reviewing the 
comments received in response to its proposal to eliminate all short 
sale price test restrictions, reviewing the Pilot Results, and taking 
into account the market developments that had occurred in the 
securities industry since the Commission adopted former Rule 10a-1 in 
1938.\72\ In addition, the Commission stated its belief that the 
amendments would bring increased uniformity to short sale regulation, 
level the playing field for market participants, and remove an 
opportunity for regulatory arbitrage.\73\
---------------------------------------------------------------------------

    \71\ See 2007 Price Test Adopting Release, 72 FR 36348.
    \72\ See id. at 36352.
    \73\ See id.
---------------------------------------------------------------------------

C. Proposal To Adopt a Short Sale Price Test Restriction or Circuit 
Breaker

    On April 8, 2009, following changes in market conditions since the 
elimination of former Rule 10a-1, we proposed to re-examine and seek 
comment on whether to impose price test restrictions or circuit breaker 
restrictions on short selling.\74\ In the Proposal, we noted that 
market volatility had recently increased markedly in the U.S., as well 
as in every major stock market around the world.\75\ We also noted that 
although we were not aware of specific empirical evidence that the 
elimination of short sale price tests contributed to the increased 
volatility in U.S. markets, many members of the public associate the 
removal of former Rule 10a-1 with such volatility, including steep 
declines in some securities' prices, and loss of investor confidence in 
our markets.\76\ Due to the market conditions with which we were faced 
and the resulting deterioration in investor confidence, we stated in 
the Proposal that we believed it was appropriate to propose amending 
Regulation SHO to add a short sale price test or a circuit breaker 
rule.\77\
---------------------------------------------------------------------------

    \74\ See Proposal, 74 FR 18042.
    \75\ See id. at 18049.
    \76\ See id.
    \77\ See Proposal, 74 FR at 18047.
---------------------------------------------------------------------------

    In response to the Proposal and the Re-Opening Release, we received 
over 4,300 unique comment letters.\78\ A number of commenters stated 
that they do not believe that we should reinstate any form of short 
sale price test restriction, whether in the form of a short sale price 
test restriction or a circuit breaker rule. For example, a number of 
commenters noted a lack of empirical evidence suggesting that such 
restrictions would advance the Commission's goals of restoring investor 
confidence and preventing short selling, including potentially abusive 
or manipulative short selling, from driving down the market or being 
used as a tool to exacerbate a declining market in a security.\79\ In 
response to our specific

[[Page 11238]]

request for empirical data in the Proposal, a number of commenters 
submitted data or referenced studies in support of their position that 
a short sale price test restriction would not have a positive impact on 
the market.\80\ In addition, several commenters stated they do not 
believe that short selling exacerbated market declines during the Fall 
2008 financial crisis, and suggested that long sale activity was a more 
substantial factor in those declines.\81\ Other commenters stated that 
short selling is a small segment of the overall equity marketplace and 
active short sellers are an even smaller group of participants and, 
therefore, represented a de minimus amount of the selling pressure that 
the markets experienced recently.\82\ As support for their arguments, 
commenters referenced, among other things, two recent studies by the 
Staff that were also discussed in the Proposal.\83\ In these studies, 
the Staff analyzed the impact that a short sale price test might have 
had during a thirteen day period in September 2008,\84\ as well as 
whether and the extent to which short selling and long selling exerted 
downward price pressure during a volatile period in early September 
2008.\85\ The first of these studies noted that, although its data was 
limited to historical trade and quote data from a period when no short 
sale price test was in place and the shape of order book and trading 
sequences might have differed had a short sale price test been in 
place, a short sale price test would likely have been most restrictive 
during periods of low volatility, with greatest impact on short selling 
in lower priced and more active stocks.\86\ The second study found that 
during periods of price declines, the selling pressure was more intense 
from long sellers than from short sellers. It also found that, on 
average, short sale volume as a fraction of total volume was highest 
during periods of positive returns, noting, however, that it was also 
possible that there were instances in which short selling activity 
peaked during periods of extreme negative returns.\87\
---------------------------------------------------------------------------

    \78\ See http://www.sec.gov/comments/s7-08-09/s70809.shtml.
    \79\ See, e.g., letter from Daniel Mathisson, Managing Director, 
Credit Suisse Securities (USA), LLC, dated June 16, 2009 (``Credit 
Suisse (June 2009)''); letter from Citadel et al. (June 2009); 
letter from Peter Kovac, Chief Operating Officer and Financial and 
Operations Principal, EWT, LLC, dated June 19, 2009 (``EWT (June 
2009)''); letter from Stephen Schuler, Managing Member, Daniel 
Tierney, Managing Member, Global Electronic Trading Company, dated 
June 19, 2009 (``GETCO (June 2009)''); letter from SIFMA (June 
2009); letter from Kimberly Unger, Executive Director, Security 
Traders Association of New York, Inc., dated June 18, 2009 (``STANY 
(June 2009)''); letter from Karrie McMillan, General Counsel, 
Investment Company Institute, dated June 19, 2009 (``ICI (June 
2009)''); letter from Megan A. Flaherty, Chief Legal Counsel, 
Wolverine Trading, LLC, dated June 19, 2009 (``Wolverine''); letter 
from Eric Swanson, SVP and General Counsel, BATS Exchange, Inc., 
dated Sept. 21, 2009 (``BATS (Sept. 2009)''); letter from Michael R. 
Trocchio, Esq. on behalf of Bingham McCutchen, LLP, dated Sept. 30, 
2009 (``Bingham McCutchen''); letter from James S. Chanos, Chairman, 
Coalition of Private Investment Companies, dated Sept. 21, 2009 
(``CPIC (Sept. 2009)'') (citing letter from Credit Suisse letter 
(June 2009)); letter from Luke Fichthorn, Managing Member, John 
Fichthorn, Managing Member, Dialectic Capital Management, LLC, dated 
Sept. 21, 2009 (``Dialectic Capital (Sept. 2009)''); letter from 
Eric W. Hess, General Counsel, Direct Edge Holdings LLC, dated Sept. 
21, 2009 (``Direct Edge (Sept. 2009)''); letter from Paul M. Russo, 
Managing Director and Head of U.S. Equity Trading, Goldman, Sachs & 
Co., dated Sept. 21, 2009 (``Goldman Sachs (Sept. 2009)''); letter 
from Suhas Daftuar, Managing Director, Hudson River Trading LLC, 
dated Sept. 21, 2009 (``Hudson River Trading''); letter from Leonard 
J. Amoruso, General Counsel, Knight Capital Group, Inc., dated Sept. 
22, 2009 (``Knight Capital (Sept. 2009)''); letter from Richard 
Chase, Managing Director and General Counsel, RBC Capital Markets 
Corporation, dated Sept. 21, 2009 (``RBC (Sept. 2009)''); letter 
from Peter J. Driscoll, Chairman, John C. Giesea, President and CEO, 
Security Traders Association, dated Sept. 21, 2009 (``STA (Sept. 
2009)''); letter from Barbara Palk, President, TD Asset Management, 
Inc., dated Sept. 14, 2009 (``TD Asset Management''); letter from 
George U. Sauter, Managing Director and Chief Investment Officer, 
The Vanguard Group, Inc., dated Sept. 21, 2009 (``Vanguard (Sept. 
2009)''); letter from Chris Concannon, Virtu Financial, LLC, dated 
Sept. 21, 2009 (``Virtu Financial''); letter from Stuart J. Kaswell, 
Executive Vice President, Managing Director and General Counsel, 
Managed Funds Association, dated Oct. 1, 2009 (``MFA (Oct. 2009)''); 
letter from Jeffrey S. Davis, Vice President and Deputy General 
Counsel, The Nasdaq OMX Group, Inc., dated Oct. 7, 2009 (``Nasdaq 
OMX Group (Oct. 2009)'').
    \80\ See, e.g., letter from Michael D. Lipkin, Adjunct Assistant 
Professor, Columbia University, dated Apr. 9, 2009 (``Prof. 
Lipkin''); letter from Eric Swanson, SVP and General Counsel, BATS 
Exchange, Inc., dated May 14, 2009 (``BATS (May 2009)''); Autore, 
Billingsley, and Kovacs, Short Sale Constraints, Dispersion of 
Opinion, and Market Quality: Evidence from the Short Sale Ban on 
U.S. Financial Stocks (June 19, 2009); letter from William J. 
Brodsky, Chairman and CEO, Edward J. Joyce, President and COO, The 
Chicago Board Options Exchange, Inc., dated June 19, 2009 (``CBOE 
(June 2009)''); letter from James S. Chanos, Chairman, Coalition of 
Private Investment Companies, dated June 19, 2009 (``CPIC (June 
2009)''); letter from STANY (June 2009); letter from SIFMA (June 
2009); letter from MFA (June 2009); letter from ICI (June 2009); 
letter from Joan Hinchman, Executive Director, President and CEO, 
National Society of Compliance Professionals Inc., dated June 19, 
2009 (``NSCP''); letter from Mary Richardson, Director of Regulatory 
and Tax Department, Alternative Investment Management Association, 
dated June 19, 2009 (``AIMA''); letter from Credit Suisse (June 
2009); letter from Rory O'Kane, President, TD Professional 
Execution, Inc, dated June 19, 2009 (``T.D. Pro Ex''); letter from 
Citadel et al. (June 2009); letter from William Connell, President 
and CEO, Allston Trading, LLC, dated June 18, 2009 (``Allston 
Trading (June 2009)''); letter from Wolverine; letter from Roy J. 
Katzovicz, Chief Legal Officer, Pershing Square Capital Management 
L.P., dated June 19, 2009 (``Pershing Square''); letter from GETCO 
(June 2009); letter from Luke Fichthorn, Managing Member, John 
Fichthorn, Managing Member, Dialectic Capital Management, LLC, dated 
June 18, 2009 (``Dialectic Capital (June 2009)''); memorandum of a 
meeting between representatives of Credit Suisse and the Office of 
Commissioner Aguilar, dated July 2, 2009, and written materials 
submitted at the meeting (``Credit Suisse (July 2009)''); letter 
from CPIC (Sept. 2009); letter from STA (Sept. 2009); letter from 
Ira D. Hammerman, Senior Managing Director and General Counsel, 
Securities Industry and Financial Markets Association, dated Sept. 
21, 2009 (``SIFMA (Sept. 2009)''); letter from TD Asset Management; 
letter from Goldman Sachs (Sept. 2009); letter from Peter Kovac, 
Chief Operating Officer and Financial and Operations Principal, EWT, 
LLC, dated Sept. 21, 2009 (``EWT (Sept. 2009)''); letter from 
Charles M. Jones, PhD, Robert W. Lear Professor of Finance and 
Economics, Columbia Business School, dated Sept. 21, 2009 (``Prof. 
Jones''). See also infra Section II.D. (discussing the data and 
studies submitted and/or referenced by commenters).
    \81\ See, e.g., letter from MFA (June 2009); letter from STANY 
(June 2009); letter from Credit Suisse (June 2009); letter from STA 
(Sept. 2009) (noting that ``[t]he STA believes that long sellers 
deleveraging and anticipating withdrawals and redemptions were 
largely responsible for the declines'').
    \82\ See, e.g., letter from STA (Sept. 2009).
    \83\ See Proposal, 74 FR at 18049.
    \84\ See Staff, Analysis of a short sale price test using 
intraday quote and trade data, Dec. 17, 2008 (``Staff Analysis (Dec. 
17, 2008)'') at http://www.sec.gov/comments/s7-08-09/s70809-368.pdf.
    \85\ See Staff, Analysis of Short Selling Activity during the 
First Weeks of September, 2008, Dec. 16, 2008 (``Staff Analysis 
(Dec. 16, 2008)'') at http://www.sec.gov/comments/s7-08-09/s70809-
369.pdf.
    \86\ See Staff Analysis (Dec. 17, 2008).
    \87\ See Staff Analysis (Dec. 16, 2008).
---------------------------------------------------------------------------

    Some commenters stated that the recent market stability suggests 
that investor confidence has been restored and, therefore, short sale 
price test restrictions are not necessary.\88\ Several commenters 
submitted data or referenced studies showing that investor confidence 
has recently improved.\89\ A number of commenters expressed concern 
that any short sale price test restriction would carry with it the 
unintended consequences of reduced liquidity and widened bid-ask 
spreads, resulting in less efficient pricing in the securities 
markets.\90\ One commenter stated its belief that because short sale 
price test restrictions would weaken and erode benefits of short 
selling such as

[[Page 11239]]

liquidity, price discovery and the ability to manage risk, they would 
also weaken and erode investor confidence.\91\ Many commenters stated 
that the reinstatement of any short sale price test restriction would 
impose significant costs on market participants and lead to increased 
transaction costs for investors.\92\ In addition, several commenters 
noted that while the Commission is rightly trying to increase investor 
confidence, current short sale regulations, including Rule 204 of 
Regulation SHO and Exchange Act Rule 10b-21, are sufficient to address 
the public's concerns about potentially abusive short selling.\93\
---------------------------------------------------------------------------

    \88\ See, e.g., letter from Renee M. Toth, President, National 
Association of Active Investment Managers, dated June 12, 2009 
(``NAAIM''); letter from NSCP; letter from RBC (Sept. 2009).
    \89\ See, e.g., memorandum of meeting between representative of 
TD Ameritrade and the Office of Commissioner Aguilar, dated June 1, 
2009, and written materials submitted at the meeting (``TD 
Ameritrade''); letter from RBC (Sept. 2009); letter from EWT (Sept. 
2009). In addition, one commenter submitted preliminary data on the 
relationship between short selling and investor confidence and 
stated that ``[w]hile it is too early to draw conclusions from this 
data, the evidence presented below does not suggest that there is a 
negative relationship between short selling activity and investor 
confidence.'' See letter from Ingrid M. Werner, PhD, Martin and 
Andrew Murrer Professor of Finance, Fisher College of Business, The 
Ohio State University, dated June 19, 2009 (``Prof. Werner''). See 
also infra Section II.D. (discussing data submitted and/or 
referenced by commenters regarding investor confidence).
    \90\ See e.g., letter from Jeffrey S. Wecker, CEO, Lime 
Brokerage LLC, dated June 19, 2009 (``Lime Brokerage (June 2009)'') 
(noting that ``[w]e believe there would be significant unintended 
consequences of the proposed restrictions, including reduction in 
overall market liquidity and widening of spreads * * *''); letter 
from Leonard J. Amoruso, General Counsel, Knight Capital Group, 
Inc., dated June 18, 2009 (``Knight Capital (June 2009)''); letter 
from MFA (June 2009); see also infra Section II.D. (discussing 
empirical data regarding the potential impact of short sale price 
test restrictions).
    \91\ See letter from AIMA; see also letter from CPIC (June 2009) 
(stating ``investor confidence will not be served in the long term 
by the adoption of rules that the Commission itself has acknowledged 
have no sound empirical basis and may decrease market efficiency, 
limit price discovery, provide less protection against upward stock 
price manipulations, increase trading costs, reduce liquidity and 
impose other potential costs on investors'').
    \92\ See e.g., letter from Scott C. Goebel, Senior Vice 
President and General Counsel, Fidelity Investments, dated June 22, 
2009 (``Fidelity''); letter from MFA (June 2009); letter from Credit 
Suisse (June 2009); letter from EWT (June 2009); letter from SIFMA 
(June 2009); letter from Wolverine; letter from T.D. Pro Ex; letter 
from ICI (June 2009); letter from Simon M. Lorne, Chief Legal 
Officer, Martin Z. Schwartz, Chief Compliance Officer, Millennium 
Management LLC, dated June 19, 2009 (``Millennium''); letter from 
Citadel et al. (June 2009).
    \93\ See e.g., letter from Tim Belloto, dated May 5, 2009; 
letter from MFA (June 2009); letter from SIFMA (June 2009); letter 
from Pershing Square; letter from Paul M. Russo, Managing Director 
and Head of U.S. Equity Trading, Goldman, Sachs & Co., dated June 
19, 2009 (``Goldman Sachs (June 2009)''); letter from CBOE (June 
2009); letter from Allston Trading (June 2009); letter from STANY 
(June 2009); letter from Citadel et al. (June 2009); letter from STA 
(Sept. 2009); letter from BATS (Sept. 2009).
---------------------------------------------------------------------------

    A significant number of commenters, however, continue to urge the 
Commission to reinstate some form of short sale price test restriction 
because these commenters believe that such a measure will help to 
restore investor confidence.\94\ One commenter stated that ``we believe 
that a price test could have a real impact on investors' and issuers' 
confidence in the equities market.'' \95\ Some commenters have stated 
that a lack of price test restrictions makes them question whether they 
should invest in the stock market.\96\ Other commenters have stated 
that they believe a short sale price test will aid small investors.\97\ 
In addition, some commenters have suggested that restricting the prices 
at which securities may be sold short will help address steep declines 
in securities' prices.\98\

[[Page 11240]]

Some Members of Congress and representatives of one SRO have also 
continued to express support for reinstatement of price test 
restrictions.\99\ One such SRO representative noted that over 95% of 
its issuers who participated in a survey believed that the market would 
function better with one of the proposed short sale price test 
restrictions.\100\
---------------------------------------------------------------------------

    \94\ See, e.g., letter from Herbert C. Roubidoux, dated May 4, 
2009; letter from William K. Barnard, CEO, Equity Insight, Inc., 
dated May 4, 2009 (``Equity Insight''); letter from Henry J. Judd, 
CEO, Alethium Corp., dated May 6, 2009; letter from John Sook, dated 
May 6, 2009; letter from Boris Finkelstein, dated May 7, 2009; 
letter from John E. Detraz, dated May 8, 2009; letter from Joseph 
Giancola, dated May 8, 2009; letter from John W. Kozak, Chief 
Financial Officer, Park National Corporation, dated May 19, 2009 
(``Park National''); letter from Robert S. Miloszewski, dated June 
1, 2009; letter from Dr. George R. Arends, dated June 1, 2009; 
letter from Kent Hendrickson, dated June 4, 2009; letter from Dennis 
Nixon, Chairman and Chief Executive Officer, International 
Bancshares Corporation, dated June 9, 2009 (``IBC''); letter from 
Brian P. Hendey, dated June 9, 2009; letter from Catherine Mapen, 
dated June 15, 2009; letter from Jeffrey T. Brown, Senior Vice 
President, Office of Legislative and Regulatory Affairs, Charles 
Schwab & Co., Inc., dated June 18, 2009 (``Schwab''); letter from 
Michael Gitlin, Head of Global Trading, David Oestreicher, Chief 
Legal Counsel, Christopher P. Hayes, Sr. Legal Counsel, T. Rowe 
Price Associates, Inc., dated June 18, 2009 (``T. Rowe Price (June 
2009)''); letter from Michael R. McAlevey, Vice President and Chief 
Corporate, Securities and Finance Counsel, General Electric Company, 
dated June 18, 2009 (``GE''); letter from Janet M. Kissane, Senior 
Vice President, Legal and Corporate Secretary, NYSE Euronext, dated 
June 19, 2009 (``NYSE Euronext (June 2009)''); letter from Ronald C. 
Long, Director, Regulatory Affairs, Wells Fargo Advisors, dated June 
15, 2009 (``Wells Fargo (June 2009)''). In addition, prior to the 
Proposal, a number of commenters stated that they believe that 
reinstatement of some form of price test restriction would help 
restore investor confidence. See, e.g., letter from Richard F. 
Vulpi, dated Sept. 24, 2008; letter from Maureen Christensen, dated 
Oct. 9, 2008; letter from Peter B. Eckle, CEO Associate 
Arrangements, dated Oct. 11, 2008; letter from Joe Garrett, dated 
Oct. 15, 2008; letter from Jenna L. Spurrier, dated Oct. 24, 2008; 
letter from Scotland Settle, dated Oct. 27, 2008; letter from 
Patrick McQuaid, dated Oct. 29, 2008; letter from Lynn Miller, dated 
Nov. 13, 2008; letter from David Sheridan, dated Nov. 18, 2008; 
letter from W. Romain Spell, dated Nov. 19, 2008; letter from Phil 
Mason, dated Nov. 19, 2008; letter from Jeff Brower, dated Nov. 20, 
2008; letter from Mike Abraham, dated Nov. 20, 2008; letter from 
Marvin Dingott, dated Nov. 20, 2008; letter from Josh Dodson, dated 
Nov. 21, 2008; letter from J. Geddes Parsons, dated Nov. 21, 2008; 
letter from Charles Rudisill, dated Nov. 21, 2008; letter from Mike 
Ryan, dated Nov. 21, 2008; letter from David B. Campbell and Natalie 
H. Win, dated Nov. 25, 2008; letter from Edward L. Yingling, 
American Bankers Association, dated Dec. 16, 2008; letter from 
Robert A. Lee, dated Feb. 10, 2009; letter from Robert Levine, dated 
Feb. 17, 2009; letter from Karl Findorff, dated Feb. 19, 2009; 
letter from Robert Lounsbury, dated Feb. 25, 2009; letter from Dr. 
Bill Daniel, dated Feb. 26, 2009; letter from Glenn A. Webster, 
dated Feb. 26, 2009; letter from Arleen Golden, dated Mar. 2, 2009; 
letter from Doug Cameron, dated Mar. 2, 2009; letter from Mike 
Rogers, dated Mar. 3, 2009; letter from George A. Flagg, dated Mar. 
3, 2009; letter from Kevin Girard, dated Mar. 4, 2009; letter from 
Briggs Diuguid, dated Mar. 5, 2009 (``Briggs Diuguid''); letter from 
Bob Young, dated Mar. 5, 2009; letter from Troy Williams, dated Mar. 
6, 2009; letter from Paul Kent, dated Mar. 7, 2009; letter from 
Chris Baratta, dated Mar. 9, 2009 (``Chris Baratta''); see also 
letter from Professor Constantine Katsoris, Fordham University 
School of Law, dated Mar. 4, 2009 (stating that elimination of 
former Rule 10a-1 ``hardly generates confidence on the part of a 
true investor who is entrusting his or her life's savings * * * to 
the current market'').
    \95\ Letter from NYSE Euronext (June 2009).
    \96\ See, e.g., letter from Phil Koepke, dated May 5, 2009; 
letter from Joe Wells, dated May 29, 2009; letter from Michael 
Anderson, dated June 1, 2009 (noting ``[i]f the SEC fails to act in 
the best interest of all investors, then peopel (sic) like myself, 
will look at other investment alternatives than the Stock 
Market.''); letter from Anton Kleinschmidt, dated June 2, 2009 
(noting that he ``will not return to the equity markets'' until he 
is ``confident that the wide range of market predators such as 
unregulated short sellers are being effectively controlled''). In 
addition, prior to (and as cited in) the Proposal, commenters 
expressed similar concerns regarding a lack of price test 
restrictions. See, e.g., letter from Jeff Boyd, dated Feb. 10, 2009; 
letter from Tim Zanni, dated Feb. 19, 2009.
    \97\ See, e.g., letter from Michael Anderson, dated June 1, 
2009; letter from Carl H. Van Hoozier, Jr., dated June 3, 2009; 
letter from Kevin Adcock, dated June 3, 2009 (noting that 
``[w]ithout this reinstatement the market will never be judged as 
fair, balanced or worth the unfair risks created by the SEC removing 
a tried and tested 70+ year old rule''); letter from Fran Mazenko, 
dated June 4, 2009; letter from Daniel H. Owings, dated June 4, 2009 
(noting ``the elimination of the uptick rule * * * prevented the 
small investor from equal treatment in the market''); letter from 
Kathleen Jardine, dated June 4, 2009. In addition, prior to (and as 
cited in) the Proposal, commenters expressed similar statements 
regarding short sale price tests aiding small investors. See, e.g., 
letter from Chris Baratta (noting that while price test restrictions 
could not reasonably be expected to prevent market downturns, they 
would, in his opinion, ``give the little investor a chance'' in the 
current conditions); see also letter from Paul D. Mendelsohn, 
President, Windham Financial Services, Inc., dated Mar. 6, 2009 
(stating that he believes former Rule 10a-1 ``protected'' the 
markets and that ``suspension of the uptick rule has opened a 
security hole into our financial system''); letter from Bob Young, 
dated Mar. 5, 2009 (suggesting that reinstatement of the uptick rule 
``will not be a quick or total fix, but it will help'').
    \98\ See, e.g., letter from Grant D. Wieler, dated May 8, 2009; 
letter from John J. Piccitto, Managing Director, John Piccitto 
Consulting Ltd., dated May 7, 2009 (noting that ``[b]ecause the 
decline of the value of a stock can be very steep and very fast 
indeed, the ensuing `feeding frenzy' * * * should be addressed by 
regulators. Slowing the cascade of short selling would create both 
the fact and the appearance of regulatory control * * *''); letter 
from Mucho Balka, Esq., dated May 30, 2009; letter from George A. 
Mitchell, dated June 1, 2009; letter from Jason Sturm, dated June 1, 
2009; letter from Erin Chieffi, dated June 2, 2009; letter from Paul 
Rivett, Vice President and Chief Legal Officer, Fairfax Financial 
Holdings Ltd., dated June 17, 2009 (``Fairfax Financial''); letter 
from GE; letter from Michael Lamanna, dated June 17, 2009; letter 
from Stanyarne Burrows, dated June 17, 2009; letter from William R. 
Harker, Senior Vice President, General Counsel and Corporate 
Secretary, Sears Holdings Corporation, dated June 19, 2009 
(``Sears''); letter from Glen Shipway, dated Sept. 21, 2009 (``Glen 
Shipway (Sept. 2009)''). In addition, the American Bankers 
Association noted that its members, ``both large and small, have 
told us that short sellers were taking advantage of the uptick 
rule's absence; that their stock prices were experiencing excessive 
downward pressure unrelated to actual conditions of the firm. * * 
*'' and that its members expressed ``that measures needed to be 
taken, including reinstating the uptick rule in some format, to 
reduce the avenues for abusive trading practices and to restore 
investor confidence.'' Letter from Sarah A. Miller, Senior Vice 
President, Center for Securities, Trust and Investments, American 
Bankers Association, dated July 1, 2009 (``Amer. Bankers Assoc.''); 
see also letter from Paul Tudor Jones II, Tudor Investment 
Corporation, dated Oct. 10, 2008 (stating that he believes that one 
way to ``immediately stem the decline'' in the stock market would be 
to reinstate the uptick rule); letter from James F. Kane, Jr., dated 
Feb. 6, 2009 (stating that he believes that reinstating ``the Up-
tick Rule will go a long way in preventing speculators from ganging 
up on a particular stock and forcing it down''); letter from Briggs 
Diuguid (stating that while short sellers ``make efficient 
markets,'' he is nonetheless concerned that short selling may be a 
tool of manipulators when short sales are ``piled on'' a particular 
company).
    \99\ See e.g., letter to Mary Schapiro, Chairman, from Kirsten 
Gillibrand, United States Senator, dated June 5, 2009; joint 
statement of Ted Kaufman, United States Senator, and Johnny Isakson, 
United States Senator, dated Sept. 29, 2009. In addition, prior to 
(and as cited in) the Proposal, several current and former Members 
of Congress have called for reinstatement of short sale price test 
restrictions. See, e.g., letter to Christopher Cox, Chairman, from 
Hillary Rodham Clinton, former United States Senator, dated Sept. 
17, 2008; letter to Christopher Cox, Chairman, from Bill Sali, 
Member of Congress, dated Oct. 1, 2008; letter to Christopher Cox, 
Chairman, from Peter T. King, Member of Congress, dated Oct. 7, 
2008; letter to Mary Schapiro, Chairman, from Gary L. Ackerman, 
Member of Congress, dated Jan. 27, 2009; letter to Mary Schapiro, 
Chairman, from Rep. Barney Frank and other Members of the House 
Financial Services Committee, dated Mar. 11, 2009; Proposal, 74 FR 
at 18046-18047 (noting statements by a Member of Congress and a 
former U.S. Senator asking the Commission to reinstate former Rule 
10a-1 or some other form of short sale price test restriction). See 
also letter to Mary Schapiro, Chairman, from Carolyn Maloney, Member 
of Congress and Chairman of the Joint Economic Committee, dated Mar. 
23, 2009. We note, however, that other Members of Congress have 
expressed concerns regarding our adopting a short sale price test 
restriction. See, e.g., letter to Mary Schapiro, Chairman, from 
Michael Crapo, United States Senator, Jim Bunning, United States 
Senator, David Vitter, United States Senator, Michael Enzi, United 
States Senator, and Mel Martinez, former United States Senator, 
dated June 17, 2009.
    With respect to comments by SRO representatives, see, e.g., 
letter from Janet M. Kissane, Senior Vice President, Legal and 
Corporate Secretary, NYSE Euronext, dated Sept. 21, 2009 (``NYSE 
Euronext (Sept. 2009)''); letter from NYSE Euronext (June 2009); 
statement of Larry Leibowitz, Group Executive Vice President and 
Head of Global Technology and US Executions, NYSE Euronext, dated 
May 5, 2009 (``NYSE Euronext (May 2009)''). In addition, prior to 
(and as cited in) the Proposal, one senior SRO representative 
endorsed the reinstatement of a short sale price test restriction. 
See Edgar Ortega, Short-Sale Rule Undermined as Bernanke Backs 
Review, Bloomberg News Service, Mar. 4, 2009 (noting comments by 
Duncan Niederauer, CEO, The NYSE Euronext Group, Inc., that imposing 
a measure such as former Rule 10a-1, ``would go a long way to adding 
confidence'' in our markets).
    \100\ See letter from NYSE Euronext (June 2009).
---------------------------------------------------------------------------

    As we noted in the Proposal, some researchers have also indicated 
that they believe that they have collected data that establishes a 
possible association between the recent market downturn and the 
elimination of former Rule 10a-1.\101\ Commenters also submitted data 
or referenced studies they believe support the contention that a price 
test restriction would have a positive impact on the market.\102\ In 
addition, there have been reports of significant short selling in 
connection with the use of credit default swaps (``CDS''), particularly 
in the securities of significant financial institutions,\103\ and it 
has been suggested that the interaction between and amplifying effects 
of CDS and short selling may be a reason to reinstate a short sale 
price test.\104\
---------------------------------------------------------------------------

    \101\ See Proposal, 74 FR at 18047, n.64; see also letter from 
Yavni Bar-Yam, New England Complex Systems Institute, dated June 23, 
2009 (``Yavni Bar-Yam''); Dion Harmon and Yaneer Bar-Yam, April 
2009, Technical Report on SEC Uptick Rule Proposals, New England 
Complex Systems Institute.
    \102\ See, e.g., letter from NYSE Euronext (June 2009); letter 
from Schwab; letter from Richard J. Adler, Managing Director, 
European Investors, Inc., dated June 19, 2009 (``European Investors 
(June 2009)''); letter from Richard J. Adler, Managing Director, 
European Investors, dated Sept. 21, 2009 (``European Investors 
(Sept. 2009)''); letter from William Furber, High Street Advisors, 
L.P., dated June 18, 2009 (``High Street Advisors''); letter from 
Park National; letter from IBC; letter from Daniel P. Amos, Chairman 
and CEO, Aflac Incorporated, dated June 23, 2009 (``Aflac''); letter 
from J. Austin Murphy, PhD, Professor of Finance at Oakland 
University, School of Business Administration, dated Apr. 9, 2009 
(``Prof. Murphy''); letter from Martin B. Napor, dated June 17, 2009 
(``Martin Napor''); see also infra Section II.D. (discussing 
empirical data submitted in response to the Proposal and the Re-
Opening Release).
    \103\ See Proposal, 74 FR at 18047, n.65 (referring to an 
article by George Soros, The Game Changer, available at http://
www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html). 
Similarly, in response to the Proposal, commenters raised concerns 
about CDS and short selling. See, e.g., letter from Edward D. 
Herlihy, Theodore A. Levine, Wachtell, Lipton, Rosen & Katz, dated 
June 17, 2009 (``Wachtell''); letter from GE.
    \104\ See Proposal, 74 FR at 18047, n.66 and accompanying text.
---------------------------------------------------------------------------

    Further, as we stated in the Proposal, questions and comments have 
been raised about the role that short selling, and in particular 
potentially abusive short selling, may have had in connection with the 
recent price fluctuations and disruption in our markets.\105\ As such, 
prior to issuing the Proposal, in the latter part of 2008, we took a 
number of other short sale-related actions aimed at addressing these 
concerns. For example, due to our concerns that false rumors spread by 
short sellers regarding financial institutions of significance in the 
U.S. may have fueled market volatility in the securities of some of 
these institutions, on July 15, 2008, we issued an emergency order 
(``July Emergency Order'') \106\ pursuant to section 12(k)(2) of the 
Exchange Act \107\ which imposed borrowing and delivery requirements on 
short sales of the equity securities of certain financial institutions. 
We noted in the July Emergency Order that false rumors can lead to a 
loss of investor confidence. Such loss of investor confidence can lead 
to panic selling, which may be further exacerbated by ``naked'' short 
selling. As a result, the prices of securities may artificially and 
unnecessarily decline well below the price level that would have 
resulted from the normal price discovery process.\108\ If significant 
financial institutions are involved, this chain of events can threaten 
disruption of our markets.\109\
---------------------------------------------------------------------------

    \105\ See Proposal, 74 FR at 18047-18048.
    \106\ See Exchange Act Release No. 58166 (July 15, 2008), 73 FR 
42379 (July 21, 2008).
    \107\ 15 U.S.C. 78l(k)(2).
    \108\ See July Emergency Order, 73 FR 42379.
    \109\ See id.
---------------------------------------------------------------------------

    Due to our concerns regarding the impact of short selling on the 
prices of financial institution securities, on September 18, 2008, we 
issued another emergency order prohibiting short selling in the 
publicly traded securities of certain financial institutions.\110\ Our 
concerns, however, were not limited to financial institutions, given 
the importance of confidence in our markets and the rapid and steep 
declines in the prices of securities that generally we were seeing at 
that time.\111\ Such rapid and steep price declines can give rise to 
questions about the underlying financial condition of an institution, 
which in turn can erode confidence, even without an underlying 
fundamental basis.\112\ This erosion of confidence can impair the 
liquidity and ultimate viability of an institution, with potentially 
broad market consequences.\113\
---------------------------------------------------------------------------

    \110\ See Exchange Act Release No. 58592 (Sept. 18, 2008), 73 FR 
55169 (Sept. 24, 2008) (``Short Sale Ban Emergency Order'').
    \111\ See, e.g., July Emergency Order, 73 FR 42379; Short Sale 
Ban Emergency Order 73 FR 55169; Exchange Act Release No. 58572 
(Sept. 17, 2008), 73 FR 54875 (Sept. 23, 2008) (``September 
Emergency Order'').
    \112\ See Short Sale Ban Emergency Order, 73 FR 55169; September 
Emergency Order, 73 FR 54875.
    \113\ See id.
---------------------------------------------------------------------------

    These concerns resulted in our issuance on September 17, 2008 of an 
emergency order under Section 12(k)(2) of the Exchange Act, in part 
targeting short selling in all equity securities.\114\ Pursuant to the 
September Emergency Order we imposed enhanced delivery requirements on 
sales of all equity securities under Rule 204T of Regulation SHO.\115\
---------------------------------------------------------------------------

    \114\ See September Emergency Order, 73 FR 54875.
    \115\ See id. In addition, we issued an emergency order, and 
subsequent Interim Final Temporary Rule, Rule 10a-3T, to require 
disclosure of short sales and short positions in certain securities. 
The temporary rule expired on August 1, 2009. See Exchange Act 
Release No 58591 (Sept. 18, 2008) 73 FR 55175 (Sept. 24, 2008); 
Exchange Act Release No. 58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 
17, 2008).

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[[Page 11241]]

    Rule 204T, among other things, required participants of a 
registered clearing agency to close-out fails to deliver resulting from 
short sales of any equity security by purchasing or borrowing the 
security by no later than the beginning of trading on the day after the 
fail to deliver occurred. We adopted the provisions of the September 
Emergency Order as an Interim Final Temporary Rule in October 2008 
because of our continued concern about the potentially negative market 
impact of large and persistent fails to deliver.\116\
---------------------------------------------------------------------------

    \116\ See Exchange Act Release No. 58773 (Oct. 14, 2008), 73 FR 
61706 (Oct. 17, 2008) (``Interim Final Temporary Rule 204T'').
---------------------------------------------------------------------------

    Our adoption of Interim Final Temporary Rule 204T followed a series 
of other steps aimed at reducing such fails to deliver and addressing 
potentially abusive short selling. These steps included eliminating the 
``grandfather'' and options market maker exceptions to Regulation SHO's 
close-out requirement,\117\ and proposing and subsequently adopting a 
``naked'' short selling anti-fraud rule, Rule 10b-21.\118\ Although we 
recognize that fails to deliver can occur for legitimate reasons, we 
remained concerned about the impact of large and persistent fails to 
deliver on market confidence. Results from Staff analysis indicate that 
our actions to further reduce fails to deliver are having their 
intended effect. For example, these results indicate that fails to 
deliver in all equity securities have declined significantly since the 
adoption of Interim Final Temporary Rule 204T.\119\ To help further our 
goal of reducing fails to deliver by maintaining the reductions in 
fails to deliver achieved by the adoption of Interim Final Temporary 
Rule 204T, as well as other actions taken by the Commission, we adopted 
the substance of Interim Final Temporary Rule 204T as a permanent rule, 
Rule 204, in July 2009.\120\
---------------------------------------------------------------------------

    \117\ See 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 
Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690 (Oct. 
17, 2008) (``Options Market Maker Elimination Release'').
    \118\ See Exchange Act Release No. 58774 (Oct. 14, 2008), 73 FR 
61666 (Oct. 17, 2008); September Emergency Order, 73 FR 54875; 
Exchange Act Release No. 57511 (Mar. 17, 2008), 73 FR 15376 (Mar. 
21, 2008).
    \119\ See Memorandum from the Staff Re: Impact of Recent SHO 
Rule Changes on Fails to Deliver, Nov. 4, 2009 at http://
www.sec.gov/spotlight/shortsales/oeamemo110409.pdf (stating, among 
other things, that the average daily number of aggregate fails to 
deliver for all securities decreased from 2.21 billion to 0.25 
billion for a total decline of 88.5% when comparing a pre-Rule to 
post-Rule period); Memorandum from the Staff Re: Impact of Recent 
SHO Rule Changes on Fails to Deliver, Nov. 26, 2008 at http://
www.sec.gov/comments/s7-30-08/s73008-37.pdf; Memorandum from the 
Staff Re: Impact of Recent SHO Rule Changes on Fails to Deliver, 
Mar. 20, 2009 at http://www.sec.gov/comments/s7-30-08/s73008-
107.pdf.
    \120\ See Exchange Act Release No. 60388 (July 27, 2009), 74 FR 
38266 (July 31, 2009) (``Rule 204 Adopting Release''). Rule 204 
contained some modifications to address commenters' concerns. See 
id.
---------------------------------------------------------------------------

    Despite the significant decline in fails to deliver and the more 
recent stability in the securities markets, concerns persist about 
rapid and steep price declines in securities and erosion of investor 
confidence in our markets. Thus, we continued to examine whether there 
are other actions that the Commission should take, including re-
evaluating whether a short sale price test should be reintroduced or a 
circuit breaker rule should be imposed.
    As we stated in the Proposal, when we eliminated all short sale 
price test restrictions in July 2007, we acknowledged that 
circumstances may develop that could warrant relief from the 
prohibition in Rule 201 of Regulation SHO for a short sale price test, 
including a short sale price test of an SRO, to apply to short sales in 
any security.\121\ Thus, in determining whether or not to propose, and 
now adopt, a short sale price test rule or circuit breaker rule, we 
have considered the recent turmoil in the financial sector and steep 
declines and extreme volatility in securities prices.\122\
---------------------------------------------------------------------------

    \121\ See Proposal, 74 FR at 18048; see also 2007 Price Test 
Adopting Release, 72 FR at 36348.
    \122\ See, e.g., Proposal, 74 FR at 18048 (noting the turbulence 
in the securities markets at the time we issued the Proposal and 
during the eighteen months prior thereto).
---------------------------------------------------------------------------

    As discussed in this adopting release, we remain mindful that short 
selling provides benefits to the market. For example, legitimate short 
selling can play an important and constructive functional role in the 
markets, providing liquidity and price efficiency. Short sellers also 
play an important role in correcting upward stock price 
manipulation.\123\ Because short sale price test restrictions may 
lessen some of these benefits, it is important that any short sale 
price test regulation is designed to limit any potentially unnecessary 
impact on legitimate short selling.
---------------------------------------------------------------------------

    \123\ See, e.g., Staff's Summary Pilot Report at 9.
---------------------------------------------------------------------------

    Thus, as discussed in detail below, we are adopting in Rule 201 a 
targeted short sale price test restriction that will be based on the 
current national best bid and that will apply only if the price of an 
individual security declines intra-day by 10% or more from that 
security's prior day's closing price on the listing market for that 
security. We are also amending Rule 200(g) of Regulation SHO to address 
when a broker-dealer may need to mark certain sell orders ``short 
exempt.''

D. Empirical Data Regarding Potential Market Impact of Short Sale Price 
Test Restrictions Submitted in Response to the Proposal and Re-Opening 
Release

    In the Proposal, we requested that commenters provide empirical 
data to support their views and arguments with respect to the proposed 
short sale price test rules and the proposed circuit breaker 
rules.\124\ Overall, the interpretations and results of the analyses 
submitted were mixed and sometimes conflicted with each other. In 
addition, the methods used in the empirical analyses submitted ranged 
from simple plots of data points to carefully constructed econometrics. 
The Pilot Results, while dated, in our view should continue to inform 
our decisionmaking where relevant, and none of the empirical studies 
discussed below have given us reason to question the rigor or validity 
of the Pilot Results.
---------------------------------------------------------------------------

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

    A number of commenters submitted data or referenced studies in 
support of their position that a short sale price test restriction 
would not have a positive impact on the market.\125\ In contrast,

[[Page 11242]]

and as we noted in the Proposal, some commenters have indicated that 
they believe that they have collected data that establishes a possible 
association between the recent market downturn and the elimination of 
former Rule 10a-1.\126\ Commenters also submitted data or referenced 
studies in support of the contention that a price test restriction 
would have a positive impact on the market.\127\ We summarize below 
findings from these studies and discuss our views with respect to the 
studies.
---------------------------------------------------------------------------

    \125\ See, e.g., letter from BATS (May 2009); Autore, 
Billingsley, and Kovacs, Short Sale Constraints, Dispersion of 
Opinion, and Market Quality: Evidence from the Short Sale Ban on 
U.S. Financial Stocks (June 19, 2009); letter from CBOE (June 2009); 
letter from CPIC (June 2009); letter from STANY (June 2009); letter 
from SIFMA (June 2009); letter from MFA (June 2009); letter from ICI 
(June 2009); letter from NSCP; letter from AIMA; letter from Credit 
Suisse (June 2009); letter from T.D. Pro Ex; letter from Citadel et 
al. (June 2009); letter from Allston Trading (June 2009); letter 
from Knight Capital (June 2009); letter from Wolverine; letter from 
Pershing Square; letter from GETCO (June 2009); letter from 
Dialectic Capital (June 2009); letter from Hudson River Trading; 
memorandum regarding meeting with Credit Suisse (July 2009); letter 
from CPIC (Sept. 2009); letter from STA (Sept. 2009); letter from 
SIFMA (Sept. 2009); letter from TD Asset Management; letter from 
Goldman Sachs (Sept. 2009); letter from EWT (Sept. 2009); letter 
from Prof. Jones; see also letter from NAAIM; letter from Prof. 
Werner; memorandum regarding meeting with TD Ameritrade; letter from 
Adam V. Reed, Julian Price Associate Professor of Finance, 
University of North Carolina at Chapel Hill, dated Sept. 21, 2009 
(``Prof. Reed''); letter from RBC (Sept. 2009); letter from Daniel 
Mathisson, Managing Director, Credit Suisse Securities (USA), LLC, 
dated Mar. 30, 2009 (``Credit Suisse (Mar. 2009)''); Ana Avramovic, 
What Happened When Traders' Shorts Were Pulled Down?, Credit Suisse 
Market Commentary (Sept. 2008) (``Avramovic (Sept. 2008)'').
    \126\ See Proposal, 74 FR at 18047, n.64; see also letter from 
Yavni Bar-Yam; Dion Harmon and Yaneer Bar-Yam, April 2009, Technical 
Report on SEC Uptick Rule Proposals, New England Complex Systems 
Institute.
    \127\ See, e.g., letter from Jeff Wang, dated May 7, 2009 
(``Jeff Wang''); letter from NYSE Euronext (June 2009); letter from 
Schwab; letter from European Investors (June 2009); letter from 
European Investors (Sept. 2009); letter from High Street Advisors; 
letter from Park National; letter from IBC; letter from Aflac; 
letter from GE; letter from Michael R. Grupe, Executive Vice 
President, Research & Investor Outreach, National Association of 
Real Estate Investment Trusts, dated June 19, 2009 (``NAREIT''); 
letter from Kurt N. Schacht, Managing Director, Linda L. 
Rittenhouse, Director, Capital Markets Policy, CFA Institute Centre 
for Financial Market Integrity, dated Aug. 21, 2009 (``CFA''); 
letter from Martin Napor.
---------------------------------------------------------------------------

    Several commenters cited empirical evidence showing that short 
selling contributes to market liquidity, price discovery, and market 
efficiency and that restrictions on short selling, particularly bans on 
short selling, may impede liquidity, price discovery, and market 
efficiency.\128\ While we agree with commenters that short selling 
contributes to market liquidity, price discovery and market efficiency 
and while these studies provide relevant information with respect to 
the effects of a short selling ban, they do not address the effects of 
a short sale price test restriction, or more specifically for purposes 
of Rule 201, a circuit breaker that, when triggered, imposes the 
alternative uptick rule.\129\ In fact, because Rule 201 does not impose 
a ban on short selling but instead continues to allow short selling 
(although at a price above the national best bid) when the short sale 
price test restriction has been triggered, the Rule's structure will 
help preserve the benefits of short selling.
---------------------------------------------------------------------------

    \128\ See, e.g., letter from BATS (May 2009); letter from AIMA; 
letter from CBOE (June 2009); letter from CPIC (June 2009); letter 
from Credit Suisse (June 2009); letter from GETCO (June 2009); 
letter from ICI (June 2009); letter from NSCP; letter from TD Asset 
Management; letter from T.D. Pro Ex; letter from STANY (June 2009); 
letter from Hudson River Trading; letter from Allston Trading (June 
2009); letter from Knight Capital (June 2009); letter from Pershing 
Square; letter from Wolverine; letter from Citadel et al. (June 
2009) (referencing Lawrence E. Harris, Ethan Namvar and Blake 
Phillips, Price Inflation and Wealth Transfer during the 2008 SEC 
Short-Sale Ban, (Apr. 2009)); Matthew Clifton and Mark Snape, The 
Effect of Short-selling Restrictions on Liquidity: Evidence from the 
London Stock Exchange (Dec. 19, 2008); Recent Trends in Trading 
Activity, Short Sales and Failed Trades and Study on the Impact of 
the Prohibition on the Short Sale of Inter-Listed Financial Sector 
Issuers by Investment Industry Regulatory Organization of Canada 
(IIROC) (February 2009); See Autore, Billingsley, and Kovacs, Short 
Sale Constraints, Dispersion of Opinion, and Market Quality: 
Evidence from the Short Sale Ban on U.S. Financial Stocks (June 19, 
2009); memorandum regarding meeting with Credit Suisse (July 2009); 
see also letter from Credit Suisse (Mar. 2009).
    \129\ See id. In addition, several commenters cited research 
showing that short selling may be beneficial to price discovery and 
market efficiency, but that did not address the effect of a short 
sale price test restriction on price discovery or market efficiency. 
See letter from CPIC (June 2009) (citing Jonathan Karpoff and 
Xiaoxia Lou, Do Short Sellers Detect Overpriced Firms? Evidence from 
SEC Enforcement Actions, Working paper, 2008); letter from Goldman 
Sachs (Sept. 2009) (citing Jonathan Karpoff and Xiaoxia Lou, Short 
Sellers and Financial Misconduct, Working paper, 2009); letter from 
Pershing Square (citing Jonathan Karpoff and Xiaoxia Lou, Do Short 
Sellers Detect Overpriced Firms? Evidence from SEC Enforcement 
Actions, Working paper, 2008); letter from CPIC (Sept. 2009) (citing 
Jonathan Karpoff and Xiaoxia Lou, Short Sellers and Financial 
Misconduct, Working paper, 2009). Another commenter submitted a 
study showing that short sellers trade after news stories and that 
short sellers effectively process publicly available information. 
See letter from Prof. Reed. While this study uses short selling 
volume data to support its conclusion that short sellers do not 
disproportionately engage in information-based manipulation, it does 
not directly examine the impact of a short sale price test 
restriction, and, therefore, has limited utility for purposes of 
evaluating the potential market impact of Rule 201.
---------------------------------------------------------------------------

    Some commenters cited a study (the ``Pre-Borrow Study'') which did 
not find a relationship between changes in short interest and changes 
in trading volume, and which concluded that ``short sales do not have a 
significant effect on market liquidity: Other factors drive 
liquidity.'' \130\ We note, however, that the correlation between 
changes in short interest and changes in trading volume may not be an 
accurate measure of the impact of short sales on liquidity. Economic 
theory does not tend to support using changes in trading volume as a 
measure of liquidity.\131\ Trading volume itself, as opposed to changes 
in trading volume, is considered a measure of liquidity, though other 
measures, such as effective spreads and price impact, are considered by 
many to be better measures of liquidity and are more commonly used for 
measuring the liquidity of equities.\132\ In addition, changes in short 
interest do not necessarily measure the volume of short selling. In 
fact, short interest is a ``snapshot'' variable, so the change in short 
interest does not necessarily measure correctly the volume of short 
selling, which is what the Pre-Borrow Study is trying to examine. Thus, 
we do not believe that the results in the Pre-Borrow Study cited by 
commenters should be interpreted to suggest that short sales are 
unimportant for liquidity. We also note that the Pre-Borrow study does 
not reconcile its results to a large body of conflicting evidence, 
including (but not restricted to) analyses in the comments mentioned 
above, showing that short selling contributes to market liquidity and 
that restrictions on short selling, particularly bans on short selling, 
may impede liquidity.\133\
---------------------------------------------------------------------------

    \130\ See, e.g., letter from Patrick M. Byrne, Chairman and CEO, 
Overstock.com, Inc., dated May 29, 2009 (``Overstock.com (May 
2009)'') (citing Robert J. Shapiro and Nam D. Pham, The Impact of a 
Pre-Borrow Requirement for Short Sales on Failures-to-Deliver and 
Market Liquidity, Apr. 2009; letter from Brian D. Pardo, Chairman 
and CEO, Life Partners Holding, Inc., dated May 28, 2009 (``Life 
Partners Holding'') (citing the Pre-Borrow Study).
    \131\ The reason why we cannot interpret a change in trading 
volume as a measure of liquidity can be illustrated by the following 
example: A less liquid stock can experience an increase (positive 
change) in trading volume and a more liquid stock can experience a 
decrease in trading volume. Measuring liquidity by changes in 
trading volume will mischaracterize the less liquid stock as more 
liquid and the more liquid stock as less liquid.
    \132\ See, e.g., Tarun Chordia, Richard Roll, and Avanidhar 
Subrahmanyam, 2001, Market Liquidity and Trading Activity, Journal 
of Finance, 34: 501-530; Joel Hasbrouck and Duane J. Seppi, 2001, 
Common Factors in Prices, Order Flows and Liquidity, Journal of 
Financial Economics, 59: 383-411; Yakov Amihud, 2002, Illiquidity 
and stock returns: cross-section and time-series effects, Journal of 
Financial Markets, 5: 31-56.
    \133\ See supra note 128 (referencing, among others, empirical 
evidence cited by commenters as showing that short selling 
contributes to market liquidity).
---------------------------------------------------------------------------

    Several commenters provided analyses showing that short interest 
initially fell immediately after the repeal of former Rule 10a-1 and 
that either short interest or short selling volume fell for specific 
stocks over periods leading up to the Short Sale Ban Emergency 
Order.\134\ Overall, these analyses show that the negative returns of 
financial securities in the weeks both before and during the Short Sale 
Ban Emergency Order are unlikely to be the result of short selling 
activities.\135\ We note that, although these studies create some doubt 
about whether certain price declines during that time period were 
caused by short sellers, because the analyses provided are specific to 
the Short Sale Ban Emergency Order and to a time period during which 
there was significant market turmoil, the analyses are less relevant 
regarding the potential impact on returns of the circuit breaker 
approach of Rule 201.
---------------------------------------------------------------------------

    \134\ See, e.g., letter from Dialectic Capital (June 2009); 
letter from MFA (June 2009); letter from STA (Sept. 2009); Avramovic 
(Sept. 2008).
    \135\ See Avramovic (Sept. 2008); letter from Credit Suisse 
(June 2009).
---------------------------------------------------------------------------

    Several other commenters stated that the absence of a short sale 
price test restriction has been detrimental to

[[Page 11243]]

prices and provided information on share prices, volume and/or short 
interest that they believe support this statement.\136\ We note that, 
while some of the noted price changes coincide with changes in short 
selling activity, some do not.\137\ Moreover, because these studies 
look at a long horizon (e.g., months instead of minutes), it is not 
clear that the evidence provided is relevant to support such 
conclusion. Thus, it is difficult to conclude from these analyses that 
the absence of a short sale price test restriction and the actions of 
short sellers resulted in issuer prices falling below their fundamental 
values.
---------------------------------------------------------------------------

    \136\ See, e.g., letter from Park National; letter from GE; 
letter from Aflac; letter from IBC; letter from Jeff Wang; letter 
from Martin Napor.
    \137\ For example, some of the noted price declines coincide 
with increases in short interest. See letter from Aflac; letter from 
IBC. Other noted price changes do not correlate with changes in 
short interest or short selling activity. See letter from Dialectic 
Capital (June 2009); letter from MFA (June 2009); letter from Peter 
J. Driscoll, Chairman, John C. Giesea, President and CEO, Security 
Traders Association, dated June 19, 2009 (``STA (June 2009)''); 
Avramovic (Sept. 2008).
---------------------------------------------------------------------------

    One commenter cited a study that used intra-day short selling 
transaction data to examine the impact of short selling on volatility 
and found that the removal of former Rule 10a-1 did not exacerbate 
volatility.\138\ We note that, while the study analyzed a period prior 
to and after the removal of former Rule 10a-1, it analyzed only a six-
week period following the elimination of former Rule 10a-1, which may 
minimize the study's statistical significance. We also note that 
although the Staff found, in the Staff's Summary Pilot Report 
presenting the Staff's analysis of the data made public during the 
Pilot, that short sale price tests in effect at that time did not have 
a significant impact on daily volatility, the Staff also found some 
evidence that the short sale price tests dampened intra-day volatility 
for smaller stocks.\139\
---------------------------------------------------------------------------

    \138\ See letter from Citadel et al. (June 2009) (citing 
Ekkehart Boehmer, Charles M. Jones, and Xioayan Zhang, Unshackling 
Short Sellers: The Repeal of the Uptick Rule (Nov. 2008)).
    \139\ See Staff's Summary Pilot Report at 55.
---------------------------------------------------------------------------

    In contrast, other commenters submitted data showing an increase in 
volatility from July 2007 through November 2008 to support the 
conclusion that the absence of a short sale price test restriction 
caused an increase in market volatility.\140\ As discussed above and in 
the Proposal,\141\ concurrent with the subprime mortgage crises and 
credit crisis in 2007, U.S. markets experienced increased volatility 
and steep price declines, particularly in the stocks of certain 
financial issuers. We are not aware, however, of any empirical evidence 
that the elimination of short sale price test restrictions contributed 
to the increased volatility in the U.S. markets. In addition, the data 
showing an increase in volatility since the elimination of former Rule 
10a-1 submitted by commenters in response to the Proposal does not 
address the extent to which other factors may have influenced the 
increased volatility. Moreover, because these studies look at a long 
horizon (e.g., months instead of minutes), it is not clear that the 
evidence provided is relevant to support such conclusion. Thus, the 
relationship between the elimination of short sale price test 
restrictions and the increased volatility remains unclear.
---------------------------------------------------------------------------

    \140\ See, e.g., letter from NAREIT; letter from High Street 
Advisors; letter from European Investors (June 2009); letter from 
European Investors (Sept. 2009).
    \141\ See Proposal, 74 FR at 18043.
---------------------------------------------------------------------------

    Several commenters submitted data on the percentage of short sales 
that might be affected by a short sale price test restriction.\142\ One 
commenter submitted data indicating that the alternative uptick rule, 
adopted on a permanent, market-wide basis, could affect up to 37% of 
short sale orders.\143\ As acknowledged by this commenter, however, 
this number does not indicate how severely the short sellers would be 
affected, how the number might change in different market conditions, 
or whether the number would result in changes in market quality.\144\ 
In addition, as acknowledged by the commenter, the number also does not 
account for how order submission strategies would differ based on the 
alternative uptick rule.\145\
---------------------------------------------------------------------------

    \142\ See letter from Prof. Jones; letter from BATS (May 2009) 
(stating that, on its own market during May, June, September and 
October 2008, 12% to 13% of all executions were short sellers 
trading at a price less than the last execution price).
    \143\ See letter from Prof. Jones (stating that, during the 
period from July 6, 2007 through the end of August 2007, an average 
of 37% of submitted short sale orders in NYSE-listed Russell 3000 
stocks were either market orders or marketable limit orders).
    \144\ See id.
    \145\ See id.
---------------------------------------------------------------------------

    In addition, as discussed in more detail below,\146\ in response to 
our request for comment on an appropriate threshold at which to trigger 
the proposed circuit breaker short sale price restrictions, commenters 
submitted estimates of the number of securities that would trigger a 
circuit breaker rule at a 10% threshold.\147\ While commenters' 
analyses (including the facts and assumptions used) and their resulting 
estimates varied,\148\ commenters' estimates reflect that a 10% circuit 
breaker threshold, on average, should affect a limited percentage of 
covered securities.\149\ Given the variations in the facts and 
assumptions underlying the estimates submitted by commenters, the Staff 
also looked at trading data to confirm the reasonableness of those 
estimates. The Staff found that, during the period covering April 9, 
2001 to September 30, 2009,\150\ the price test restrictions of Rule 
201 would have been triggered, on an average day, for approximately 4% 
of covered securities.\151\ The Staff also found that for a low 
volatility period, covering January 1, 2004 to December 31, 2006, the 
10% trigger level of Rule 201 would have, on an average day, been 
triggered for approximately 1.3% of covered securities.\152\ Thus, we 
believe that the short sale price test restriction of Rule 201 is 
structured so that generally it will not be triggered for the majority 
of covered securities at any given time and, thereby, will not 
interfere with the provision of market benefits such as liquidity and 
price efficiency for those securities, including when prices in such 
securities are undergoing minimal downward price pressure or are stable 
or rising.
---------------------------------------------------------------------------

    \146\ See infra Section III.A.5. (discussing the circuit breaker 
trigger level).
    \147\ See supra note 21.
    \148\ See infra note 306.
    \149\ See infra note 307.
    \150\ See infra note 309.
    \151\ See infra note 310.
    \152\ See infra note 311.
---------------------------------------------------------------------------

    Several commenters submitted data on indexes of investor confidence 
to argue that investor confidence has been restored and, therefore, 
short sale price test restrictions are not necessary.\153\ In addition, 
one commenter submitted preliminary data, drawn in part from investor 
confidence indexes, on the relationship between short selling and 
investor confidence and stated that ``[w]hile it is too early to draw 
conclusions from this data, the evidence presented * * * does not 
suggest that there is a negative relationship between short selling 
activity and investor confidence.'' \154\ Another commenter submitted a 
survey showing that its clients put more money into the markets between 
Fall 2008 and Spring 2009 and that many of its clients do not believe 
that an overhaul of financial services regulation would restore 
investor confidence.\155\
---------------------------------------------------------------------------

    \153\ See, e.g., letter from RBC (Sept. 2009); letter from EWT 
(Sept. 2009); letter from CPIC (June 2009); see also letter from 
NAAIM (citing press articles as evidence of increased investor 
confidence).
    \154\ Letter from Prof. Werner.
    \155\ See memorandum regarding meeting with TD Ameritrade.
---------------------------------------------------------------------------

    We also note that some other commenters submitted surveys showing

[[Page 11244]]

that reinstituting a short sale price test restriction would improve 
investor confidence.\156\ One commenter submitted a survey showing that 
over 95% of the issuers participating in the survey believed that the 
market would function better with a short sale price test restriction 
and stated that this data ``suggests that a price test would boost 
confidence.'' \157\
---------------------------------------------------------------------------

    \156\ See, e.g., letter from NYSE Euronext (June 2009); letter 
from CFA; see also letter from Schwab.
    \157\ Letter from NYSE Euronext (June 2009).
---------------------------------------------------------------------------

    While the analyses of investor confidence indexes submitted by 
commenters do contain measures of investor confidence, we believe that 
the investor confidence indexes cited are designed to capture elements 
of investor confidence not directly affected by regulatory changes. 
Investor confidence indexes often capture measures of systematic risk 
or optimism about the economy, as opposed to measures of investor 
confidence related to regulation designed to provide investor 
protections. In addition, in light of the surveys that were submitted 
in support of a short sale price test restriction as a means to restore 
investor confidence,\158\ we do not believe that the surveys submitted 
to argue that a short sale price test restriction would not improve 
investor confidence \159\ provide strong evidence on this point.
---------------------------------------------------------------------------

    \158\ See, e.g., letter from Schwab; letter from NYSE Euronext 
(June 2009); letter from CFA.
    \159\ See, e.g., memorandum regarding meeting with TD 
Ameritrade.
---------------------------------------------------------------------------

    Although in recent months there has been an increase in stability 
in the securities markets, we remain concerned that excessive downward 
price pressure on individual securities accompanied by the fear of 
unconstrained short selling can undermine investor confidence in our 
markets generally. Further, we are concerned about potential future 
market turmoil, including significant increases in market volatility 
and significant price declines, and the impact of any such future 
market turmoil on investor confidence. Thus, we believe it is 
appropriate to adopt the targeted short sale price test restrictions 
contained in Rule 201.
    In summary, we have reviewed the empirical data, analyses and 
studies submitted and carefully considered them in connection with our 
determination that it is appropriate at this time to adopt in Rule 201 
a short sale price test restriction combined with a circuit breaker 
approach.

III. Discussion of Rule 201 of Regulation SHO

    In the Proposal, we proposed two approaches to restrictions on 
short selling: one that would apply on a market-wide and permanent 
basis and one that would apply only to a particular security during a 
significant market decline in the price of that security (i.e., a 
circuit breaker approach).\160\ With respect to the permanent, market-
wide approach, we proposed two alternative short sale price tests: the 
proposed modified uptick rule, based on the current national best bid, 
and the proposed uptick rule, based on the last sale price. With 
respect to the circuit breaker approach, we proposed two alternative 
circuit breaker tests: one that would temporarily prohibit short 
selling in a particular security when there is a significant decline in 
the price of that security and one that would temporarily impose either 
the proposed modified uptick rule or the proposed uptick rule on short 
sales in a particular security when there is a significant decline in 
the price of that security.
---------------------------------------------------------------------------

    \160\ See Proposal, 74 FR 18042.
---------------------------------------------------------------------------

    In addition, in the Proposal we inquired whether a short sale price 
test restriction that would permit short selling at a price above the 
current national best bid, i.e., the alternative uptick rule, would be 
preferable to the proposed modified uptick rule and the proposed uptick 
rule.\161\ We sought comment regarding the application of the 
alternative uptick rule as a market-wide permanent price test 
restriction or in conjunction with a circuit breaker.\162\ We received 
two comment letters regarding applying the alternative uptick rule on a 
permanent, market-wide basis \163\ and seven comment letters with 
respect to applying the alternative uptick rule in combination with a 
circuit breaker.\164\ To allow us to further consider the alternative 
uptick rule, on August 20, 2009, we re-opened the comment period to the 
Proposal.\165\ In addition, on May 5, 2009, we held the May 2009 
Roundtable \166\ at which panelists discussed the proposed short sale 
price test restrictions and circuit breaker rules.
---------------------------------------------------------------------------

    \161\ See Proposal, 74 FR at 18072, 18081, 18082.
    \162\ See id.
    \163\ See letter from William Hartley, dated May 8, 2009; letter 
from Glen Shipway, dated June 19, 2009 (``Glen Shipway (June 
2009)'').
    \164\ See letter from BATS (May 2009); letter from Johnny 
Peters, ChFC, dated May 20, 2009; letter from Credit Suisse (June 
2009); letter from SIFMA (June 2009); letter from Goldman Sachs 
(June 2009); letter from NYSE Euronext (June 2009); letter from Eric 
W. Hess, General Counsel, Direct Edge Holdings LLC, dated June 23, 
2009 (``Direct Edge (June 2009)''). In addition, in connection with 
the May 2009 Roundtable, panelists expressed support for the 
alternative uptick rule. See statement from NYSE Euronext (May 
2009); opening remarks of James J. Angel, Ph.D., CFA, Associate 
Professor of Finance, McDonough School of Business, Georgetown 
University, dated May 5, 2009. We also note that prior to the 
Proposal, four exchanges, NYSE Euronext, Nasdaq OMX Group, BATS, and 
National Stock Exchange, submitted a comment letter recommending a 
circuit breaker combined with a price test that would allow short 
selling only at an increment above the current national best bid. 
See letter from National Stock Exchange, NYSE Euronext, Nasdaq OMX 
Group, and BATS, dated Mar. 24, 2009 (``National Stock Exchange et 
al.''). NYSE Euronext, in its subsequent comments, stated that it 
supported the proposed modified uptick rule applied on a permanent 
and market-wide basis rather than the position expressed in the 
earlier March 24, 2009 letter. See statement from NYSE Euronext (May 
2009); letter from NYSE Euronext (June 2009).
    \165\ See Re-Opening Release, 74 FR 42033.
    \166\ See supra note 14.
---------------------------------------------------------------------------

    As noted above, we received over 4,300 unique comment letters in 
response to the Proposal and Re-Opening Release.\167\ In discussing the 
provisions of Rule 201, we highlight and address below the main issues, 
concerns, and suggestions raised by commenters.
---------------------------------------------------------------------------

    \167\ See supra note 78.
---------------------------------------------------------------------------

A. Operation of the Circuit Breaker Plus Alternative Uptick Rule

    We are adopting in Rule 201 a circuit breaker approach combined 
with the alternative uptick rule. Specifically, Rule 201(b)(1) provides 
that ``[a] trading center shall establish, maintain, and enforce 
written policies and procedures reasonably designed to: (i) Prevent the 
execution or display of a short sale order of a covered security at a 
price that is less than or equal to the current national best bid if 
the price of that covered security decreases by 10% or more from the 
covered security's closing price as determined by the listing market 
for the covered security as of the end of regular trading hours on the 
prior day; and (ii) Impose the requirements of paragraph (b)(1)(i) of 
this section for the remainder of the day and the following day when a 
national best bid for the covered security is calculated and 
disseminated on a current and continuing basis by a plan processor 
pursuant to an effective national market system plan.'' \168\
---------------------------------------------------------------------------

    \168\ Rule 201(b).
---------------------------------------------------------------------------

    Thus, Rule 201 will require a trading center \169\ to have policies 
and

[[Page 11245]]

procedures reasonably designed to prevent it from executing or 
displaying any short sale order, absent an exception, at a price that 
is equal to or below the national best bid if the price of that 
security decreases by 10% or more from the security's closing price as 
determined by the listing market for the covered security as of the end 
of regular trading hours on the prior day.\170\ As discussed in more 
detail below, we believe that such a Rule will help prevent short 
sellers from using short selling as a tool to exacerbate a declining 
market in a security.
---------------------------------------------------------------------------

    \169\ Consistent with the Proposal, Rule 201(a)(9) states that 
the term ``trading center'' shall have the same meaning as in Rule 
600(b)(78). Rule 600(b)(78) of Regulation NMS defines a ``trading 
center'' as ``a national securities exchange or national securities 
association that operates an SRO trading facility, an alternative 
trading system, an exchange market maker, an OTC market maker, or 
any other broker or dealer that executes orders internally by 
trading as principal or crossing orders as agent.'' See 17 CFR 
242.600(b)(78). The definition encompasses all entities that may 
execute short sale orders. Thus, Rule 201 will apply to any entity 
that executes short sale orders.
    \170\ Any such execution or display will also need to be in 
compliance with applicable rules regarding minimum pricing 
increments. See 17 CFR 242.612. See also infra Section III.A.2.
---------------------------------------------------------------------------

1. Covered Securities
    Consistent with the proposed permanent, market-wide short sale 
price test restrictions and proposed circuit breaker rules, Rule 201 
will apply to any ``covered security.'' As proposed and as adopted, 
Rule 201 defines ``covered security'' to mean any ``NMS stock'' as 
defined under Rule 600(b)(47) of Regulation NMS.\171\ Rule 600(b)(47) 
of Regulation NMS defines an ``NMS stock'' as ``any NMS security other 
than an option.'' \172\ Rule 600(b)(46) of Regulation NMS defines an 
``NMS security'' as ``any security or class of securities for which 
transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options.'' \173\ Thus, Rule 201 will apply to any security or class of 
securities, except options, for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan. As a result, Rule 201 generally will cover 
all securities, except options, listed on a national securities 
exchange whether traded on an exchange or in the OTC market.\174\ As 
discussed further below, it will not include non-NMS stocks quoted on 
the OTC Bulletin Board or elsewhere in the OTC market.
---------------------------------------------------------------------------

    \171\ See Rule 201(a)(1).
    \172\ 17 CFR 242.600(b)(47).
    \173\ 17 CFR 242.600(b)(46).
    \174\ We note that there may be securities that are listed on a 
national securities exchange but that are not NMS stocks because 
they do not meet the definition of ``NMS stock.'' Thus, these 
securities will not be subject to the short sale price test 
restrictions of Rule 201.
---------------------------------------------------------------------------

    In response to our requests for comment, some commenters stated 
that any short sale price test adopted by the Commission for NMS stocks 
should also apply to non-NMS stocks quoted on the OTC Bulletin Board or 
elsewhere in the OTC market.\175\ One commenter indicated that failure 
to apply a short sale price test restriction applicable to NMS stocks 
to non-NMS stocks quoted on the OTC Bulletin Board or elsewhere in the 
OTC market would cause investors to have inappropriately negative views 
about the OTC market and the firms whose securities are quoted 
there.\176\ This commenter and another commenter also stated that not 
including non-NMS stocks quoted on the OTC Bulletin Board or elsewhere 
in the OTC market in a short sale price test restriction could have a 
negative impact on the ability of firms whose securities are quoted OTC 
to raise capital.\177\ Commenters noted that many issuers of securities 
that are quoted OTC are ``small, emerging growth companies,'' \178\ 
that may have a particular need to raise capital in the equity 
markets.\179\ One commenter noted that ``less liquid stocks and the 
stock of less capitalized firms that trade in the OTC markets are in 
need of as much, if not more, protection from manipulative behavior 
than NMS stocks''\180\ while another stated that ``OTC Bulletin Board 
and Pink Sheet securities would appear to be prime targets for 
manipulative shorting practices.''\181\ Commenters also noted that 
applying a price test rule uniformly to NMS stocks and to non-NMS 
stocks quoted on the OTC Bulletin Board or elsewhere in the OTC market 
could reduce the costs of such a rule because market participants would 
need only one set of programs and systems designed to ensure compliance 
with the rule, rather than different programs and systems for 
securities covered by the rule and securities not covered by the 
rule.\182\
---------------------------------------------------------------------------

    \175\ See letter from Peter J. Chepucavage, General Counsel, 
Plexus Consulting LLC, The International Association of Small Broker 
Dealers and Advisors, dated Apr. 21, 2009; letter from R. Cromwell 
Coulson, Chief Executive Officer, Pink OTC Markets, Inc., dated May 
26, 2009 (``Pink OTC''); letter from STANY (June 2009); letter from 
Michael L. Crowl, Managing Director and Global General Counsel, 
Barclays Global Investors, dated June 19, 2009 (``Barclays (June 
2009)'').
    \176\ See letter from Pink OTC.
    \177\ See letter from Pink OTC; letter from STANY (June 2009).
    \178\ Letter from Pink OTC.
    \179\ See letter from Pink OTC; letter from Alan F. Eisenberg, 
Executive Vice President, Emerging Companies and Business 
Development, Biotechnology Industry Organization, dated June 29, 
2009 (``BIO''). BIO requested that biotechnology companies, many of 
which BIO stated are emerging companies that are ``very dependent on 
capital, including using the public markets as a source of 
financing,'' be covered by any short sale price test restriction. 
Letter from BIO. We also note that one commenter requested that the 
Commission adopt a short sale price test or circuit breaker halt 
restriction specifically applicable to financial sector stocks. See 
letter from IBC. However, another commenter stated, ``Restrictions 
on short selling in only the issues of financial services providers 
is perhaps the least valuable of all the ideas to be discussed 
during the short sale debate.'' See letter from STA (June 2009). 
Another commenter noted that it is not possible to anticipate which 
industry sectors may be impacted by potentially manipulative short 
selling in the future. See letter from T. Rowe Price (June 2009). 
Given the lack of a widespread call for industry specific short 
selling restrictions, and the additional complexities that an 
industry specific restriction would raise, such as identifying and 
defining the industry or sector to be covered, we have determined 
not to apply an industry specific short selling restriction at this 
time.
    \180\ Letter from STANY (June 2009).
    \181\ Letter from T. Rowe Price (June 2009).
    \182\ See letter from Pink OTC; letter from STANY (June 2009).
---------------------------------------------------------------------------

    Several commenters, however, expressed support for the application 
of a price test only to NMS stocks.\183\ Several commenters noted that 
the current national best bid and offer are not currently collected, 
consolidated and disseminated for non-NMS stocks quoted on the OTC 
Bulletin Board or elsewhere in the OTC market.\184\ Further, although 
one commenter indicated that the Commission should plan to phase in 
application of a price test rule to non-NMS stocks quoted on the OTC 
Bulletin Board or elsewhere in the OTC market,\185\ another commenter 
expressed concerns that the OTC market is not ``robust enough to 
withstand'' such regulation.\186\
---------------------------------------------------------------------------

    \183\ See, e.g., letter from Wells Fargo (June 2009); letter 
from T. Rowe Price (June 2009); letter from STA (June 2009); letter 
from Credit Suisse (Sept. 2009).
    \184\ See letter from Pink OTC; letter from T. Rowe Price (June 
2009).
    \185\ See letter from T. Rowe Price (June 2009).
    \186\ Letter from STA (June 2009).
---------------------------------------------------------------------------

    At this time, we are not applying Rule 201 to non-NMS stocks quoted 
on the OTC Bulletin Board or elsewhere in the OTC market because a 
national best bid and offer currently is not required to be collected, 
consolidated, and disseminated for such securities.\187\ Rule 201 is 
based on the current national best bid and its implementation requires 
that the national best bid is collected, consolidated and disseminated 
to market participants. Although several commenters indicated that it 
would be possible for non-NMS stocks quoted on the OTC Bulletin Board 
or elsewhere in the OTC market to join or create a national plan for 
disseminating consolidated national

[[Page 11246]]

best bid information for such stocks,\188\ we are concerned that this 
would be a significant undertaking that would add greatly to the 
implementation time and cost of Rule 201, particularly in light of 
comments that the implementation process may be complex even for those 
securities for which the national best bid is currently collected, 
consolidated, and disseminated.\189\
---------------------------------------------------------------------------

    \187\ As noted above, former Rule 10a-1 also did not apply to 
non-exchange listed securities quoted on the OTC Bulletin Board or 
elsewhere in the OTC market. See supra note 43.
    \188\ See, e.g., letter from Pink OTC; letter from STANY (June 
2009); letter from T. Rowe Price (June 2009). The comment letter 
from Pink OTC indicates that it ``would be willing to join the 
current Tape C UTP network or work with FINRA to create an OTC/UTP 
Plan including the best bid and offer prices for securities quoted 
on OTCBB and our Pink Quote Inter-Dealer Quotation System.'' Letter 
from Pink OTC.
    \189\ See infra Section VII. (discussing implementation time) 
and Sections X.B.1.b. and X.B.2.b. (discussing implementation 
costs).
---------------------------------------------------------------------------

    We recognize commenters' concerns, however, regarding not applying 
Rule 201 to non-NMS stocks quoted on the OTC Bulletin Board or 
elsewhere in the OTC market. Thus, at a later time, we may reconsider 
whether applying Rule 201 to non-NMS stocks quoted on the OTC Bulletin 
Board or elsewhere in the OTC market may be appropriate.
    In response to our requests for comment, a number of commenters 
expressed concerns about the application of a short sale price test to 
equity securities without also addressing derivative securities.\190\ 
Several commenters indicated that the ability of market participants to 
create ``synthetic'' short positions that are the economic equivalent 
of a short sale through the use of derivative securities would 
undermine the effectiveness of a short sale price test \191\ and/or 
result in an increased use of derivative products to create 
``synthetic'' short positions.\192\ Some commenters indicated that the 
Commission should apply some sort of restriction to derivative 
securities with respect to ``synthetic'' short sales,\193\ while others 
suggested that the Commission should require disclosure of 
``synthetic'' short positions created with derivative securities.\194\ 
Several commenters noted concerns with respect to practical 
difficulties related to addressing derivative securities and short 
selling issues, and that the Commission may not have the necessary 
legislative authority to address certain areas.\195\
---------------------------------------------------------------------------

    \190\ See, e.g., letter from Gregory Bloom, dated Apr. 10, 2009; 
letter from Peter J. Driscoll, Chairman, John C. Giesea, President 
and CEO, Security Traders Association, dated Apr. 16, 2009 (``STA 
(Apr. 2009)''); letter from Jeffrey D. Morgan, President and CEO, 
National Investor Relations Institute, dated May 29, 2009 
(``NIRI''); letter from Douglas Engmann, President, Engmann Options, 
Inc., dated June 1, 2009 (``Engmann Options''); letter from Dale 
W.R. Rosenthal, Assistant Professor of Finance, College of Business 
Administration, University of Illinois at Chicago, dated June 2, 
2009 (``Prof. Rosenthal''); letter from Leslie Seff, President, 
Matthew B. Management, Inc., dated June 5, 2009 (``Matthew B. 
Management''); letter from Patrick J. Healy, Issuer Advisory Group, 
dated June 30, 2009 (``IAG''); letter from Barclays (June 2009); 
letter from Jesse J. Greene, Jr., Vice President, Financial 
Management and Chief Financial Risk Officer, International Business 
Machines Corporation, dated June 19, 2009 (``IBM''); letter from 
Katherine Tew Darras, General Counsel, Americas, International Swaps 
and Derivatives Association, Inc., dated June 19, 2009 (``ISDA''); 
letter from STA (June 2009); letter from George U. Sauter, Managing 
Director and Chief Investment Officer, The Vanguard Group, Inc., 
dated June 19, 2009 (``Vanguard (June 2009)''); letter from GE; 
letter from Knight Capital (June 2009); letter from Wachtell; letter 
from Keith F. Higgins, Chair, Committee on Federal Regulation of 
Securities, American Bar Association, dated July 8, 2009 (``Amer. 
Bar Assoc. (July 2009)''); letter from Jeffrey S. Wecker, CEO, Lime 
Brokerage LLC, dated Sept. 21, 2009 (``Lime Brokerage (Sept. 
2009)''); letter from Jonathan E. Johnson III, President, 
Overstock.com, dated Sept. 24, 2009 (``Overstock.com (Sept. 
2009)''); letter from Kevin Holley, dated Sept. 29, 2009 (``Kevin 
Holley''); see also letter from Eric W. Hess, General Counsel, 
Direct Edge Holdings LLC, dated Mar. 30, 2009 (``Direct Edge (Mar. 
2009)'').
    \191\ See, e.g., letter from Prof. Rosenthal; letter from STA 
(Apr. 2009); letter from Overstock.com (Sept. 2009); letter from 
Lime Brokerage (Sept. 2009).
    \192\ See, e.g., letter from Matthew B. Management; letter from 
Prof. Rosenthal; letter from Barclays (June 2009); letter from STA 
(June 2009); letter from Vanguard (June 2009); letter from Lime 
Brokerage (Sept. 2009).
    \193\ See, e.g., letter from IAG; letter from ISDA; letter from 
STA (June 2009); letter from Wachtell; letter from Matthew B. 
Management; letter from James L. Rothenberg, dated Sept. 20, 2009 
(``James Rothenberg'').
    \194\ See, e.g., letter from IAG; letter from GE; letter from 
Wachtell; see also letter from Direct Edge (Mar. 2009).
    \195\ See letter from Barclays (June 2009); letter from GE; 
letter from NIRI; letter from Amer. Bar Assoc. (July 2009). Two 
commenters stated that the Commission should seek authority from 
Congress to regulate derivative securities where authority is 
currently lacking. See letter from GE; letter from NIRI.
---------------------------------------------------------------------------

    As indicated in the Proposal and our requests for comment,\196\ we 
recognize that the ability to obtain a short position through the use 
of derivative products such as options, futures, contracts for 
differences, warrants, CDS or other swaps (so-called ``synthetic short 
sales'') or other instruments (such as inverse leveraged exchange 
traded funds) may undermine our goals for adopting short sale price 
test restrictions. We are also concerned that synthetic short positions 
may increase as a result of the adoption of Rule 201. Rule 201, 
however, like former Rule 10a-1 and NASD's former bid test, which also 
did not apply to derivative securities, is formulated with the specific 
structure of the equity markets in mind and not for the substantially 
different market structure applicable to many derivatives securities. 
In addition, we believe that applying a Rule 201-type rule to 
derivatives securities would significantly complicate the 
implementation process. Thus, we have determined at this time not to 
modify the definition of ``covered security'' from that proposed and, 
therefore, the scope of securities to which Rule 201 will apply.
---------------------------------------------------------------------------

    \196\ See Proposal, 74 FR at 18071, 18078.
---------------------------------------------------------------------------

    We note, however, that short sales in the equity markets to hedge 
derivatives transactions are subject to Rule 201. In addition, because 
we are concerned that the ability to create a short position through 
the use of derivative securities may undermine the goals of short sale 
price test restrictions, we may reconsider, at a later time, whether 
additional regulation of derivative securities and the use of 
``synthetic'' short positions may be appropriate.
    The securities covered by Rule 201 will overlap with the securities 
covered by former Rule 10a-1. Former Rule 10a-1 applied to securities 
registered on, or admitted to unlisted trading privileges on, a 
national securities exchange, if trades of the security were reported 
pursuant to an effective transaction reporting plan and information 
regarding such trades was made available in accordance with such plan 
on a real-time basis to vendors of market transaction information. All 
securities that would have been subject to former Rule 10a-1 will also 
be subject to Rule 201. In addition, certain securities, i.e., 
securities traded on Nasdaq prior to its regulation as an exchange, 
that were not subject to former Rule 10a-1 will be subject to Rule 
201.\197\
---------------------------------------------------------------------------

    \197\ When Nasdaq became a national securities exchange in 2006, 
absent an exemption from former Rule 10a-1, all Nasdaq securities 
would have been subject to former Rule 10a-1. The Commission 
provided Nasdaq with an exemption from the application of the 
provisions of former Rule 10a-1 to securities traded on Nasdaq 
because the Pilot was already in progress, and the Commission 
believed it was necessary and appropriate to maintain the status quo 
for short sale price tests during the Pilot and to ensure that 
market participants would not be burdened with costs associated with 
implementing a price test that might be temporary. See Exchange Act 
Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006) (order 
approving application of Nasdaq for registration as a national 
securities exchange); see also letter from James A. Brigagliano 
Acting Associate Director, Division of Market Regulation, SEC, to 
Marc Menchel, Executive Vice President and General Counsel, NASD, 
Inc., dated June 26, 2006.
---------------------------------------------------------------------------

    As we discussed in the Proposal,\198\ market information for NMS 
stocks, including quotes, is disseminated pursuant to three different 
national market system plans.\199\ The national

[[Page 11247]]

securities exchanges and FINRA participate in these joint-industry 
plans (``Plans'').\200\ The Plans establish three separate networks to 
disseminate market information for NMS stocks.\201\ These networks are 
designed to ensure that, among other things, consolidated bids from the 
various trading centers that trade NMS stocks are continually collected 
and disseminated on a real-time basis, in a single stream of 
information. Thus, all market participants will have access to the 
consolidated bids for all the securities that will be subject to Rule 
201.\202\ As discussed in further detail below, however, we note that 
the national best bid can change rapidly and repeatedly and potentially 
there might be latencies in obtaining data regarding the national best 
bid.\203\
---------------------------------------------------------------------------

    \198\ See Proposal, 74 FR at 18050-18051.
    \199\ The three joint-industry plans are (1) the Consolidated 
Tape Association Plan (``CTA Plan''), which disseminates transaction 
information for securities primarily listed on an exchange other 
than Nasdaq, (2) the Consolidated Quotation Plan (``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.
    \200\ Rule 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).
    \201\ These 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.
    \202\ See Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496, 37503 (June 29, 2005) (``Regulation NMS Adopting Release'').
    \203\ See infra Section III.A.7.
---------------------------------------------------------------------------

2. Pricing Increment
    Rule 201(b) provides that a trading center shall establish, 
maintain, and enforce written policies and procedures reasonably 
designed to prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on the prior day. In Rule 201 we have determined not to 
specify at what price a trading center may execute or display a short 
sale order of a covered security provided it is not at a price that is 
less than or equal to the current national best bid. As we stated in 
the Proposal, however, any such execution or display must be in 
compliance with applicable rules regarding minimum pricing 
increments.\204\
---------------------------------------------------------------------------

    \204\ See Proposal, 74 FR at 18050, n.99, 101 (referencing 17 
CFR 242.612).
---------------------------------------------------------------------------

    In the Proposal and Re-Opening Release, we did not propose a 
specific increment above the national best bid or last sale price at 
which short selling would be permissible. In response to our requests 
for comment regarding pricing increments, however, a number of 
commenters stated that any increment should be greater than one cent in 
order to make a price test more restrictive or effective or to address 
decimal pricing concerns.\205\ Several commenters noted, however, that 
the higher the increment, the more restrictive such an increment could 
be on short selling and, if high enough, could even be tantamount to a 
ban on short selling.\206\ A study by the Staff found that even 
moderate changes in bid increments can have a big impact on the 
constraints imposed on short selling activity and that, for practical 
purposes, high bid increments, such as five or ten cents, might be 
equivalent to a ban on short selling in some stocks, especially during 
periods when prices are not changing rapidly.\207\
---------------------------------------------------------------------------

    \205\ See, e.g., letter from Franco A. Mortarotti, Managing 
Director, Zermatt Capital Management, dated Apr. 10, 2009 
(``Zermatt''); letter from Neal E. Schear, President, Schear 
Capital, Inc., dated Apr. 28, 2009 (``Schear''); letter from Dale T. 
Forte, dated Apr. 14, 2009; letter from Arthur Colman, dated May 4, 
2009; letter from Joseph Leegan, dated Mar. 25, 2009; letter from 
John H. Happke, dated May 7, 2009; letter from Louis G. Marozsan, 
Jr., dated May 8, 2009; letter from S. Buford Scott, Chairman, 
Walter S. Robertson, III, President and CEO, John Sherman, Jr., Past 
President and CEO, William P. Schubmehl, Past President and CEO, 
Scott & Stringfellow LLC, dated May 14, 2009 (``Scott & 
Stringfellow''); letter from Martin Napor; letter from Michael 
Sigmon, Chairman, Sigmon Wealth Management, dated June 10, 2009 
(``Sigmon Wealth Management (June 2009)''); letter from Christopher 
Ailman, Chief Investment Officer, California State Teachers' 
Retirement System, dated June 17, 2009; letter from IBM; letter from 
Stan Ryckman, dated June 19, 2009.
    \206\ See, e.g., letter from Citadel et al. (June 2009); letter 
from SIFMA (June 2009); letter from STA (June 2009)); see also 
letter from Credit Suisse (Mar. 2009).
    \207\ See Staff Analysis (Dec. 17, 2008).
---------------------------------------------------------------------------

    Several commenters supported an increment of one trading unit, or 
one cent,\208\ while another commenter suggested that the increment 
should be consistent with the minimum pricing increments specified in 
Rule 612 of Regulation NMS.\209\ One commenter stated that the 
Commission should not specify a minimum increment and should permit 
trades to be executed at the mid-point between the best bid and best 
offer, even if the price were less than one cent above the best 
bid.\210\ Another commenter expressed concerns that a short sale price 
test might advantage subpenny executions if, for example, certain 
trading venues were permitted to comply with the test by executing 
transactions at less than one cent above the national best bid.\211\
---------------------------------------------------------------------------

    \208\ See, e.g., letter from Citadel et al. (June 2009); letter 
from STA (June 2009).
    \209\ 17 CFR 242.612. See letter from NYSE Euronext (Sept. 
2009).
    \210\ See letter from Howard Meyerson, General Counsel, 
Liquidnet, Inc., dated June 18, 2009 (``Liquidnet'').
    \211\ See letter from Alec Hanson, dated Sept. 19, 2009.
---------------------------------------------------------------------------

    After considering the comments, we have determined at this time to 
not specify in Rule 201 a particular increment above the national best 
bid at which a covered security may be sold short. We believe that the 
goals we are seeking to advance by adopting Rule 201 will be achieved 
by requiring that when a covered security becomes subject to the short 
sale price test restrictions of Rule 201, all short selling must be at 
a price above the current national best bid. As discussed above, a goal 
of Rule 201 is to help prevent short selling from being used as a tool 
to exacerbate a declining market in a security. Thus, the price test 
restriction of Rule 201 does not permit short selling at or below the 
current national best bid. In addition to achieving this goal, however, 
we also recognize the need to minimize market disruption as well as the 
need for the price test restriction in Rule 201 to not be unduly 
restrictive. We believe that restricting short selling to a price above 
the current national bid for a particular security when the circuit 
breaker has been triggered for that security, without specifying at 
what price such short sales may occur, will best achieve these 
goals.\212\
---------------------------------------------------------------------------

    \212\ As noted above, any execution or display of a short sale 
order must be in compliance with applicable rules of Regulation NMS 
regarding minimum pricing increments. See supra note 204 and 
accompanying text.
---------------------------------------------------------------------------

3. Alternative Uptick Rule
    We have determined to adopt in Rule 201(b) the alternative uptick 
rule such that when triggered, short selling will be permitted only at 
a price above the current national best bid. Specifically, Rule 201(b) 
will require a trading center to establish, maintain, and enforce 
written policies and procedures reasonably designed to prevent the 
execution or display of a short sale order of a covered security at a 
price that is less than or equal to the current national best bid if 
the price of that covered security decreases by 10% or more from the 
covered security's closing price as determined by the listing market 
for the covered security as of the end of regular trading hours on the 
prior day.\213\ As noted above, we have determined to adopt in Rule 
201(b) a circuit breaker trigger combined with

[[Page 11248]]

the alternative uptick rule. Thus, while this Section III.A.3. focuses 
on the alternative uptick rule in the context of comments received 
about the different price tests that we proposed, the alternative 
uptick rule operates in conjunction with the circuit breaker approach 
and should not be considered as an isolated provision.
---------------------------------------------------------------------------

    \213\ See Rule 201(b).
---------------------------------------------------------------------------

    In the Proposal and the Re-Opening Release, we sought comment on 
three alternative types of short sale price test restrictions that 
could be applied on a permanent, market-wide basis or in combination 
with a circuit breaker: the proposed uptick rule, the proposed modified 
uptick rule, and the alternative uptick rule.\214\ The alternative 
uptick rule is similar to the proposed modified uptick rule in that it 
will use the current national best bid, rather than the last sale 
price, as a reference point for short sale orders. Unlike the proposed 
modified uptick rule and the proposed uptick rule, the alternative 
uptick rule will not allow short selling at the current national best 
bid or last sale price. Instead, the alternative uptick rule will only 
permit short selling at an increment above the current national best 
bid, unless an applicable exception applies.
---------------------------------------------------------------------------

    \214\ See Proposal, 74 FR 18042; Re-Opening Release, 74 FR 
42033.
---------------------------------------------------------------------------

    In response to the Proposal and the Re-Opening Release, we received 
a number of comment letters supporting and opposing the alternative 
uptick rule. Those that opposed the alternative uptick rule stated, 
among other things, that because it will allow short selling only at a 
price above the current national best bid or last sale price, rather 
than at the current national best bid or last sale price, it will be 
more disruptive to the market than the proposed modified uptick rule or 
proposed uptick rule.\215\ Some commenters stated that the alternative 
uptick rule will decrease liquidity, widen bid-ask spreads, decrease 
pricing efficiency, create inefficiencies in the routing and execution 
of short sale orders, increase intra-day volatility, and result in 
higher costs to investors.\216\ Some commenters expressed concerns that 
the alternative uptick rule will exacerbate downward price movements 
because market participants may perceive the presence of short limit 
orders as a negative view of a security, causing buyers to withdraw 
their bids.\217\ Other commenters stated that, although easier to 
implement, the alternative uptick rule would have a more disruptive 
effect on the market than the proposed modified uptick rule or the 
proposed uptick rule.\218\
---------------------------------------------------------------------------

    \215\ See, e.g., letter from William E. McDonnell, Jr., Chief 
Compliance Officer, Atherton Lane Advisers, LLC, dated Sept. 9, 2009 
(``Atherton Lane''); letter from Michael J. Simon, Secretary, 
International Securities Exchange LLC, dated Sept. 21, 2009 (``ISE 
(Sept. 2009)''); letter from John Nagel, Managing Director and 
Deputy General Counsel, Citadel Investment Group, LLC, John Liftin, 
Managing Director and General Counsel, The D.E. Shaw Group, Mark 
Silber, Executive Vice President, Renaissance Technologies, dated 
Sept. 21, 2009 (``Citadel et al. (Sept. 2009)''); letter from 
Bingham McCutchen; letter from Vanguard (Sept. 2009); letter from 
STA (Sept. 2009).
    \216\ See, e.g., letter from Karrie McMillan, General Counsel, 
Investment Company Institute, dated Sept. 21, 2009 (``ICI (Sept. 
2009)''); letter from CPIC (Sept. 2009); letter from STA (Sept. 
2009); letter from Kimberly Unger, Executive Director, Security 
Traders Association of New York, Inc., dated Sept. 21, 2009 (``STANY 
(Sept. 2009)''); letter from RBC (Sept. 2009); letter from EWT 
(Sept. 2009); letter from MFA (Oct. 2009); letter from Knight 
Capital (Sept. 2009).
    \217\ See, e.g., letter from John Gilmartin, Co-CEO and Ben 
Londergan, Co-CEO, Group One Trading, L.P., dated Sept. 14, 2009 
(``Group One Trading (Sept. 2009)''); letter from STANY (Sept. 
2009); letter from Glen Shipway (Sept. 2009); letter from Michael L. 
Crowl, Managing Director, Global General Counsel, Barclays Global 
Investors, dated Sept. 21, 2009 (``Barclays (Sept 2009)''); letter 
from Knight Capital (Sept. 2009); letter from MFA (Oct. 2009).
    \218\ See, e.g., letter from ISE (Sept. 2009); letter from ICI 
(Sept. 2009).
---------------------------------------------------------------------------

    The alternative uptick rule, like former Rule 10a-1 and the 
proposed uptick rule and proposed modified uptick rule, when triggered 
will affect all short selling, including some legitimate short selling, 
as well as abusive or manipulative short selling. The alternative 
uptick rule is by definition more restrictive than the proposed 
modified uptick rule, but differences between the operation of the 
proposed uptick rule and the alternative uptick rule mean that one 
approach or the other would be more restrictive in particular 
circumstances.\219\ The empirical evidence regarding former Rule 10a-1 
tends to demonstrate that it did not have a negative effect on market 
liquidity and price efficiency.\220\ We similarly believe that the 
alternative uptick rule will have a minimal, if any, negative effect on 
market liquidity or price efficiency.\221\
---------------------------------------------------------------------------

    \219\ See, e g., infra note 242 and accompanying text 
(discussing automated trade matching systems).
    \220\ See, e.g., the Pilot Results.
    \221\ See infra Section X.B.1.a. (discussing the impact of Rule 
201 on market liquidity and price efficiency).
---------------------------------------------------------------------------

    In contrast to those commenters opposed to the alternative uptick 
rule, several commenters expressed support for the alternative uptick 
rule, stating that the alternative uptick rule is preferable to the 
proposed modified uptick rule or the proposed uptick rule because it 
will eliminate sequencing issues, will be easier and less costly to 
implement, will be more effective in decreasing price pressure on a 
security,\222\ and will reduce the ability of market participants to 
use short selling as a market manipulation tool.\223\ Some commenters 
stated that because the alternative uptick rule will most effectively 
prevent short selling from proactively driving the price of a security 
lower, it will also be the most effective of the proposed short sale 
price test restrictions at achieving the Commission's goal of helping 
to restore investor confidence.\224\ In discussing the alternative 
uptick rule, one commenter stated that ``[n]ot only does it faithfully 
replicate the old uptick rule it improves upon it by making each and 
every short sale a liquidity providing transaction.'' \225\ Another 
commenter, in supporting the alternative uptick rule, stated that it 
will ``likely be more restrictive on short selling than the original 
Rule 10a-1 `uptick rule'.'' \226\
---------------------------------------------------------------------------

    \222\ See, e.g., letter from Direct Edge (Sept. 2009); letter 
from BATS (Sept. 2009); letter from Ronald C. Long, Director, 
Regulatory Affairs, Wells Fargo Advisors, dated Sept. 17, 2009 
(``Wells Fargo (Sept. 2009)''); see also letter from SIFMA (Sept. 
2009) (stating that a circuit breaker coupled with the alternative 
uptick rule ``would limit instances where a security is the subject 
of severe downward pressure''); letter from Hudson River Trading 
(expressing support for the alternative uptick rule in conjunction 
with a circuit breaker as opposed to other proposed price tests in 
conjunction with a circuit breaker).
    \223\ See letter from BATS (Sept. 2009); letter from Wells Fargo 
(Sept. 2009); letter from Glen Shipway (Sept. 2009).
    \224\ Letter from Michael Gitlin, Head of Global Trading, David 
Oestreicher, Chief Legal Counsel, Christopher P. Hayes, Sr. Legal 
Counsel, T. Rowe Price Associates, Inc., dated Sept. 21, 2009 (``T. 
Rowe Price (Sept. 2009)'').
    \225\ Letter from Glen Shipway (Sept. 2009).
    \226\ Letter from Virtu Financial.
---------------------------------------------------------------------------

    We have determined to adopt the alternative uptick rule in 
combination with a circuit breaker because we believe the alternative 
uptick rule will be more effective at meeting our goals than the other 
proposed rules. Because the alternative uptick rule, when triggered, 
will generally permit short selling only at a price above the current 
national best bid, the alternative uptick rule will not allow short 
sales to get immediate execution at the bid.\227\ In other words, short 
sellers will not be permitted to act as liquidity takers when the 
alternative uptick rule applies, but will participate, if at all, as 
liquidity providers (unless an exception applies), adding depth to the 
market. Put another way, short sale orders will be executed only when 
purchasers arrive willing to

[[Page 11249]]

buy at prices above the national best bid. In addition, by not allowing 
short sellers to sell at the current national best bid, the alternative 
uptick rule will generally allow long sellers, by selling at the bid, 
to sell first and, thereby, take liquidity in a declining market for a 
security. As the Commission has noted previously in connection with 
short sale price test restrictions, a goal of such restrictions is to 
allow long sellers to sell first in a declining market.\228\ A short 
seller that is seeking to profit quickly from market moves may find it 
advantageous to be able to short sell at the current national best bid. 
By placing long sellers ahead of short sellers in the execution queue 
under certain circumstances, Rule 201 will help promote capital 
formation, since investors should be more willing to hold long 
positions if they know that they may have a preferred position over 
short sellers when they wish to sell.
---------------------------------------------------------------------------

    \227\ As noted by some commenters, there may be situations in 
which a short seller could get immediate execution, such as where an 
order is executed in a facility that provides executions at the mid-
point of the national best bid and offer. See, e.g., letter from ISE 
(Sept. 2009); see also letter from BATS (Sept. 2009).
    \228\ See supra note 17.
---------------------------------------------------------------------------

    In addition, by making bids accessible only by long sellers when a 
security's price is undergoing significant downward price pressure, 
Rule 201 will help to facilitate and maintain stability in the markets 
and help ensure that they function efficiently. It will also help 
restore investor confidence during times of substantial uncertainty 
because, once the circuit breaker has been triggered for a particular 
security, long sellers will have preferred access to bids for the 
security, and the security's continued price decline will more likely 
be due to long selling and the underlying fundamentals of the issuer, 
rather than to other factors.
    As we stated in the Proposal, short sale price test restrictions, 
whether a permanent, market-wide restriction or in combination with a 
circuit breaker, might help prevent short sellers from accelerating a 
declining market by exhausting all remaining bids at one price level, 
and causing successively lower prices to be established by long 
sellers.\229\ Because the alternative uptick rule will only permit 
short selling at a price above the current national best bid, unless an 
exception applies, we believe it will be more effective than the 
proposed uptick rule or the proposed modified uptick rule at helping to 
prevent short selling, including potentially abusive or manipulative 
short selling, from being used as a tool to exacerbate a decline in the 
price of a security by exhausting all remaining bids at one price 
level.
---------------------------------------------------------------------------

    \229\ See Proposal, 74 FR at 18050, 18053, 18059, 18061, 18065, 
18069; see also Securities and Exchange Commission, Special Study of 
Securities Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., at 251 
(1963).
---------------------------------------------------------------------------

    A number of commenters favored the proposed circuit breaker halt 
rule, stating, among other things, that they believe it would be the 
least disruptive of the proposed rules with respect to market 
functioning, while still achieving the Commission's underlying 
goals,\230\ and would be the easiest of the proposed rules to 
implement.\231\ We are concerned, however, that, as expressed by other 
commenters, the proposed circuit breaker halt rule could harm the 
market by preventing short sellers from being able to provide benefits 
such as liquidity and price efficiency to the impacted security during 
the duration of the halt or that it could harm investor 
confidence.\232\ We note that in severe conditions, stocks tend to be 
less liquid. Thus, as a rule that permits short selling only at a price 
above the national best bid, the alternative uptick rule will require 
that during the period of time when a covered security is subject to 
the rule, short sellers in the security must act as liquidity 
providers, not liquidity takers, in that security.\233\ In addition, by 
restricting the ability of short sellers to take liquidity when a 
covered security is undergoing significant price pressure, it will 
allow long sellers to access available liquidity by being able to sell 
at the current national best bid. This, in turn, may result in an 
increase in investor confidence during times of crisis as long sellers 
will have preferred access to bids for a security because when the 
circuit breaker has been triggered for a covered security, Rule 201 
generally will allow only long sellers to sell at the bid.\234\
---------------------------------------------------------------------------

    \230\ See, e.g., letter from Lime Brokerage (Sept. 2009); see 
also letter from Lime Brokerage (June 2009) (stating that 
``[i]mplementing a ``cooling off'' period after a steep decline in a 
given security's price will give market participants a chance to 
absorb the situation and possibly reassess their desire to continue 
short selling''); letter from Credit Suisse (June 2009); letter from 
T.D. Pro Ex.
    \231\ See, e.g., letter from SIFMA (June 2009); letter from 
Credit Suisse (June 2009); letter from Liquidnet; letter from 
Manisha Kimmel, Executive Director, Financial Information Forum, 
dated June 19, 2009 (``FIF (June 2009)''); letter from Lime 
Brokerage (Sept. 2009). Some commenters also stated that they 
believe that the proposed circuit breaker halt rule would be 
effective at preventing bear raids, reducing volatility in the 
market, and helpful in restoring investor confidence. See, e.g., 
letter from Matthew Samelson, Principal, Woodbine Associates, dated 
May 15, 2009 (``Woodbine''); letter from Credit Suisse (June 2009); 
letter from IBC; letter from Sigmon Wealth Management (June 2009); 
letter from Wachtell.
    \232\ See, e.g., letter from BATS (May 2009); letter from 
Citadel et al. (June 2009); letter from Direct Edge (June 2009); 
letter from Wolverine; letter from Amer. Bankers Assoc. Other 
commenters viewed the proposed circuit breaker halt rule as too 
restrictive. See, e.g., letter from BATS (May 2009); letter from 
Direct Edge (June 2009). Some commenters argued that the proposed 
circuit breaker halt rule could harm investor confidence, by 
reducing volume and increasing bid-ask spreads during the effective 
period of the halt. See, e.g., letter from ICI (June 2009); letter 
from Amer. Bankers Assoc.; letter from Citadel et al. (June 2009). 
Other commenters expressed opposition to the concept of short sale 
halts and bans as a general matter, perceiving such actions as 
harmful to the markets, citing prior regulatory halts and short sale 
bans as evidence. See, e.g., letter from Josh Galper, Managing 
Principal, Finadium LLC, dated Apr. 13, 2009 (``Finadium); letter 
from Barclays (June 2009); letter from Citadel et al. (June 2009); 
letter from Dialectic Capital (June 2009); letter from Knight 
Capital (June 2009); letter from MFA (June 2009).
    \233\ See supra note 29 (discussing the terms ``liquidity 
provider'' and ``liquidity taker'').
    \234\ Too much investor confidence may also be detrimental to 
investors because it can lead to investors making inappropriate 
decisions. Investor over-confidence, however, is less likely during 
times of crisis. See, e.g., Brad M. Barber and Terrance Odean, 2000, 
Trading is Hazardous to Your Wealth: The Common Stock Investment 
Performance of Individual Investors, Journal of Finance, 55: 773-
806.
---------------------------------------------------------------------------

    We have also determined to adopt the alternative uptick rule 
because, unlike the proposed uptick rule, it will be based on the 
current national best bid rather than the last sale price. As we stated 
in the Proposal, we believe that a short sale price test based on the 
national best bid is more suitable to today's markets than a short sale 
price test based on the last sale price.\235\

[[Page 11250]]

Although we recognize that a quotation proposes a transaction, whereas 
the last trade price reflects an actual trade, we note that pursuant to 
Commission and SRO rules, quotations for all covered securities must be 
firm.\236\ By requiring that quotations be firm, the Commission 
intended to ensure that quotations provide reliable information to the 
marketplace to assist broker-dealers in satisfying their best execution 
obligations to their customers and to assist customers in making 
informed investment decisions.\237\ Moreover, quotation information has 
significant value to the marketplace because it reflects the various 
factors affecting the market, including current levels of buying and 
selling interest.\238\ Both retail and institutional investors rely on 
quotation information to understand the market forces at work at a 
given time and to assist in the formulation of investment 
strategies.\239\
---------------------------------------------------------------------------

    \235\ See Proposal, 74 FR at 18053. In response to our requests 
for comment in the Proposal and the Re-Opening Release, a number of 
commenters to the Proposal and Re-Opening Release expressed support 
for a price test restriction based on the national best bid rather 
than the last sale price, stating that it would be more suitable to 
today's markets. See, e.g., letter from BATS (May 2009); letter from 
SIFMA (June 2009); letter from NYSE Euronext (June 2009); letter 
from Goldman Sachs (June 2009); letter from Direct Edge (June 2009); 
letter from GE; letter from Bingham McCutchen; letter from Citadel 
et al. (June 2009); letter from Amer. Bar Assoc. (July 2009); letter 
from Barry Friedman, Llewellyn Jones, and Derrick Kaiser, Founding 
Members, Qtrade Capital Partners LLC, dated Sept. 21, 2009 
(``Qtrade''); letter from MFA (Oct. 2009). We also note supporting 
statements made by Larry Leibowitz, Group Executive Vice President 
at NYSE Euronext, at our May 5, 2009 Roundtable, stating that the 
proposed uptick rule would be ineffective in today's market ``due to 
improper price sequencing caused by permitted reporting delays and 
the potential for manipulation.'' Statement of NYSE Euronext (May 
2009). Available at: http://www.sec.gov/comments/4-581/4581-86.pdf.
    We note, however, that a number of commenters offered support 
for a price test restriction based on the last sale price. See, 
e.g., letter from Zermatt; letter from Bruce Lueck, Managing 
Partner, Zephyr Unicorn Funds, dated Apr. 10, 2009; letter from 
Walter Cruttenden, Cruttenden Partners, dated Apr. 14, 2009; letter 
from Larry Chlebina, President, Chlebina Capital Management, LLC, 
dated Apr. 15, 2009 (``Chlebina (Apr. 2009)''); letter from Chad 
McCurdy, Managing Partner, Marlin Capital Partners, dated Apr. 20, 
2009; letter from David Wagner, CEO, Active Investment Management, 
LLC, dated Apr. 22, 2009; letter from Bradley Kelly, President, 
Magnum Opus Financial, dated Apr. 29, 2009; letter from Equity 
Insight; letter from Tony Wyan, CEO, Tony Wyan and Company, dated 
May 5, 2009; letter from Aaron Shafter, President, Great Mountain 
Capital Management, LLC, dated May 5, 2009; letter from Richard 
Casey, Chairman and CEO, Casey Securities, LLC, dated May 8, 2009; 
letter from Scott & Stringfellow; letter from Donald Rembert Sr., 
President, Rembert Pendelton and Jackson, dated May 28, 2009; letter 
from Sigmon Wealth Management (June 2009); letter from Sears.
    \236\ See, e.g., 17 CFR 242.602.
    \237\ See, e.g., Exchange Act Release No. 43085 (July 28, 2000), 
65 FR 47918, 47924-47925 (Aug. 4, 2000).
    \238\ See id. at 47925.
    \239\ See id.
---------------------------------------------------------------------------

    Further, we believe that bids generally are a more accurate 
reflection of current prices for a security because changes in bids are 
more accurately timed than transactions. Transactions may be reported 
within a 90 second window, which can easily result in ``stale'' 
reports. Even transactions that are executed and reported automatically 
may be out of sequence if they occur in different trading centers, 
which can detract from the accuracy and reliability of the last sale. 
For example, trade reporting for covered securities can involve 
multiple trading centers reporting trades in the same stock from 
different locations using different means of reporting. Thus, for those 
covered securities for which a significant amount of trading occurs 
manually, or in multiple trading centers, a price test based on the 
national best bid will be a more accurate and effective means of 
regulating short selling than a test based on the last sale price 
because the manner in which trades are reported may create up-ticks and 
down-ticks that may not accurately reflect actual price movements in 
the security for the purpose of a test based on the last sale price.
    We also note that the national best bid is nearly always a 
protected bid for the trade-through rule of Rule 611 of Regulation 
NMS,\240\ with which every trading center must comply. Because trading 
centers' execution procedures must incorporate protected bids, they 
will also usually include the national best bid. Market participants 
will also be familiar with using the current national best bid as a 
reference point because NASD's former bid test, which was in existence 
from 1994 to mid-2007, was based on the current national best bid.\241\
---------------------------------------------------------------------------

    \240\ See 17 CFR 242.611.
    \241\ NASD's former bid test referenced the national best bid 
and was designed to help prevent short selling at or below the 
current national best bid in a declining market. See supra note 43 
(discussing NASD's former bid test).
---------------------------------------------------------------------------

    In addition, another advantage of the alternative uptick rule is 
that it accommodates trading systems and strategies used in the 
marketplace today, such as the automated trade matching systems that 
offer price improvement based on the national best bid and offer. These 
passive pricing systems often effect trades at an independently-derived 
price, such as at the mid-point of the bid-offer spread. Such pricing 
would often not satisfy the tick test of former Rule 10a-1 because 
matches could potentially occur at a price below the last reported sale 
price. Thus, we provided a limited exception from former Rule 10a-1 for 
these trading systems.\242\ In response to the Proposal and Re-Opening 
Release, commenters noted that a short sale price test restriction 
based on the current national best bid is preferable to a restriction 
based on the last sale price because it would not impede mid-point and 
similar derived price trading.\243\ One such commenter noted that mid-
point trading is beneficial to the markets because it provides price 
improvement to both sides of the trade.\244\ The short sale price test 
restrictions of Rule 201 will accommodate matching systems that execute 
trades at an independently-derived price because such systems are 
designed so that matches occur above the current national best bid.
---------------------------------------------------------------------------

    \242\ See, e.g., supra note 42; letter from James A. 
Brigagliano, Acting Associate Director, Division of Market 
Regulation, SEC, to Alan J. Reed, Jr., First Vice President and 
Director of Compliance, Instinet Group, LLC, dated June 15, 2006 
(granting Instinet modified exemptive relief from Rule 10a-1 for 
certain transactions executed through Instinet's Intra-day Crossing 
System).
    \243\ See letter from Liquidnet; letter from GE.
    \244\ See letter from Liquidnet.
---------------------------------------------------------------------------

    We have also determined to adopt the alternative uptick rule rather 
than the proposed uptick rule or the proposed modified uptick rule 
because it will not require monitoring of the sequence of bids or last 
sale prices (i.e., whether the current national best bid or last sale 
price is above or below the previous national best bid or last sale 
price) and, therefore, will likely be easier to implement and monitor. 
As we noted in the Re-Opening Release, commenters had stated that the 
alternative uptick rule would likely be easier to monitor, could likely 
be implemented more quickly and with less cost, and would be easier to 
program into trading and surveillance systems than the proposed 
modified uptick rule or the proposed uptick rule because it would not 
require bid sequencing.\245\ In response to the Re-Opening Release, 
several commenters made similar statements in comparing the alternative 
uptick rule to the proposed modified uptick rule and proposed uptick 
rule.\246\
---------------------------------------------------------------------------

    \245\ See Re-Opening Release, 74 FR at 42034.
    \246\ See, e.g., letter from BATS (Sept. 2009); letter from 
Credit Suisse (Sept. 2009); letter from John McCarthy, General 
Counsel, Global Electronic Trading Company, dated Sept. 21, 2009 
(``GETCO (Sept. 2009)''); letter from Hudson River Trading. Some 
commenters, however, expressed disagreement that a price test 
restriction that will require sequencing of bids or last sale prices 
is not technologically feasible. See, e.g., letter from Bingham 
McCutchen; letter from ISE (Sept. 2009); letter from EWT (Sept. 
2009); letter from Vincent Florack and Steve Crutchfield, Matlock 
Capital LLC, dated Sept. 18, 2009 (``Matlock Capital (Sept. 
2009)''); letter from Gary E. Shugrue, President, Ascendant Capital 
Partners, dated May 11, 2009 (``Ascendant Capital''); letter from 
Robert P. Porter, President, Paladin Investment LLC, dated May 8, 
2009 (``Paladin Investment'').
---------------------------------------------------------------------------

    The requirements of Rule 201 will also not result in the type of 
disparate short sale regulation that existed under former Rule 10a-
1.\247\ Rule 201 will apply a uniform rule to trades in the same 
securities that can occur in multiple, dispersed, and diverse markets. 
To further this goal of having a uniform short sale price test, 
consistent with the Proposal, subsection (e) of Rule 201 provides that 
no SRO shall have any rule that is not in conformity with, or conflicts 
with, Rule 201.\248\ One of the reasons for the elimination of former 
Rule 10a-1 and the prohibition on any SRO from having a short sale 
price test in July 2007 was that the application of short sale price 
tests had become disjointed, with different price tests applying to the 
same securities trading in different markets. One commenter noted that 
a rule that does not cover all market centers would result in an 
unlevel playing field,\249\ while another stated that the Commission 
should not adopt a rule that would create an opportunity

[[Page 11251]]

for regulatory arbitrage.\250\ For this same reason, this commenter 
supported a prohibition on any SRO having a rule that is not in 
conformity with or conflicts with Rule 201.\251\ We believe that a 
uniform rule will reduce compliance and surveillance costs because 
systems and surveillance mechanisms will have to be programmed to 
consider a single price test based on the national best bid, rather 
than different tests for different markets. In addition, a uniform test 
will reduce opportunities for regulatory arbitrage. Accordingly, under 
Rule 201, all covered securities, wherever traded, will be subject to 
one short sale price test, the alternative uptick rule.
---------------------------------------------------------------------------

    \247\ See Proposal, 74 FR at 18044-18045 (discussing the history 
of short sale price test restrictions).
    \248\ See Rule 201(e).
    \249\ See letter from Wells Fargo (June 2009).
    \250\ See letter from STA (June 2009).
    \251\ See id.
---------------------------------------------------------------------------

4. Circuit Breaker Approach Generally
    Under Rule 201(b), the alterative uptick rule will apply only if 
the price of a covered security has declined by 10% or more from the 
covered security's closing price as determined by the listing market 
for the covered security as of the end of regular trading hours on the 
prior day.\252\ In the Proposal, we proposed a permanent, market-wide 
approach to short sale price test restrictions that would result in the 
proposed uptick rule or proposed modified uptick rule applying to all 
covered securities all the time.\253\ We also proposed a circuit 
breaker approach, either as an addition or an alternative to a 
permanent, market-wide approach, which would temporarily result in 
either a halt on short selling in a specific security or the proposed 
modified uptick rule or the proposed uptick rule applying to a specific 
security if there was a significant decline in the price of that 
security.\254\ In addition, in the Re-Opening Release, we stated that 
the alternative uptick rule could be implemented market-wide or in 
combination with a short selling circuit breaker.\255\
---------------------------------------------------------------------------

    \252\ See Rule 201(b).
    \253\ See Proposal, 74 FR 18042.
    \254\ See id.
    \255\ See Re-Opening Release, 74 FR 42033.
---------------------------------------------------------------------------

    A number of commenters stated that if we determined to adopt a 
short sale price test restriction, it should be in combination with a 
circuit breaker rather than on a permanent, market-wide basis.\256\ For 
example, one commenter urged us to adopt a circuit breaker approach 
because it would be more narrowly-tailored to address our concerns 
about the effects of short selling in a market subject to a significant 
downturn.\257\ This commenter noted that in such a market, circuit 
breakers likely would be triggered for a large number of 
securities.\258\ Another commenter stated that a circuit breaker is 
preferable because it ``permits normal market activity while a stock is 
trading in a natural range and short selling is more likely to benefit 
the market (by, for example, increasing price discovery and liquidity). 
Conversely, a Circuit Breaker will restrict short selling when prices 
begin to decline substantially and short selling becomes more likely to 
be abusive and potentially harmful.'' \259\ One commenter stated that 
``[a] circuit breaker would better target situations that could result 
from * * * potential bear raids and other forms of manipulation that 
may be used to drive down or accelerate the decline in the price of a 
stock.'' \260\
---------------------------------------------------------------------------

    \256\ See, e.g., statement of Justin Schack, Vice President, 
Market Structure Analysis, Rosenblatt Securities, Inc., at SEC 
Roundtable on Short Selling (May 5, 2009) (``Rosenblatt 
Securities''); letter from Richard T. Chase, Managing Director and 
General Counsel, RBC Capital Markets Corporation, dated June 19, 
2009 (``RBC (June 2009)''); letter from Michael J. Simon, Secretary, 
International Securities Exchange LLC, dated June 19, 2009 (``ISE 
(June 2009)''); memorandum of a meeting between representatives of 
Penson Worldwide, Inc., and the Division of Trading and Markets, 
dated July 21, 2009, and written materials submitted at the meeting 
(``Penson''); letter from Direct Edge (June 2009); letter from BATS 
(May 2009); letter from SIFMA (June 2009); letter from MFA (June 
2009); letter from ICI (June 2009); letter from Barclays (June 
2009); letter from Vanguard (June 2009); letter from Goldman Sachs 
(June 2009); letter from Credit Suisse (June 2009); letter from 
Dialectic Capital (June 2009); letter from Allston Trading (June 
2009); letter from Knight Capital (June 2009); letter from GETCO 
(June 2009); letter from Citadel et al. (June 2009); letter from 
William Connell, President and CEO, Allston Trading, LLC, dated 
Sept. 21, 2009 (``Allston Trading (Sept. 2009)''); letter from GETCO 
(Sept. 2009); letter from Dialectic Capital (Sept. 2009); letter 
from Credit Suisse (Sept. 2009); letter from ICI (Sept. 2009); 
letter from Citadel et al. (Sept. 2009); letter from Direct Edge 
(Sept. 2009); letter from RBC (Sept. 2009); letter from Goldman 
Sachs (Sept. 2009); letter from BATS (Sept. 2009); letter from SIFMA 
(Sept. 2009); letter from MFA (Oct. 2009); letter from AIMA; letter 
from IAG; letter from Fidelity; letter from T.D. Pro Ex; letter from 
Finadium; letter from Matthew B. Management; letter from Millennium; 
letter from Liquidnet; letter from Qtrade; letter from Hudson River 
Trading; letter from Virtu Financial; see also letter from Credit 
Suisse (Mar. 2009).
    \257\ See letter from Citadel et al. (Sept. 2009).
    \258\ See id.
    \259\ Letter from Nasdaq OMX Group (Oct. 2009); see also letter 
from Goldman Sachs (June 2009); letter from MFA (June 2009); letter 
from BATS (Sept. 2009); letter from Credit Suisse (Sept. 2009); 
letter from Virtu Financial.
    \260\ Letter from Hudson River Trading; see also letter from MFA 
(June 2009).
---------------------------------------------------------------------------

    Other commenters stated that implementing price test restrictions 
on a permanent, market-wide basis, rather than in combination with a 
circuit breaker, would substantially diminish the benefits that short 
sellers bring to the markets.\261\ One commenter stated that a price 
test restriction should be adopted with a circuit breaker because prior 
empirical studies did not necessarily include times of severe market 
events.\262\ One commenter stated that a circuit breaker approach was 
preferable because it would be easier to implement than a permanent, 
market-wide rule.\263\
---------------------------------------------------------------------------

    \261\ See, e.g., letter from Direct Edge (Sept. 2009); letter 
from Credit Suisse (Sept. 2009).
    \262\ See letter from Virtu Financial.
    \263\ See letter from SIFMA (June 2009).
---------------------------------------------------------------------------

    Other commenters were not supportive of a circuit breaker 
approach.\264\ One such commenter stated that a permanent, market-wide 
price test restriction would be preferable to a circuit breaker 
approach because it is ``more predictable for market participants and 
issuers alike, would raise fewer implementation complexities, and is 
less likely to have a `magnet effect' on the pricing of a security as 
it approaches a circuit breaker trigger point.'' \265\ This commenter 
stated that a circuit breaker is ``unlikely to be perceived as a timely 
or effective remedy against abusive short selling, since restrictions 
would only take effect after there had already been a significant 
intraday price decline in a security.'' \266\ Further, this commenter 
stated that ``[c]ircuit breakers may also undermine investor confidence 
because they introduce an element of uncertainty in the pricing of 
securities: At a certain point, the price of a declining security would 
begin to reflect not the fundamental value of the security, but rather 
the likelihood that a security will trigger the circuit breaker. This 
`magnet effect' could undermine investor confidence, resulting in less 
buying interest in securities nearing the circuit breaker if there is a 
perception that professional traders could use sophisticated pricing 
models to profit from this anomaly while public investors, lacking 
access to such tools, could not.'' \267\
---------------------------------------------------------------------------

    \264\ See, e.g., letter from Glen Shipway (June 2009); letter 
from T. Rowe Price (Sept. 2009); letter from NYSE Euronext (Sept. 
2009); letter from EWT (Sept. 2009).
    \265\ Letter from NYSE Euronext (Sept. 2009).
    \266\ Id.
    \267\ Id.; see also letter from Amer. Bankers Assoc. 
(referencing the ``stigmatizing effect'' on stocks subject to a 
circuit breaker); letter from T. Rowe Price (Sept. 2009) (expressing 
support for the alternative uptick rule that would apply on a 
permanent, market-wide basis).
---------------------------------------------------------------------------

    Another commenter stated that it believes that a circuit breaker 
approach is unworkable because it ``may exacerbate market dislocations 
by suddenly and unexpectedly altering the regulatory regime and 
liquidity

[[Page 11252]]

characteristics of a particular security, precisely when it is under 
duress.'' \268\ One commenter stated that it did not support a circuit 
breaker approach because it ``would still allow abusive short sellers 
to drive down the price of a stock at least 10% on any given day even 
before the circuit breaker would kick in.'' \269\ This commenter also 
stated that it was concerned that during periods of extreme volatility, 
``circuit breakers could potentially impact far too many stocks on any 
given day and damage the benefits of short selling.'' \270\ Another 
commenter stated that it did not support a circuit breaker approach 
because, among other things, it would add ``an additional element of 
trading risk that could result in a decrease in certain market 
participant's [sic] willingness to supply liquidity in securities 
perceived to be potentially subject to triggering of a circuit 
breaker.'' \271\
---------------------------------------------------------------------------

    \268\ Letter from EWT (Sept. 2009).
    \269\ Letter from Atherton Lane.
    \270\ Id.
    \271\ Letter from NYSE Euronext (June 2009).
---------------------------------------------------------------------------

    In line with the Commission's position that market impediments 
should be minimized, we believe the short selling circuit breaker 
approach of Rule 201 will benefit the market as a narrowly-tailored 
response to severe circumstances.\272\ As discussed above, due to the 
changes in market conditions and erosion of investor confidence that 
occurred recently, investors have become increasingly concerned about 
sudden and excessive declines in prices that appear to be unrelated to 
issuer fundamentals.\273\ We believe that a circuit breaker that is 
triggered by a significant intra-day decline in price of an individual 
security is a targeted response to address these concerns. Although a 
permanent, market-wide approach that would apply to all covered 
securities all the time may, as one commenter stated,\274\ provide an 
element of predictability, we believe that the circuit breaker approach 
of Rule 201 is appropriate because it provides a balance between 
achieving our goals for adopting a short sale price test restriction 
and limiting impediments to the normal operations of the market.
---------------------------------------------------------------------------

    \272\ See 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'').
    \273\ See supra Section II.C. (discussing investor confidence); 
see also Proposal, 74 FR at 18046-18049.
    \274\ See letter from NYSE Euronext (Sept. 2009).
---------------------------------------------------------------------------

    As noted above, some commenters expressed concerns regarding the 
effectiveness and workability of a circuit breaker approach because the 
price test restriction will apply only after there has already been a 
significant intra-day price decline in a security, and because it may 
exacerbate market dislocations when a security is under duress. The 
Commission has previously noted that circuit breakers may benefit the 
market by allowing participants an opportunity to re-evaluate 
circumstances and respond to volatility.\275\ Unlike a price test 
restriction that would apply on a permanent, market-wide basis, Rule 
201 will restrict short selling for an individual covered security for 
a specified period of time. As we stated in the Proposal, in discussing 
a short selling circuit breaker, one commenter noted that such a 
measure could address the issue of ``bear raids'' while limiting the 
market impact that may arise from other forms of short sale price test 
restrictions.\276\ In addition, although we agree that a circuit 
breaker combined with a halt on short selling may cause or exacerbate 
market dislocations, we do not believe that the circuit breaker 
approach of Rule 201 will have the same impact because it will continue 
to allow short selling, although at a price above the national best 
bid, even when the price test restriction is in effect. Further, to the 
extent that the circuit breaker approach results in market 
dislocations, we believe any such dislocations are justified by the 
benefits provided by the Rule.
---------------------------------------------------------------------------

    \275\ See 1998 Release, 63 FR 18477.
    \276\ See Proposal, 74 FR at 18067, n.252 (noting a letter from 
Peter Brown, dated Dec. 12, 2008).
---------------------------------------------------------------------------

    We have designed the alternative uptick rule implemented through a 
circuit breaker to strike the appropriate balance between our goal of 
preventing potential short sale abuse and the need to limit impediments 
to the normal operations of the market. The Commission has long held 
the view that circuit breakers may help restore investor confidence 
during times of substantial uncertainty.\277\ We believe that the 
requirements of Rule 201 will produce similar benefits. By imposing the 
alternative uptick rule once a security's price is experiencing a 
significant intra-day price decline, the short selling circuit breaker 
rule in Rule 201(b) is designed to target only those securities that 
experience such declines and, therefore, will help to prevent short 
selling from being used as a tool to exacerbate a declining market in a 
security. This approach establishes a narrowly-tailored Rule that will 
target only those securities experiencing such a decline. We believe 
that addressing short selling in connection with such a decline in an 
individual security will help restore investor confidence in the 
markets generally.
---------------------------------------------------------------------------

    \277\ See, e.g., 1998 Release, 63 FR 18477; see also Proposal, 
74 FR at 18067.
---------------------------------------------------------------------------

    As discussed above, short selling is an important tool in price 
discovery and the provision of liquidity to the market, and we 
recognize that imposition of a short selling circuit breaker that when 
triggered imposes the alternative uptick rule could restrict otherwise 
legitimate short selling activity during periods of significant 
volatility. To the extent that the alternative uptick rule may 
negatively impact the ability of short sellers to provide liquidity to 
the markets and contribute to price efficiency, we believe any such 
negative impact is justified by the benefits provided by the Rule in 
preventing short selling, including potentially manipulative or abusive 
short selling, from driving down further the price of a security that 
has already experienced a significant intra-day price decline.
    In addition, we believe that any such negative impact will be 
limited both in duration and reach. First, the circuit breaker will 
apply for a limited period of time, that is, through the end of the day 
on which it is triggered and the following day. Second, because the 
restrictions of Rule 201 will apply only when the price of a covered 
security has experienced a significant intra-day price decline, the 
circuit breaker approach of Rule 201 will preserve the potential 
benefits of short selling, such as the provision of liquidity and price 
efficiency, for those securities for which prices are undergoing 
minimal downward pressure, or are stable or rising.\278\ To the extent 
that the markets are experiencing periods of extreme volatility, we 
expect that the circuit breaker will be triggered for more securities 
than during periods of low volatility. We believe this is an 
appropriate result of Rule 201 because it is designed to impose 
restrictions on short selling when individual securities are undergoing 
significant intra-day price declines. Because Rule 201 does not impose 
a halt on short selling, however, short selling will be possible even 
when the circuit breaker has been triggered, although it will be 
limited to a price above the current national best bid. A circuit 
breaker approach will also allow regulatory, supervisory and compliance 
resources to focus on, and address, those situations where a

[[Page 11253]]

specific security is experiencing significant downward price 
pressure.\279\
---------------------------------------------------------------------------

    \278\ In addition, as discussed above, based on the empirical 
evidence regarding former Rule 10a-1 that tends to demonstrate that 
it did not have an effect on market liquidity and price efficiency, 
we similarly believe that the alternative uptick rule will have a 
minimal, if any, effect on market liquidity or price efficiency. See 
supra note 220 and accompanying text.
    \279\ See letter from Nasdaq OMX Group (Oct. 2009); letter from 
SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    As we stated in the Proposal, we understand that there are concerns 
about a potential ``magnet effect'' that could arise as an unintended 
consequence of a circuit breaker that imposes a short selling price 
test restriction.\280\ This ``magnet effect'' could result in short 
sellers driving down the price of an equity security in a rush to 
execute short sales before the circuit breaker is triggered. We are 
also concerned about short selling demand building until the circuit 
breaker is lifted. In response to our requests for comments, several 
commenters stated that a short sale circuit breaker could exacerbate 
downward pressure on stocks as their value reached the threshold 
level.\281\ Commenters also discussed the possibility that short 
selling demand could be built up until the short selling restriction is 
lifted.\282\ Other commenters, however, discounted the possibility or 
impact of a ``magnet effect,'' \283\ including some commenters who 
cited empirical studies that question whether a circuit breaker would 
result in artificial pressure on the price of individual 
securities.\284\
---------------------------------------------------------------------------

    \280\ See, e.g., Proposal, 74 FR at 18067.
    \281\ See, e.g., letter from Vincent Florack and Steve 
Crutchfield, Matlock Capital LLC, dated May 26, 2009 (``Matlock 
Capital (May 2009)''); letter from Schwab; letter from Lime 
Brokerage (June 2009); letter from STA (June 2009); letter from Glen 
Shipway (June 2009); letter from NYSE Euronext (June 2009); letter 
from Wolverine; letter from Direct Edge (June 2009); letter from 
Amer. Bankers Assoc.; letter from NYSE Euronext (Sept. 2009); see 
also letter from SIFMA (June 2009) (indicating that an ``on/off'' 
circuit breaker trigger could dampen any magnet effect); letter from 
Direct Edge (Mar. 2009).
    \282\ See letter from STA (June 2009); letter from Wolverine.
    \283\ See letter from BATS (May 2009); letter from Credit Suisse 
(June 2009); letter from Credit Suisse (Sept. 2009); letter from 
Hudson River Trading; letter from Virtu Financial; see also letter 
from Credit Suisse (Mar. 2009).
    \284\ See letter from Credit Suisse (June 2009); letter from 
Credit Suisse (Sept. 2009); see also letter from Credit Suisse (Mar. 
2009); letter from Nasdaq OMX Group (Oct. 2009).
---------------------------------------------------------------------------

    After considering the comments, including studies cited by 
commenters, we do not believe that the evidence is clear regarding a 
``magnet effect.'' In fact, many academic studies that have analyzed 
circuit breakers in other contexts found no evidence of such trading 
patterns.\285\ We recognize, however, that some of these studies were 
conducted in markets dissimilar from the highly automated markets 
currently existing in the United States and, therefore, that limits 
their utility in this context. Overall, however, the most relevant 
studies fail to demonstrate a magnet effect and we believe that 
adopting the circuit breaker approach best serves our goals.
---------------------------------------------------------------------------

    \285\ See, e.g., letter from Credit Suisse (June 2009); see also 
David Abad and Roberto Pascual, On the Magnet Effect of Price 
Limits, European Financial Management, 13:833-852 (2007) (studying 
the Spanish stock exchange); Chan et al., Price limit performance: 
Evidence from transactions data and the limit order book, Journal of 
Empirical Finance, 12: 269-290 (2005) (studying the Kuala Lumpur 
Stock Exchange); Anthony D. Hall and Paul Korfman, Limits to linear 
price behavior: Futures prices regulated by limits, Journal of 
Futures Markets, 21:463-488 (2001) (studying five agriculture 
futures contracts); Henk Berkman and Onno Steenbeek, The influence 
of daily price limits on trading in Nikkei futures, Journal of 
Futures Markets, 18:265-279 (1998) (studying futures contracts on 
the Osaka Securities Exchange); Marcelle Arak and Richard E. Cook, 
Do daily price limits act as magnets? The case of treasury bond 
futures, Journal of Financial Services Research, 12:5-20 (1997) 
(studying treasury bond futures).
---------------------------------------------------------------------------

5. Circuit Breaker Trigger Level and Duration
    In the Proposal, we proposed that if the price of a covered 
security declined by at least 10% from the prior day's closing price 
for that covered security, as measured by the closing price of the 
covered security on the consolidated system, then all short selling in 
the covered security would be subject to a halt or a price test 
restriction for the remainder of the trading day.\286\ To avoid market 
disruption that might occur if a circuit breaker were triggered late in 
the trading day, the circuit breaker rules, as proposed, would not have 
been triggered if the specified market decline threshold was reached in 
a covered security within thirty minutes of the end of regular trading 
hours.\287\
---------------------------------------------------------------------------

    \286\ See Proposal, 74 FR at 18066.
    \287\ See id.
---------------------------------------------------------------------------

    In Rule 201(b), we are adopting a 10% trigger level measured from 
the closing price determined by the covered security's listing market 
as of the end of regular trading hours on the prior day.\288\ This 
differs from the Proposal, under which the price decline would have 
been measured from the covered security's last price reported in the 
consolidated system during regular trading hours on the prior day.\289\ 
In addition, we are modifying the proposed duration of the price test 
restriction once the circuit breaker is triggered. Under Rule 201(b), 
as adopted, once the circuit breaker has been triggered, the price test 
restriction will remain in place for the remainder of the day and for 
the following day.\290\ In addition, as discussed in more detail below, 
because the price test restriction will remain in place for the 
remainder of the day and for the following day, we are not adopting in 
Rule 201 a provision that the short sale price test restriction of the 
Rule will not be triggered if the 10% trigger level is reached in a 
covered security within thirty minutes of the end of regular trading 
hours.
---------------------------------------------------------------------------

    \288\ ``Regular trading hours'' is defined in Rule 201 to have 
the same meaning as in Rule 600(b)(64) of Regulation NMS. See Rule 
201(a)(7). Rule 600(b)(64) provides that ``Regular trading hours 
means the time between 9:30 a.m. and 4:00 p.m. Eastern Time, or such 
other time as is set forth in the procedures established pursuant to 
Sec.  242.605(a)(2).'' 17 CFR 242.600(b)(64).
    \289\ See Proposal, 74 FR at 18066.
    \290\ Rule 201(b). We note that if the price of a covered 
security declines intra-day by at least 10% on a day on which the 
security is already subject to the short sale price test restriction 
of Rule 201, the restriction will be re-triggered and, therefore, 
will continue in effect for the remainder of that day and the 
following day. For example, if on Monday, the price of XYZ security 
declines intra-day by at least 10%, XYZ security will be subject to 
the alternative uptick rule for the remainder of Monday and for the 
following day, Tuesday. If then on Tuesday, the price of XYZ 
security again declines intra-day by at least 10%, the circuit 
breaker will be re-triggered for that security such that the 
alternative uptick rule will apply for the following day, i.e., 
Wednesday, as well as for the remainder of the day on Tuesday.
---------------------------------------------------------------------------

    In the Proposal, we noted our preliminary belief that a 10% decline 
in a security's price from the prior day's closing price would be an 
appropriate level at which to trigger the proposed circuit breaker 
rules.\291\ We also noted that a 10% threshold would be consistent with 
current SRO rules that restrict or halt trading if key market indexes 
fall by specified amounts (``SRO Circuit Breakers'') \292\ and had been 
recommended by certain commenters.\293\ The Commission solicited 
comment on whether a 10% decline from the prior day's closing price 
would be an appropriate threshold

[[Page 11254]]

at which to trigger the proposed circuit breaker short sale price 
restrictions.\294\ We noted that the threshold level would affect the 
balance of the costs and benefits of the Rule; a low trigger level 
could result in more securities being subject to the proposed short 
sale price test restrictions, or subject to them more frequently, and a 
high trigger level could result in securities facing more significant 
declines before the benefits of the short sale price test restrictions 
applied.\295\
---------------------------------------------------------------------------

    \291\ See Proposal, 74 FR at 18066, 18069.
    \292\ See Proposal, 74 FR at 18065-18066. To protect investors 
and the markets, the Commission has approved proposals to restrict 
or halt trading if key market indexes fall by specified amounts. 
Currently, all stock exchanges and FINRA have rules or policies to 
implement coordinated circuit breaker halts. See 1998 Release, 63 FR 
18477; see also NYSE Rule 80B. The circuit breaker procedures call 
for cross-market trading halts when the Dow Jones Industrial Average 
(``DJIA'') declines by 10%, 20%, and 30% from the previous day's 
closing value. See, e.g., BATS Exchange Rule 11.18. The options 
markets also have rules applying circuit breakers. See Amex Rule 950 
(applying Amex Rule 117, Trading Halts Due to Extraordinary Market 
Volatility, to options transactions); CBOE Rule 6.3B; ISE Rule 703; 
NYSE Arca Options Rule 7.5; and Phlx Rule 133. The futures exchanges 
that trade index futures contracts have adopted circuit breaker halt 
procedures in conjunction with their price limit rules for index 
products. See, e.g., CME Rule 35102.I. The CME will implement a 
trading halt on S&P 500 Index futures contracts if a NYSE Rule 80B 
trading halt is imposed in the primary securities market. Trading of 
S&P 500 Index futures contracts will resume upon lifting of the NYSE 
Rule 80B trading halt. Finally, security futures products are 
required to have cross-market circuit breaker regulatory halt 
procedures in place. See Exchange Act Release No. 45956 (May 17, 
2002), 67 FR 36740 (May 24, 2002).
    \293\ See Proposal, 74 FR at 18066.
    \294\ See Proposal, 74 FR at 18066, 18069, 18070.
    \295\ See Proposal, 74 FR at 18079, 18081.
---------------------------------------------------------------------------

    In response to our request for comment, several commenters 
expressed support for a 10% trigger level.\296\ One commenter did not 
specifically object to the 10% threshold, but stated that 10% should be 
the minimum trigger level considered.\297\ One commenter expressed 
support for a lower, 5% trigger level.\298\
---------------------------------------------------------------------------

    \296\ See, e.g., letter from BATS (May 2009); letter from 
Allston Trading (June 2009); letter from IBC.
    \297\ See letter from Direct Edge (June 2009).
    \298\ See letter from James J. Angel, Ph.D., CFA, Associate 
Professor of Finance, McDonough School of Business, Georgetown 
University, dated Sept. 21, 2009 (``Prof. Angel (Sept. 2009)'').
---------------------------------------------------------------------------

    Several commenters expressed support for a trigger level higher 
than 10%.\299\ Several of these commenters stated that a circuit 
breaker threshold of 10% would be too narrow or restrictive.\300\ Other 
commenters indicated that a circuit breaker should only be triggered in 
extraordinary circumstances and asked that we consider a trigger level 
higher than 10% due to concerns that a 10% trigger level would capture 
``normal'' trading activity.\301\ Several commenters indicated that a 
higher trigger level would be particularly important for lower priced 
securities because a 10% trigger level would likely be reached 
frequently even in the absence of abnormal activity for such 
securities.\302\ Other commenters indicated that, in addition to price, 
the trigger level should factor in other characteristics of individual 
securities, such as volume and volatility.\303\ One commenter stated 
that a higher trigger level would be especially important for a circuit 
breaker in conjunction with the alternative uptick rule because the 
alternative uptick rule is more restrictive than the other proposed 
price tests.\304\
---------------------------------------------------------------------------

    \299\ See, e.g., letter from MFA (June 2009); letter from 
Goldman Sachs (June 2009); letter from ISDA; letter from ISE (June 
2009); letter from SIFMA (June 2009); letter from Citadel et al. 
(June 2009); letter from Dialectic Capital (Sept. 2009); letter from 
Goldman Sachs (Sept. 2009); letter from ISE (Sept. 2009); letter 
from SIFMA (Sept. 2009); letter from Virtu Financial; letter from 
Nasdaq OMX Group (Oct. 2009).
    \300\ See, e.g., letter from MFA (June 2009); letter from ISDA; 
letter from ISE (June 2009); letter from Virtu Financial; letter 
from Jordan & Jordan; letter from Credit Suisse (June 2009).
    \301\ See, e.g., letter from MFA (June 2009); letter from 
Citadel et al. (June 2009); letter from Goldman Sachs (June 2009); 
letter from ISDA; letter from ISE (June 2009); letter from SIFMA 
(June 2009); letter from Dialectic Capital (Sept. 2009); letter from 
SIFMA (Sept. 2009); letter from Virtu Financial.
    \302\ See, e.g., letter from Barclays (June 2009); letter from 
ISDA; letter from SIFMA (June 2009); letter from SIFMA (Sept. 2009).
    \303\ See letter from Direct Edge (June 2009); letter from 
Barclays (June 2009); letter from Goldman Sachs (June 2009); letter 
from Lime Brokerage (June 2009); letter from Direct Edge (Sept. 
2009); letter from Goldman Sachs (Sept. 2009).
    \304\ See letter from ISE (Sept. 2009).
---------------------------------------------------------------------------

    In addition, several commenters submitted estimates of the number 
of securities that would trigger a circuit breaker rule at a 10% 
threshold.\305\ While commenters' analyses (including the facts and 
assumptions used) and their resulting estimates varied,\306\ 
commenters' estimates reflect that a 10% circuit breaker threshold, on 
average, should affect only a limited percentage of covered 
securities.\307\ For example, one commenter submitted an estimate that 
slightly more than 5% of a universe of 4,800 NMS common stocks would 
have ``tripped the 10% threshold on average each day'' during roughly 
the first half of 2009.\308\ In determining that a 10% threshold is 
appropriate, we considered other thresholds and the data presented by 
commenters regarding the numbers of securities that they believed would 
be subject to a short sale price test restriction at those different 
thresholds. Given the variations in the facts and assumptions 
underlying the estimates submitted by commenters, the Staff also looked 
at trading data to confirm the reasonableness of those estimates. The 
Staff found that, over the period covering April 9, 2001 to September 
30, 2009,\309\ the 10% trigger level of Rule 201 would have, on an 
average day, been triggered for approximately 4% of covered 
securities.\310\ The Staff also found that for a low volatility period, 
covering January 1, 2004 to December 31, 2006, the 10% trigger level of 
Rule 201 would have, on an average day, been triggered for 
approximately 1.3% of covered securities.\311\
---------------------------------------------------------------------------

    \305\ See, e.g., letter from Jordan & Jordan; letter from 
Citadel et al. (June 2009); letter from MFA (June 2009); letter from 
SIFMA (June 2009); letter from Credit Suisse (Sept. 2009).
    \306\ See, e.g., letter from Jordan & Jordan (providing 
estimated percentages of exchange listed stocks impacted by a 10% 
circuit breaker threshold on sample days); letter from MFA (June 
2009) (providing the average daily number and percentage of Russell 
3000 stocks impacted by a 10% circuit breaker threshold over a ten 
year period); letter from Credit Suisse (Sept. 2009) (providing the 
number of times, by month, a circuit breaker with a 10% threshold 
would have been triggered for S&P 500 stocks and for Russell 2000 
stocks); letter from SIFMA (June 2009) (referencing two member 
firms' estimates, one that provided the average number of stocks out 
of 4,800 NMS common stocks that would have triggered the 10% 
threshold during roughly the first half of 2009 and another that 
measured the average number of Russell 3000 stocks per day that 
declined by 10% from their opening price from November 2008 to March 
2009).
    \307\ See, e.g., letter from MFA (June 2009) (reflecting that 
approximately 5% of Russell 3000 stocks would have been impacted at 
any one time by a circuit breaker with a 10% threshold during the 
period of October 1998 to September 2008); letter from SIFMA (June 
2009) (reflecting that approximately 3% of Russell 3000 stocks 
trading above $10 and 16.5% of Russell 3000 stocks trading below $10 
would have been impacted by a 10% threshold measured from the 
security's opening price during the period of November 2008 through 
March 2009); but cf letter from Jordan & Jordan. We note that the 
sample of days in the data reflected in the letter from Jordan & 
Jordan is not representative of typical trading.
    \308\ Letter from SIFMA (June 2009).
    \309\ This time period constitutes the period after full 
implementation of decimal increments.
    \310\ The Staff estimates that on the average day during this 
period, approximately 6.0% of stocks would have been impacted by the 
Rule, which is comprised of 3.4% of stocks that would have triggered 
the circuit breaker on a given day, plus an additional 2.6% of 
stocks that would have been affected as a result of having triggered 
the circuit breaker on the previous day. We note that the actual 
percentage of stocks affected by the Rule in the future could be 
different from the historical average, particularly under different 
market conditions. In particular, the percentage of stocks affected 
by the Rule is likely to be higher under crisis conditions. For 
example, the Staff estimates that on October 10, 2008 approximately 
68.1% of stocks would have traded under a short sale price test 
during part or all of the day while on November 24, 2006 
approximately 0.6% of stocks would have traded under a short sale 
price test during part or all of the day. The S&P 500 Index was down 
nearly 15% on October 10, 2008 from the closing price two days 
earlier while the S&P 500 Index was nearly flat on November 24, 2006 
from the closing price two days earlier. The estimates are 
calculated based on data from CRSP US Stock Database (copyright)2009 
Center for Research in Security Prices (CRSP), The University of 
Chicago Booth School of Business.
    \311\ The period from 2004 to 2006 exhibited low daily 
volatility as measured by the S&P 500 Index. The estimates are 
calculated based on data from CRSP US Stock Database (copyright)2009 
Center for Research in Security Prices (CRSP), The University of 
Chicago Booth School of Business.
---------------------------------------------------------------------------

    After considering the comments, we believe that a 10% decline in a 
security's price, as measured from the security's closing price on the 
prior day, is an appropriate level at which to trigger a circuit 
breaker. As discussed in the Proposal, the circuit breaker short sale 
price test restrictions were designed to target a security experiencing 
a significant intra-day price decline, where the concerns about the 
potential harmful effects of short selling would be greatest. In this 
way, they would be tailored to help prevent short selling, including 
potentially abusive or manipulative short selling, from being used as a 
tool to exacerbate the declining market in those securities

[[Page 11255]]

experiencing a significant intra-day decline and, thereby, help 
stabilize the market in those securities and help address concerns 
about the erosion in investor confidence.\312\ At the same time, we 
explained, the proposed circuit breaker price test restrictions would 
not impact trading in the majority of securities, and so would preserve 
the benefits of legitimate short selling, such as the provision of 
liquidity and price efficiency, in those securities.\313\
---------------------------------------------------------------------------

    \312\ See, e.g., Proposal, 74 FR at 18065, 18069.
    \313\ See, e.g., Proposal, 74 FR at 18065, 18069; see also 
Proposal, 74 FR at 18104 (``By targeting only those securities that 
experience severe intraday declines, all three proposed circuit 
breaker rules would be narrowly tailored so that most stocks would 
not fall under any new short sale restrictions.'').
---------------------------------------------------------------------------

    Although we recognize commenters' concerns that a 10% trigger level 
may capture some ``normal'' trading activity, commenters' estimates and 
the Staff's analysis show that a 10% circuit breaker threshold 
generally should affect only a limited percentage of covered 
securities. This supports the conclusion that Rule 201 provides a 
tailored approach that reaches a limited subset of covered securities 
that are experiencing a significant intra-day price decline, while 
generally not restricting short selling in the majority of covered 
securities. Thus, by including a 10% trigger level in Rule 201, the 
Rule will not interfere with trading in the majority of securities most 
of the time, including when prices in such securities are undergoing 
minimal downward price pressure or are stable or rising. In addition, 
we note that a circuit breaker approach is more targeted than applying 
a short sale price test restriction on a permanent, market-wide basis, 
and that any circuit breaker approach needs to have a line drawn.
    Further, we are concerned that setting a trigger level higher than 
10% would undermine our goals of helping to prevent short selling from 
being used as a tool to exacerbate a price decline in a particular 
security and of increasing investor confidence because so few 
securities would, on average, trigger a threshold higher than 10%.\314\ 
The 10% threshold for a circuit breaker that, when triggered, results 
in all short selling in a covered security being subject to the 
alternative uptick rule strikes a balance between the need to restrict 
short selling in moments of significant intra-day price declines in a 
covered security and the market participant's expectation that its 
short selling strategy will normally be available in an efficient and 
open marketplace. Thus, we have determined that a 10% trigger level 
strikes the right balance among our goals of facilitating the smooth 
functioning of the markets, preserving investor confidence, and 
preventing abusive market practices.
---------------------------------------------------------------------------

    \314\ See supra notes 305 to 311 (discussing the limited number 
of securities that would, on an average day, trigger a circuit 
breaker with a 10% threshold).
---------------------------------------------------------------------------

    Although we recognize commenters' concerns that a 10% trigger level 
may be reached more frequently for lower priced securities, at this 
time we have determined not to set a higher trigger level for lower 
priced securities, or to base the trigger on other characteristics of a 
security. Varying the trigger level according to characteristics of 
individual securities would complicate and increase costs with respect 
to implementation of, compliance with, and regulatory oversight of, 
Rule 201. Moreover, contrary to the concerns of commenters, we believe 
that having a trigger level that is reached more frequently for lower 
priced stocks may be beneficial. As stated in the Staff's Summary Pilot 
Report, during the Pilot, the Staff found some evidence that short sale 
price tests dampened intra-day volatility in the smallest market 
capitalization stocks, which tend to have lower share prices than 
larger market capitalization stocks.\315\ Thus, a trigger level that is 
reached more frequently for lower priced stocks may impose the 
alternative uptick rule in those situations where it is more likely to 
dampen volatility and achieve our goals in adopting short sale price 
test restrictions.
---------------------------------------------------------------------------

    \315\ See Staff's Summary Pilot Report at 55-56, 81.
---------------------------------------------------------------------------

    In response to our request for comment,\316\ some commenters asked 
that we clarify how to determine the official price from which to 
measure a price decline and to designate from where that price will 
come.\317\ In addition, a number of commenters expressed concerns that 
measuring the trigger level from the prior day's closing price for a 
security would result in a short selling restriction being applied as 
the result of a price change caused by the overnight release of 
material news or other significant events outside of trading 
hours.\318\ Several commenters asked that the percentage decline be 
measured from the covered security's opening price rather than the 
prior day's closing price.\319\ One commenter specified that the 
opening price should be the official opening price distributed by a 
SIP,\320\ while other commenters stated that it should be the opening 
price on the covered security's primary market.\321\ One commenter 
stated that the opening print should not be included in the measurement 
of the trigger level.\322\ Other commenters, however, supported our 
proposal to measure the decline from the previous day's closing 
price.\323\ One commenter noted that measuring the trigger level from 
the previous day's closing price might be easier to implement in 
connection with a policies and procedures approach.\324\
---------------------------------------------------------------------------

    \316\ See Proposal, 74 FR at 18066, 18079.
    \317\ See, e.g., letter from SIFMA (June 2009).
    \318\ See, e.g., letter from Citadel et al. (June 2009); letter 
from GETCO (June 2009); letter from Goldman Sachs (June 2009); 
letter from Lime Brokerage (June 2009); letter from SIFMA (June 
2009); letter from Credit Suisse (June 2009); letter from Credit 
Suisse (Sept. 2009); letter from Hudson River Trading; letter from 
Virtu Financial; see also letter from CBOE (June 2009) (stating that 
the opening price would take into account after hours news and avoid 
disorderly openings, particularly on options settlement dates).
    \319\ See, e.g., letter from Knight Capital (June 2009); letter 
from Citadel et al. (June. 2009); letter from GETCO (June 2009); 
letter from Goldman Sachs (June 2009); letter from Lime Brokerage 
(June 2009); letter from SIFMA (June 2009); letter from Credit 
Suisse (June 2009); letter from Credit Suisse (Sept. 2009); letter 
from Goldman Sachs (Sept. 2009); letter from Hudson River Trading.
    \320\ See letter from Virtu Financial.
    \321\ See, e.g., letter from Goldman Sachs (June 2009); letter 
from SIFMA (June 2009).
    \322\ See letter from SIFMA (June 2009).
    \323\ See, e.g., letter from IBC; letter from Nasdaq OMX Group 
(Oct. 2009).
    \324\ See letter from SIFMA (June 2009); see also letter from 
Glen Shipway (June 2009) (noting that basing the trigger level on 
the previous day's closing price ``certainly would be a price 
mechanism easier to track and to comprehend by market 
participants'').
---------------------------------------------------------------------------

    As discussed in more detail in Section III.A.6. below, Rule 
201(b)(3) provides that the listing market for each covered security 
must determine whether a covered security's price has declined by 10% 
or more such that it is subject to the short sale price test 
restrictions of Rule 201 and such information must be disseminated to 
the trading centers via the applicable single plan processor.\325\
---------------------------------------------------------------------------

    \325\ See Rule 201(b)(3); see also infra Section III.A.6. Rule 
201(a)(6) provides that ``[t]he term plan processor shall have the 
same meaning as in Sec.  242.600(b)(55).'' Rule 600(b)(55) of 
Regulation NMS states: ``Plan processor means any self-regulatory 
organization or securities information processor acting as an 
exclusive processor in connection with the development, 
implementation and/or operation of any facility contemplated by an 
effective national market system plan.'' The single plan processors 
are ``exclusive processors'' as defined under Section 3(a)(22) of 
the Exchange Act. 17 CFR 242.600(b)(55). See 15 U.S.C. 78c(a)(22).
---------------------------------------------------------------------------

    As set forth in Rule 201(b)(1), we have determined that it is 
appropriate to measure the price decline from the covered security's 
closing price as determined by the listing market for the covered 
security as of the end of regular trading hours on the prior day. In 
the proposed circuit breaker rules, we proposed that the decline in a 
covered security's price would be measured from the security's last 
price as reported in the consolidated system during

[[Page 11256]]

regular trading hours on the prior day.\326\ After considering the 
comments, we believe that the closing price as determined by the 
covered security's listing market as of the end of regular trading 
hours on the prior day will provide a more accurate price from which to 
measure a decline in price than the last price reported in the 
consolidated system. We believe that the last price reported in the 
consolidated system is more likely to reflect an anomalous trade, e.g., 
a trade that is not consistent with the current market due to, for 
example, the 90 second reporting window, or an uncorrected error. 
Listing markets generally have in place specific procedures designed to 
ensure the accuracy and reliability of their closing prices.\327\ Thus, 
we believe it is appropriate to use the more accurate closing price as 
determined by the covered security's listing market rather than the 
last price reported in the consolidated system.
---------------------------------------------------------------------------

    \326\ See Proposal, 74 FR at 18110-18113.
    \327\ See, e.g., NYSE Rule 116.40; NYSE Rule 123C(3).
---------------------------------------------------------------------------

    We also believe that the price decline in a covered security under 
Rule 201(b)(1)(i) should be measured from the covered security's 
closing price reported on the prior day rather than from each day's 
opening price for the covered security because the closing price 
provides a clearly discernible price and time from which to measure the 
decline. The closing price of a covered security will be known by or 
shortly after the end of regular trading hours such that the listing 
markets will have a price on the following day from which to determine 
if a covered security is subject to the short sale price test 
restrictions of Rule 201. An opening price, on the other hand, is 
established only if there is opening interest for a security, which, 
for thinly traded securities, may present issues. In addition, as noted 
by one commenter, we believe that measuring the price decline from the 
closing price on the prior day is preferable because it should be 
easier to implement than a requirement to measure the decline from the 
covered security's opening price.\328\ For example, should any 
uncertainties in price occur, using the closing price as a measurement 
will provide time to resolve any such uncertainties before the 
requirements of Rule 201 will potentially apply. If the Rule required 
that the decline must be measured from the opening price, any 
uncertainties would have to be resolved in real time, so that if a 10% 
or more price decline were to occur, the short sale price test 
restrictions of Rule 201 could be applied that day in accordance with 
the Rule.
---------------------------------------------------------------------------

    \328\ See letter from SIFMA (June 2009).
---------------------------------------------------------------------------

    As noted above, under Rule 201(b), once the circuit breaker has 
been triggered, the price test restriction will remain in place for the 
remainder of the day and for the following day. This requirement 
differs from the proposed circuit breaker rules that would have applied 
a short selling halt or short sale price test restriction for the 
remainder of the day only.
    In response to our request for comment on the duration of the 
proposed circuit breaker rules, comments were mixed. For example, one 
commenter suggested that the Commission should consider extending the 
duration of the short selling restriction through the close of trading 
on the trading day following the triggering of the circuit breaker to 
allow sufficient time to achieve the Commission's intended purpose of 
``halting or slowing a price decline in a security.'' \329\ Some 
commenters supported the proposed period for the circuit breaker of the 
remainder of the trading day \330\ for various reasons, including that 
the limited duration would mitigate the potential adverse impact of a 
short selling restriction.\331\ In addition, several commenters 
supported a circuit breaker with a duration of less than the remainder 
of the trading day.\332\
---------------------------------------------------------------------------

    \329\ See letter from RBC (June 2009); see also letter from 
Credit Suisse (Mar. 2009).
    \330\ See, e.g., letter from Direct Edge (June 2009) (stating 
that the circuit breaker should be limited in duration to the end of 
the trading day with respect to the proposed circuit breaker halt 
rule); letter from AIMA; letter from Goldman Sachs (June 2009).
    \331\ See, e.g., letter from AIMA; see also letter from Direct 
Edge (June 2009) (opposing a circuit breaker duration beyond one 
trading day specifically with respect to a circuit breaker 
triggering a short selling halt); letter from Barclays (June 2009); 
letter from Goldman Sachs (June 2009).
    \332\ See letter from Barclays (June 2009); letter from Citadel 
et al. (June 2009); letter from SIFMA (June 2009); see also letter 
from Jordan & Jordan (providing data regarding the extent to which 
securities with an ``on/off'' trigger recovered by the end of 
trading).
---------------------------------------------------------------------------

    One commenter, however, stated that the circuit breaker should not 
be in effect for multiple days, but also that it should not be in 
effect for a matter of hours because ``frequent changes in the status 
of a security would create more disruption.'' \333\ Several commenters 
who supported a circuit breaker with a duration of less than the 
remainder of the trading day stated that the circuit breaker should be 
lifted if the security's price has recovered and the price decline is 
less than 10% before the end of the trading day.\334\ These commenters 
stated, among other things, that such a recovery may be a common 
occurrence \335\ and that lifting the circuit breaker would take into 
account the resilience of the markets.\336\ Another commenter stated 
that the circuit breaker should only be in effect long enough to re-
establish equilibrium between buying and selling interests and further 
noted that the duration of the circuit breaker should depend on the 
time of day when the threshold is triggered.\337\
---------------------------------------------------------------------------

    \333\ Letter from Goldman Sachs (June 2009).
    \334\ See letter from Barclays (June 2009); letter from SIFMA 
(June 2009).
    \335\ See letter from SIFMA (June 2009).
    \336\ See letter from Barclays (June 2009).
    \337\ See letter from Citadel et al. (June 2009).
---------------------------------------------------------------------------

    Some commenters supported the Commission's proposal that a circuit 
breaker would not be triggered if the 10% trigger level were reached in 
a covered security within thirty minutes of the end of regular trading 
hours.\338\ Other commenters, however, stated that the last thirty 
minutes of the day has become the most volatile part of the day and 
that this is exactly the time that a rule that would slow short selling 
and reduce volatility would be most needed.\339\
---------------------------------------------------------------------------

    \338\ See letter from Barclays (June 2009); letter from Citadel 
et al. (June 2009).
    \339\ See, e.g., letter from Jibralta Merrill, dated May 5, 
2009; letter from Arthur Porcari, dated May 11, 2009; letter from 
IBC; letter from STA (June 2009).
---------------------------------------------------------------------------

    After considering the comments, we believe it is appropriate to 
apply the alternative uptick rule, when triggered, for the remainder of 
the day and the day following the day on which the circuit breaker is 
triggered. We believe that a circuit breaker that is in effect for the 
remainder of the day and the following day will have the advantage of 
being more effective at preventing short selling from being used as a 
tool to exacerbate a security's decline in price. As we, and several 
commenters, have noted, because the alternative uptick rule will permit 
short selling only at a price above the current national best bid, it 
will likely be the most effective of the proposed price tests at 
preventing short selling from driving down further a security's price 
or from exacerbating a price decline.\340\ A circuit breaker that will 
impose a short selling restriction for only the remainder of the 
trading day, or as some commenters suggested, for less than the 
remainder of the trading day, may not allow sufficient time for the 
short selling restriction to have its desired effect. To the extent 
that short selling is causing or contributing

[[Page 11257]]

to downward price pressure, a longer duration will provide additional 
time during which the security will be subject to reduced downward 
price pressure from short selling. In addition, we note that the 
circuit breaker could be triggered at any point during regular trading 
hours. Further, as noted by one commenter, we are concerned that if the 
circuit breaker is triggered late in the day, such that it would be in 
effect for only a short period of time, this would in fact create more 
disruption rather than achieving our goals with respect to short sale 
price test restrictions for that security.\341\ By applying the short 
sale price test restriction for the day following the day on which it 
is triggered, the time period will help ensure that there is not 
unnecessary disruption caused by the triggering of the circuit breaker.
---------------------------------------------------------------------------

    \340\ See letter from Wells Fargo (Sept. 2009); letter from STA 
(Sept. 2009); letter from Glen Shipway (Sept. 2009); letter from 
BATS (Sept. 2009).
    \341\ See supra note 333 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, the Commission has previously noted that 
circuit breakers may benefit the market by allowing participants an 
opportunity to re-evaluate circumstances and respond to 
volatility.\342\ We believe that imposing a short selling restriction 
for the remainder of the day and the following day will help ensure 
that market participants have a reasonable opportunity to become aware 
of, and respond to, a significant decline in a security's price, and 
will provide sufficient time to re-establish market efficiency in the 
individual security. Although, for the reasons discussed above, we 
believe it is necessary to impose the short sale price test restriction 
of Rule 201 for longer than the remainder of the day, we do not believe 
it is appropriate to extend the duration beyond the time period 
specified in Rule 201 because we believe that the duration specified in 
Rule 201 strikes the appropriate balance between achieving our goals in 
adopting Rule 201 and not causing unnecessary market disruption.
---------------------------------------------------------------------------

    \342\ See supra note 275 and accompanying text.
---------------------------------------------------------------------------

    In the Proposal, we stated that to avoid market disruption that may 
occur if a circuit breaker is triggered late in the trading day, the 
proposed circuit breaker rules would not be triggered if the specified 
market decline threshold is reached in a covered security within thirty 
minutes of the end of regular trading hours.\343\ As noted above, 
because the short sale price test restriction of Rule 201 will remain 
in place for the remainder of the day and the following day, we have 
determined not to include a provision in Rule 201 stating that the 
Rule's restrictions will not be triggered if the 10% trigger level is 
reached in a covered security within thirty minutes of the end of 
regular trading hours. We believe it is appropriate to apply Rule 201 
during the last thirty minutes of regular trading hours because, due to 
potential volatility during this period, it is a time period when a 
covered security's price may experience a significant decline.
---------------------------------------------------------------------------

    \343\ See Proposal, 74 FR at 18066.
---------------------------------------------------------------------------

    Consistent with the Proposal, we have determined to apply the price 
test restriction, if triggered, during periods when the national best 
bid is calculated and disseminated on a current and continuing basis by 
a plan processor.\344\ As discussed above and as we discussed in the 
Proposal,\345\ market information for quotes in covered securities is 
disseminated pursuant to two different national market system plans, 
the CQ Plan and Nasdaq UTP Plan.\346\ Quotation information is made 
available pursuant to the CQ Plan between 9 a.m. and 6:30 p.m. ET, 
while one or more participants is open for trading. In addition, 
quotation information is made available pursuant to the CQ Plan during 
any other period in which any one or more participants wish to furnish 
quotation information to the Plan.\347\ Quotation information is made 
available by the Nasdaq UTP Plan between 9:30 a.m. and 4 p.m. ET. The 
Nasdaq UTP Plan also collects, processes, and disseminates quotation 
information between 4 a.m. and 9:30 a.m. ET, and after 4 p.m. when any 
participant is open for trading, until 8 p.m. ET.\348\ During the time 
periods in which these Plans do not operate, real-time quote 
information is not collected, calculated and disseminated.
---------------------------------------------------------------------------

    \344\ See Rule 201(b).
    \345\ See Proposal, 74 FR at 18060, 18064-18065.
    \346\ See supra note 199 and accompanying text. See also 17 CFR 
242.603(b). Rule 603 of Regulation NMS requires that every national 
securities exchange on which an NMS stock is traded and national 
securities association shall act jointly pursuant to one or more 
effective national market system plans to disseminate consolidated 
information, including a national best bid and national best offer, 
on quotations for and transactions in NMS stocks.
    \347\ See http://www.nyxdata.com/cta.
    \348\ See http://www.utpdata.com/docs/UTP_PlanAmendment.pdf.
---------------------------------------------------------------------------

    In response to our request for comment,\349\ one commenter stated 
that any price test restriction should be applied during regular 
trading hours only because the period when the current national best 
bid is calculated, collected and disseminated ``can vary depending on 
whether a participant in the particular national market system 
governing quote consolidation for a security decides to pay the 
consolidator to extend the hours of the calculation of the bid.'' \350\ 
In contrast, other commenters stated that the proposed price test 
restrictions should apply at all times during after-hours trading.\351\ 
Because the short sale price test restrictions of Rule 201 are based on 
the current national best bid, we believe that the restrictions should 
apply at all times when the current national best bid is collected, 
calculated and disseminated even though this period can vary depending 
on whether a participant in the particular national market system 
governing quote consolidation for a security decides to pay the 
consolidator to extend the hours of the calculation of the bid.\352\ 
Thus, the price test restrictions of Rule 201 will apply at times when 
quotation information and, therefore, the national best bid, is 
collected, processed, and disseminated pursuant to a national market 
system plan. We note, however, that at a later time we may reconsider 
whether any changes to Rule 201 would be necessary to also apply the 
Rule to short selling during times when the national best bid is not 
collected, calculated and disseminated, in light of any new information 
on short selling activity during these times.
---------------------------------------------------------------------------

    \349\ See, e.g., Proposal, 74 FR at 18060.
    \350\ Letter from Credit Suisse (Sept. 2009); see also letter 
from SIFMA (June 2009); letter from Goldman Sachs (June 2009); 
letter from T. Rowe Price (June 2009).
    \351\ See, e.g., letter from Michael Sigmon, Chairman, Sigmon 
Wealth Management, dated Apr. 14, 2009; letter from IBC.
    \352\ We note that currently, the period during which the 
current national best bid is collected, calculated and disseminated 
can vary depending on whether a participant in the particular 
national market system governing quote consolidation for a security 
has decided to pay the consolidator to extend the hours of the 
calculation of the bid.
---------------------------------------------------------------------------

6. Determination Regarding Securities Subject to Rule 201 and 
Dissemination of Such Information
    In the Proposal, we requested comment regarding who should be 
responsible for monitoring the price declines of individual securities 
to determine if they trigger the short selling circuit breaker, such as 
broker-dealers or SROs, how such information should be disseminated to 
the market, and who should be responsible for disseminating the 
information.\353\ In response to our request for comment, some 
commenters stated that if we were to adopt a circuit breaker rule, 
securities subject to the Rule should be tracked and disseminated by 
the SIP for the covered security in question, noting that SIPs 
currently track and disseminate

[[Page 11258]]

percentage moves \354\ and that such a role would be consistent with 
the responsibilities of a SIP to collect, process, distribute and 
publish information with respect to transactions in, or quotations for, 
any security for which it acts as a SIP on a current and continuing 
basis.\355\ One commenter stated that it would be inappropriate to 
allow each market to perform its own calculation or to impose the 
responsibility on a particular market due to the importance of ensuring 
that triggering of a circuit breaker is communicated to all markets and 
market participants on a fair, impartial and timely basis.\356\ Other 
commenters stated that the listing market for a covered security should 
communicate the triggering of the circuit breaker to the SIP for the 
covered security, which would then redistribute such information to the 
market.\357\ Another commenter stated that the exchanges should be 
required to develop and maintain ``a centralized real-time list of all 
securities subject to the circuit breaker price test.'' \358\ This 
commenter stated that it believes this centralization ``would ensure 
consistent treatment of orders and help reduce the costs of compliance 
for market participants.'' \359\ One commenter stated that as an 
alternative to the listing market notifying the SIP for a covered 
security when the circuit breaker has been triggered, trading centers 
could arrange to receive this information directly from the listing 
market.\360\
---------------------------------------------------------------------------

    \353\ See Proposal, 74 FR at 18078.
    \354\ See, e.g., letter from Virtu Financial (also stating that 
the SIPs would add a flag to their data feeds that would announce 
when the circuit breaker is in effect).
    \355\ See letter from NYSE Euronext (Sept. 2009); see also 
letter from SIFMA (June 2009) (stating that some of its member firms 
``believe that exchange-controlled SIPs should monitor prices and 
disseminate information flags when a security is in short sale mode 
* * *'').
    \356\ See letter from NYSE Euronext (Sept. 2009).
    \357\ See, e.g., letter from Direct Edge (June 2009); letter 
from Liquidnet; letter from FIF (June 2009); letter from Manisha 
Kimmel, Executive Director, Financial Information Forum, dated Sept. 
23, 2009 (``FIF (Sept. 2009)'').
    \358\ Letter from RBC (June 2009).
    \359\ Id.
    \360\ See letter from Liquidnet.
---------------------------------------------------------------------------

    After considering the comments, we have determined that the listing 
market for each covered security must determine whether that covered 
security is subject to Rule 201.\361\ Rule 201(a)(3) defines the term 
``listing market'' to have the same meaning as the term ``listing 
market'' as defined in the effective transaction reporting plan for the 
covered security.\362\ Because the definition of ``listing market'' is 
a currently-used definition, we believe users of the Rule will not have 
difficulty identifying for a security which entity is its listing 
market.
---------------------------------------------------------------------------

    \361\ See Rule 201(b)(3).
    \362\ Rule 201(a)(2). Rule 201(a)(2) provides that ``[t]he term 
effective transaction reporting plan for a covered security shall 
have the same meaning as in Sec.  242.600(b)(22).'' Rule 201(a)(2).
---------------------------------------------------------------------------

    Currently, there are two effective transaction reporting plans, the 
CTA Plan, which disseminates transaction information for securities 
primarily listed on an exchange other than Nasdaq, and the Nasdaq UTP 
Plan, which disseminates consolidated transaction and quotation 
information for securities primarily listed on Nasdaq.\363\ Each of 
these Plans includes a definition of ``listing market,'' which 
definitions we are incorporating by reference into Rule 201. We have 
determined to incorporate by reference into Rule 201 the definition of 
``listing market,'' as that term is defined in the CTA Plan and the 
Nasdaq UTP Plan,\364\ to provide the markets with uniformity with 
respect to decisions regarding trading restrictions for individual NMS 
stocks because the listing markets are already familiar with making 
determinations regarding, and imposing trading restrictions on, 
individual NMS stocks. For example, listing markets already have rules 
or policies in place to coordinate trading suspensions or halts in 
individual NMS stocks.\365\
---------------------------------------------------------------------------

    \363\ See supra note 199 (discussing the joint-industry plans).
    \364\ We note that although the definition of a ``listing 
market'' in the CTA Plan and Nasdaq UTP Plan is similar, the Plans 
differ with respect to how they treat dually listed securities. The 
CTA Plan states that ``the `listing market' for any Eligible 
Security shall be that exchange Participant on which the Eligible 
Security is listed. If an Eligible Security is dually listed, 
`listing market' shall be that exchange Participant on which the 
Eligible Security was originally listed.'' The Nasdaq UTP Plan 
states that `` `Listing Market' for an Eligible Security means the 
Participant's Market on which the Eligible Security is listed. If an 
Eligible Security is dually listed, Listing Market shall mean the 
Participant's Market on which the Eligible Security is listed that 
also has the highest number of the average of the reported 
transactions and reported share volume for the preceding 12-month 
period. The Listing Market for dually-listed Eligible Securities 
shall be determined at the beginning of each calendar quarter.'' 
Although there are differences between how each of the Plans 
determines the listing market for dually listed securities, we do 
not believe this difference will impact the rule operationally 
because participants are already familiar with determining the 
applicable listing market for a covered security.
    \365\ See, e.g., Nasdaq Rule 4120 (relating to trading halts in 
Nasdaq-listed securities); NYSE Rule 123D (relating to delayed 
openings and trading halts in NYSE-listed securities).
---------------------------------------------------------------------------

    In addition, requiring the listing market for a covered security to 
determine whether the security has become subject to the short sale 
price test restrictions of Rule 201 will help ensure consistency for 
each covered security with respect to such determinations as only the 
listing market for that covered security will be making the 
determination. In addition, we believe that listing markets will be in 
the best position to respond to anomalous or unforeseeable events that 
may impact a covered security's price, such as an erroneous trade, 
because the listing markets generally have in place specific procedures 
designed to address such events.
    As discussed above, in response to our request for comment,\366\ 
some commenters provided comments regarding how information that a 
covered security has become subject to the short sale price test 
restrictions of Rule 201 should be disseminated to the markets.\367\ In 
order that all market participants receive information regarding when a 
security has become subject to Rule 201 on a fair, impartial and timely 
basis, after considering the comments we have determined to provide in 
Rule 201(b)(3) that once the listing market has determined that a 
security has become subject to the requirements of Rule 201, the 
listing market shall immediately notify the single plan processor 
responsible for consolidation of information for the covered security 
in accordance with Rule 603(b) of Regulation NMS \368\ of the fact that 
a covered security has become subject to the short sale price test 
restriction of Rule 201. The plan processor must then disseminate this 
information.\369\
---------------------------------------------------------------------------

    \366\ See supra note 353 and accompanying text.
    \367\ See, e.g., letter from Direct Edge (June 2009); letter 
from FIF (June 2009); letter from Liquidnet; letter from RBC (June 
2009); letter from SIFMA (June 2009); letter from FIF (Sept. 2009); 
letter from NYSE Euronext (Sept. 2009); letter from Virtu Financial.
    \368\ Rule 603(b) of Regulation NMS provides that ``Every 
national securities exchange on which an NMS stock is traded and 
national securities association shall act jointly pursuant to one or 
more effective national market system plans to disseminate 
consolidated information, including a national best bid and national 
best offer, on quotations for and transactions in NMS stocks. Such 
plan or plans shall provide for the dissemination of all 
consolidated information for an individual NMS stock through a 
single plan processor.'' 17 CFR 242.603(b).
    \369\ See Rule 201(b)(3); 17 CFR 242.603(b).
---------------------------------------------------------------------------

    As discussed above, the CTA Plan disseminates transaction 
information for securities primarily listed on an exchange other than 
Nasdaq and the Nasdaq UTP Plan disseminates consolidated transaction 
and quotation information for securities primarily listed on Nasdaq. In 
accordance with Rule 603(b) of Regulation NMS, these plans, together 
with the CQ Plan, provide for the dissemination of all consolidated 
information for individual

[[Page 11259]]

NMS stocks through a single plan processor. The single plan processors 
currently receive information from listing markets regarding trading 
restrictions (i.e., Regulatory Halts as defined in those plans) on 
individual securities and disseminate such information. Thus, the 
requirements of Rule 201(b)(3) are similar to existing obligations on 
plan processors pursuant to the requirements of Regulation NMS, the CTA 
and CQ Plans and the Nasdaq UTP Plan.
    We recognize that the requirements of Rule 201(b)(3) may require 
changes to systems currently supported by the single plan 
processors.\370\ Thus, in considering the appropriate implementation 
period for Rule 201, we have factored into our considerations time to 
allow the single plan processors to determine any changes to their 
systems requirements and to make any necessary changes.
---------------------------------------------------------------------------

    \370\ See letter from FIF (June 2009).
---------------------------------------------------------------------------

7. Policies and Procedures Approach
    In the Proposal, we stated that the proposed price test 
restrictions could be applied in combination with a policies and 
procedures approach, a prohibition approach, or a combination 
thereof.\371\ We have determined to adopt a policies and procedures 
approach in Rule 201(b). Rule 201(b) will require trading centers to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to prevent the execution or display of a short sale 
order of a covered security at a price that is less than or equal to 
the current national best bid if the price of the security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on the prior day.\372\ In addition, such policies and 
procedures must be reasonably designed to impose the short sale price 
test restriction in Rule 201(b)(1) for the remainder of the day on 
which it is triggered and on the following day when a national best bid 
for the covered security is calculated and disseminated on a current 
and continuing basis by a plan processor pursuant to an effective 
national market system plan.\373\
---------------------------------------------------------------------------

    \371\ See Proposal, 74 FR at 18049.
    \372\ See Rule 201(b)(1)(i).
    \373\ See Rule 201(b)(1)(ii).
---------------------------------------------------------------------------

    Several commenters stated that any short sale price test 
restriction should be implemented through a policies and procedures 
approach.\374\ One such commenter stated that a policies and procedures 
approach ``would help promote compliance by all affected parties, 
distribute compliance and monitoring responsibility, allow flexibility 
to address inadvertent violations (thus likely resulting in fewer 
cancellations and trade breaks), and conserve the enforcement resources 
of agencies and other self-regulatory organizations.'' \375\ Another 
commenter noted the ``smooth implementation'' and ``successful 
operation'' of Regulation NMS, which also uses a policies and 
procedures approach, and stated that a policies and procedures approach 
for Rule 201 will ``allow for a smoother transition into full 
implementation as well as a more flexible rule where triggers based on 
circuit breakers are being contemplated.'' \376\
---------------------------------------------------------------------------

    \374\ See, e.g., letter from SIFMA (June, 2009); letter from 
Goldman Sachs (June 2009); letter from NYSE Euronext (June 2009); 
letter from T. Rowe Price (June 2009); letter from RBC (June 2009); 
letter from Schwab; letter from BATS (Sept. 2009); letter from SIFMA 
(Sept. 2009); letter from Credit Suisse (Sept. 2009); letter from 
Virtu Financial; letter from Goldman Sachs (Sept. 2009); letter from 
NYSE Euronext (Sept. 2009); letter from Qtrade; letter from Citadel 
et al. (Sept. 2009); letter from MFA (Oct. 2009).
    \375\ Letter from Citadel et al. (Sept. 2009); see also letter 
from AIMA.
    \376\ Letter from Virtu Financial; see also letter from MFA 
(Oct. 2009) (stating that it believes that ``implementation concerns 
would be minimized if executing market centers (or any broker using 
an intermarket sweep order) surveil for compliance as they could 
leverage existing architecture developed to comply with the order 
protection rule in Reg. NMS (Rule 611)'').
---------------------------------------------------------------------------

    Some commenters stated that any short sale price test restriction 
should be implemented with a policies and procedures approach as well 
as a straight prohibition approach.\377\ In supporting this combination 
approach, one such commenter noted that a policies and procedures 
approach would be consistent with Regulation NMS, permit trading 
centers the flexibility to tailor such policies and procedures to their 
particular markets, and permit broker-dealers to manage their order 
flow. At the same time, this commenter stated that a prohibition 
approach would be familiar to market participants and will give the 
Commission direct enforcement authority over violations.\378\
---------------------------------------------------------------------------

    \377\ See, e.g., letter from GE; letter from Wachtell; letter 
from Amer. Bankers Assoc.
    \378\ See letter from GE; see also letter from Wachtell.
---------------------------------------------------------------------------

    In contrast, some commenters stated that a short sale price test 
restriction, if adopted, should be implemented with a straight 
prohibition approach only. For example, one commenter stated that a 
straight prohibition approach is preferable because ``[v]ariations in 
policies and procedures would lead some to believe certain market 
participants are less vigilant than others.'' \379\ Another said a 
straight prohibition approach would be easier for market participants 
to implement and understand.\380\ In addition, several commenters 
expressed support for a rule that would ``prohibit'' short selling on a 
down-bid (or down-tick) \381\ or expressed that they did not support a 
policies and procedures approach.\382\
---------------------------------------------------------------------------

    \379\ Letter from Wells Fargo (Sept. 2009).
    \380\ See, e.g., letter from Amer. Bankers Assoc. We note that 
this commenter also expressed support for a policies and procedures 
requirement for trading centers.
    \381\ See, e.g., letter from Sigmon Wealth Management (June 
2009); letter from James V. Kelly, President, Kelly Capital 
Management, LLC, dated June 2, 2009 (``Kelly Capital''); letter from 
Larry Chlebina, President, Ryan Stine, VP Portfolio Strategist, 
Chlebina Capital Management, LLC, dated May 29, 2009.
    \382\ See, e.g., letter from Theresa Kinley, dated May 14, 2009; 
see also letter from James Rothenberg.
---------------------------------------------------------------------------

    We recognize some commenters' preference that a short sale price 
test restriction be adopted with a straight prohibition approach or in 
combination with a straight prohibition approach because it is the 
approach taken under former Rule 10a-1 and, therefore, is familiar to 
market participants. Further, some commenters noted there can be 
variations in policies and procedures. As discussed in more detail 
below, however, we have determined to adopt in Rule 201(b)(1) a 
policies and procedures approach rather than a straight prohibition 
approach (or a combination thereof) because this alternative is similar 
to the policies and procedures approach under Regulation NMS and, 
therefore, market participants are familiar with a policies and 
procedures approach and can build on such policies and procedures in 
implementing Rule 201. In addition, a policies and procedures approach 
provides flexibility to trading centers and their customers in managing 
order flow because it allows trading centers, together with their 
customers, to determine how to handle orders that are not immediately 
executable or displayable by the trading center because the order is 
impermissibly priced. This flexibility potentially allows for the more 
efficient functioning of the securities markets than a rule that 
applies a straight prohibition approach.
    In addition, we note that the Commission and SROs will carefully 
monitor whether trading centers' policies and procedures are reasonably 
designed to prevent short selling in violation of Rule 201. To the 
extent that a trading center's policies and procedures permit any 
execution or display of a short sale order not in accordance with the 
requirements of the

[[Page 11260]]

Rule, such trading center's policies and procedures may not be 
reasonable and could subject the trading center to enforcement action. 
Further, any conduct by trading centers, or other market participants, 
that facilitates short sales in violation of Rule 201 could also lead 
to liability for aiding and abetting or causing a violation of 
Regulation SHO, as well as potential liability under the anti-fraud and 
anti-manipulation provisions of the Federal securities laws, including 
sections 9(a), 10(b), and 15(c) of the Exchange Act, and Rule 10b-5 
thereunder.
    Under Rule 201(b)(1), a trading center will be required to have 
written policies and procedures reasonably designed to prevent the 
execution or display of short sale orders at a price that is less than 
or equal to the current national best bid when the price of a covered 
security decreases by 10% or more from the covered security's closing 
price as determined by the listing market for the covered security as 
of the end of regular trading hours on the prior day. In addition, such 
policies and procedures must be reasonably designed to impose the short 
sale price test restriction of Rule 201(b)(1)(i) for the remainder of 
the day and the following day. Thus, a trading center's policies and 
procedures must require that a trading center be able to determine when 
a covered security is subject to the short sale price test restriction 
of Rule 201. As discussed above, due to the importance of ensuring that 
the triggering of the requirements of Rule 201 is communicated to all 
market participants on a fair, impartial and timely basis, we believe 
it is appropriate for the listing market for the covered security to 
determine whether that security is subject to the requirements of Rule 
201 and, if it is, for such information to be disseminated to the 
market by the single plan processor. Thus, a trading center's policies 
and procedures must be reasonably designed so that the trading center 
is able to obtain such information from the single plan processor if 
the covered security becomes subject to the Rule's requirements.
    Upon receipt of a short sale order for a covered security that is 
subject to the Rule's requirements, a trading center's policies and 
procedures must ensure that the trading center is able to determine 
whether or not the short sale order can be executed or displayed in 
accordance with the provisions of Rule 201(b)(1). If the order is 
marketable at a permissible price, the trading center may present the 
order for immediate execution or, if not immediately marketable, hold 
it for execution later at its specified price.
    Rule 201(b)(1) permits a trading center to display an order 
provided it is permissibly priced at the time the trading center 
displays the order. If an order is impermissibly priced, the trading 
center could, in accordance with policies and procedures reasonably 
designed to prevent the execution or display of a short sale order at a 
price that is less than or equal to the current national best bid, re-
price the order upwards to the lowest permissible price and hold it for 
later execution at its new price or better.\383\ As quoted prices 
change, in accordance with Rule 201(b)(1), a trading center may 
repeatedly re-price and display an order at the lowest permissible 
price down to the order's original limit order price (or, if a market 
order, until the order is filled).
---------------------------------------------------------------------------

    \383\ For example, if a trading center receives a short sale 
order priced at $47.00 when the current national best bid in the 
security is $47.00, the trading center could re-price the order at 
the permissible offer price of $47.01, and display the order for 
execution at this new limit price.
---------------------------------------------------------------------------

    In addition, paragraph (b)(1)(iii)(A) of Rule 201 requires a 
trading center's policies and procedures to be reasonably designed to 
permit a trading center to execute a displayed short sale order at a 
price that is less than or equal to the current national best bid 
provided that, at the time the order was initially displayed by the 
trading center it was permissibly priced, i.e., not at a price that was 
less than or equal to the then-current national best bid.\384\ As 
discussed in the Proposal, this exception for properly displayed short 
sale orders will help avoid a conflict between Rule 201 and the ``Quote 
Rule'' under Rule 602 of Regulation NMS.\385\ The Quote Rule requires 
that, subject to certain exceptions, the broker-dealer responsible for 
communicating a quotation shall be obligated to execute any order to 
buy or sell presented to him, other than an odd lot order, at a price 
at least as favorable to such buyer or seller as the responsible 
broker-dealer's published bid or published offer in any amount up to 
his published quotation size.\386\ Thus, pursuant to this exception, a 
trading center will be able to comply with the ``firm quote'' 
requirement of Rule 602 of Regulation NMS by executing a presented 
order to buy against its displayed offer to sell as long as the 
displayed offer to sell was permissibly priced under Rule 201 at the 
time it was first displayed, even if the execution of the transaction 
will be at a price that is less than or equal to the current national 
best bid at the time of execution.\387\
---------------------------------------------------------------------------

    \384\ See Rule 201(b)(1)(iii)(A).
    \385\ See Proposal, 74 FR at 18051.
    \386\ See 17 CFR 242.602(b)(2). We note that to the extent that 
a short sale order is un-displayed, Rule 201 will prevent the 
trading center from executing the order unless at the time of 
execution, the execution price complies with the Rule.
    \387\ We note that such a conflict between the Quote Rule and 
Rule 201 should be relatively infrequent. If a displayed order to 
sell shares is at a price that is less than or equal to the national 
best bid, this would result in a crossed or locked market. In 
accordance with Rule 610(d) of Regulation NMS, each national 
securities exchange and national securities association must 
establish, maintain, and enforce written rules that require its 
members reasonably to avoid: Displaying quotations that lock or 
cross any protected quotation in an NMS stock, displaying manual 
quotations that lock or cross any quotation in an NMS stock 
disseminated pursuant to an effective national market system plan; 
are reasonably designed to assure reconciliation of locked or 
crossed quotations in an NMS stock; and prohibit its members from 
engaging in a pattern or practice of displaying quotations that lock 
or cross any protected quotation, or other quotation, in an NMS 
stock, unless an exception in such rules applies. See 17 CFR 
242.610(d).
---------------------------------------------------------------------------

    Because a trading center can re-price and display a previously 
impermissibly priced short sale order, the policies and procedures 
approach of Rule 201, as noted by one commenter,\388\ potentially 
allows for the more efficient functioning of the markets than a rule 
that applies a straight prohibition approach. Another commenter noted 
that while a prohibition approach could provide ``bright lines'' as to 
the acceptability of trades, such an approach would result in an 
``inordinate number'' of trades being cancelled by trading 
centers.\389\ Because trading centers will not have to reject or cancel 
impermissibly priced orders unless instructed to do so by the trading 
center's customer submitting the short sale order, we believe that the 
policies and procedures approach of Rule 201 will provide more 
flexibility to trading centers and their customers and result in more 
efficient markets. We recognize, however, that some trading centers 
might not want to re-price an impermissibly priced short sale order. 
Thus, re-pricing is not a requirement under Rule 201.
---------------------------------------------------------------------------

    \388\ See, e.g., letter from Citadel et al. (Sept. 2009) (noting 
that a policies and procedures approach is favorable to a strict 
prohibition approach in that it ``would help promote compliance'' 
and ``address inadvertent violations'' of Rule 201).
    \389\ Letter from STA (June 2009).
---------------------------------------------------------------------------

    In addition, as noted by commenters, Rule 201 will provide trading 
centers and their customers with flexibility in determining how to 
handle orders that are not immediately executable or displayable by the 
trading center because the order is impermissibly priced. For example, 
trading centers can offer their customers various order types regarding 
the handling of impermissibly priced orders such that a trading center 
can either reject an impermissibly priced order or re-price the order

[[Page 11261]]

upwards to the lowest permissible price until the order is filled.
    As proposed and as adopted, Rule 201(b)(2) requires trading centers 
to regularly surveil to ascertain the effectiveness of the policies and 
procedures required by Rule 201(b)(1) and to take prompt action to 
remedy deficiencies in such policies and procedures.\390\ As one 
commenter noted, this provision places trading centers in the position 
of determining whether an execution complies with the requirements of 
Rule 201(b)(1).\391\ Thus, short sale orders executed or displayed at 
impermissible prices will require the trading center that executed or 
displayed the short sales to take prompt action to remedy any 
deficiencies.
---------------------------------------------------------------------------

    \390\ See Rule 201(b)(2).
    \391\ See letter from Wolverine.
---------------------------------------------------------------------------

    The policies and procedures requirements of Rule 201(b)(1) are 
similar to those set forth under Regulation NMS.\392\ In accordance 
with Regulation NMS, trading centers must have in place written 
policies and procedures in connection with that Regulation's Order 
Protection Rule.\393\ Thus, as we stated in the Proposal, trading 
centers are already familiar with establishing, maintaining, and 
enforcing trading-related policies and procedures, including 
programming their trading systems in accordance with such policies and 
procedures.\394\ Several commenters agreed with the Commission's view 
that this familiarity should reduce the implementation time and costs 
of the Rule on trading centers.\395\
---------------------------------------------------------------------------

    \392\ See Regulation NMS Adopting Release, 70 FR 37496; see also 
17 CFR 242.611.
    \393\ See id.
    \394\ See Proposal, 74 FR at 18051-18052.
    \395\ See, e.g., letter from Amer. Bankers Assoc.; letter from 
Schwab; letter from Credit Suisse (Sept. 2009); letter from GE; 
letter from Goldman Sachs (June 2009); letter from NYSE Euronext 
(June 2009); letter from SIFMA (June 2009); letter from T. Rowe 
Price (June 2009); letter from Virtu Financial (noting familiarity 
with the policies and procedures approach of Regulation NMS should 
reduce the implementation costs of Rule 201).
---------------------------------------------------------------------------

    As discussed in the Proposal,\396\ similar to the requirements 
under Regulation NMS in connection with the Order Protection Rule, at a 
minimum, a trading center's policies and procedures must enable a 
trading center to monitor, on a real-time basis, the national best bid, 
so as to determine the price at which the trading center may execute or 
display a short sale order. In addition, as proposed, a trading center 
must have policies and procedures reasonably designed to permit the 
execution or display of a short sale order of a covered security marked 
``short exempt'' without regard to whether the order is at a price that 
is less than or equal to the current national best bid.\397\ A trading 
center's policies and procedures will not, however, have to include 
mechanisms to determine on which provision a broker-dealer is relying 
in marking an order ``short exempt'' in accordance with paragraph (c) 
or (d) of Rule 201.\398\ We note that we did not receive comments that 
specifically discussed a trading center's policies and procedures with 
respect to the monitoring, on a real-time basis, of the national best 
bid, or its policies and procedures related to orders marked ``short 
exempt.''
---------------------------------------------------------------------------

    \396\ See Proposal, 74 FR at 18052.
    \397\ See Rule 201(b)(1)(iii)(B); see also infra Section III.B. 
(discussing short sale orders marked ``short exempt'').
    \398\ See infra Section III.B.; see also Rules 201(c) and 201(d)
---------------------------------------------------------------------------

    As discussed in the Proposal,\399\ a trading center must also take 
such steps as will be necessary to enable it to enforce its policies 
and procedures effectively. For example, trading centers may establish 
policies and procedures that include regular exception reports to 
evaluate their trading practices. If a trading center's policies and 
procedures include exception reports, any such reports will need to be 
examined by the trading center to affirm that a trading center's 
policies and procedures have been followed by its personnel and 
properly coded into its automated systems and, if not, promptly 
identify the reasons and take remedial action. In addition, we note 
that one commenter stated, and we agree, that as a means for developing 
an effective set of policies and procedures for compliance with the 
provisions of Rule 201, trading centers should conduct ``regular post-
trade analysis.'' \400\ Another commenter stated that significant 
oversight of policies and procedures is necessary to prevent trades 
from being directed toward venues that become known for lax supervision 
regarding compliance with Rule 201.\401\
---------------------------------------------------------------------------

    \399\ See Proposal, 74 FR at 18052.
    \400\ See letter from Jordan & Jordan.
    \401\ See letter from STA (June 2009). We note that to the 
extent that a trading center is lax with respect to its supervision 
regarding Rule 201, such trading center could be subject to 
enforcement action. In addition, the Commission and SROs will 
monitor whether trading centers adequately monitor their compliance 
with Rule 201 as part of their examinations.
---------------------------------------------------------------------------

    To help ensure compliance with Rule 201, as discussed in the 
Proposal,\402\ trading centers may also have policies and procedures 
that will enable a trading center to have a record identifying the 
current national best bid at the time of execution or display of a 
short sale order. Such ``snapshots'' of the market will aid SROs in 
evaluating a trading center's written policies and procedures and 
compliance with Rule 201. In addition, such snapshots will aid trading 
centers in verifying that a short sale order was priced in accordance 
with the provisions of proposed Rule 201(b)(1) if bid ``flickering,'' 
i.e., rapid and repeated changes in the current national best bid 
during the period between identification of the current national best 
bid and the execution or display of the short sale order, creates 
confusion regarding whether or not the short sale order was executed or 
displayed at a permissible price. Snapshots of the market at the time 
of execution or display of an order will also aid trading centers in 
dealing with time lags in receiving data regarding the national best 
bid from different data sources. A trading center's policies and 
procedures will be required to address latencies in obtaining data 
regarding the national best bid. In addition, to the extent such 
latencies occur, a trading center's policies and procedures will need 
to implement reasonable steps to monitor such latencies on a continuing 
basis and take appropriate steps to address a problem should one 
develop.
---------------------------------------------------------------------------

    \402\ See Proposal, 74 FR at 18052.
---------------------------------------------------------------------------

    Some commenters requested clarification regarding whether, in 
determining the current national best bid, trading centers and/or 
broker-dealers, as applicable, may rely on the current national best 
bid as disseminated by proprietary feeds as well as the current 
national best bid disseminated by SIPs.\403\ In addition, several 
commenters indicated that trading centers and/or broker-dealers should 
be required to rely on one source of the national best bid,\404\ such 
as the current national best bid disseminated by SIPs.\405\ One 
commenter stated that ``[s]uch centralization would ensure consistent 
treatment of orders,'' \406\ and another commenter stated that it would 
``eliminate redundant effort across broker-dealers and maintain 
uniformity across exchanges.'' \407\ Other

[[Page 11262]]

commenters, however, questioned whether a unitary data feed would be 
beneficial, stating that ``[e]ven utilizing a unitary data feed would 
be problematic, however, given the `flickering' that occurs,'' \408\ 
and that latencies in the receipt of data by market participants is of 
concern, ``even if they are working with the same SIP or exchange 
feed.'' \409\ Another commenter noted concerns with respect to market 
disruption as a result of a single mandated data feed, stating that 
``the entire market could be disrupted significantly by a single point 
of failure at the aggregator.'' \410\
---------------------------------------------------------------------------

    \403\ See, e.g., letter from Glen Shipway (Sept. 2009); see also 
letter from Credit Suisse (June 2009); letter from FIF (June 2009); 
letter from Goldman Sachs (June 2009); letter from Lime Brokerage 
(June 2009); letter from RBC (June 2009); letter from SIFMA (June 
2009); letter from Direct Edge (June 2009); letter from BATS (Sept. 
2009); letter from Credit Suisse (Sept. 2009); letter from Lime 
Brokerage (Sept. 2009); letter from Qtrade.
    \404\ See, e.g., letter from FIF (June 2009); letter from RBC 
(June 2009); letter from NYSE Euronext (Sept. 2009).
    \405\ See, e.g., letter from FIF (June 2009); letter from NYSE 
Euronext (Sept. 2009); see also letter from Direct Edge (June 2009).
    \406\ Letter from RBC (June 2009).
    \407\ Letter from FIF (June 2009).
    \408\ Letter from Direct Edge (June 2009).
    \409\ Letter from Lime Brokerage (June 2009); see also letter 
from Lime Brokerage (Sept. 2009).
    \410\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    We recognize commenters' concerns regarding the potential impact 
that receiving national best bid information from different data feeds 
might have on the application of Rule 201, including latencies that may 
occur in receiving such information from different data feeds.\411\ We 
do not believe, however, that it is appropriate to mandate that the 
receipt of the current national best bid must be from any one 
particular data feed because a policies and procedures approach that 
provides for a ``snapshot'' of the applicable current national best bid 
will allow trading centers to deal with time lags in receiving data 
regarding the national best bid from different data sources. Thus, Rule 
201 does not require modifications to how data feeds are currently 
received.
---------------------------------------------------------------------------

    \411\ See infra Section X.B.1.b.i. and Section X.B.1.b.ii. 
(discussing the potential impact of not mandating receipt of the 
current national best bid from one particular data feed on the 
implementation costs of Rule 201).
---------------------------------------------------------------------------

    As discussed in the Proposal, trading centers will be required to 
conduct regular surveillance of their policies and procedures under 
Rule 201. Specifically, Rule 201(b)(2) provides that a trading center 
must regularly surveil to ascertain the effectiveness of the policies 
and procedures required under the Rule and must take prompt action to 
remedy deficiencies in such policies and procedures.\412\ This 
provision will reinforce the requirement of Rule 201(b)(1) to maintain 
and enforce policies and procedures by explicitly assigning an 
affirmative responsibility to trading centers to surveil to ascertain 
the effectiveness of their policies and procedures.\413\ Thus, under 
the Rule, trading centers may not merely establish policies and 
procedures that may be reasonable when created and assume that such 
policies and procedures will continue to satisfy the requirements of 
Rule 201(b). Rather, trading centers will be required to regularly 
assess the continuing effectiveness of their policies and procedures 
and take prompt action when needed to remedy deficiencies. In 
particular, trading centers will need to engage in regular and periodic 
surveillance to determine whether executions or displays of short sale 
orders on impermissible bids are occurring without an applicable 
exception and whether the trading center has failed to implement and 
maintain policies and procedures that would have reasonably prevented 
such impermissible executions or displays of short sale orders. We note 
that, although discussed in the Proposal, we did not receive comments 
that specifically addressed the requirement that trading centers must 
conduct regular surveillance of their policies and procedures under 
Rule 201.
---------------------------------------------------------------------------

    \412\ See Rule 201(b)(2).
    \413\ We note that Rule 611(a)(2) of Regulation NMS contains a 
similar provision for trading centers. See 17 CFR 242.611(a)(2).
---------------------------------------------------------------------------

B. ``Short Exempt'' Provisions of Rule 201

    In the Proposal, we proposed that a trading center's policies and 
procedures must be reasonably designed to permit the execution or 
display of a short sale order of a covered security marked ``short 
exempt'' without regard to whether the order otherwise met the short 
sale price test restrictions.\414\ In addition, we included provisions 
in the Proposal that set out circumstances under which a broker-dealer 
could mark a sale order as ``short exempt.'' \415\
---------------------------------------------------------------------------

    \414\ See, e.g., Proposal, 74 FR at 18107, 18111.
    \415\ See, e.g., Proposal, 74 FR at 18108, 18111-18112. We note 
that we proposed provisions relating to when a broker-dealer may 
mark a sale order as ``short exempt.'' In discussing the ``short 
exempt'' marking provisions in paragraphs (c) and (d) of Rule 201, 
we set forth below how and why the provisions, as adopted, differ 
from the provisions as set forth in the proposed circuit breaker 
with modified uptick rule because that rule most closely resembles 
Rule 201, as adopted. To that end, we note that the circumstances 
under which a sale order may be marked as ``short exempt'' are 
contained in paragraphs (c) and (d) of Rule 201, as adopted, whereas 
such circumstances were contained in paragraphs (d) and (e) of the 
proposed circuit breaker with modified uptick rule.
---------------------------------------------------------------------------

    After considering the comments and consistent with the Proposal, we 
have determined to include in Rule 201(b)(1)(iii)(B) a requirement that 
a trading center's policies and procedures must be reasonably designed 
to permit the execution or display of a short sale order of a covered 
security marked ``short exempt'' without regard to whether the order is 
at a price that is less than or equal to the current national best 
bid.\416\ We have also determined to include in Rule 201(c) and (d) 
provisions that specify the circumstances under which a broker-dealer 
may mark certain sale orders as ``short exempt'' so that a trading 
center may execute or display such orders without regard to whether 
they are priced in accordance with the requirements of Rule 
201(b).\417\ The provisions contained in paragraphs (c) and (d) of Rule 
201 are designed to promote the workability of the Rule, while at the 
same time furthering the Commission's goals.
---------------------------------------------------------------------------

    \416\ See Rule 201(b)(1)(iii)(B).
    \417\ See Rule 201(c); 201(d).
---------------------------------------------------------------------------

    The provisions contained in paragraph (d) of Rule 201 parallel 
exceptions to former Rule 10a-1 and exemptive relief granted pursuant 
to that rule.\418\ These exceptions and exemptions from former Rule 
10a-1 had been in place for several years. As we noted in the Proposal, 
we believe that the rationales underlying these exceptions and 
exemptions from former Rule 10a-1 still hold true today.\419\ Moreover, 
due to the limited scope of these exceptions and exemptions, we do not 
believe that including them will undermine the Commission's goals for 
adopting Rule 201. To the extent that commenters addressed our 
inclusion of these exceptions and exemptions, we discuss such comments 
below.
---------------------------------------------------------------------------

    \418\ See Proposal, 74 FR at 18054 (discussing how the ``short 
exempt'' marking provisions of the proposed modified uptick rule 
would parallel exceptions to former Rule 10a-1 and exemptive relief 
granted pursuant to that rule).
    \419\ See Proposal, 74 FR at 18054-18059.
---------------------------------------------------------------------------

    A number of commenters stated that if we were to adopt a form of 
short sale price test restriction, it should include exceptions beyond 
those that we proposed in the Proposal and Re-Opening Release, 
particularly if we were to adopt a short sale price test restriction 
based on the alternative uptick rule.\420\ Some commenters stated that 
the exceptions included in the Proposal and the Re-Opening Release were 
insufficient, stating that broader and/or additional exceptions would 
be necessary to, among other things, provide stability and liquidity to 
the market \421\ and so as not to impair price discovery.\422\ For 
example, commenters requested exceptions for activity excepted from, or 
necessary to comply with, Regulation NMS.\423\ Commenters

[[Page 11263]]

also requested an exception for exchange traded funds (``ETFs'') and 
similar broad-based indices and baskets of stocks.\424\ Some commenters 
requested exceptions for short sales in connection with the 
facilitation of capital raising transactions, through stock issuances 
and convertible instruments, by issuers and selling shareholders.\425\ 
In connection with convertible instruments, commenters stated that 
there needs to be an exception from any short sale price test 
restriction to allow investors purchasing a convertible instrument to 
hedge their long exposure.\426\ Other exceptions requested relate to 
automated electronic buy-side trading,\427\ bona fide hedging 
generally,\428\ ``exchange for physicals'' transactions,\429\ index 
expirations,\430\ and market on open \431\ and market on close 
orders.\432\
---------------------------------------------------------------------------

    \420\ See, e.g., letter from SIFMA (Sept. 2009); letter from 
NYSE Euronext (Sept. 2009); letter from EWT (Sept. 2009); letter 
from GETCO (Sept. 2009).
    \421\ See, e.g., letter from SIFMA (June 2009); letter from NYSE 
Euronext (June 2009).
    \422\ See, e.g., letter from NYSE Euronext (June 2009).
    \423\ See, e.g., letter from SIFMA (June 2009); letter from RBC 
(June 2009); letter from Goldman Sachs (June 2009). We note that 
where a broker-dealer is routing an inter-market sweep order 
(``ISO'') solely to facilitate its execution of a customer's long 
sale in compliance with Rule 611, such ISOs may be marked as ``short 
exempt.'' This will allow the destination trading centers to execute 
the orders against better-priced protected quotations without regard 
to the short sale price test restrictions of Rule 201. Such ISOs 
must not be marked as ``long.''
    \424\ See, e.g., letter from SIFMA (June 2009); letter from NYSE 
Euronext (June 2009); letter from MFA (June 2009); letter from RBC 
(June 2009); letter from ICI (June 2009); letter from Citadel et al. 
(June 2009); letter from Credit Suisse (June 2009); letter from 
ISDA; letter from NYSE Euronext (Sept. 2009); letter from Direct 
Edge (Sept. 2009); letter from Knight Capital (Sept. 2009); letter 
from Virtu Financial; letter from EWT (Sept. 2009).
    \425\ See, e.g., letter from SIFMA (June 2009); see also letter 
from ISDA.
    \426\ See, e.g., letter from SIFMA (June 2009).
    \427\ See, e.g., letter from MFA (June 2009).
    \428\ See, e.g., letter from MFA (June 2009); letter from Credit 
Suisse (June 2009); letter from ISDA; letter from John K. Robinson, 
General Counsel, P. Schoenfeld Asset Management LP, dated July 2, 
2009 (``P. Schoenfeld Asset Management'').
    \429\ See, e.g., letter from SIFMA (June 2009); letter from RBC 
(June 2009).
    \430\ See, e.g., letter from SIFMA (June 2009).
    \431\ See, e.g., letter from RBC (June 2009); letter from 
Goldman Sachs (June 2009); letter from Goldman Sachs (Sept. 2009).
    \432\ See, e.g., letter from SIFMA (June 2009); letter from RBC 
(June 2009); letter from Credit Suisse (June 2009); letter from EWT 
(Sept. 2009); letter from Goldman Sachs (June 2009); letter from 
Goldman Sachs (Sept. 2009). We also note that some commenters stated 
that we should include a marking error exception in connection with 
any short sale price test restriction we adopt. See, e.g., letter 
from RBC (June 2009); letter from SIFMA (June 2009). In connection 
with the proposed uptick rule, we proposed an exception for any sale 
by a broker-dealer of a covered security for an account in which it 
has no interest, pursuant to an order marked ``long.'' See Proposal, 
74 FR at 18109. This exception would have applied where a broker-
dealer effects a sale of an order marked ``long'' by another broker-
dealer, but the order was mis-marked such that it should have been 
marked as a short sale order. We do not believe that a similar 
exception is necessary under Rule 201 because Rule 201, unlike the 
proposed uptick rule, is based on a policies and procedures approach 
rather than a straight prohibition approach. Thus, if a trading 
center's written policies and procedures are reasonably designed to 
prevent the execution or display of a short sale order of a covered 
security at a price that is less than or equal to the current 
national best bid, it is unlikely that such trading center's 
participation in any violation of the Rule due to a mis-marking by a 
broker-dealer could be knowing or reckless. See Proposal, 74 FR at 
18063. As we stated in the Proposal, knowledge may be inferred where 
a broker-dealer has previously accepted orders marked ``long'' from 
the same counterparty that required borrowed shares for delivery or 
that resulted in a ``fail to deliver.'' See Proposal, 74 FR at 18063 
n.212; see also 2004 Regulation SHO Adopting Release, 69 FR at 
48019, n.111 (stating that ``[i]t may be unreasonable for a broker-
dealer to treat a sale as long where orders marked `long' from the 
same customer repeatedly require borrowed shares for delivery or 
result in `fails to deliver.' A broker-dealer also may not treat a 
sale as long if the broker-dealer knows or has reason to know that 
the customer borrowed shares being sold.'').
---------------------------------------------------------------------------

    In addition, as discussed in more detail in Section III.B.9. below, 
commenters requested an exception for short sales by market makers 
engaged in bona fide market making activities, including market makers 
in OTC and listed derivatives, options, convertibles and ETFs, and 
block positioners.\433\
---------------------------------------------------------------------------

    \433\ See, e.g., letter from SIFMA (June 2009); letter from NYSE 
Euronext (June 2009); letter from Knight Capital (June 2009); letter 
from EWT (June 2009); letter from STANY (June 2009); letter from 
Credit Suisse (June 2009); letter from CBOE (June 2009); letter from 
RBC (June 2009); letter from Citadel et al. (June 2009); letter from 
NYSE Euronext (Sept. 2009); letter from Direct Edge (Sept. 2009); 
letter from Virtu Financial; letter from EWT (Sept. 2009); letter 
from Credit Suisse (Sept. 2009). Some commenters also asked for an 
exception for, or clarification that, a short sale price test 
restriction would not apply to short sales pursuant to all options 
assignments and exercises. See, e.g., letter from SIFMA (June 2009); 
letter from CBOE (June 2009); letter from Boston Options Exchange, 
Chicago Board Options Exchange, International Securities Exchange, 
Nasdaq Options Market, Nasdaq OMX PHLX, NYSE Amex, NYSE Arca and The 
Options Clearing Corporation, dated June 22, 2009 (``Boston Options 
Exchange et al. (June 2009)''); letter from RBC (June 2009). We note 
that because short sales pursuant to options exercises and 
assignments (whether or not automatic) are unrelated to the current 
national best bid, Rule 201 does not apply to such sales.
---------------------------------------------------------------------------

    Several commenters, however, stated that the Commission should be 
cautious of adopting numerous exceptions and discussed problems that 
may arise from adopting a short sale price test restriction with many 
or complex exceptions, such as additional implementation difficulties, 
greater compliance costs, lack of uniformity that may cause unfair 
application of the rule, increased opportunities for gaming and abuse, 
and, overall, a less effective rule that only applies to a limited 
numbers of short sales.\434\ Commenters stated that a short sale price 
test restriction with numerous exceptions will create loopholes and a 
rule that is easy to circumvent, thus resulting in a rule that applies 
to little trading activity and fails to serve the purpose for which it 
was adopted.\435\ One commenter stated that emphasis should first be 
placed on ``a sales price restriction on short sales, its possible 
effects on helping restore a measure of price continuity, and its 
possible deleterious effects on informational efficiency * * * with 
exceptions to be evolved as time goes by and as the industry petitions 
for them.'' \436\ Another commenter noted that a short sale price test 
restriction with many exceptions will impose additional burdens on the 
Commission's inspection staff, which will be tasked with ``retracing 
transactions to discern which were eligible for exceptions, which were 
not, and if any were disguised.'' \437\
---------------------------------------------------------------------------

    \434\ See, e.g., letter from Paladin Investment; letter from 
Douglas M. Branson, W. Edward Sell Professor of Business Law, 
University of Pittsburgh School of Law, dated June 10, 2009 (``Prof. 
Branson''); letter from Wells Fargo (June 2009); letter from CPIC 
(June 2009); letter from IAG; letter from IBC; letter from Jordan & 
Jordan; letter from Kelly Capital; letter from Lime Brokerage (June 
2009); letter from Millennium; letter from Hudson River Trading; 
letter from Lime Brokerage (Sept. 2009); letter from Glen Shipway 
(Sept. 2009); letter from Qtrade.
    \435\ See, e.g., letter from Paladin Investment; letter from 
Prof. Branson; letter from CPIC (June 2009); letter from Wells Fargo 
(June 2009); letter from IBC (June 2009); letter from Jordan & 
Jordan; letter from Lime Brokerage (June 2009); letter from 
Millennium.
    \436\ Letter from Prof. Branson.
    \437\ Letter from CPIC (June 2009).
---------------------------------------------------------------------------

    In addition, one commenter noted that the exceptions that accompany 
any price test restriction will be driven by the approach adopted.\438\ 
This commenter noted that a permanent, market-wide approach may 
necessitate more exceptions than one triggered by a temporary circuit 
breaker.\439\ This commenter further noted that ``a circuit breaker 
short sale ban may necessitate more or different exceptions than a 
circuit breaker that still permits short selling to occur.'' \440\
---------------------------------------------------------------------------

    \438\ See, e.g., letter from ICI (June 2009).
    \439\ See letter from ICI (June 2009).
    \440\ Letter from ICI (June 2009).
---------------------------------------------------------------------------

    Although, as noted above, commenters requested a variety of 
exceptions in addition to those set forth in the Proposal, at this 
time, we have determined to include in Rule 201(c) and (d) only the 
``short exempt'' marking provisions that we proposed. We believe that 
these limited provisions will help ensure the smooth functioning of the 
markets while at the same time not undermining our goals for adopting 
Rule 201.
    In addition, we note that a number of commenters that discussed the 
need for additional and/or broader exceptions referenced the absence of 
some of the requested exceptions during the Short

[[Page 11264]]

Sale Ban Emergency Order \441\ and the effect on market quality of the 
Short Sale Ban Emergency Order in the absence of such exceptions.\442\ 
These commenters noted the absence from the Short Sale Ban Emergency 
Order of exceptions for certain convertible arbitrage or hedging 
activities \443\ and for automated electronic buy-side trading.\444\ We 
note, however, that unlike the Short Sale Ban Emergency Order, which 
halted all short selling in the securities subject to the emergency 
order for its three-week duration, the short sale restrictions of Rule 
201 will apply for a limited duration and will only apply to a covered 
security if such security has experienced a significant intra-day price 
decline (of 10% or more). Thus, Rule 201 will not impact trading in the 
vast majority of covered securities on an average day.\445\ If a 
covered security becomes subject to the short sale price test 
restrictions of Rule 201 it will occur because that security's price is 
experiencing extreme downward price pressure and it is these securities 
that Rule 201 is designed to address by helping to prevent short 
selling from being used as a tool to exacerbate its price decline. If, 
as requested by commenters, we were to expand the scope of short 
selling activities that would not be subject to Rule 201, we are 
concerned such exceptions could undermine this goal of Rule 201.
---------------------------------------------------------------------------

    \441\ See supra Section II.C. (discussing the Short Sale Ban 
Emergency Order).
    \442\ See, e.g., letter from SIFMA (June 2009); letter from RBC 
(June 2009); letter from CPIC (June 2009); letter from Goldman Sachs 
(June 2009); letter from MFA (June 2009).
    \443\ See, e.g., letter from RBC (June 2009) (attaching and 
discussing letter from Philip Taylor and Scott DeCanio, Directors, 
RBC Capital Markets Corp., dated Sept. 25, 2008); letter from CPIC 
(June 2009); letter from Goldman Sachs (June 2009); letter from 
SIFMA (June 2009); letter from MFA (June 2009).
    \444\ See, e.g., letter from MFA (June 2009).
    \445\ See supra Section III.A.5. (discussing analyses regarding 
the number of securities that will trigger the circuit breaker on an 
average day).
---------------------------------------------------------------------------

    In addition, although short selling will be restricted if the price 
of a covered security decreases by 10% or more, in contrast to 
securities subject to the Short Sale Ban Emergency Order, Rule 201 will 
still permit short selling in the covered security even when the 
restriction is in place, although at a price above the current national 
best bid. Thus, short sellers engaged in the various activities for 
which commenters are requesting additional or expanded exceptions will 
continue to be able to sell short even when the price test restriction 
is in effect. In addition, the restriction on short selling will be in 
place for a limited duration, that is, the remainder of the day on 
which the circuit beaker level is triggered and the following day, 
further reducing the need for additional exceptions.
    We also note that with respect to ETFs, although under former Rule 
10a-1 the Commission issued limited exemptive relief for certain ETFs 
via authority delegated to the Staff, that relief was issued on a case-
by-case basis for a permanent, market-wide short sale price test 
rule.\446\ Since the elimination of former Rule 10a-1, there has been a 
significant growth in ETF trading volume and an expansion in different 
structures of ETF products.\447\ Commenters who opposed an exception 
for these products noted the growth in ETF trading volume and new ETF 
products among the reasons not to provide an exception for ETFs from 
any short sale price test restriction.\448\ We do not believe that a 
general ETF exception is necessary because the circuit breaker approach 
of Rule 201 will generally result in the majority of ETFs not being 
subject to its short sale price test restrictions because ETFs are 
generally diversified, whereas single stocks are not. If such 
securities do become subject to its restrictions, the restrictions will 
be in place for a limited duration and will continue to permit short 
selling even when in place.
---------------------------------------------------------------------------

    \446\ See, e.g., letter from Racquel L. Russell, Esq., Branch 
Chief, Office of Trading Practices and Processing, Division of 
Market Regulation, to George T. Simon, Esq., Foley & Lardner LLP, 
dated June 21, 2006; letter from James A. Brigagliano, Assistant 
Director, Division of Market Regulation, to Claire P. McGrath, Vice 
President and Special Counsel, Amex, dated Aug. 17, 2001. We note 
that each of the approvals for relief under former Rule 10a-1 was 
conditioned on the ETF meeting certain enumerated conditions, either 
specific to certain products or included as part of a broader 
``class exemption.''
    \447\ See, e.g., Investment Company Institute, 2009 Investment 
Company Fact Book, (49 ed.); National Stock Exchange, NSX Annouces 
Record January ETF Trading Volume Surpasses $2.2 Trillion, News & 
Views, Feb. 14, 2008 available at http://www.nsx.com/content/news/
story/90.
    \448\ See, e.g., letter from Robert E. Koza, dated May 4, 2009; 
letter from Robert W. Angove, President, Santiam Mountain 
Investment, dated May 5, 2009; letter from David Tarrell, dated May 
6, 2009; letter from Mitchel Schlesinger, Principal, FBB Capital 
Partners, dated May 8, 2009; letter from Paladin Investment; letter 
from Shelby Frisch, dated May 15, 2009; letter from Robert 
Cannataro, dated June 5, 2009; letter from High Street Advisors; 
letter from European Investors (June 2009); letter from Ascendant 
Capital; letter from Kelly Capital; letter from European Investors 
(Sept. 2009); letter from NAREIT.
---------------------------------------------------------------------------

    For the reasons discussed above, at this time we believe it is 
appropriate to limit the scope and number of circumstances under which 
a broker-dealer may mark a sell order as ``short exempt.'' We 
recognize, however, the concerns raised by commenters and note that to 
help ensure the future workability of Rule 201, or for other reasons, 
we may reconsider whether certain exceptions or exemptions are 
warranted.
1. Broker-Dealer Provision
    After the 10% circuit breaker is triggered for a covered security, 
Rule 201(c) will permit a broker-dealer submitting a short sale order 
for the covered security to a trading center to mark the order ``short 
exempt'' if the broker-dealer identifies the order as being at a price 
above the current national best bid at the time of submission.\449\ We 
have modified this provision from the Proposal to clarify that a 
broker-dealer may only mark an order as ``short exempt'' after the 
circuit breaker has been triggered for a covered security.\450\ In 
addition, consistent with the Proposal, Rule 201(c) requires any 
broker-dealer relying on this provision to establish, maintain, and 
enforce written policies and procedures that are reasonably designed to 
prevent the incorrect identification of orders as being priced in 
accordance with the requirements of Rule 201(c) and requires the 
broker-dealer regularly to surveil to ascertain the effectiveness of 
these policies and procedures, and to take prompt action to remedy 
deficiencies.\451\
---------------------------------------------------------------------------

    \449\ See Rule 201(c).
    \450\ We have also made technical modifications to Rule 201(c) 
to reflect that it is the broker-dealer submitting the order that 
must also mark the order as ``short exempt'' and to reflect the 
difference in operation of the alternative uptick rule from the 
proposed circuit breaker with modified uptick rule.
    \451\ See Rule 201(c).
---------------------------------------------------------------------------

    As discussed above, in response to our request for comment,\452\ 
several commenters stated that if we were to adopt a short sale price 
test restriction, it should include a broker-dealer provision.\453\ One 
commenter stated that the broker-dealer provision is necessary to 
prevent contradictory requirements for broker-dealers under Regulation 
NMS and Regulation SHO.\454\
---------------------------------------------------------------------------

    \452\ See Proposal, 74 FR at 18073-18074.
    \453\ See, e.g., letter from SIFMA (June 2009); letter from BATS 
(May 2009); letter from EWT (Sept. 2009); letter from Qtrade.
    \454\ See letter from EWT (Sept. 2009).
---------------------------------------------------------------------------

    Other commenters disagreed, stating that they do not think that the 
broker-dealer provision is necessary. One commenter pointed to problems 
that may arise from the provision, such as increasing the potential for 
confusion in the marketplace, creating an unlevel playing field, and 
penalizing participants who have the most efficient market data 
infrastructures.\455\ Commenters also noted that the broker-dealer 
provision has the potential to

[[Page 11265]]

greatly increase costs to the industry and to adversely impact the 
ability of smaller broker-dealers to compete.\456\ One commenter stated 
that, what it termed a ``requirement,'' that broker-dealers maintain 
``snapshots,'' may impose significant costs, including costs associated 
with technology, data storage, and surveillance and review and that the 
Commission's cost estimates of over $100,000 per broker-dealer ``seem 
to underestimate the cost to large, full service broker-dealers, since 
the volume of orders handled by these firms are likely to lead to 
significantly greater technology and storage costs alone as well as 
more frequent reviews.'' \457\ We note that, as discussed in the 
Proposal and in more detail below, we believe that ``snapshots'' of the 
market could aid broker-dealers in complying with Rule 201(c), but Rule 
201 does not ``require'' such snapshots.\458\
---------------------------------------------------------------------------

    \455\ See letter from Lime Brokerage (June 2009).
    \456\ See letter from STANY (June 2009); letter from Lime 
Brokerage (June 2009); letter from NSCP.
    \457\ Letter from NSCP.
    \458\ See Proposal, 74 FR at 18054-18055.
---------------------------------------------------------------------------

    Another commenter expressed the belief that a majority of broker-
dealer participants that service customer orders will want to take 
advantage of the provision to remain competitive and to ensure that 
client orders receive the best possible execution, which will result in 
many non-trading center participants becoming subject to market data 
``snapshotting'' and other compliance-related changes.\459\
---------------------------------------------------------------------------

    \459\ See letter from Lime Brokerage (June 2009).
---------------------------------------------------------------------------

    After considering the comments, as discussed above, we have 
determined to include in Rule 201(c) a provision to permit a broker-
dealer submitting a short sale order for a covered security to a 
trading center after the circuit breaker is triggered for a covered 
security, to mark the order ``short exempt'' if the broker-dealer 
identifies the order as being at a price above the current national 
best bid at the time of submission.\460\ Rule 201(c) will provide 
broker-dealers with the option to manage their order flow, rather than 
having to always rely on their trading centers to manage their order 
flow on their behalf.
---------------------------------------------------------------------------

    \460\ See Rule 201(c).
---------------------------------------------------------------------------

    Although we recognize commenters' concerns, including regarding 
potential increased costs to the industry with respect to technology, 
data storage and surveillance, we note that most broker-dealers may 
already have developed ``snapshot'' capability in connection with 
Regulation NMS's Order Protection Rule. We also agree that ``snapshot'' 
capability will require data storage by broker-dealers; however, as 
noted by one commenter,\461\ because the alternative uptick rule does 
not require sequencing of the national best bid, the data storage 
requirements under the alternative uptick rule are lower than they 
would be under the proposed modified uptick rule or the proposed uptick 
rule. In addition, we believe that the costs of a policies and 
procedures approach that provides for a snapshot of the applicable 
current national best bid of the security are justified because 
snapshot capability will aid broker-dealers in dealing with time lags 
in receiving data regarding the national best bid from different data 
sources and facilitate verification of whether a short sale order was 
executed or displayed at a permissible price.
---------------------------------------------------------------------------

    \461\ See letter from STA (Sept. 2009).
---------------------------------------------------------------------------

    In addition, we note that this provision will not undermine our 
goals for short sale regulation because any broker-dealer marking an 
order ``short exempt'' in accordance with this provision must have 
mechanisms in place to enable the broker-dealer to identify the short 
sale order as priced in accordance with the provisions of Rule 201(c). 
In accordance with Rule 201(c)(1), these mechanisms must include 
written policies and procedures reasonably designed to prevent the 
incorrect identification of orders as being permissibly priced in 
accordance with the provisions of 201(c).\462\ Thus, although a broker-
dealer relying on this provision in marking an order ``short exempt'' 
will not need to identify the order as permissibly priced to the 
trading center, it will need to have written policies and procedures in 
place reasonably designed to enable it to identify that an order was 
permissibly priced at the time of submission of the order to a trading 
center.\463\ We believe these policies and procedures will further our 
goals by helping to ensure that short sale orders are not incorrectly 
marked as ``short exempt,'' and, thereby, helping to preclude 
impermissible short sales from being executed when the price test 
restriction has been triggered.\464\
---------------------------------------------------------------------------

    \462\ See Rule 201(c)(1).
    \463\ Such policies and procedures should be similar to those 
required for trading centers complying with paragraph (b) of Rule 
201.
    \464\ We also note that it would be a violation of Rule 200(g) 
to mark a short sale order as ``short exempt'' when a security is 
not subject to the alternative uptick rule.
---------------------------------------------------------------------------

    At a minimum, a broker-dealer's policies and procedures must be 
reasonably designed to enable a broker-dealer to monitor, on a real-
time basis, the national best bid, so as to determine the price at 
which the broker-dealer may submit a short sale order to a trading 
center in compliance with the provisions of Rule 201(c). To ensure 
compliance with Rule 201(c), a broker-dealer may also have policies and 
procedures that will enable it to have a record identifying the current 
national best bid at the time of submission of a short sale order. Such 
``snapshots'' of the market will also aid SROs in evaluating a broker-
dealer's written policies and procedures and compliance with Rule 
201(c). In addition, such snapshots will aid broker-dealers in 
verifying that a short sale order was priced in accordance with the 
provisions of Rule 201(c) if bid flickering during the period between 
identification of the current national best bid and the submission of 
the short sale order to a trading center creates confusion regarding 
whether or not the short sale order was submitted at a permissible 
price. Snapshots of the market at the time of submission of an order 
will also aid broker-dealers in dealing with time lags in receiving 
data regarding the national best bid from different data sources. Under 
Rule 201(c)(2), latencies in obtaining data regarding the national best 
bid will need to be addressed.\465\ In addition, to the extent such 
latencies occur, a broker-dealer's policies and procedures will need to 
implement reasonable steps to monitor such latencies on a continuing 
basis and take appropriate steps to address a problem should one 
develop.
---------------------------------------------------------------------------

    \465\ See Rule 201(c)(2).
---------------------------------------------------------------------------

    Surveillance will be a required part of a broker-dealer's 
satisfaction of its legal obligations. Rule 201(c)(2) provides that a 
broker-dealer must regularly surveil to ascertain the effectiveness of 
the policies and procedures required under Rule 201(c)(1) and must take 
prompt action to remedy deficiencies in such policies and 
procedures.\466\ This provision will reinforce the on-going maintenance 
and enforcement requirements of Rule 201(c) by explicitly assigning an 
affirmative responsibility to broker-dealers to surveil to ascertain 
the effectiveness of their policies and procedures.\467\ Thus, under 
paragraphs (c)(1) and (c)(2) of Rule 201, broker-dealers may not merely 
establish policies and procedures that may be reasonable when created 
and assume that such policies and procedures will continue to satisfy 
the requirements of the Rule. Rather, broker-dealers will be required 
to regularly assess the continuing effectiveness of their procedures 
and

[[Page 11266]]

take prompt action when needed to remedy deficiencies. In particular, 
each broker-dealer will need to engage in regular and periodic 
surveillance to determine whether it is submitting short sale orders 
marked ``short exempt'' without complying with the requirements of Rule 
201(c) and whether the broker-dealer has failed to implement and 
maintain policies and procedures that would have reasonably prevented 
such impermissible submissions.
---------------------------------------------------------------------------

    \466\ See id.
    \467\ We note that Rule 611(a)(2) of Regulation NMS contains a 
similar surveillance provision. See 17 CFR 242.611(a)(2).
---------------------------------------------------------------------------

    A broker-dealer will also need to take such steps as will be 
necessary to enable it to enforce its policies and procedures 
effectively.\468\ For example, broker-dealers may establish policies 
and procedures that include regular exception reports to evaluate their 
trading practices. If a broker-dealer's policies and procedures include 
exception reports, any such reports will need to be examined to affirm 
that a broker-dealer's policies and procedures have been followed by 
its personnel and properly coded into its automated systems and, if 
not, promptly identify the reasons and take remedial action.
---------------------------------------------------------------------------

    \468\ See Rule 201(c)(2).
---------------------------------------------------------------------------

2. Seller's Delay in Delivery \469\
---------------------------------------------------------------------------

    \469\ We note that we have modified paragraph (d) of Rule 201 
from that provision as proposed to reflect that a broker-dealer may 
only mark an order as ``short exempt'' pursuant to the provisions in 
paragraph (d) after the circuit breaker has been triggered for a 
covered security.
---------------------------------------------------------------------------

    We are adopting Rule 201(d)(1) without modification to provide that 
a broker-dealer may mark an order ``short exempt'' if the broker-dealer 
has a reasonable basis to believe that the seller owns the security 
being sold and that the seller intends to deliver the security as soon 
as all restrictions on delivery have been removed.\470\ Specifically, 
Rule 201(d)(1) provides that a broker-dealer may mark a short sale 
order ``short exempt'' if the broker-dealer has a reasonable basis to 
believe the short sale order of a covered security is by a person that 
is ``deemed to own'' the covered security pursuant to Rule 200 of 
Regulation SHO,\471\ provided that the person intends to deliver the 
security as soon as all restrictions on delivery have been 
removed.\472\
---------------------------------------------------------------------------

    \470\ Subsection (e)(1) of former Rule 10a-1 contained an 
exception relating to a seller's delay in the delivery of 
securities. The provision in Rule 201(d)(1) parallels the exception 
in former Rule 10a-1(e)(1).
    \471\ See 17 CFR 242.200(a)-(f) (defining the term ``deemed to 
own'').
    \472\ See Rule 201(d)(1). This provision is also consistent with 
Rule 203(b)(2)(ii) and Rule 204(a)(2) of Regulation SHO. Rule 
203(b)(2)(ii) provides an exception from the ``locate'' requirement 
of Rule 203(b)(1) of Regulation SHO for ``[a]ny sale of a security 
that a person is deemed to own pursuant to Sec.  242.200, provided 
that the broker or dealer has been reasonably informed that the 
person intends to deliver such security as soon as all restrictions 
on delivery have been removed * * *''. Rule 204(a)(2) provides 
additional time to close out fails to deliver ``[i]f a participant 
of a registered clearing agency has a fail to deliver position at a 
registered clearing agency in any equity security resulting from a 
sale of a security that person is deemed to own pursuant to Sec.  
242.200 and that such person intends to deliver as soon as all 
restrictions on delivery have been removed, the participant shall, 
by no later than the beginning of regular trading hours on the 
thirty-fifth consecutive calendar day following the trade date for 
the transaction, immediately close out the fail to deliver position 
by purchasing securities of like kind and quantity.'' We note that 
to the extent that an exception to Regulation SHO's locate 
requirement applies to a short sale order, such order must be marked 
``short'' in accordance with Rule 200(g) of Regulation SHO unless 
the order can be marked ``short exempt'' pursuant to Rule 200(g)(2) 
of Regulation SHO.
---------------------------------------------------------------------------

    Rule 200(g)(1) of Regulation SHO provides that a sale can be marked 
``long'' only if the seller is deemed to own the security being sold 
and either (i) the security is in the broker-dealer's physical 
possession or control; or (ii) it is reasonably expected that the 
security will be in the broker-dealer's possession or control by 
settlement of the transaction.\473\ Thus, even where a seller owns a 
security, if delivery will be delayed, such as in the sale of formerly 
restricted securities pursuant to Rule 144 of the Securities Act of 
1933,\474\ or where a convertible security, option, or warrant has been 
tendered for conversion or exchange, but the underlying security is not 
reasonably expected to be received by settlement date, such sales must 
be marked ``short.'' As a result, Rule 201(d)(1) is necessary to allow 
for sales of securities that, although owned, are subject to the 
provisions of Regulation SHO governing short sales due solely to the 
seller being unable to deliver the covered security to its broker-
dealer prior to settlement based on circumstances outside the seller's 
control. In response to our request for comment, commenters that 
specifically addressed this provision were supportive of it.\475\
---------------------------------------------------------------------------

    \473\ See 17 CFR 242.200(g)(1).
    \474\ 17 CFR 230.144.
    \475\ See, e.g., letter from BATS (May 2009); letter from SIFMA 
(June 2009); letter from Jesse D. Hill, Director of Regulatory 
Relations, Office of Regulatory Counsel, Edward Jones, dated Sept. 
21, 2009 (``Edward Jones''); letter from NYSE Euronext (Sept. 2009).
---------------------------------------------------------------------------

    After considering the comments, we believe it is appropriate to 
adopt Rule 201(d)(1) as proposed. This provision is consistent with the 
goals of Rule 201 and with other provisions of Regulation SHO related 
to sales of securities that although owned are subject to the 
provisions of Regulation SHO governing short sales. Thus, we are 
adopting Rule 201(d)(1) such that the provision will apply to the sale 
of any covered securities that a seller is deemed to own pursuant to 
Rule 200 of Regulation SHO and cannot deliver by settlement date based 
on circumstances outside the seller's control, provided the seller 
intends to deliver the securities as soon as all restrictions on 
delivery have been removed.\476\
---------------------------------------------------------------------------

    \476\ Such circumstances could include the situation where a 
convertible security, option or warrant has been tendered for 
conversion or exchange, but the underlying security is not 
reasonably expected to be received by settlement date. See 
Regulation SHO Adopting Release, 69 FR at 48015; see also 17 CFR 
242.200(b) (defining when a person shall be ``deemed to own'' a 
security). In addition, we understand that sellers that own 
restricted equity securities that wish to sell such securities 
pursuant to an effective registration statement pursuant to Rule 415 
under the Securities Act of 1933 experience similar types of 
potential settlement delays as those persons selling Rule 144 
securities. Thus sales of such securities pursuant to Rule 415 may 
be marked ``short exempt'' in accordance with Rule 201(d)(1) if the 
securities subject to the sale are outstanding at the time they are 
sold, and the sale occurs after the registration statement has 
become effective. In addition, and as noted by one commenter, we 
understand that sales made pursuant to broker-dealer assisted 
cashless exercises of compensatory options to purchase a company's 
securities may result in potential settlement delays that would 
otherwise require the seller to mark such sales ``short'' pursuant 
to the definition under Rule 200(g) of Regulation SHO. Such sales 
may be marked ``short exempt'' pursuant to Rule 201(d)(1). See Rule 
204 Adopting Release, 74 FR at 38277, n.141; see also 17 CFR 
230.415.
---------------------------------------------------------------------------

3. Odd Lot Transactions
    We are adopting in Rule 201(d)(2), without modification, the 
ability for a broker-dealer to mark a short sale order as ``short 
exempt'' if the broker-dealer has a reasonable basis to believe that 
the short sale order is by a market maker to offset a customer odd-lot 
\477\ order or to liquidate an odd-lot position that changes such 
broker-dealer's position by no more than a unit of trading.\478\ In 
response to our request for comment, commenters that specifically 
addressed this provision were supportive of

[[Page 11267]]

inclusion of this provision in any short sale price test 
restriction.\479\
---------------------------------------------------------------------------

    \477\ 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).
    \478\ See Rule 201(d)(2). SRO rules define a ``unit of trading'' 
or ``normal unit of trading,'' and the term generally means 100 
shares, i.e., a round lot. For example, FINRA Rule 6320A(a)(7) 
defines a ``normal unit of trading'' to mean ``100 shares of a 
security unless, with respect to a particular security, FINRA 
determines that a normal unit of trading shall constitute other than 
100 shares.'' NYSE Rule 55 states that ``[t]he unit of trading in 
stocks shall be 100 shares, except that in the case of certain 
stocks designated by the Exchange the unit of trading shall be such 
lesser number of shares as may be determined by the Exchange, with 
respect to each stock so designated. * * *''
    \479\ See, e.g., letter from BATS (May 2009); letter from SIFMA 
(June 2009); letter from NYSE Euronext (Sept. 2009).
---------------------------------------------------------------------------

    Under former Rule 10a-1, an exception for certain odd-lot 
transactions was created in an effort to reduce the burden and 
inconvenience that short sale restrictions would place on odd-lot 
transactions. In 1938, the Commission found that odd-lot transactions 
played a very minor role in potential manipulation by short 
selling.\480\ Initially, sales of odd-lots were not subject to the 
restrictions of former Rule 10a-1.\481\ However, the Commission became 
concerned over the volume of odd-lot transactions, which possibly 
indicated that the exception was being used to circumvent the rule. As 
a result, the exception was changed to include the two odd lot 
exceptions described below.\482\
---------------------------------------------------------------------------

    \480\ See Former Rule 10a-1 Adopting Release, 3 FR 213.
    \481\ The Commission initially adopted three exceptions for odd-
lot transactions. While the first one, excepting all odd-lot 
transactions, seemed to make other odd-lot exceptions unnecessary, 
the 1938 adopting release included all three exceptions without 
discussion. See Former Rule 10a-1 Adopting Release, 3 FR 213.
    \482\ See Exchange Act Release No. 11030 (Sept. 27, 1974), 39 FR 
35570 (Oct. 2, 1974) (``1974 Release'').
---------------------------------------------------------------------------

    Former Rule 10a-1(e)(3) contained a limited exception that allowed 
short sales by odd-lot dealers registered in the security and by third 
market makers of covered securities to fill customer odd lot orders. 
Former Rule 10a-1(e)(4) provided an exception under the rule for any 
sale to liquidate an odd-lot position by a single round lot sell order 
that changed the broker-dealer's position by no more than a unit of 
trading.
    Rule 201(d)(2), as proposed and adopted, generally parallels the 
exceptions in subsections (e)(3) and (e)(4) of former Rule 10a-1. In 
addition, however, as proposed, we are extending the provision to cover 
all market makers acting in the capacity of an odd-lot dealer. When 
former Rule 10a-1 was adopted, odd-lot dealers dealt exclusively with 
odd-lot transactions, and were so registered. Today, market makers 
registered in a security typically also act as odd-lot dealers of the 
security. Thus, as proposed, we are broadening the provision in Rule 
201(d)(2) to all broker-dealers acting as ``market makers'' in odd 
lots.\483\
---------------------------------------------------------------------------

    \483\ Section 3(a)(38) of the Exchange Act defines the term 
``market maker,'' and includes specialists. See 15 U.S.C. 
78c(a)(38).
---------------------------------------------------------------------------

    We believe that a provision that will allow a broker-dealer to mark 
a short sale order ``short exempt'' if it has a reasonable basis to 
believe that the short sale order is by a market maker to offset a 
customer odd-lot order or liquidate an odd-lot position that changes 
such broker-dealer's position by no more than a unit of trading, will 
continue to be of utility under Rule 201 and will not be in conflict 
with the goals of the Rule.
    Because odd-lot transactions by market makers to facilitate 
customer orders are not of a size that could facilitate a downward 
movement in the particular security, we do not believe that Rule 
201(d)(2) will adversely affect the goals of short sale regulation that 
Rule 201 seeks to advance. Thus, we believe that a broker-dealer should 
be able to mark such orders ``short exempt'' so that those acting in 
the capacity of a ``market maker,'' with the commensurate negative and 
positive obligations, will be able to offset a customer odd-lot order 
and liquidate an odd-lot position without a trading center's policies 
and procedures preventing the execution or display of such orders at a 
price that is less than or equal to the current national best bid.
4. Domestic Arbitrage
    We are adopting in Rule 201(d)(3) without modification the ability 
for a broker-dealer to mark as ``short exempt'' short sale orders 
associated with certain bona fide domestic arbitrage transactions. 
Although commenters generally stated that a domestic arbitrage 
provision should be included in any short sale price test restriction, 
some commenters also stated that the provision, as proposed, should be 
expanded to cover more trading scenarios.\484\ However, one commenter 
stated that arbitrage activities are not unique in contributing to 
market efficiency and any short sale price test restriction that the 
Commission adopts should require few, if any, exceptions to maintain 
market quality.\485\
---------------------------------------------------------------------------

    \484\ See, e.g., letter from SIFMA (June 2009) (stating that the 
exception should cover convertible arbitrage strategies); letter 
from AIMA (stating that the provisions relating to domestic and 
international arbitrage are too narrow in scope, and that they 
should be broadened to include: (1) Bona fide strategies and risk 
management tools that provide necessary market liquidity and 
efficiency, and (2) other forms of convertible securities that 
differ from standard American-style convertibles); letter from 
Credit Suisse (June 2009); letter from Citadel et al. (June 2009) 
(stating that the exception should be broadened to cover any 
transaction in connection with domestic arbitrage, even if not 
contemporaneous in time); letter from RBC (June 2009) (stating that 
the exception should accommodate convertible arbitrage strategies as 
well as arbitrage strategies that do not meet the contemporaneous 
requirement of this provision); letter from MFA (June 2009) (stating 
that we should broaden the domestic arbitrage provision to include 
``bona fide hedging transactions,'' such as risk arbitrage and 
statistical arbitrage transactions).
    \485\ See letter from Hudson River Trading; see also letter from 
Liquidnet (expressing concern regarding the complexity of the 
arbitrage and other exceptions to a short sale price test 
restriction and concern that the exceptions could result in 
different rules applying to different industry participants).
---------------------------------------------------------------------------

    As discussed above, the short sale price test restriction adopted 
in Rule 201(b) will apply to a covered security only after the security 
has experienced a significant intra-day price decline, will remain in 
place for a limited period of time, and will continue to permit short 
selling at a price above the national best bid (rather than, for 
example, halting all short selling in that security). As such, we do 
not believe it is appropriate at this time to broaden the scope of the 
domestic arbitrage provision. Due to the already limited scope and 
applicability of Rule 201, we believe that expanding the domestic 
arbitrage provision to cover more trading scenarios would undermine our 
goals in adopting Rule 201. Thus, we are adopting the provision as 
proposed.
    Subsection (e)(7) of former Rule 10a-1 contained an exception 
related to domestic arbitrage.\486\ That exception applied to bona fide 
arbitrage undertaken to profit from a current difference in price 
between a convertible security and the underlying common stock.\487\ 
The term ``bona fide arbitrage'' describes an activity undertaken by 
market professionals in which essentially contemporaneous purchases and 
sales are effected in order to lock in a gross profit or spread 
resulting from a current differential in pricing of two related 
securities.\488\ For example, a person may sell short securities to 
profit from a current price differential based upon a convertible 
security that entitles him to acquire a number of securities equivalent 
to the securities sold short. We continue to believe that bona fide 
arbitrage activities are beneficial to the markets because

[[Page 11268]]

they tend to reduce pricing disparities between related securities and, 
thereby, promote market efficiency.\489\
---------------------------------------------------------------------------

    \486\ See Exchange Act Release No. 1645 (Apr. 8, 1938).
    \487\ See 1999 Concept Release, 64 FR 57996.
    \488\ 1999 Concept Release, 64 FR at 58001, n.54 and 
accompanying text (discussing the domestic arbitrage exception under 
former Rule 10a-1). See also Section 220.6(b) of Regulation T, which 
states that the term ``bona fide arbitrage'' means: ``(1) A purchase 
or sale of a security in one market together with an offsetting sale 
or purchase of the same security in a different market at as nearly 
the same time as practicable for the purpose of taking advantage of 
a difference in prices in the two markets; or (2) A purchase of a 
security which is, without restriction other than the payment of 
money, exchangeable or convertible within 90 calendar days of the 
purchase into a second security together with an offsetting sale of 
the second security at or about the same time, for the purpose of 
taking advantage of a concurrent disparity in the prices of the two 
securities.'' 12 CFR 220.6(b). See also Exchange Act Release No. 
15533 (Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979) (``1979 Release'') 
(interpretation concerning the application of Exchange Act Section 
11(a)(1) to bona fide arbitrage).
    \489\ See 1979 Release, 44 FR 6084.
---------------------------------------------------------------------------

    Rule 201(d)(3) parallels the exception in former Rule 10a-1(e)(7). 
Specifically, Rule 201(d)(3) provides that a broker-dealer may mark a 
short sale order of a covered security ``short exempt'' if the broker-
dealer has a reasonable basis to believe that the short sale order is 
``for a good faith account of a person who then owns another security 
by virtue of which he is, or presently will be, entitled to acquire an 
equivalent number of securities of the same class as the securities 
sold; provided such sale, or the purchase which such sale offsets, is 
effected for the bona fide purpose of profiting from a current 
difference between the price of the security sold and the security 
owned and that such right of acquisition was originally attached to or 
represented by another security or was issued to all the holders of any 
such securities of the issuer.'' \490\
---------------------------------------------------------------------------

    \490\ Rule 201(d)(3).
---------------------------------------------------------------------------

    The domestic arbitrage exception in former Rule 10a-1 was intended 
to be consistent with the arbitrage provision of Regulation T.\491\ 
Thus, consistent with that provision, former Rule 10a-1(e)(7) referred 
to a ``special arbitrage account'' and not a ``good faith account.'' 
\492\ The Federal Reserve Board amended Regulation T in 1998 to 
eliminate the ``special arbitrage account'' and to allow the functions 
formerly effected in that account to be effected in a ``good faith 
account.'' Consistent with that language, Rule 201(d)(3) refers to a 
``good faith account.''
---------------------------------------------------------------------------

    \491\ See 12 CFR 220.6.
    \492\ See Proposal, 74 FR at 18056.
---------------------------------------------------------------------------

    Because allowing domestic arbitrage at a price that is less than or 
equal to the current national best bid will potentially promote market 
efficiency, we have included in Rule 201 a limited provision to allow 
broker-dealers to mark short sale orders ``short exempt'' where the 
broker-dealer has a reasonable basis to believe that the conditions in 
proposed Rule 201(d)(3) have been met. Thus, Rule 201 is designed to 
permit the execution or display of such orders in connection with bona 
fide arbitrage transactions involving convertible, exchangeable, and 
other rights to acquire the securities sold short, where such rights of 
acquisition were originally attached to, or represented by, another 
security, or were issued to all the holders of any such class of 
securities of the issuer.
5. International Arbitrage
    We are adopting Rule 201(d)(4) without modification to allow a 
broker-dealer to mark as ``short exempt'' short sale orders associated 
with certain international arbitrage transactions. In response to our 
request for comment, commenters were generally supportive of this 
provision relating to international arbitrage.\493\ Some commenters, 
however, stated that they believe that the provision should be expanded 
to cover more trading scenarios.\494\
---------------------------------------------------------------------------

    \493\ See, e.g., letter from SIFMA (June 2009); letter from RBC 
(June 2009); letter from NYSE Euronext (Sept. 2009); letter from 
STANY (Sept. 2009).
    \494\ See, e.g., letter from RBC (June 2009) (stating that the 
exception should accommodate convertible arbitrage strategies as 
well as arbitrage strategies that do not meet the contemporaneous 
requirement of this provision); letter from Credit Suisse (June 
2009); see also supra note 484 (discussing comments regarding the 
domestic arbitrage provision).
---------------------------------------------------------------------------

    As discussed above, the short sale price test restriction of Rule 
201(b) will apply to a covered security only after the security has 
experienced a significant intra-day price decline, will remain in place 
for a limited period of time, and will continue to permit short selling 
at a price above the current national best bid (rather than, for 
example, halting all short selling in that security). As such, we do 
not believe it is appropriate at this time to broaden the scope of the 
international arbitrage provision. Due to the already limited scope and 
applicability of Rule 201, we believe that expanding the scope of the 
international arbitrage provision to cover more trading scenarios would 
undermine our goals in adopting Rule 201 because its scope would be 
even further limited, thereby risking not achieving our goals in 
adopting Rule 201. Thus, we are adopting the provision as proposed.
    Former Rule 10a-1(e)(8) included an international arbitrage 
exception that was adopted in 1939.\495\ In adopting the exception, the 
Commission stated that it was necessary to facilitate ``transactions 
which are of a true arbitrage nature, namely, transactions in which a 
position is taken on one exchange which is to be immediately covered on 
a foreign market.'' \496\ We believe likewise that such transactions 
will have utility under Rule 201. As discussed above in connection with 
domestic arbitrage, bona fide arbitrage transactions promote market 
efficiency because they equalize prices at an instant in time in 
different markets or between relatively equivalent securities.
---------------------------------------------------------------------------

    \495\ See Exchange Act Release No. 2039 (Mar. 10, 1939), 4 FR 
1209 (Mar. 14, 1939).
    \496\ See id.
---------------------------------------------------------------------------

    Rule 201(d)(4) parallels the exception contained in former Rule 
10a-1(e)(8). Specifically, Rule 201(d)(4) provides that a broker-dealer 
may mark a short sale order of a covered security ``short exempt'' if 
the broker-dealer has a reasonable basis to believe that the short sale 
order is ``for a good faith account and submitted to profit from a 
current price difference between a security on a foreign securities 
market and a security on a securities market subject to the 
jurisdiction of the United States, provided that the short seller has 
an offer to buy on a foreign market that allows the seller to 
immediately cover the short sale at the time it was made.'' \497\
---------------------------------------------------------------------------

    \497\ Rule 201(d)(4).
---------------------------------------------------------------------------

    In Rule 201(d)(4), we have simplified the language of former Rule 
10a-1(e)(8) to make it more understandable.\498\ In addition, we have 
changed the reference in former Rule 10a-1(e)(8) from a ``special 
international arbitrage account'' to a ``good faith account.'' As 
discussed above in connection with the domestic arbitrage provision of 
Rule 201(d)(3), this revision will make the provision consistent with 
the arbitrage provision in Regulation T.
---------------------------------------------------------------------------

    \498\ Former Rule 10a-1(e)(8) provided that the short sale price 
test restrictions of that rule shall not apply to: ``Any sale of a 
security registered on, or admitted to unlisted trading privileges 
on, a national securities exchange effected for a special 
international arbitrage account for the bona fide purpose of 
profiting [sic] from a current difference between the price of such 
security on a securities market not within or subject to the 
jurisdiction of the United States and on a securities market subject 
to the jurisdiction of the United States; provided the seller at the 
time of such sale knows or, by virtue of information currently 
received, has reasonable grounds to believe that an offer enabling 
him to cover such sale is then available to him in such foreign 
securities market and intends to accept such offer immediately.''
---------------------------------------------------------------------------

    In addition, as proposed, we have incorporated language from the 
exception in former Rule 10a-1(e)(12) that provided that, for purposes 
of the international arbitrage exception, a depository receipt for a 
security shall be deemed to be the same security represented by the 
receipt. This language was originally included in the Commission's 1939 
release adopting the international arbitrage exception, but was 
incorporated separately in former Rule 10a-1(e)(12).\499\ Although we 
requested comment in the Proposal regarding whether a depository 
receipt for a security should be deemed to be the same security 
represented by the receipt, we did not receive comments specific to 
this request.\500\ As proposed,

[[Page 11269]]

we are incorporating in Rule 201(d)(4) the language from the exception 
in former Rule 10a-1(e)(12).\501\
---------------------------------------------------------------------------

    \499\ See supra note 495.
    \500\ See Proposal, 74 FR at 18057.
    \501\ To the extent that the short sale is of a depository 
receipt and the seller intends to purchase the same security 
represented by the depository receipt to immediately cover the short 
sale of the depository receipt, the sale may be marked ``short 
exempt'' provided that the seller reasonably believes at the time of 
the sale that it will be able to convert the security to be 
purchased into the depository receipt and deliver the depository 
receipt by settlement date for the sale.
---------------------------------------------------------------------------

    As with the exception in former Rule 10a-1(e)(8), Rule 201(d)(4) 
will apply only to bona fide arbitrage transactions. Thus, this 
provision will only be applicable if at the time of the short sale 
there is a corresponding offer in a foreign securities market, so that 
the immediate covering purchase will have the effect of neutralizing 
the short sale. We believe Rule 201(d)(4) is necessary to facilitate 
arbitrage transactions in which a position is taken in a security in 
the U.S. market, and which is to be immediately covered in a foreign 
market.\502\ Thus, we do not believe that permitting broker-dealers to 
mark these orders ``short exempt'' will undermine our goals for 
adopting Rule 201, and, as described above, we believe facilitating or 
permitting these transactions has utility in terms of promoting market 
and pricing efficiency.
---------------------------------------------------------------------------

    \502\ We note that the requirement that the transaction be 
``immediately'' covered on a foreign market requires the foreign 
market to be open for trading at the time of the transaction. See 
Proposal, 74 FR at 18057, n.166; see also 2003 Regulation SHO 
Proposing Release, 68 FR at 62986, n.119.
---------------------------------------------------------------------------

6. Over-Allotments and Lay-Off Sales
    We have determined to adopt without modification in Rule 201(d)(5) 
a provision that will permit a broker-dealer to mark as ``short 
exempt'' short sale orders by underwriters or syndicate members 
participating in a distribution in connection with an over-allotment, 
and any short sale orders for purposes of lay-off sales by such persons 
in connection with a distribution of securities through a rights or 
standby underwriting commitment.\503\ In response to our request for 
comment, commenters were generally supportive of inclusion of this 
provision relating to certain syndicate activity.\504\ Some commenters, 
however, asked that we expand this provision beyond over-allotment and 
lay-off sales.\505\
---------------------------------------------------------------------------

    \503\ See Rule 201(d)(5).
    \504\ See, e.g., letter from BATS (May 2009); letter from SIFMA 
(June 2009); letter from NYSE Euronext (Sept. 2009).
    \505\ See, e.g., letter from SIFMA (June 2009).
---------------------------------------------------------------------------

    As discussed above, the short sale price test restriction of Rule 
201(b) will apply to a covered security only after the security has 
experienced a significant intra-day price decline, will remain in place 
for a limited period of time, and will continue to permit short selling 
at a price above the national best bid (rather than, for example, 
halting all short selling in that security). As such, we do not believe 
it is appropriate at this time to broaden the scope of the provision 
relating to over-allotment and lay-off sales. Due to the already 
limited scope and applicability of Rule 201, we believe that expanding 
the scope of this provision to cover other sales effected in connection 
with a distribution would undermine our goals in adopting Rule 201 
because it would further limit the scope of the Rule, thereby risking 
not achieving our goals in adopting Rule 201. Thus, we are adopting the 
provision as proposed. In addition, we note that we are including a 
``short exempt'' marking provision for syndicate and lay-off sales in 
part because, as discussed further below, we have historically excepted 
such activity from short sale rules.
    Former Rule 10a-1(e)(10) contained an exception for over-allotment 
and lay-off sales.\506\ Although the exception was not adopted until 
1974, the Commission's approval of the concept of excepting over-
allotments and lay-off sales from short sale rules is long-
standing.\507\ In addition, we note that recently we excepted these 
sales from the July Emergency Order, which among other things required 
that short sellers borrow or arrange to borrow securities prior to 
effecting a short sale, stating that it was not necessary for the Order 
to cover such sales because such activity is covered by Regulation M 
under the Exchange Act,\508\ an anti-manipulation rule.\509\ In 
accordance with the long-standing Commission position regarding these 
sales, we are including in Rule 201(d)(5) a provision to permit broker-
dealers to mark as ``short exempt'' short sale orders in connection 
with over-allotment and lay-off sales, which provision also parallels 
the exception in former Rule 10a-1(e)(10).
---------------------------------------------------------------------------

    \506\ See 1974 Release, 39 FR 35570.
    \507\ See, e.g., Exchange Act Release No. 3454 (July 6, 1946), 
in which the Commission approved the NYSE's special offering plan, 
which permitted short sales in the form of over-allotments to 
facilitate market stabilization.
    \508\ 17 CFR 242.100 et seq.
    \509\ See 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).
---------------------------------------------------------------------------

7. Riskless Principal Transactions
    We have determined to adopt without modification in Rule 201(d)(6) 
a provision that will permit a broker-dealer to mark as ``short 
exempt'' short sale orders where broker-dealers are facilitating 
customer buy orders or sell orders where the customer is net long, and 
the broker-dealer is net short but is effecting the sale as riskless 
principal.\510\ In response to our request for comment, commenters that 
specifically addressed this provision supported its inclusion.\511\
---------------------------------------------------------------------------

    \510\ See Rule 201(d)(6).
    \511\ See, e.g., letter from BATS (May 2009); letter from SIFMA 
(June 2009); letter from Credit Suisse (June 2009); letter from NYSE 
Euronext (Sept. 2009).
---------------------------------------------------------------------------

    As discussed in the Proposal,\512\ in 2005, the Commission, via 
authority delegated to the Staff, granted exemptive relief under former 
Rule 10a-1 for any broker-dealer that facilitates a customer buy or 
long sell order on a riskless principal basis.\513\ In granting the 
relief, the Commission noted representations made in the letter 
requesting relief that, in the situation where the amount of securities 
that the broker-dealer purchases for the customer may not be sufficient 
to give the broker-dealer an overall net ``long'' position, former Rule 
10a-1 would constrain the ability of the broker-dealer to fill the 
customer buy order. Further, the Commission noted representations in 
the letter requesting relief that, because such short sales would be 
effected only in response to a customer buy order, this should vitiate 
any concerns about such sales having a depressing impact on the 
security's price.\514\
---------------------------------------------------------------------------

    \512\ See Proposal, 74 FR at 18057-18058.
    \513\ See letter from James A. Brigagliano, Assistant Director, 
Division of Market Regulation, SEC, to Ira Hammerman, Senior Vice 
President and General Counsel, Securities Industry Association, 
dated July 18, 2005 (``Riskless Principal Letter'').
    \514\ See id.
---------------------------------------------------------------------------

    In addition, the Commission noted representations made in the 
letter requesting relief that where a broker-dealer is facilitating a 
customer long sale order in a riskless principal transaction, because 
the ultimate seller is long the shares being sold, these transactions 
present none of the potential abuses that former Rule 10a-1 was 
designed to address.\515\ The Commission also noted representations 
that the application of former Rule 10a-1 to riskless principal 
transactions involving a customer long sale can inhibit the broker-
dealer's ability to provide timely (or any) execution to such customer 
long sale. Specifically, if the broker-dealer has a net short position, 
the broker-dealer will be restricted from executing its own principal 
trade to complete the first leg of the riskless principal 
transaction.\516\

[[Page 11270]]

Thus, compliance with former Rule 10a-1 would adversely affect a 
broker-dealer's ability to provide best execution to a customer 
order.\517\
---------------------------------------------------------------------------

    \515\ See id.
    \516\ See id.
    \517\ See id.
---------------------------------------------------------------------------

    Taken together, Rules 201(a)(8) and (d)(6) parallel the conditions 
for relief in the Riskless Principal Letter.\518\ Consistent with the 
relief granted in the Riskless Principal Letter, we believe that 
including a provision to permit a broker-dealer to mark ``short 
exempt'' short sale orders in connection with riskless principal 
transactions is appropriate and will not undermine our goals in 
adopting short sale price test regulation. In particular, we note that 
such a provision will facilitate a broker-dealer's ability to provide 
best execution to customer orders. In addition, such provision will 
apply only where the customer is selling long.
---------------------------------------------------------------------------

    \518\ These 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).
---------------------------------------------------------------------------

    Rule 201(a)(8) defines the term ``riskless principal'' to mean ``a 
transaction in which a broker or dealer, after having received an order 
to buy a security, purchases the security as principal at the same 
price to satisfy the order to buy, exclusive of any explicitly 
disclosed markup or markdown, commission equivalent, or other fee, or, 
after having received an order to sell, sells the security as principal 
at the same price to satisfy the order to sell, exclusive of any 
explicitly disclosed markup or markdown, commission equivalent, or 
other fee.'' \519\
---------------------------------------------------------------------------

    \519\ Rule 201(a)(8). In addition to being consistent with the 
conditions in the Riskless Principal Letter and Rule 10b-18(a)(12) 
of the Exchange Act, this definition is consistent with the 
definition of ``riskless principal'' in FINRA Rule 6642. See FINRA 
Rule 6642(d). We note that Rule 201(a)(8), as adopted, is slightly 
modified from the definition in the Proposal in that we have added 
language to clarify that the term ``same price'' shall be exclusive 
of any explicitly disclosed markup or markdown, commission 
equivalent, or other fee. This language is consistent with the 
conditions in the Riskless Principal Letter and Rule 10b-18(a)(12). 
It is also consistent with FINRA's trade reporting rules which 
require a riskless principal transaction in which both legs are 
executed at the same price to be reported once, in the same manner 
as an agency transaction, exclusive of any markup, markdown, 
commission equivalent, or other fee. See FINRA Rule 6380A(d)(3)(B).
---------------------------------------------------------------------------

    Rule 201(d)(6) provides 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.\520\ In addition, Rule 201(d)(6) requires the 
broker-dealer, if it marks an order ``short exempt'' under this 
provision, to have written policies and procedures in place to assure 
that, at a minimum: (i) The customer order was received prior to the 
offsetting transaction; (ii) the offsetting transaction is allocated to 
a riskless principal or customer account within 60 seconds of 
execution; and (iii) that it has supervisory systems in place to 
produce records that enable the broker-dealer to accurately and readily 
reconstruct, in a time-sequenced manner, all orders on which the 
broker-dealer relies pursuant to this provision.\521\
---------------------------------------------------------------------------

    \520\ See Rule 201(d)(6). Due to the modification to the 
definition of ``riskless principal'' in Rule 201(a)(8), we have not 
included in Rule 201(d)(6) the proposed language that stated that 
the purchase or sell order must be given the same per-share price at 
which the broker-dealer sold or bought shares to satisfy the 
facilitated order, exclusive of any explicitly disclosed markup or 
markdown, commission equivalent or other fee. See also supra note 
519.
    \521\ See Rule 201(d)(6). We note that we determined to adopt, 
as proposed, in Rule 201(d)(6) an explicit requirement that broker-
dealers must establish policies and procedures for handling such 
transactions to be consistent with the conditions in the Riskless 
Principal Letter and Rule 10b-18(a)(12), which also contain such a 
requirement.
---------------------------------------------------------------------------

    We believe that Rule 201(d)(6) will provide broker-dealers with 
additional flexibility to facilitate customer orders and provide best 
execution. In addition, we believe that the conditions set forth in 
Rule 201(d)(6) will provide a mechanism for the surveillance of the 
provision's use by linking it to specific incoming orders and 
executions, and by requiring broker-dealers to establish procedures for 
handling such transactions. These requirements will help ensure that 
broker-dealers are complying with Rule 201(d)(6).
8. Transactions on a Volume-Weighted Average Price Basis
    We have determined to adopt in Rule 201(d)(7) without modification 
the ability for a broker-dealer to mark as ``short exempt'' certain 
short sale orders executed on a volume-weighted average price 
(``VWAP'') basis. In response to the Proposal, commenters to this 
provision were supportive of the provision. Some commenters, however, 
requested that we expand this provision to, for example, cover all 
benchmark orders, similar to the exception in Rule 611 of Regulation 
NMS.\522\ As discussed above, the short sale price test restriction of 
Rule 201(b) will apply to a covered security only after the security 
has experienced a significant intra-day price decline, will remain in 
place for a limited period of time, and will continue to permit short 
selling at a price above the current national best bid (rather than, 
for example, halting all short selling in that security). As such, we 
do not believe it is appropriate at this time to broaden the scope of 
the provision relating to transactions on a VWAP basis. Due to the 
already limited scope and applicability of Rule 201, we believe that 
expanding the scope of this provision to cover other transactions would 
undermine our goals in adopting Rule 201 because it would further limit 
the scope of the Rule, thereby risking not achieving our goals in 
adopting Rule 201. Thus, we are adopting the provision as proposed.
---------------------------------------------------------------------------

    \522\ See, e.g., letter from SIFMA (June 2009); letter from RBC 
(June 2009); see also letter from Goldman Sachs (June 2009); letter 
from ICI (June 2009) (stating that a broadened exception would be 
necessary to facilitate execution of the types of large orders 
executed by institutional investors and that such benchmark orders 
do not raise concerns of manipulation or negative market effects 
that a short sale price test restriction would be designed to 
prevent); letter from Credit Suisse (Sept. 2009) (positing that the 
exception should be extended to cover any orders executed on a 
similar formulaic basis as VWAP orders).
---------------------------------------------------------------------------

    Under former Rule 10a-1, the Commission, via authority delegated to 
the Staff, granted limited relief from that rule in connection with 
short sales executed on a VWAP basis.\523\ The relief was limited to 
VWAP transactions that are arranged or ``matched'' before the market 
opens at 9:30 a.m., but are not assigned a price until after the close 
of trading when the VWAP value is calculated. The Commission granted 
the exemptions based, in part, on the fact that these VWAP short sale 
transactions appeared to pose little risk of facilitating the type of 
market effects that former Rule 10a-1 was designed to prevent.\524\ In 
particular, the Commission noted that the pre-opening VWAP short sale 
transactions do not participate in or affect the determination of the 
VWAP for a particular security.\525\ Moreover, the Commission stated 
that all trades used to calculate the day's VWAP would continue to be 
subject to former Rule 10a-1.\526\
---------------------------------------------------------------------------

    \523\ See e.g. letter from Larry E. Bergmann, Senior Associate 
Director, Division of Market Regulation, SEC, to Edith Hallahan, 
Associate General Counsel, Phlx, dated Mar. 24, 1999; letter from 
Larry E. Bergmann, Senior Associate Director, Division of Market 
Regulation, SEC, to Soo J. Yim, Wilmer, Cutler & Pickering, dated 
Dec. 7, 2000; letter from James Brigagliano, Assistant Director, 
Division of Market Regulation, SEC, to Andre E. Owens, Schiff Hardin 
& Waite, dated Mar. 30, 2001; letter from James Brigagliano, 
Assistant Director, Division of Market Regulation, SEC, to Sam Scott 
Miller, Esq., Orrick, Herrington & Sutcliffe LLP, dated May 12, 
2001; letter from James Brigagliano, Assistant Director, Division of 
Market Regulation, SEC, to William W. Uchimoto, Esq., Vie 
Institutional Services, dated Feb. 12, 2003.
    \524\ See id.
    \525\ See id.
    \526\ See id.
---------------------------------------------------------------------------

    Consistent with the relief granted under former Rule 10a-1 and with 
the Proposal, we are providing that a broker-dealer may mark as ``short

[[Page 11271]]

exempt'' certain short sale orders executed at the VWAP. Rule 201(d)(7) 
differs from the relief granted under former Rule 10a-1, however, in 
that it is not limited to VWAP transactions that are arranged or 
``matched'' before the market opens at 9:30 a.m., or that are not 
assigned a price until after the close of trading when the VWAP value 
is calculated. As noted in the Proposal, we believe this restriction is 
not necessary because VWAP short sale transactions appear to pose 
little risk of facilitating the type of market effects that a short 
sale price test restriction is designed to prevent. In addition, in 
contrast to the Proposal, we have not included in Rule 201 the 
requirement that no short sale orders marked ``short exempt'' may be 
used to calculate the VWAP. We have not incorporated this condition 
into Rule 201(d)(7) because the information used to calculate the VWAP 
will not contain information regarding whether an order was marked 
``short exempt.''
    Thus, pursuant to Rule 201(d)(7), a broker-dealer may mark a short 
sale order of a covered security ``short exempt'' if the broker-dealer 
has a reasonable basis to believe that the short sale order is for the 
sale of a covered security at the VWAP that meets the following 
conditions: \527\ (1) The VWAP for the covered security is calculated 
by: Calculating the values for every regular way trade reported in the 
consolidated system for the security during the regular trading 
session, by multiplying each such price by the total number of shares 
traded at that price; compiling an aggregate sum of all values; and 
dividing the aggregate sum by the total number of reported shares for 
that day in the security; (2) the transactions are reported using a 
special VWAP trade modifier; (3) the VWAP matched security qualifies as 
an ``actively-traded security'' (as defined under Rules 101(c)(1) and 
102(d)(1) of Regulation M), or where the subject listed security is not 
an ``actively-traded security,'' the proposed short sale transaction 
will be permitted only if it is conducted as part of a basket 
transaction of twenty or more securities in which the subject security 
does not comprise more than 5% of the value of the basket traded; (4) 
the transaction is not effected for the purpose of creating actual, or 
apparent, active trading in or otherwise affecting the price of any 
security; and (5) a broker or dealer will act as principal on the 
contra-side to fill customer short sale orders only if the broker-
dealer's position in the covered security, as committed by the broker-
dealer during the pre-opening period of a trading day and aggregated 
across all of its customers who propose to sell short the same security 
on a VWAP basis, does not exceed 10% of the covered security's relevant 
average daily trading volume, as defined in Regulation M.\528\
---------------------------------------------------------------------------

    \527\ See Rule 201(d)(7).
    \528\ See Rule 201(d)(7); 17 CFR 242.100(b) (defining average 
daily trading volume), 242.101(c)(1), 242.102(d)(1).
---------------------------------------------------------------------------

    Except as discussed above, the conditions set forth in Rule 
201(d)(7) parallel the conditions contained in the exemptive relief 
from former Rule 10a-1 granted for VWAP short sale transactions. We 
believe that these conditions worked well in restricting the exemptive 
relief to situations that generally would not raise the harms that 
short sale price tests are designed to prevent. We believe they will be 
similarly effective in serving that function today and, therefore, we 
have incorporated them into Rule 201(d)(7).
9. Decision Not To Adopt a Provision That a Broker-Dealer May Mark an 
Order ``Short Exempt'' in Connection With Bona Fide Market Making 
Activity
    As discussed in the Proposal, former Rule 10a-1(e)(5) provided a 
limited exception from the restrictions of that rule for ``[a]ny sale * 
* * by a registered specialist or registered exchange market maker for 
its own account on any exchange with which it is registered for such 
security, or by a third market maker for its own account over-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.'' \529\ Unless prohibited by exchange 
rule, this exception was intended to permit registered specialists or 
market makers to protect customer orders against transactions in other 
markets in the consolidated system by allowing them to sell short at a 
price equal to the last trade price reported to the consolidated 
system, even if that sale was on a minus or zero-minus tick.\530\ 
Although former Rule 10a-1 included this exception for market makers, 
exchanges adopted rules that prohibited their registered specialists 
and market makers from availing themselves of this exception.\531\ In 
addition, former Rule 10a-1 did not contain a general exception for 
short selling in connection with bona fide market making 
activities.\532\
---------------------------------------------------------------------------

    \529\ See Proposal, 74 FR at 18059.
    \530\ See 1974 Release, 39 FR 35570. Former Rule 10a-1(a)(1)(i) 
referenced the last sale price reported to an effective transaction 
reporting plan, but former Rule 10a-1(a)(2) also permitted an 
exchange to make an election to use the last sale price reported in 
that exchange market. Certain exchanges, such as the NYSE, 
implemented short sale price test rules consistent with former Rule 
10a-1(a)(2). See, e.g., former NYSE Rule 440B.
    \531\ See 1974 Release, 39 FR 35570.
    \532\ We note, however, that NASD's former bid test contained an 
exception for short sales executed by qualified market makers in 
connection with bona fide market making. Although the NASD's former 
bid test contained an exception for short sales executed by 
qualified market makers in connection with bona fide market making 
activity, we understand that market makers relied on the exception a 
small percentage of the time. For example, a 1997 study indicates 
that during a sample month in 1997, market maker short sales at or 
below the inside bid accounted for only 2.41% of their total share 
volume. See D. Timothy McCormick and Bram Zeigler, The Nasdaq Short 
Sale Rule: Analysis of Market Quality Effects and The Market Maker 
Exemption, NASD Economic Research, (August 7, 1997) at 27; see also 
2003 Regulation SHO Proposing Release, 68 FR at 62989. In addition, 
we note that when the Commission approved NASD's former bid test and 
the market maker exception to the bid test, it noted concerns that 
the market maker exception could create opportunities for abusive 
short selling. See Exchange Act Release No. 34277 (June 29, 1994), 
59 FR 34885 (July 7, 1994). See also supra note 43 (discussing NASD 
Rule 3350).
---------------------------------------------------------------------------

    In the Proposal, in connection with one proposed rule, the proposed 
circuit breaker halt rule, we included a provision that would permit a 
broker-dealer to mark a short sale order ``short exempt'' in connection 
with certain bona fide market making activities. None of the other 
proposed rules contained a ``short exempt'' marking provision with 
respect to bona fide market making activities. In connection with the 
proposed circuit breaker halt rule, we included an exception for equity 
and options market makers engaged in bona fide market making 
activities.\533\ We also included in the proposed circuit breaker halt 
rule an exception related to bona fide market making in 
derivatives.\534\
---------------------------------------------------------------------------

    \533\ See Proposal, 74 FR at 18110. Proposed Rule 201(d)(1) of 
the proposed circuit breaker halt rule provided that the short 
selling halt would not apply to ``[a]ny sale of a covered security 
by a registered market maker, block positioner, or other market 
maker obligated to quote in the over-the-counter market, in each 
case that are selling short a covered security as part of bona fide 
market making in such covered security.'' Id.
    \534\ See id. Proposed Rule 201(d)(4) of the proposed circuit 
breaker halt rule provided that the short selling halt would not 
apply to ``[a]ny sale of a covered security by any person that is a 
market maker, including an over-the-counter market maker, if the 
sale is part of a bona fide market making and hedging activity 
related directly to bona fide market making in: (i) Derivative 
securities based on that covered security; or (ii) exchange traded 
funds and exchange traded notes of which that covered security is a 
component.'' Id.

---------------------------------------------------------------------------

[[Page 11272]]

    In response to our decision not to provide in the Proposal for most 
of the proposed alternatives that a broker-dealer may mark an order 
``short exempt'' in connection with bona fide market making activity, 
we received a wide variety of comments both supporting and opposing 
such a provision. Many commenters stated that any short sale price test 
restriction adopted by the Commission must include an exception for 
market makers due to the large amount of liquidity that they provide to 
the markets; although comments varied with respect to the necessity of 
such an exception to the various proposed price test restrictions and 
circuit breaker rules and to whom such an exception should apply.\535\ 
Commenters stated that the lack of a market maker exception to any 
short sale price test restriction could result in, among other things, 
reduced liquidity, increased bid-ask spreads, increased volatility, 
increased barriers to entry for new market makers, reduced competition 
among market makers, and increased costs to market makers and 
investors.\536\ Some commenters stated that the Commission should 
consider exceptions that would permit high frequency traders \537\ and 
other market makers to continue to provide the same level of liquidity 
to the markets.\538\
---------------------------------------------------------------------------

    \535\ See, e.g., roundtable statement of Rosenblatt Securities; 
letter from BATS (May 2009); letter from Matlock Capital (May 2009); 
letter from Pink OTC; letter from Direct Edge (June 2009); letter 
from Engmann Options; letter from Prof. Rosenthal; letter from 
Credit Suisse (June 2009); letter from John Gilmartin, Co-CEO and 
Ben Londergan, Co-CEO, Group One Trading, L.P., dated June 17, 2009 
(``Group One Trading (June 2009)''); letter from Allston Trading 
(June 2009); letter from Knight Capital (June 2009); letter from 
STANY (June 2009); letter from AIMA; letter from Barclays (June 
2009); letter from Citadel et al. (June 2009); letter from EWT (June 
2009); letter from GETCO (June 2009); letter from Goldman Sachs 
(June 2009); letter from ICI (June 2009); letter from NYSE Euronext 
(June 2009); letter from RBC (June 2009); letter from SIFMA (June 
2009); letter from STA (June 2009); letter from T.D. Pro Ex; letter 
from Vanguard (June 2009); letter from Direct Edge (Sept. 2009); 
letter from BATS (Sept. 2009); letter from Credit Suisse (Sept. 
2009); letter from Group One Trading (Sept. 2009); letter from 
Allston Trading (Sept. 2009); letter from Knight Capital (Sept. 
2009); letter from STANY (Sept. 2009); letter from Citadel et al. 
(Sept. 2009); letter from EWT (Sept. 2009); letter from GETCO (Sept. 
2009); letter from Goldman Sachs (Sept. 2009); letter from NYSE 
Euronext (Sept. 2009); letter from RBC (Sept. 2009); letter from 
SIFMA (Sept. 2009); letter from William J. Brodsky, Chairman and 
CEO, The Chicago Board Options Exchange, Inc., dated Sept. 21, 2009 
(``CBOE (Sept. 2009)''); letter from Edward Jones; letter from Virtu 
Financial.
    \536\ See, e.g., letter from SIFMA (June 2009); letter from 
Knight Capital (June 2009); letter from EWT (June 2009); letter from 
GETCO (June 2009); letter from Goldman Sachs (June 2009); letter 
from EWT (Sept. 2009); letter from Virtu Financial; but cf. letter 
from Dr. Jim DeCosta, dated Sept. 14, 2009 (``Dr. Jim DeCosta'') 
(noting that there are currently few barriers to entry for market 
makers and abuse can arise from small market makers, who are in need 
of business, being willing to misuse a bona fide market maker 
exemption in exchange for order flow).
    \537\ See letter from Bingham McCutchen.
    \538\ See, e.g., roundtable statement of Rosenblatt Securities; 
letter from MFA (June 2009); see also letter from Credit Suisse 
(Mar. 2009).
---------------------------------------------------------------------------

    Some commenters stated that an exception for options market makers, 
in particular, would be necessary for any short sale price test 
restriction, citing the important role that short selling plays in an 
options market maker's ability to hedge risk and the negative impact 
that a short sale price test restriction would have on options market 
quality, liquidity, bid-ask spreads, quote size, and investor 
costs.\539\ One commenter noted that although former Rule 10a-1 did not 
contain an options market maker exception, the NASD's former bid test 
contained an exception that ``allowed options market makers to provide 
liquidity and depth for listed options by allowing them to hedge,'' but 
that also had ``limited definitions and scope.'' \540\ Another 
commenter recognized the risk of a transference effect resulting from 
an options market maker exception, namely that an exception may 
facilitate short selling by buying puts from or selling calls to market 
makers, but stated that there was no empirical evidence showing that 
the risk is more than theoretical.\541\
---------------------------------------------------------------------------

    \539\ See, e.g., roundtable statement of Rosenblatt Securities; 
letter from BATS (May 2009); letter from Matlock Capital (May 2009); 
letter from Direct Edge (June 2009); letter from Engmann Options; 
letter from Prof. Rosenthal; letter from Credit Suisse (June 2009); 
letter from Group One Trading (June 2009); letter from STANY (June 
2009); letter from John Favia, Blue Capital Group LLC, dated June 
19, 2009 (``Blue Capital''); letter from Goldman Sachs (June 2009); 
letter from ISE (June 2009); letter from NYSE Euronext (June 2009); 
letter from RBC (June 2009); letter from SIFMA (June 2009); letter 
from STA (June 2009); letter from T.D. Pro Ex; letter from Boston 
Options Exchange et al. (June 2009); letter from Direct Edge (Sept. 
2009); letter from BATS (Sept. 2009); letter from Credit Suisse 
(Sept. 2009); letter from Group One Trading (Sept. 2009); letter 
from Knight Capital (Sept. 2009); letter from STANY (Sept. 2009); 
letter from Goldman Sachs (Sept. 2009); letter from ISE (Sept. 
2009); letter from NYSE Euronext (Sept. 2009); letter from RBC 
(Sept. 2009); letter from SIFMA (Sept. 2009); letter from Boston 
Options Exchange, Chicago Board Options Exchange, International 
Securities Exchange, Nasdaq Options Market, Nasdaq OMX PHLX, NYSE 
Amex, NYSE Arca and The Options Clearing Corporation, dated Sept. 
22, 2009 (``Boston Options Exchange et al. (Sept. 2009)''); letter 
from CBOE (Sept. 2009).
    \540\ Letter from CBOE (June 2009); see also letter from Boston 
Options Exchange et al. (June 2009); letter from ISE (June 2009); 
letter from Citadel et al. (June 2009); letter from STANY (June 
2009); letter from GETCO (June 2009).
    \541\ See letter from Blue Capital; but cf. letter from John H. 
Frazer, Jr., dated May 4, 2009 (``Frazer'') (stating that if options 
market makers are not subject to the short sale price test 
restriction, then ``short sellers will simply purchase Puts knowing 
that Options Market Makers will simply sell the stock short without 
restriction.'').
---------------------------------------------------------------------------

    Some commenters stated that a market maker exception should include 
market makers in listed and OTC derivatives.\542\ Other commenters 
stated that a market maker exception should cover block 
positioners.\543\ In addition, some commenters stated that a market 
maker exception should include market makers in convertibles and 
warrants.\544\ Several commenters stated that an exception for market 
makers in ETFs should be included in any price test restriction adopted 
by the Commission.\545\
---------------------------------------------------------------------------

    \542\ See, e.g., letter from Direct Edge (June 2009); letter 
from Credit Suisse (June 2009); letter from STANY (June 2009); 
letter from Barclays (June 2009); letter from Goldman Sachs (June 
2009); letter from ICI (June 2009); letter from NYSE Euronext (June 
2009); letter from RBC (June 2009); letter from SIFMA (June 2009); 
letter from ISDA; letter from Direct Edge (Sept. 2009); letter from 
Credit Suisse (Sept. 2009); letter from STANY (Sept. 2009); letter 
from Goldman Sachs (Sept. 2009); letter from RBC (Sept. 2009); 
letter from SIFMA (Sept. 2009).
    \543\ See letter from Credit Suisse (June 2009); letter from RBC 
(June 2009); letter from SIFMA (June 2009); letter from SIFMA (Sept. 
2009); letter from Credit Suisse (Sept. 2009); letter from RBC 
(Sept. 2009).
    \544\ See, e.g., letter from Credit Suisse (June 2009); letter 
from SIFMA (June 2009); letter from Credit Suisse (Sept. 2009); 
letter from Direct Edge (Sept. 2009); letter from SIFMA (Sept. 
2009).
    \545\ See, e.g., letter from Credit Suisse (June 2009); letter 
from Allston Trading (June 2009); letter from STANY (June 2009); 
letter from Goldman Sachs (June 2009); letter from ICI (June 2009); 
letter from SIFMA (June 2009); letter from SIFMA (Sept. 2009); 
letter from Credit Suisse (Sept. 2009); letter from STANY (Sept. 
2009); letter from Goldman Sachs (Sept. 2009); letter from Direct 
Edge (Sept. 2009).
---------------------------------------------------------------------------

    In addition, some commenters stated that to not include an 
exception for bona fide market making activities is inconsistent with 
the Commission's short sale-related emergency orders issued in mid- to 
late-2008, which included various forms of exceptions for bona fide 
market making activities.\546\ Commenters also noted that since its 
adoption in 2004, Regulation SHO has included an exception for bona 
fide market making activities from the ``locate'' requirement of Rule 
203(b)(1).\547\ Several commenters also noted that fails to deliver 
resulting from certain bona fide market making activity are provided 
additional time to be closed out under Regulation SHO's close-out 
requirements.\548\
---------------------------------------------------------------------------

    \546\ See, e.g., letter from SIFMA (June 2009); letter from RBC 
(June 2009); letter from CBOE (June 2009); letter from Boston 
Options Exchange et al. (June 2009); letter from ISE (June 2009); 
letter from Citadel et al. (June 2009); letter from Goldman Sachs 
(June 2009); see also supra Section II.C. (discussing the 
Commission's emergency orders).
    \547\ See, e.g., letter from SIFMA (June 2009); letter from CBOE 
(June 2009); letter from Boston Options Exchange et al. (June 2009); 
letter from Goldman Sachs (June 2009); letter from GETCO (June 
2009); see also 17 CFR 242.203(b)(2)(iii).
    \548\ See, e.g., letter from Goldman Sachs (June 2009); letter 
from Wolverine; letter from Boston Options Exchange et al. (June 
2009); letter from GETCO (Sept. 2009); letter from Virtu Financial; 
letter from Nasdaq OMX Group (Oct. 2009); see also 17 CFR 
242.204(a)(3).

---------------------------------------------------------------------------

[[Page 11273]]

    Several commenters, however, discussed the importance of limiting a 
market maker exception to bona fide market making activity and 
requested that the Commission define the term strictly so as to 
eliminate the possibility for gaming.\549\ Moreover, some commenters 
stated that a market maker exception may not be necessary. For example, 
commenters noted that equity market makers will usually sell at their 
offer quote, which would not be inhibited by any price test 
restriction.\550\ One commenter stated that if we were to adopt a 
circuit breaker approach with the alternative uptick rule, an equity 
market making exception may not be as critical because equity market 
makers generally post their offers one price increment above the 
national best bid.\551\ This commenter stated that ``[i]n a market 
characterized by the kind of decline that would trigger a circuit 
breaker, remaining above the [national best bid] will tend to be the 
natural norm.'' \552\
---------------------------------------------------------------------------

    \549\ See letter from Pink OTC; letter from SIFMA (June 2009); 
letter from STA (June 2009); letter from SIFMA (Sept. 2009); see 
also letter from NYSE Euronext (June 2009); letter from NYSE 
Euronext (Sept. 2009) (stating that the definition should contain 
some obligation to the market).
    \550\ See letter from CBOE (June 2009); letter from GETCO (June 
2009). Although GETCO stated that a market maker typically should 
not need an exception because the market maker will be able to sell 
short on the offer when providing liquidity, this commenter also 
noted that market makers such as GETCO ``often employ market making 
strategies that sometimes include removing liquidity on the bid as 
part of the overall strategy, which may include short selling.'' 
GETCO stated that such strategies result in tighter spreads, more 
liquidity and potentially lower costs to investors. See letter from 
GETCO (June 2009).
    \551\ See letter from Direct Edge (Sept. 2009).
    \552\ Letter from Direct Edge (Sept. 2009).
---------------------------------------------------------------------------

    Other commenters stated that there should not be an exception for 
market makers in any short sale price test restriction that the 
Commission adopts.\553\ One commenter noted that the activities of 
market makers ``are not unique in contributing to market efficiency; 
all market participants, regardless of trading frequency or 
professional expertise, improve market quality by their very 
participation, whether or not their trading activity is arbitrage or 
professional market making * * * the Commission's goal should be to 
implement rules that are sufficiently focused and require few, if any, 
exceptions to maintain market quality.'' \554\ In addition, as 
discussed in Section III.B. above, several commenters cautioned against 
the Commission adopting numerous exceptions and discussed problems that 
may arise from adopting a short sale price test restriction with many 
or complex exceptions, such as additional implementation difficulties, 
greater compliance costs, lack of uniformity that may cause unfair 
application of the rule, increased opportunities for gaming and abuse, 
and, overall, a less effective rule that only applies to a limited 
number of short sales.\555\
---------------------------------------------------------------------------

    \553\ See, e.g., letter from David G. Furr, dated Apr. 20, 2009; 
letter from R. Skinner, dated Apr. 21, 2009; letter from Frazer; 
letter from IBC; letter from Vitus Lask, dated June 20, 2009; letter 
from Stephen R. Porpora, dated Sept. 10, 2009; letter from Hudson 
River Trading; letter from David Furr, dated Nov. 3, 2009.
    \554\ Letter from Hudson River Trading.
    \555\ See supra note 434.
---------------------------------------------------------------------------

    At this time, we believe that including a provision to permit 
broker-dealers to mark as ``short exempt'' short sale orders in 
connection with market making activity in the equity or options markets 
is not necessary and would not advance the goals of our adopting a 
short sale price test restriction. We recognize that there are distinct 
differences between options market making and market making in the 
equity markets and that Rule 201 may impact these markets differently. 
In addition, we recognize commenters' concerns regarding the potential 
negative market impact of not including an exception for market making 
activity in the equity or options markets. Due to the reasons discussed 
below, however, we believe such impact, if any, would be limited. In 
addition, we believe that the potential costs of not including 
exceptions for equity and options market makers are justified by the 
benefits provided by the Rule in preventing short selling, including 
potentially manipulative or abusive short selling, from driving down 
further the price of a security that has already experienced a 
significant intra-day price decline.
    We believe that the potential negative market impact from not 
including an equity or options market maker exception to Rule 201 will 
be limited, in large part, because Rule 201 is a narrowly-tailored Rule 
that will impose a short sale price test restriction only if the price 
of a covered security declines by 10% or more from the covered 
security's closing price as determined by the listing market for the 
covered security as of the end of regular trading hours on the prior 
day. In addition, once triggered, the short sale price test restriction 
will apply for a limited period of time--the remainder of the day on 
which the circuit breaker has been triggered and the following day. 
Thus, unlike NASD's former bid test or former Rule 10a-1 (which also 
did not include an exception for bona fide market making activity), 
Rule 201 does not impose a short sale price test restriction that will 
apply all the time to all covered securities. Nor does Rule 201 impose 
a halt on short selling. Instead, Rule 201 is a targeted Rule that will 
not impact trading in the majority of covered securities. As discussed 
in more detail above,\556\ in response to our request for comment on an 
appropriate threshold at which to trigger the proposed circuit breaker 
short sale price restrictions, commenters submitted estimates of the 
number of securities that would trigger a circuit breaker rule at a 10% 
threshold \557\ and the estimates reflect that a 10% circuit breaker 
threshold, on average, should result in a limited percentage of covered 
securities triggering the threshold.\558\ In addition, following its 
review of trading data, the Staff found that, during the period 
covering April 9, 2001 to September 30, 2009, the price test 
restrictions of Rule 201 would have, on an average day, been triggered 
for approximately 4% of covered securities.\559\ The Staff also found 
that for a low volatility period, covering January 1, 2004 to December 
31, 2006, the 10% trigger level of Rule 201 would have, on an average 
day, been triggered for approximately 1.3% of covered securities.\560\
---------------------------------------------------------------------------

    \556\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level).
    \557\ See, e.g., letter from Jordan & Jordan; letter from 
Citadel et al. (June 2009); letter from MFA (June 2009); letter from 
SIFMA (June 2009); letter from Credit Suisse (Sept. 2009).
    \558\ See supra notes 305 to 308 and accompanying text.
    \559\ See supra note 310 and accompanying text.
    \560\ See supra note 311 and accompanying text.
---------------------------------------------------------------------------

    In addition, we believe that any negative market impact due to the 
lack of a bona fide market making exception for equity market makers 
will be limited, if any, because as noted by some commenters, for the 
most part, equity market makers sell at their offer quote.\561\ Thus, 
the price test restriction of Rule 201, that requires short selling at 
a price above the national best bid and only if the circuit breaker has 
been triggered, is consistent with equity market making strategies 
because these market makers generally post their offer quotes at a 
price above the national best bid.\562\ In addition, because equity 
market makers typically provide liquidity on the opposite side of the 
market, if a covered security is experiencing significant downward 
price pressure such that it is subject to

[[Page 11274]]

Rule 201, market makers will tend to be buying not selling the 
security. Thus, equity market makers will continue to be able to 
provide liquidity in that security.
---------------------------------------------------------------------------

    \561\ See, e.g., letter from CBOE (June 2009); letter from GETCO 
(June 2009).
    \562\ See letter from Direct Edge (Sept. 2009).
---------------------------------------------------------------------------

    Although a number of commenters expressed concerns regarding the 
lack of an options market maker exception from a price test 
restriction, we do not believe that such an exception under Rule 201 is 
necessary because, unlike with a ban on short selling, options market 
makers will be able to sell short to hedge their positions even when 
the restriction is in place.\563\ In addition, not all covered 
securities have options traded on them (``optionable covered 
securities''). As discussed above, data provided by commenters and 
Staff analysis indicate that, on an average day, a limited number of 
all covered securities would trigger a 10% circuit breaker level.\564\ 
Thus, an even more limited number of optionable covered securities 
would trigger a 10% circuit breaker, thereby further reducing the need 
for an options market maker exception to the Rule's requirements. To 
the extent that an optionable covered security is subject to Rule 201, 
we recognize this may result in a delay in an options market maker's 
ability to sell short to hedge a position.\565\ Such delay, and the 
resulting uncertainty options market makers may face (including as the 
price of an optionable covered security approaches the circuit breaker) 
regarding their ability to obtain immediate execution of their short 
sale hedging transactions, may have a negative impact on the options 
markets, such as the widening of options quote spreads.
---------------------------------------------------------------------------

    \563\ We note that some commenters, in stating that a short sale 
price test restriction should include an options market maker 
exception, provided support for their arguments by referencing the 
impact of the Short Sale Ban Emergency Order that halted short 
selling in the securities subject to the emergency order, rather 
than imposing a short sale price test restriction that would 
continue to allow short selling while the restriction is in effect. 
See, e.g., letter from CBOE.
    \564\ See supra note 310 and 311 and accompanying text.
    \565\ We note that one commenter stated that ``[options market 
makers] need immediacy in their hedges, which means selling at lower 
than the inside offer quote.'' See letter from CBOE (June 2009). 
Rule 201, if triggered, limits short selling to a price above the 
current national best bid. Thus, it does not prevent short selling 
at a price between the current national best bid and offer.
---------------------------------------------------------------------------

    We believe, however, that this potential negative market impact and 
any resulting costs to options market makers will be limited and are 
justified by the benefits of the Rule. As discussed above, we believe 
these costs will be limited because, among other things, due to the 
Rule's circuit breaker approach, the Rule's restrictions will not apply 
to most optionable covered securities most of the time. In addition, 
even when a security is experiencing excessive downward price pressure 
such that the short sale price test restriction of Rule 201 has been 
triggered for a particular security, we expect there will be purchasers 
in the market willing to buy the security at the offer or at a price 
between the current national best bid and offer. Thus, for securities 
that are subject to Rule 201, there will be buying interest in the 
market that will result in execution of short sale hedging 
transactions.
    We have also determined not to include an options market maker 
exception because we are concerned about creating an un-level playing 
field between options market makers and market makers in other 
derivatives that sell short to hedge their positions in the 
derivative.\566\ For the reasons discussed above and below, we do not 
believe that any market maker exception is necessary.
---------------------------------------------------------------------------

    \566\ We also note that, as discussed in Section III.A.1. above, 
we, as well as some commenters, are concerned about the ability to 
obtain a short position through the use of derivative products and 
that synthetic short positions may increase as a result of the 
adoption of a short sale price test restriction. We are concerned 
that inclusion of an exception in Rule 201 for short sale hedging 
transactions would make such an increase even more likely. See supra 
Section III.A.1.
---------------------------------------------------------------------------

    We are also concerned that the inclusion of an exception for equity 
or options market makers may create an opportunity for potential 
misuse. Whether from misuse or proper use, if a large volume of short 
selling were excepted from the short sale price test restrictions of 
the Rule, such an exception could potentially undermine our goals for 
adopting the Rule.\567\ We are also concerned that the inclusion of an 
exception could result in significant additional surveillance and 
compliance costs necessary to help to determine whether market 
participants are validly claiming the applicable exception and to 
prevent any misuse. In determining not to include such an exception, we 
also considered these additional costs.
---------------------------------------------------------------------------

    \567\ See, e.g., Ekkehart Boehmer, Charles M. Jones and Xiaoyan 
Zhang, 2009, Shackling Short Sellers: The 2008 Shorting Ban. This 
study on the Short Sale Ban Emergency Order found that ``[d]uring 
the shorting ban (19 Sep through 8 Oct), [NYSE-executed] short sales 
are 7.72% of overall trading volume for stocks on the original ban 
list, compared to 19.32% of overall trading volume over the same 
time interval for the matching set of non-banned stocks.'' The 
authors of the study attributed the on-going short sales in the 
banned stocks to market makers selling short as part of their market 
making and hedging activity, as such activity was excepted from the 
Short Sale Ban Emergency Order. See id. While short sale volume 
decreased in the banned stocks, based on this study's results and 
its comparison of ban and non-ban stocks, approximately 40% of the 
short sale trading volume would be expected to be exempt short 
selling. This short selling may have occurred as a result of market 
making exceptions.
---------------------------------------------------------------------------

    Although some commenters noted that the NASD's former bid test 
contained exceptions for equity and options market makers, as noted 
above, former Rule 10a-1, which was in place for almost seventy years, 
and applied on a permanent, market-wide basis, did not contain any such 
exceptions. We are not aware of any negative impact on market quality 
or any significant costs to investors arising from the lack of such 
exceptions. In addition, we note that although Regulation SHO currently 
contains a limited exception from its locate requirement \568\ and an 
additional two days to close out fails to deliver under its close-out 
requirement for certain market making activity,\569\ these exceptions 
relate to the ability to obtain shares in time to make delivery by 
settlement date rather than to downward price pressure and potential 
price manipulation resulting from short selling. Thus, although 
commenters noted these exceptions as support for an exception from a 
short sale price test restriction, we do not agree that the inclusion 
of such exceptions to Regulation SHO's locate and close-out 
requirements necessitates the inclusion of such an exception in Rule 
201.
---------------------------------------------------------------------------

    \568\ See 17 CFR 242.203(b)(2)(iii).
    \569\ See 17 CFR 242.204(a)(3).
---------------------------------------------------------------------------

    Moreover, we note that we recently eliminated an exception to 
Regulation SHO's close-out requirement relating to fails to deliver 
resulting from options market making activity because, as we noted in 
the Options Market Maker Elimination Release, a substantial level of 
fails to deliver continued to persist in threshold securities, and it 
appeared that a significant number of the fails were as a result of the 
options market maker exception.\570\ In addition, in adopting that 
amendment, we noted that although we acknowledged commenters' concerns 
regarding the potential impact of the elimination of the options market 
maker exception on market making risk, quote depths, spread widths, and 
market liquidity, we believed that these potential effects were 
justified by the benefits of requiring such fails to deliver to be 
closed out within specific time-frames

[[Page 11275]]

rather than being allowed to persist indefinitely.\571\
---------------------------------------------------------------------------

    \570\ See Options Market Maker Elimination Release, 73 FR at 
61696. In addition, as we stated in the Options Market Maker 
Elimination Release, preliminary analysis by the Staff indicated 
that there was a significant increase in fails to deliver in 
threshold securities with options traded on them following 
elimination of the grandfather exception to Regulation SHO's close-
out requirement. See id. at 61693.
    \571\ See id. at 61696. As discussed above and as noted by 
several commenters to the Proposal and Re-Opening Release, since the 
elimination of the options market maker exception to Regulation 
SHO's close-out requirement, among other Commission actions, data 
from the Staff indicates there has been a significant reduction in 
fails to deliver. See supra note 119 (discussing the recent 
reduction in fails to deliver).
---------------------------------------------------------------------------

    Similarly, although we recognize commenters' concerns about the 
potential impact of the lack of an options market maker exception or a 
general equity market maker exception on market liquidity, volatility, 
spread widths, and investor costs, we believe, for the reasons 
discussed, that these potential costs are justified by the benefits of 
requiring that when a covered security's price is undergoing 
significant downward price pressure, short selling in the security by 
market makers generally is restricted. Moreover, as discussed above, 
because the short sale price test restriction of Rule 201(b) will apply 
to a covered security only after the security has experienced a 
significant intra-day price decline, will remain in place for a limited 
period of time, and will continue to permit short selling at a price 
above the current national best bid (rather than, for example, halt all 
short selling in that security) even when the restriction is in place, 
we believe that the negative market impact, if any, when the 
restriction is in place, will be limited.\572\
---------------------------------------------------------------------------

    \572\ See supra Sections III.A.3. and III.A.4. (discussing, 
among other things, the market impact of the alternative uptick rule 
in combination with a circuit breaker approach); see also infra 
Sections X.B.1.a. and X.B.2.a. (discussing the market impact of the 
alternative uptick rule and the circuit breaker approach).
---------------------------------------------------------------------------

    For the reasons discussed above, rather than provide an exception 
for short selling in connection with bona fide market making activity, 
whether in the equity or options markets, we have determined to limit 
the extent to which market makers will be permitted to sell short 
without restriction under Rule 201. We note, however, as discussed 
above, Rule 201 permits broker-dealers to mark short sale orders as 
``short exempt'' in connection with riskless principal transactions. We 
also note that under Rule 201, a trading center's policies and 
procedures will be designed to permit the execution or display of short 
sale orders at the offer. As discussed above, and as noted by some 
commenters, equity market makers typically will sell at their offer 
quote.\573\ Thus, Rule 201 generally will not restrict short selling by 
equity market makers engaged in bona fide market making activity. 
Moreover, in connection with both equity and options market makers, 
because most covered securities and, to an even greater extent, most 
optionable covered securities, will not be subject to the short sale 
price test restriction of Rule 201, these market makers will be able to 
continue to provide liquidity and hedge positions, as applicable, by 
selling short at or below the national best bid in most securities most 
of the time. For all these reasons, at this time we do not believe it 
is necessary to provide that a broker-dealer may mark an order ``short 
exempt'' where the short sale order is in connection with bona fide 
market making activity, whether in the equity or options markets.\574\
---------------------------------------------------------------------------

    \573\ See supra notes 550, 561, and 562 and accompanying text.
    \574\ We note, however, as discussed in more detail below, we 
have instructed the Staff to assess the impact of the Rule on the 
options markets and to provide a written assessment of the impact. 
See infra Section VIII.
---------------------------------------------------------------------------

IV. Order Marking

    In the Proposal, we proposed amending Rule 200(g) of Regulation SHO 
to add a ``short exempt'' marking requirement.\575\ Rule 200(g) of 
Regulation SHO provides that a broker-dealer must mark all sell orders 
of any security as ``long'' or ``short.'' \576\ As initially adopted, 
Regulation SHO included an additional marking requirement of ``short 
exempt'' applicable to short sale orders if the seller was ``relying on 
an exception from the tick test of 17 CFR 240.10a-1, or any short sale 
price test of any exchange or national securities association.'' \577\ 
We adopted amendments to Rule 200(g) of Regulation SHO to remove the 
``short exempt'' marking requirement in conjunction with our 
elimination of former Rule 10a-1.\578\
---------------------------------------------------------------------------

    \575\ See Proposal, 74 FR at 18082-18083.
    \576\ See 17 CFR 242.200(g).
    \577\ See 2004 Regulation SHO Adopting Release, 69 FR at 48030.
    \578\ See 2007 Price Test Adopting Release, 72 FR 36348.
---------------------------------------------------------------------------

    In conjunction with the adoption of Rule 201 of Regulation SHO to 
add a short sale circuit breaker rule, we are amending Rule 200(g) of 
Regulation SHO, substantially as proposed, to again impose a ``short 
exempt'' marking requirement.\579\ Specifically, Rule 200(g), as 
amended, provides that ``[a] broker or dealer must mark all sell orders 
of any equity security as ``long,'' ``short,'' or ``short exempt.'' 
\580\ In addition, Rule 200(g)(2) provides that a sale order shall be 
marked ``short exempt'' only if the provisions of paragraph (c) or (d) 
of Rule 201 are met.\581\
---------------------------------------------------------------------------

    \579\ In connection with Rule 200(g), we note that we have made 
one technical modification to Rule 200(g)(2) from the language in 
the proposed circuit breaker with modified uptick rule. 
Specifically, we have specified the subsections of Rule 201--
subsections (c) and (d)--that set forth the circumstances under 
which a short sale order may be marked ``short exempt.''
    \580\ Rule 200(g).
    \581\ See Rule 200(g)(2).
---------------------------------------------------------------------------

    In response to our requests for comment, several commenters noted 
that a new ``short exempt'' marking requirement would require 
adjustments to front end systems, that many firms have multiple front 
end systems, and that such costs would be multiplied for firms with 
correspondent clearing operations because each correspondent firm can 
have its own front end system.\582\ Commenters also stated that market 
participants would need to make adjustments to reporting systems, 
including blue sheets, OATS, and OTS reporting systems,\583\ in 
addition to order entry and routing applications.\584\
---------------------------------------------------------------------------

    \582\ See letter from RBC (June 2009); letter from NSCP; see 
also letter from FIF (June 2009).
    \583\ See letter from RBC (June 2009); letter from NSCP; letter 
from FIF (June 2009).
    \584\ See letter from FIF (June 2009).
---------------------------------------------------------------------------

    In contrast, several commenters indicated that requiring broker-
dealers to mark all sell orders ``long,'' ``short,'' or ``short 
exempt'' would provide valuable information to the Commission \585\ and 
that such information would be worth the costs of requiring such 
marking.\586\ One commenter indicated that the information provided by 
a ``short exempt'' marking requirement would provide the Commission 
with data on the extent to which exceptions are being used to 
circumvent the requirements of Rule 201.\587\ In addition, with respect 
to implementation periods, one commenter stated that the ``short 
exempt'' marking requirement would require coding for new fields in 
order records, which should be accomplished in approximately three 
months.\588\
---------------------------------------------------------------------------

    \585\ See, e.g., letter from CFA; letter from STA (June 2009).
    \586\ See, e.g., letter from STA (June 2009).
    \587\ See id.
    \588\ See id.
---------------------------------------------------------------------------

    After considering the comments, we have determined to adopt the 
proposed ``short exempt'' marking requirement, including the 
requirement that a sale order shall be marked ``short exempt'' only if 
the provisions of paragraph (c) or (d) of Rule 201 are met. The ``short 
exempt'' marking requirement will provide a record that a broker-dealer 
is availing itself of one of the provisions of paragraph (c) or (d) of 
Rule 201. The records provided pursuant to the ``short exempt'' marking 
requirements of Rule 200(g) will also aid surveillance by SROs and the 
Commission for

[[Page 11276]]

compliance with the provisions of Rule 201. In addition, under the 
policies and procedures approach required by Rule 201, the ``short 
exempt'' marking requirement will indicate to a trading center whether 
it must execute or display a short sale order without regard to whether 
the short sale order is at a price that is less than or equal to the 
current national best bid.
    We recognize that the ``short exempt'' marking requirement will 
increase implementation and compliance costs, including costs related 
to adjusting front-end systems, reporting systems, and order entry and 
routing applications.\589\ We believe, however, that these costs are 
justified by the benefit of the information that the ``short exempt'' 
marking requirement will provide. In addition, to allow sufficient time 
to make any necessary systems changes, we are providing for a six month 
implementation period for the ``short exempt'' marking requirement of 
Rule 200(g) such that market participants will have to comply with this 
requirement six months following the effective date of these 
amendments. We believe that a six month implementation period will 
provide market participants with sufficient time in which to modify 
their systems and procedures in order to comply with the proposed 
marking requirements. In addition, the six month implementation period 
is consistent with the implementation period for Rule 201.
---------------------------------------------------------------------------

    \589\ See infra Section X.A.3. and Section X.B.4. (discussing 
the benefits and costs of the ``short exempt'' order marking 
requirement).
---------------------------------------------------------------------------

V. Exemptive Procedures

    Consistent with the provisions proposed, Rule 201(f) as adopted 
includes provisions establishing procedures for the Commission, upon 
written request or its own motion, to grant an exemption from the 
Rule's provisions, either unconditionally or on specified terms and 
conditions, if the Commission determines that such exemption is 
necessary or appropriate in the public interest and is consistent with 
the protection of investors.\590\ Pursuant to this provision, we will 
consider and act upon appropriate requests for relief from the 
provisions of Rule 201 and will consider the particular facts and 
circumstances relevant to each such request and any appropriate 
conditions to be imposed as part of the exemption.
---------------------------------------------------------------------------

    \590\ See Rule 201(f).
---------------------------------------------------------------------------

    In response to our request for comment, one commenter stated that 
``it is important for the Commission to have detailed procedures for 
granting exemptions,'' but that exemptions can decrease overall 
compliance with the rule by encouraging other market participants to 
tailor their situation to qualify for an exemption.\591\ The commenter 
stated that the Commission ``must set the bar high for those seeking 
exemptive relief.'' \592\
---------------------------------------------------------------------------

    \591\ Letter from STA (June 2009).
    \592\ Id.
---------------------------------------------------------------------------

    We have determined to include in Rule 201 a provision related to 
granting exemptions from the Rule's provisions in order to provide 
clear procedures for requests and grants of exemptions. As stated 
above, we will consider requests for relief and grant exemptions from 
Rule 201 if the Commission determines that an exemption is necessary or 
appropriate in the public interest and is consistent with the 
protection of investors, taking into account the particular facts and 
circumstances relevant to each such request and any appropriate 
conditions to be imposed in connection with the exemption.

VI. Overseas Transactions

    In connection with former Rule 10a-1, the Commission consistently 
took the position that the rule applied to trades in securities subject 
to that rule where the trade was ``agreed to'' in the U.S., but booked 
overseas.\593\ In addition, in the 2004 Regulation SHO Adopting Release 
we stated that any broker-dealer using the United States jurisdictional 
means to effect short sales in securities traded in the United States 
would be subject to Regulation SHO, regardless of whether the broker-
dealer is registered with the Commission or relying on an exemption 
from registration.\594\ For example, a U.S. money manager decides to 
sell a block of 500,000 shares in a covered security. The money manager 
negotiates a price with a U.S. broker-dealer, who sends the order 
ticket to its foreign trading desk for execution. In our view, this 
trade was agreed to in the United States and occurred in the United 
States as much as if the trade had been executed by the broker-dealer 
at a U.S. trading desk. Consistent with these prior statements, we 
stated in the Proposal that if a short sale is agreed to in the United 
States, it must be effected in accordance with the requirements of the 
proposed rules, unless otherwise excepted.\595\
---------------------------------------------------------------------------

    \593\ See Exchange Act Release No. 27938 (Apr. 23, 1990), 55 FR 
17949 (Apr. 30, 1990) (stating that the no-action position exempting 
certain index arbitrage sales from former Rule 10a-1 would not apply 
to an index arbitrage position that was established in an offshore 
transaction unless the holder acquired the securities from a seller 
that acted in compliance with former Rule 10a-1 or other comparable 
provision of foreign law). See also Exchange Act Release No. 21958 
(Apr. 18, 1985), 50 FR 16302, 16306, n.48 (Apr. 25, 1985) (stating 
that, ``Rule 10a-1 does not contain any exemption for short sales 
effected in international markets.''). The question of whether a 
particular transaction negotiated in the U.S. but nominally executed 
abroad by a foreign affiliate is a domestic trade for U.S. 
regulatory purposes was also addressed in the Commission's Order 
concerning Wunsch Auction Systems, Inc. (WASI). The Commission 
stated its belief that ``trades negotiated in the U.S. on a U.S. 
exchange are domestic, not foreign trades. The fact that the trade 
may be time-stamped in London for purposes of avoiding rule 390 does 
not in our view affect the obligation of WASI and BT Brokerage to 
maintain a complete record of such trades and report them as U.S. 
trades to U.S. regulatory and self-regulatory authorities and, where 
applicable, to U.S. reporting systems.'' See Exchange Act Release 
No. 28899 (Feb. 20, 1991), 56 FR 8377, 8381 (Feb. 28, 1991). In what 
is commonly referred to as the ``fax market,'' a U.S. broker-dealer 
acting as principal for its customer negotiates and agrees to the 
terms of a trade in the U.S., but transmits or faxes the terms 
overseas to be ``printed'' on the books of a foreign office. This 
practice of ``booking'' trades overseas was analyzed in depth in the 
Division of Market Regulation's Market 2000 Report. In the Report, 
the Division estimated that at that time approximately seven million 
shares a day in NYSE stocks were faxed overseas, and many of these 
trades were nominally ``executed'' in the London over-the-counter 
market. See Division of Market Regulation, SEC, Market 2000: An 
Examination of Current Equity Market Developments (Jan. 1994), Study 
VII, p. 2.
    \594\ See 2004 Regulation SHO Adopting Release, 69 FR at 48014, 
n.54.
    \595\ See Proposal, 74 FR at 18083-18084.
---------------------------------------------------------------------------

    In response to our request for comment, one commenter stated that 
``[g]enerally speaking, the Commission has taken the position that the 
provisions of Regulation SHO apply to transactions in covered 
securities `agreed to' in the United States, but sent to a foreign 
market for execution. Notwithstanding, there has been on-going 
confusion in this area. The Commission should use this opportunity to 
clarify the applicability of the restrictions (and Regulation SHO 
generally) to transactions in covered securities executed on overseas 
markets.'' \596\ Consistent with our prior statements, we note that 
Rule 201 applies to any short sale effected using the United States 
jurisdictional means, regardless of the jurisdiction in which the short 
sale is executed.
---------------------------------------------------------------------------

    \596\ Letter from RBC (June 2009).
---------------------------------------------------------------------------

VII. Rule 201 Implementation Period

    In the Proposal and Re-Opening Release, we proposed a three-month 
and two-month implementation period, respectively, and requested 
comment regarding these implementation periods.\597\ We are adopting in 
Rule 201 a six-month implementation period, such that trading centers 
will have to comply with Rule 201 six months following the effective 
date of Rule 201. We believe that this implementation period will 
provide trading centers,

[[Page 11277]]

broker-dealers and other market participants with sufficient time in 
which to modify their systems, policies and procedures in order to 
comply with the requirements of Rule 201.
---------------------------------------------------------------------------

    \597\ See Proposal, 74 FR at 18042; Re-Opening Release, 74 FR at 
42036.
---------------------------------------------------------------------------

    In response to our request for comment, commenters indicated that a 
circuit breaker rule triggering the alternative uptick rule will 
require an implementation period of between three and twelve 
months.\598\ Several commenters noted that because the alternative 
uptick rule, unlike the other proposed price tests, would not require 
sequencing of bids or last sale prices, the alternative uptick rule 
could be implemented more quickly than the other proposed price tests 
and could be implemented within three to six months.\599\ One commenter 
noted that implementation concerns with respect to a short sale price 
test restriction could be minimized, provided that trading centers 
``could leverage existing architecture developed to comply with the 
Order Protection Rule in Reg NMS (Rule 611).'' \600\ Another commenter 
noted that implementation of a circuit breaker triggering the 
alternative uptick rule would be easier to implement, ``provided that 
the Commission permits firms to leverage the numerous systems changes 
made to facilitate compliance with Regulation NMS (including the use of 
internal market data rather than consolidated data supplied by the 
industry plans).'' \601\ Other commenters noted that adopting the 
alternative uptick rule in conjunction with a circuit breaker, rather 
than as a permanent, market-wide rule, would not add significantly to 
the implementation time required.\602\
---------------------------------------------------------------------------

    \598\ See, e.g., letter from FIF (Sept. 2009); letter from 
Citadel et al. (Sept. 2009); letter from Credit Suisse (Sept. 2009); 
letter from Direct Edge (Sept. 2009); letter from EWT (Sept. 2009); 
letter from NYSE Euronext (Sept. 2009); letter from RBC (Sept. 
2009); letter from SIFMA (Sept. 2009); letter from MFA (Oct. 2009); 
letter from Amer. Bankers Assoc.; see also letter from NSCP; letter 
from RBC (June 2009); letter from STA (June 2009).
    \599\ See, e.g., letter from Credit Suisse (June 2009); letter 
from Credit Suisse (Sept. 2009); letter from STA (Sept. 2009); 
letter from FIF (Sept. 2009).
    \600\ Letter from MFA (Oct. 2009).
    \601\ Letter from Goldman Sachs (Sept. 2009).
    \602\ See, e.g., letter from Credit Suisse (Sept. 2009); letter 
from Nasdaq OMX Group (Oct. 2009).
---------------------------------------------------------------------------

    Several commenters, however, did not agree that the absence of a 
sequencing requirement would shorten the implementation time required 
for the alternative uptick rule.\603\ In addition, several commenters 
did not agree that previous implementation of Regulation NMS might 
allow for quicker implementation of a price test.\604\ Other commenters 
stated that adopting the alternative uptick rule in conjunction with a 
circuit breaker would add to the implementation time.\605\ Some 
commenters expressed concerns that allowing for certain exceptions 
could affect the implementation time.\606\
---------------------------------------------------------------------------

    \603\ See, e.g., letter from Citadel et al. (Sept. 2009); letter 
from NYSE Euronext (Sept. 2009); letter from RBC (Sept. 2009); 
letter from SIFMA (Sept. 2009).
    \604\ See, e.g., letter from NSCP; letter from RBC (June 2009).
    \605\ See letter from Direct Edge (Sept. 2009) (stating that 
adopting the alternative uptick rule with a circuit breaker would 
add approximately four to six weeks to the development process); 
letter from NYSE Euronext (Sept. 2009).
    \606\ See letter from Goldman Sachs (Sept. 2009); letter from 
FIF (Sept. 2009).
---------------------------------------------------------------------------

    We believe that a six month implementation period is 
appropriate.\607\ This implementation period, which is longer than the 
implementation periods proposed in the Proposal and the Re-opening 
Release, takes into consideration commenters' concerns that 
implementation of a price test could be complex. We do not believe that 
a longer implementation time is warranted because Rule 201 will not 
require monitoring of the sequence of bids or last sale prices, unlike 
other proposed price tests, and because Rule 201 will require the 
implementation of policies and procedures similar to those required for 
trading centers under Regulation NMS. In addition, market participants 
will be able to leverage the numerous systems changes made and current 
architecture developed to facilitate compliance with Regulation NMS. 
These factors should reduce implementation time.
---------------------------------------------------------------------------

    \607\ We note that, in effect, market participants will have 
approximately eight months from publication in the Federal Register 
to implement Rule 201. Rule 201 will not become effective until 
sixty days following publication in the Federal Register and the 
Compliance Date for Rule 201 is six months following the Rule's 
Effective Date.
---------------------------------------------------------------------------

    In addition, we believe the six month implementation period will 
allow sufficient time to address any complexities implementing the 
circuit breaker and the ``short exempt'' order marking 
requirement.\608\ We note that broker-dealers are already familiar with 
and have experience implementing a ``short exempt'' marking requirement 
as Regulation SHO, as originally adopted, included such a 
requirement.\609\ The ``short exempt'' marking requirement was 
eliminated together with the elimination of all short sale price test 
restrictions in July 2007.\610\ In addition, we note that broker-
dealers were able to make significant systems changes to de-program the 
``short exempt'' marking requirement from their systems in less than 90 
days from the compliance date for elimination of the requirement.\611\ 
Thus, we believe that a six month implementation period should be 
sufficient.
---------------------------------------------------------------------------

    \608\ See supra Section III.B. (discussing the ``short exempt'' 
marking provisions of Rule 201) and supra Section IV. (discussing 
the ``short exempt'' marking requirement of Rule 200(g)).
    \609\ See 2004 Regulation SHO Adopting Release, 69 FR 48008.
    \610\ See 2007 Price Test Adopting Release, 72 FR 36348.
    \611\ See letter from Josephine J. Tao, Assistant Director, 
Division of Market Regulation, SEC, to Ira Hammerman, Senior 
Managing Director and General Counsel, Securities Industry and 
Financial Markets Association, dated July 2, 2007.
---------------------------------------------------------------------------

    We also believe that a six month implementation period is 
appropriate for any systems changes that must be made by listing 
markets and single plan processors to comply with Rule 201. As 
discussed above, the single plan processors currently receive 
information from listing markets regarding trading restrictions (i.e. 
Regulatory Halts as defined in those plans) on individual securities 
and disseminate such information. Thus, the requirements of Rule 
201(b)(3) are similar to existing obligations on plan processors 
pursuant to the requirements of Regulation NMS, the CTA and CQ Plans 
and the Nasdaq UTP Plan. Due to this similarity, we believe that a six 
month implementation period is appropriate.

VIII. Decision Not To Implement Rule 201 on a Pilot Basis

    In the Proposal, we requested comment regarding whether, before 
determining whether to adopt a short sale price test restriction or 
circuit breaker rule on a permanent basis, we should adopt a rule that 
would apply on a pilot basis to specified securities.\612\ In response 
to our request for comment, a number of commenters stated that any 
price test restriction should be adopted on a pilot basis.\613\ A 
number of commenters indicated that a pilot study should be conducted 
prior to adoption of a price test on a permanent basis in order to 
gather empirical evidence on the effectiveness and/or market impact

[[Page 11278]]

of a price test.\614\ Some commenters stated that adopting a price test 
on a pilot basis only would limit any negative market impact to the 
subset of securities subject to the price test.\615\ Another commenter 
stated that a pilot study would allow the Commission to gather data on 
the effects of a price test as compared to a control group not subject 
to a price test.\616\ One commenter noted that a pilot study would 
allow the Commission to observe the effects of a price test under 
current market conditions,\617\ while another stated that the 
Commission should study a price test in the context of severe market 
conditions.\618\ Another commenter stated that a pilot study is 
particularly important for the alternative uptick rule because it has 
not been in effect in the market previously and would be more 
restrictive than other proposed price tests.\619\ Other commenters 
noted that a pilot study could provide data regarding the impact or 
need for various exceptions to a price test.\620\ Several commenters 
indicated that pilot study data should be made publicly available to 
permit third parties to analyze the results of the pilot study.\621\
---------------------------------------------------------------------------

    \612\ See, e.g., Proposal, 74 FR at 18071.
    \613\ See, e.g., letter from BATS (May 2009); letter from IAG; 
letter from BIO; letter from James J. Angel, PhD, CFA, Associate 
Professor of Finance, McDonough School of Business, Georgetown 
University, dated June 19, 2009 (``Prof. Angel (June 2009)''); 
letter from Barclays (June 2009); letter from Citadel et al. (June 
2009); letter from EWT (June 2009); letter from NSCP; letter from 
RBC (June 2009); letter from STA (June 2009); letter from NYSE 
Euronext (June 2009); letter from Knight Capital (June 2009); letter 
from STANY (June 2009); letter from T. Rowe Price (June 2009); 
letter from Credit Suisse (June 2009); memorandum regarding meeting 
with Penson; letter from CFA; letter from Knight Capital (Sept. 
2009); letter from Prof. Angel (Sept. 2009); letter from Dialectic 
Capital (Sept. 2009); letter from Direct Edge (Sept. 2009); letter 
from EWT (Sept. 2009); letter from NYSE Euronext (Sept. 2009); 
letter from Qtrade; letter from RBC (Sept. 2009); letter from STANY 
(Sept. 2009); letter from Virtu Financial.
    \614\ See, e.g., letter from BATS (May 2009); letter from BIO; 
letter from Prof. Angel (June 2009); letter from Credit Suisse (June 
2009); letter from Knight Capital (June 2009); letter from NSCP; 
letter from RBC (June 2009); letter from STANY (June 2009); 
memorandum regarding meeting with Penson; letter from CFA; letter 
from Prof. Angel (Sept. 2009); letter from Dialectic Capital (Sept. 
2009); letter from Direct Edge (Sept. 2009); letter from EWT (Sept. 
2009); letter from Knight Capital (Sept. 2009); letter from Qtrade; 
letter from RBC (Sept. 2009); letter from STANY (Sept. 2009); see 
also letter from Park National (stating that a review of a price 
test based on the national best bid should be conducted six months 
after implementation to ensure effectiveness). We also note that a 
number of commenters indicated that the Commission should gather 
empirical evidence through further study, though not necessarily in 
the form of a pilot study, prior to adopting a price test. See, 
e.g., letter from BATS (May 2009); letter from Citadel et al. (June 
2009); letter from Dialectic Capital (June 2009); letter from 
Geoffrey F. Foisie, Investments Manager, Shawbrook, dated June 16, 
2009; letter from Amer. Bar Assoc. (July 2009); letter from Jeffrey 
W. Rubin, Chair, Committee on Federal Regulation of Securities, 
American Bar Association, dated Sept. 30, 2009 (``Amer. Bar Assoc. 
(Sept. 2009)''); letter from Goldman Sachs (Sept. 2009).
    \615\ See, e.g., letter from Credit Suisse (June 2009); letter 
from STA (June 2009).
    \616\ See letter from Citadel et al. (June 2009).
    \617\ See letter from NYSE Euronext (June 2009).
    \618\ See letter from Virtu Financial.
    \619\ See letter from STANY (Sept. 2009).
    \620\ See, e.g., letter from T. Rowe Price (June 2009); letter 
from Direct Edge (Sept. 2009); see also letter from Wells Fargo 
(June 2009) (noting that additional study regarding an exception for 
bona fide market making activity would be needed if the Commission 
adopted a circuit breaker rule).
    \621\ See letter from BATS (May 2009); letter from STA (June 
2009).
---------------------------------------------------------------------------

    In contrast, several commenters stated that the Commission should 
not adopt a price test restriction on a pilot basis.\622\ Several of 
these commenters expressed concerns regarding the costs to implement a 
price test on a pilot basis,\623\ with some stating that such costs 
would outweigh the benefits of a pilot study.\624\ One commenter stated 
that a price test should be implemented as soon as possible, without a 
pilot study, because a pilot study would produce little or no 
benefit.\625\ Several commenters expressed support for a ``sunset'' 
provision allowing the Commission to more easily remove a price test 
restriction if it was determined that the restriction was not meeting 
the Commission's goals or was harming the market.\626\
---------------------------------------------------------------------------

    \622\ See, e.g., letter from Amer. Bankers Assoc.; letter from 
SIFMA (June 2009); letter from IBC.
    \623\ See, e.g., letter from Amer. Bankers Assoc.; letter from 
NYSE Euronext (June 2009); letter from SIFMA (June 2009); letter 
from STA (June 2009).
    \624\ See, e.g., letter from Amer. Bankers Assoc.; letter from 
SIFMA (June 2009).
    \625\ See letter from IBC.
    \626\ See, e.g., letter from SIFMA (June 2009); letter from 
Dialectic Capital (June 2009). One commenter also cited easier 
removal of the price test restriction as an argument for a pilot 
study. See letter from STANY (June 2009).
---------------------------------------------------------------------------

    We have determined not to adopt Rule 201 on a pilot basis. We 
believe that adopting the rule on a temporary pilot basis and/or only 
for a subset of securities will not advance the goals of our adopting 
Rule 201. For example, one goal in adopting Rule 201 is to address 
erosion of investor confidence in our markets. We believe that adopting 
Rule 201 on a pilot basis, such that the Rule would apply for the 
duration of the pilot only, could undermine this goal because, among 
other things, investors would know that the Rule is in place for a 
limited period of time rather than on a permanent basis and, therefore, 
may believe that any benefits that result from the Rule could be 
temporary.
    In addition, we note that unlike the Pilot, which removed then-
existing short sale price test restrictions for a subset of securities, 
undertaking a pilot study in connection with Rule 201 would require 
market participants to undertake as much time, effort and expense as 
full implementation of the new rule. As noted by one commenter, the 
implementation cost would be the same whether the Rule is adopted on a 
pilot or a permanent basis.\627\ We also do not believe a ``sunset'' 
provision would advance our goal of restoring investor confidence 
because, as with a pilot, investors would know that the Rule is in 
place for a limited period of time rather than on a permanent basis 
and, therefore, may believe that any benefits that result from the Rule 
could be temporary.
---------------------------------------------------------------------------

    \627\ See letter from STA (June 2009). We note that a number of 
commenters expressed concerns regarding the implementation costs of 
a price test. See infra Sections X.B.1.b. and X.B.2.b. (discussing 
implementation costs).
---------------------------------------------------------------------------

    We encourage researchers, however, to provide the Commission with 
their own empirical analyses regarding the impact of the Rule on the 
options markets, and on market quality in general. We will, moreover, 
carefully monitor the operation of the Rule to assess its impact and 
effectiveness, including the Rule's impact on market quality, to 
determine whether any modifications to the Rule are warranted. In 
addition, we have instructed the Staff to assess the impact of the Rule 
on the options markets and to provide us with a written report of their 
assessment within the shortest time practicable for completing a 
meaningful study, which we expect, in any event, will not exceed two 
years from the Compliance Date.
    To the extent that we determine at any time that any of the current 
parameters of Rule 201, such as the exceptions to the Rule, the 10% 
trigger level, the duration of the price test restriction if triggered, 
the basing of the trigger level on the prior day's closing price as 
determined by the covered security's listing market, or changed market 
conditions, result in Rule 201 not adequately addressing our concerns 
or meeting our goals in adopting Rule 201, we will consider whether to 
amend Rule 201, or grant relief thereunder, as appropriate at that 
time.

IX. Paperwork Reduction Act

A. Background

    Certain provisions of the amendments to Regulation SHO contain new 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\628\ We submitted the 
collection of information to the Office of Management and Budget 
(``OMB'') for review and approval in accordance with 44 U.S.C. 3507(d) 
and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person 
is not required to respond to, a collection of information unless it 
displays a currently valid OMB control number. The title for the 
collection of information is ``Rules 201 and 200(g)'' and the OMB 
control number for the collection of information is 3235-0651.
---------------------------------------------------------------------------

    \628\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    We are adopting amendments to Rules 201 and 200(g) of Regulation 
SHO under the Exchange Act. The amendments to Rule 201 impose a short 
sale-related circuit breaker that, if triggered, will impose a short 
sale price test restriction on a particular security for a limited

[[Page 11279]]

period of time. Specifically, Rule 201 requires that a trading center 
establish, maintain, and enforce written policies and procedures 
reasonably designed to prevent the execution or display of a short sale 
order of a covered security at a price that is less than or equal to 
the current national best bid if the price of that covered security 
decreases by 10% or more from the covered security's closing price as 
determined by the listing market for the covered security as of the end 
of regular trading hours on the prior day.\629\ In addition, the Rule 
requires that the trading center establish, maintain, and enforce 
written policies and procedures reasonably designed to impose this 
short sale price test restriction for the remainder of the day and the 
following day when a national best bid for the covered security is 
calculated and disseminated on a current and continuing basis by a plan 
processor pursuant to an effective national market system plan.\630\ In 
addition, we are adopting amendments to Rule 200(g) of Regulation SHO 
to provide that a broker-dealer may mark certain qualifying sell orders 
``short exempt.'' In particular, if the broker-dealer chooses to rely 
on its own determination that it is submitting the short sale order to 
the trading center at a price that is above the current national best 
bid at the time of submission or to rely on an exception specified in 
the Rule, it must mark the order as ``short exempt.'' \631\
---------------------------------------------------------------------------

    \629\ Rule 201(b). See also supra Section III.A.7. (discussing 
the policies and procedures approach).
    \630\ Id.
    \631\ See Rules 200(g) and 200(g)(2); see also supra Section IV. 
(discussing the amendments to Rule 200(g)).
---------------------------------------------------------------------------

B. Summary

    As detailed below, several provisions under the amendments to 
Regulation SHO impose a new ``collection of information'' within the 
meaning of the PRA.
1. Policies and Procedures Requirement Under Rule 201
    Rule 201 imposes a new ``collection of information'' within the 
meaning of the PRA. Rule 201 requires that a trading center establish, 
maintain, and enforce written policies and procedures reasonably 
designed to prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on the prior day.\632\ In addition, the Rule requires 
that the trading center establish, maintain, and enforce written 
policies and procedures reasonably designed to impose this short sale 
price test restriction for the remainder of the day and the following 
day when a national best bid for the covered security is calculated and 
disseminated on a current and continuing basis by a plan processor 
pursuant to an effective national market system plan. Thus, a trading 
center's policies and procedures must be reasonably designed to permit 
the trading center to be able to obtain information from the single 
plan processor regarding whether a covered security is subject to the 
short sale price test restriction of Rule 201; if the covered security 
is subject to the short sale price test restriction of Rule 201, to 
determine whether or not the short sale order is priced in accordance 
with the provisions of Rule 201(b); and to recognize when an order is 
marked ``short exempt'' such that the trading center's policies and 
procedures do not prevent the execution or display of such orders at a 
price that is less than or equal to the current national best bid, even 
if the covered security is subject to the short sale price test 
restriction of Rule 201.\633\
---------------------------------------------------------------------------

    \632\ Rule 201(b). See also supra Section III.A.7. (discussing 
the policies and procedures approach).
    \633\ Id.
---------------------------------------------------------------------------

    At a minimum, a trading center's policies and procedures must 
enable a trading center to monitor, on a real-time basis, the national 
best bid, so as to determine the price at which the trading center may 
execute or display a short sale order. As mentioned above, a trading 
center must have policies and procedures reasonably designed to permit 
the execution or display of a short sale order of a covered security 
marked ``short exempt'' without regard to whether the order is at a 
price that is less than or equal to the current national best bid.\634\
---------------------------------------------------------------------------

    \634\ Rule 200(g)(2). The broker-dealer marking the order 
``short exempt'' will have responsibility for being able to identify 
on which provision of Rule 201 it was relying in marking the order 
``short exempt.''
---------------------------------------------------------------------------

    A trading center must also take such steps as will be necessary to 
enable it to enforce its policies and procedures effectively. A trading 
center must regularly surveil to ascertain the effectiveness of the 
policies and procedures required under the Rule and must take prompt 
action to remedy deficiencies in such policies and procedures.\635\ The 
nature and extent of the policies and procedures that a trading center 
must establish to comply with these requirements will depend upon the 
type, size, and nature of the trading center.
---------------------------------------------------------------------------

    \635\ This provision will reinforce the on-going maintenance and 
enforcement requirements of Rule 201(b)(1) by explicitly assigning 
an affirmative responsibility to trading centers to surveil to 
ascertain the effectiveness of their policies and procedures. See 
Rule 201(b)(2). We note that Rule 611(a)(2) of Regulation NMS 
contains a similar provision for trading centers. See 17 CFR 
242.611(a)(2).
---------------------------------------------------------------------------

2. Policies and Procedures Requirement Under the Broker-Dealer and 
Riskless Principal Provisions
    Rule 201 contains a broker-dealer provision that requires a new 
``collection of information'' under the PRA. Rule 201(c) permits a 
broker-dealer submitting a short sale order for the covered security to 
a trading center to mark the order ``short exempt'' if the broker-
dealer identifies the order as being at a price above the current 
national best bid at the time of submission.\636\ This provision 
requires a new collection of information in that a broker-dealer 
marking an order ``short exempt'' under Rule 201(c) must identify a 
short sale order as priced in accordance with the requirements of Rule 
201(c); establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the incorrect identification 
of orders as being priced in accordance with the requirements of Rule 
201(c); regularly surveil to ascertain the effectiveness of these 
policies and procedures, and to take prompt action to remedy 
deficiencies.\637\
---------------------------------------------------------------------------

    \636\ See Rule 201(c). As a result, a trading center's policies 
and procedures will need to be reasonably designed to permit the 
execution or display of such orders without regard to whether the 
order is at a price that is less than or equal to the current 
national best bid. See Rule 201(b)(1)(iii).
    \637\ See Rules 201(c)(1) and 201(c)(2).
---------------------------------------------------------------------------

    Rule 201 also contains a riskless principal provision that requires 
a new ``collection of information'' under the PRA. Specifically, Rule 
201(d)(6) permits a broker-dealer to mark as ``short exempt'' short 
sale orders where broker-dealers are facilitating customer buy orders 
or sell orders where the customer is net long, and the broker-dealer is 
net short but is effecting the sale as riskless principal, provided 
certain conditions are satisfied.\638\ This provision requires a new 
collection of information in that it requires a broker-dealer marking 
an order ``short exempt'' under this provision to have written policies 
and procedures in place to assure that, at a

[[Page 11280]]

minimum: (i) The customer order was received prior to the offsetting 
transaction; (ii) the offsetting transaction is allocated to a riskless 
principal or customer account within 60 seconds of execution; and (iii) 
that it has supervisory systems in place to produce records that enable 
the broker-dealer to accurately and readily reconstruct, in a time-
sequenced manner, all orders on which the broker-dealer relies pursuant 
to this provision.\639\
---------------------------------------------------------------------------

    \638\ See Rule 201(d)(6). As a result, a trading center's 
policies and procedures will need to be reasonably designed to 
permit the execution or display of such orders without regard to 
whether the order is at a price that is less than or equal to the 
current national best bid. See Rule 201(b)(1)(iii).
    \639\ See Rule 201(d)(6).
---------------------------------------------------------------------------

3. Marking Requirements
    While the current marking requirements in Rule 200(g) of Regulation 
SHO, which require broker-dealers to mark all sell orders of any equity 
security as either ``long'' or ``short,'' \640\ remain in effect, the 
amendments to Rule 200(g) add a new marking requirement of ``short 
exempt.'' \641\ In particular, if the broker-dealer chooses to rely on 
its own determination that it is submitting the short sale order to the 
trading center at a price that is above the current national best bid 
at the time of submission or to rely on an exception specified in the 
Rule, it must mark the order as ``short exempt.'' \642\ The new ``short 
exempt'' marking requirements impose a new collection of information.
---------------------------------------------------------------------------

    \640\ 17 CFR 242.200(g).
    \641\ See Rule 200(g); see also supra Section IV. (discussing 
the amendments to Rule 200(g)).
    \642\ See Rule 200(g)(2).
---------------------------------------------------------------------------

C. Use of Information

1. Policies and Procedures Requirement Under Rule 201
    The information collected under Rule 201's written policies and 
procedure requirement \643\ will help ensure that the trading center 
does not execute or display any impermissibly priced short sale orders, 
unless an order is marked ``short exempt,'' in accordance with the 
Rule's requirements. This written policies and procedures requirement 
will also provide trading centers with flexibility in determining how 
to comply with the requirements of Rule 201. The information collected 
also will aid the Commission and SROs that regulate trading centers in 
monitoring compliance with the Rule's requirements. In addition, it 
will aid trading centers and broker-dealers in complying with the 
Rule's requirements.
---------------------------------------------------------------------------

    \643\ See Rule 201(b).
---------------------------------------------------------------------------

2. Policies and Procedures Requirement Under the Broker-Dealer and 
Riskless Principal Provisions
    The broker-dealer provision in Rule 201(c) permits a broker-dealer 
submitting a short sale order for the covered security to a trading 
center to mark the order ``short exempt'' if the broker-dealer 
identifies the order as being at a price above the current national 
best bid at the time of submission.\644\ This provision includes a 
policies and procedures requirement that is designed to help prevent 
incorrect identification of orders for purposes of Rule 201(c)'s 
broker-dealer provision. The information collected will also enable the 
Commission and SROs to examine for compliance with the requirements of 
the exception.
---------------------------------------------------------------------------

    \644\ See Rule 201(c).
---------------------------------------------------------------------------

    Moreover, the information collected under the written policies and 
procedures requirement in the riskless principal exception in Rule 
201(d)(6) \645\ will help assure that broker-dealers comply with the 
requirements of this provision. The information collected will also 
enable the Commission and SROs to examine for compliance with the 
requirements of the exception.
---------------------------------------------------------------------------

    \645\ See Rule 201(d)(6).
---------------------------------------------------------------------------

3. Marking Requirements
    The amendments to Rule 200(g) add a new marking requirement of 
``short exempt.'' \646\ In particular, if the broker-dealer chooses to 
rely on its own determination that it is submitting the short sale 
order to the trading center at a price that is above the current 
national best bid at the time of submission or to rely on an exception 
specified in the Rule, it must mark the order as ``short exempt.'' 
\647\ The purpose of the information collected is to enable the 
Commission and SROs to monitor whether a person entering a sell order 
covered by Rule 201 is acting in accordance with one of the provisions 
contained in paragraph (c) or (d) of the Rule. In particular, the 
``short exempt'' marking requirement will provide a record that will 
aid in surveillance for compliance with the provisions of Rule 201. It 
also will provide an indication to a trading center regarding whether 
or not it must execute or display a short sale order in accordance with 
the Rule's provisions. In addition, it will help a trading center 
determine whether its policies and procedures are reasonable and 
whether its surveillance is effective.
---------------------------------------------------------------------------

    \646\ See Rule 200(g); see also supra Section IV. (discussing 
the amendments to Rule 200(g)).
    \647\ See Rule 200(g)(2).
---------------------------------------------------------------------------

D. Respondents

    As discussed below, the Commission has considered each of the 
following respondents for the purposes of calculating the reporting 
burdens under the amendments to Rules 200(g) and 201 of Regulation SHO.
1. Policies and Procedures Requirement Under Rule 201
    Rule 201 requires each trading center to establish, maintain, and 
enforce written policies and procedures reasonably designed to prevent 
the execution or display of a short sale order of a covered security at 
a price that is less than or equal to the current national best bid 
during the period when the circuit breaker is in effect, unless an 
exception applies.\648\ A ``trading center'' is defined as ``a national 
securities exchange or national securities association that operates an 
SRO trading facility, an alternative trading system, an exchange market 
maker, an OTC market maker, or any other broker or dealer that executes 
orders internally by trading as principal or crossing orders as 
agent.'' \649\ Because Rule 201 applies to any trading center that 
executes or displays a short sale order in a covered security, the Rule 
applies to 10 registered national securities exchanges that trade 
covered securities (or ``SRO trading centers''),\650\ and approximately 
407 broker-dealers (including ATSs) registered with the Commission (or 
``non-SRO trading centers'').\651\
---------------------------------------------------------------------------

    \648\ See Rule 201(b).
    \649\ See Rule 201(a)(9); see also 17 CFR 242.600(b)(78).
    \650\ Currently, there are 10 national securities exchanges (BX, 
BATS, CBOE, CHX, ISE, Nasdaq, NSX, NYSE, NYSE Amex, and NYSE Arca) 
that operate an SRO trading facility for covered securities and thus 
will be subject to the Rule. The Proposal indicated that one 
national securities association (FINRA) would also be subject to the 
Rule. See Proposal, 74 FR at 18086, n.334. However, FINRA operates 
an SRO display-only facility for covered securities, rather than an 
SRO trading facility, and thus is not subject to the Rule.
    \651\ This number includes the approximately 357 firms that were 
registered equity market makers or specialists at year-end 2008 
(this number was derived from annual FOCUS reports and discussion 
with SRO staff), as well as the 50 ATSs that operate trading systems 
that trade covered securities. The Commission believes it is 
reasonable to estimate that in general, firms that are block 
positioners--i.e., firms that are in the business of executing 
orders internally--are the same firms that are registered market 
makers (for instance, they may be registered as a market maker in 
one or more Nasdaq stocks and carry on a block positioner business 
in exchange-listed stocks), especially given the amount of capital 
necessary to carry on such a business.

---------------------------------------------------------------------------

[[Page 11281]]

2. Policies and Procedures Requirement Under the Broker-Dealer and 
Riskless Principal Provisions
    The collection of information required in connection with the 
broker-dealer provision in Rule 201(c) and in connection with the 
riskless principal provision in Rule 201(d)(6) applies to all 
registered brokers-dealers submitting short sale orders in reliance on 
these provisions. While not all broker-dealers likely will enter sell 
orders in securities covered by the amendments to Rules 200(g) and 201 
in a manner that will subject them to this collection of information, 
we estimate, for purposes of the PRA, that all of the approximately 
5,178 \652\ registered broker-dealers will do so.
---------------------------------------------------------------------------

    \652\ This number is based on a review of 2008 FOCUS Report 
filings reflecting registered broker-dealers, including introducing 
broker-dealers. This number does not include broker-dealers that are 
delinquent on FOCUS Report filings.
---------------------------------------------------------------------------

3. Marking Requirements
    The collection of information that is required pursuant to the 
``short exempt'' marking requirements of Rule 200(g) applies to all 
registered brokers-dealers submitting short sale orders marked ``short 
exempt'' in accordance with the provisions contained in paragraph (c) 
or (d) of Rule 201. While not all broker-dealers likely will enter sell 
orders in securities covered by the amendments to Rules 200(g) and 201 
in a manner that will subject them to this collection of information, 
we estimate, for purposes of the PRA, that all of the approximately 
5,178 \653\ registered broker-dealers will do so.
---------------------------------------------------------------------------

    \653\ Id.
---------------------------------------------------------------------------

E. Total Annual Reporting and Recordkeeping Burdens

1. Policies and Procedures Requirement Under Rule 201
    Rule 201 requires each trading center to establish, maintain, and 
enforce written policies and procedures reasonably designed to prevent 
the execution or display of a short sale order of a covered security at 
a price that is less than or equal to the current national best bid 
during the period when the circuit breaker is in effect.\654\ Thus, 
trading centers must develop written policies and procedures reasonably 
designed to permit the trading center to be able to obtain information 
from the single plan processor regarding whether a covered security is 
subject to the short sale price test restriction of Rule 201; if the 
covered security is subject to the short sale price test restriction of 
Rule 201, to determine whether or not the short sale order is priced in 
accordance with the provisions of Rule 201(b); and to recognize when an 
order is marked ``short exempt'' such that the trading center's 
policies and procedures do not prevent the execution or display of such 
orders at a price that is less than or equal to the current national 
best bid, even if the covered security is subject to the short sale 
price test restriction of Rule 201.
---------------------------------------------------------------------------

    \654\ See Rule 201(b)(1).
---------------------------------------------------------------------------

    In the Proposal, we provided estimates of the reporting and 
recordkeeping burdens for trading centers under the proposed short sale 
price test restrictions, both on a permanent, market-wide basis and in 
conjunction with a circuit breaker.\655\ We also requested comment, in 
the Proposal and the Re-Opening Release, as to whether the proposed 
burden estimates were appropriate or whether such estimates should be 
increased or reduced, and if so, for which entities and by how 
much.\656\
---------------------------------------------------------------------------

    \655\ See Proposal, 74 FR at 18087.
    \656\ See Proposal, 74 FR at 18088; Re-Opening Release, 74 FR at 
42036.
---------------------------------------------------------------------------

    One commenter provided a cost estimate, including costs for 
``development man-hours'' of $500,000 per firm for implementation of a 
new short sale price test restriction by trading centers, either on a 
permanent, market-wide basis, or in conjunction with a circuit 
breaker.\657\ One commenter stated that a new short sale price test 
restriction would involve ``significant implementation costs'' and 
``the generation and retention of voluminous compliance reports'' but 
did not provide a specific estimate of the cost or hours that would be 
involved.\658\ Several commenters expressed general concerns regarding 
the time and cost that would be imposed for implementation and on-going 
monitoring and surveillance of a new short sale price test restriction, 
including a policies and procedures requirement, but did not provide 
specific estimates of such time and cost.\659\
---------------------------------------------------------------------------

    \657\ Letter from Wolverine. Wolverine provided an estimate of 
$500,000 per firm for implementation costs, which it applied to both 
non-SRO trading centers and other registered broker-dealers.
    \658\ Letter from EWT (Sept. 2009).
    \659\ See, e.g., letter from RBC (June 2009); letter from STANY 
(June 2009); letter from CPIC (June 2009); letter from EWT (Sept. 
2009); letter from RBC (Sept. 2009). We received time estimates only 
with respect to the Commission's proposed implementation time and 
did not receive comments regarding estimated PRA burden hours. See 
supra Section VII. (discussing comments on implementation time).
---------------------------------------------------------------------------

    We considered these comments in reviewing the burden estimates for 
trading centers that we proposed with respect to the collection of 
information requirements in Rule 201. We believe that the cost and time 
required for implementation of Rule 201 will be lower than some 
commenters' stated estimates \660\ because we believe that the 
implementation and on-going monitoring and surveillance costs of the 
alternative uptick rule will be lower than the implementation and on-
going monitoring and surveillance costs that would be associated with 
adoption of the proposed modified uptick rule or the proposed uptick 
rule. Unlike the proposed modified uptick rule and the proposed uptick 
rule, which would have required sequencing of the national best bid or 
last sale price (i.e., whether the current national best bid or last 
sale price is above or below the previous national best bid or last 
sale price), the alternative uptick rule references only the current 
national best bid.
---------------------------------------------------------------------------

    \660\ We received comments expressing concerns about the 
implementation and on-going monitoring and compliance costs of a 
short sale price test restriction that were not specific to the 
alternative uptick rule. See, e.g., letter from RBC (June 2009); 
letter from STANY (June 2009); letter from CPIC (June 2009); letter 
from Wolverine.
---------------------------------------------------------------------------

    A number of commenters stated that because the alternative uptick 
rule would not require monitoring of the sequence of bids or last sale 
prices, implementing the alternative uptick rule would be less costly 
\661\ or easier than implementing the proposed modified uptick rule or 
the proposed uptick rule.\662\ In addition, several commenters stated 
that the alternative uptick rule would be easier to program into 
trading and surveillance systems than the proposed modified uptick rule 
or the proposed uptick rule.\663\ Another commenter stated, with 
respect to the alternative uptick rule, that ``actual implementation 
costs in terms of time and capital expenditure would be

[[Page 11282]]

negligible when compared to those involved in implementing either the 
uptick rule or modified uptick rule.'' \664\
---------------------------------------------------------------------------

    \661\ See, e.g., letter from BATS (May 2009); letter from 
Michael L. Crowl, Managing Director, Global General Counsel, 
Barclays Global Investors, dated Sept. 21, 2009 (``Barclays (Sept. 
2009)''); letter from BATS (Sept. 2009); letter from GETCO (Sept. 
2009); letter from ICI (Sept. 2009); letter from Glen Shipway (Sept. 
2009); letter from STA (Sept. 2009). In addition, several commenters 
acknowledged that implementation of the alternative uptick rule will 
likely be less costly, without referencing the sequencing issue. 
See, e.g., letter from Atherton Lane; letter from STANY (Sept. 
2009).
    \662\ See, e.g., letter from Credit Suisse (June 2009); letter 
from Goldman Sachs (June 2009); letter from SIFMA (June 2009); 
letter from Glen Shipway (Sept. 2009); letter from SIFMA (Sept. 
2009). In addition, one commenter acknowledged that implementation 
of the alternative uptick rule will likely be easier, without 
referencing the sequencing issue. See letter from Allston Trading 
(Sept. 2009).
    \663\ See, e.g., letter from BATS (May 2009); letter from 
Goldman Sachs (June 2009); letter from Glen Shipway (Sept. 2009); 
letter from ICI (Sept. 2009); see also letter from National Stock 
Exchange et al.
    \664\ Letter from BATS (Sept. 2009).
---------------------------------------------------------------------------

    Several commenters indicated that implementation of the alternative 
uptick rule would not be easier or less costly than implementation of 
the proposed modified uptick rule or the proposed uptick rule.\665\ 
However, we note that some of these commenters presented concerns that 
were not directly related to the alternative uptick rule \666\ or to 
implementation costs or difficulties.\667\ Additionally, one commenter 
did not provide the reasoning for its belief that the alternative 
uptick rule would not be easier or less costly to implement.\668\
---------------------------------------------------------------------------

    \665\ See, e.g., letter from Matlock Capital (Sept. 2009); 
letter from NYSE Euronext (Sept. 2009); letter from RBC (Sept. 
2009); letter from Knight Capital (Sept. 2009).
    \666\ See, e.g., letter from NYSE Euronext (Sept. 2009) (stating 
that implementation of the alternative uptick rule would be more 
difficult on the basis that the alternative uptick rule would be 
paired with a circuit breaker and attributing implementation 
difficulties to the circuit breaker approach, not the alternative 
uptick rule); letter from RBC (Sept. 2009) (expressing concern about 
the implementation cost of any short sale price test restriction in 
general).
    \667\ See, e.g., letter from Knight Capital (Sept. 2009) 
(characterizing a potential increase in friction, confusion, or 
inefficiency in the market as an implementation difficulty that may 
arise from the alternative uptick rule).
    \668\ See letter from Matlock Capital (Sept. 2009).
---------------------------------------------------------------------------

    Several commenters indicated that their belief that other 
commenters' estimates regarding the difficulty or costs of implementing 
and monitoring the proposed modified uptick rule and the proposed 
uptick rule were exaggerated.\669\ We recognize that some commenters' 
estimates of the costs of the proposed modified uptick rule or the 
proposed uptick rule may have been conservative. We also believe that 
because the alternative uptick rule does not include a sequencing 
requirement, the implementation and on-going monitoring and 
surveillance costs of the alternative uptick rule will be less than 
such costs would be with respect to the other proposed short sale price 
test restrictions.
---------------------------------------------------------------------------

    \669\ See, e.g., letter from Matlock Capital (Sept. 2009); 
letter from ISE (Sept. 2009); letter from Bingham McCutchen.
---------------------------------------------------------------------------

    In addition, as noted in the Proposal, while we have based our 
burden estimates, in part, on the burden estimates provided in 
connection with the adoption of Regulation NMS,\670\ we believe that 
these estimates may be on the high end because trading centers have 
already had to establish policies and procedures in connection with 
that Regulation's Order Protection Rule, which could help form the 
basis for the policies and procedures for Rule 201. Several commenters 
agreed, stating that previous experience with the policies and 
procedures required under Regulation NMS might reduce the 
implementation and on-going monitoring and compliance burdens on 
trading centers.\671\ In contrast, some commenters indicated that the 
Commission overstated the benefit of such previous experience,\672\ 
because, for example, ``systems re-written and architected for Reg NMS 
* * * did not include any short sale restrictions,'' \673\ or because 
such systems will require modifications in order to be used in the 
context of a short sale price test restriction.\674\ However, we 
considered these issues when considering the impact of previous 
experience with the policies and procedures requirement of Regulation 
NMS's Order Protection Rule. We continue to believe that because most 
trading centers already have in place systems and written policies and 
procedures to comply with Regulation NMS's Order Protection Rule, most 
trading centers will already be already familiar with establishing, 
maintaining, and enforcing trading-related policies and procedures, 
which will mitigate the burden of implementation of the policies and 
procedures requirement under Rule 201. We realize, however, that the 
exact nature and extent of the policies and procedures that a trading 
center is required to establish likely will vary depending upon the 
type, size, and nature of the trading center. Thus, our estimates take 
into account different types of trading centers and we realize that 
these estimates may be on the low-end for some trading centers while 
they may be on the high-end for other trading centers.
---------------------------------------------------------------------------

    \670\ See Regulation NMS Adopting Release, 70 FR 37496; see also 
Proposal, 74 FR at 18087.
    \671\ See, e.g., letter from EWT (Sept. 2009); letter from MFA 
(Oct. 2009).
    \672\ See, e.g., letter from FIF (June 2009); letter from NSCP; 
letter from RBC (June 2009).
    \673\ Letter from FIF (June 2009); see also letter from RBC 
(June 2009).
    \674\ See letter from NSCP; letter from RBC (June 2009).
---------------------------------------------------------------------------

    We considered whether our estimates of the burdens associated with 
the collection of information requirements for trading centers with 
respect to the proposed modified uptick rule included in the Proposal 
\675\ would change under the circuit breaker approach of Rule 201, but, 
as discussed below, concluded that these estimates continue to 
represent reasonable estimates under the circuit breaker approach in 
combination with the alternative uptick rule.
---------------------------------------------------------------------------

    \675\ See Proposal, 74 FR at 18087.
---------------------------------------------------------------------------

    Despite some commenters' concerns regarding the implementation 
costs of a circuit breaker rule,\676\ we believe that the circuit 
breaker approach will result in largely the same implementation costs 
as we estimated would be incurred if we adopted a permanent, market-
wide short sale price test restriction.\677\ As one commenter stated 
``[o]nce the price test is in place, there is minimal incremental 
effort required to add a Circuit Breaker that controls the application 
of the price test.'' \678\ Similarly, another commenter stated that 
``[t]he additional coding required to implement a circuit breaker is 
minimal * * *'' \679\ We believe that there will be only minimal, if 
any, implementation costs for a circuit breaker approach in addition to 
the costs we estimated previously for the implementation of a 
permanent, market-wide short sale price test rule because trading 
centers would need to establish written policies and procedures to 
implement the short sale price test restriction regardless of whether 
the short sale price test restriction is adopted on a permanent, 
market-wide basis or, in the case of Rule 201, adopted in conjunction 
with a circuit breaker. Several other commenters agreed, stating that 
the costs of the circuit breaker approach would be similar to, or only 
incrementally higher than, the costs of a permanent, market-wide 
approach.\680\
---------------------------------------------------------------------------

    \676\ See, e.g., letter from T. Rowe Price (June 2009); letter 
from Glen Shipway (June 2009); see also letter from STANY (June 
2009) (stating that costs savings of a circuit breaker approach 
would be reduced if the circuit breaker triggered a short sale price 
test restriction); letter from NYSE Euronext (Sept. 2009) (stating 
that ``a circuit breaker approach raises significant implementation 
complexities''); letter from SIFMA (June 2009) (including a survey 
reflecting implementation costs of a circuit breaker triggering a 
short sale price test based on the national best bid). We note that 
one commenter indicated that adoption of a circuit breaker approach 
would add approximately four to six weeks to the implementation time 
of the alternative uptick rule. See letter from Direct Edge (Sept. 
2009); see also supra Section VII. (discussing comments on 
implementation time).
    \677\ See Proposal, 74 FR at 18087.
    \678\ Letter from Nasdaq OMX Group (Oct. 2009).
    \679\ Letter from Credit Suisse (Sept. 2009).
    \680\ See, e.g., letter from STA (June 2009).
---------------------------------------------------------------------------

    In addition, with respect to on-going monitoring and surveillance 
costs of the circuit breaker approach, we recognize, as noted by one 
commenter,\681\ that trading centers will need to continuously monitor 
whether a security is subject to the provisions of Rule 201 and that 
there will be costs associated with such monitoring. However, we 
believe that these costs will be offset because, under the circuit 
breaker approach, the alternative uptick rule is time limited and will 
only apply

[[Page 11283]]

on a stock-by-stock basis, which will reduce our previously estimated 
costs for on-going monitoring and surveillance. This is because trading 
centers only need to monitor and surveil for compliance with the 
alternative uptick rule during the limited period of time that the 
circuit breaker is in effect with respect to a specific security. As 
such, the circuit breaker approach will allow regulatory, supervisory 
and compliance resources to focus on, and to address, those situations 
where a specific security is experiencing significant downward price 
pressure. As noted by one commenter, a circuit breaker ``is 
particularly efficient in stable and rising markets because it avoids 
imposing continuous monitoring and compliance costs where there is 
little or no corresponding risk of abusive short selling.'' \682\
---------------------------------------------------------------------------

    \681\ See letter from Glen Shipway (June 2009).
    \682\ Letter from Nasdaq OMX Group (Oct. 2009); see also letter 
from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    Further, although, under the circuit breaker approach, market 
participants will need to monitor whether a stock is subject to Rule 
201, we believe that familiarity with a circuit breaker approach may 
help mitigate such compliance costs. As discussed in the Proposal, 
currently, all stock exchanges and FINRA have rules or policies to 
implement coordinated circuit breaker halts.\683\ Moreover, SROs have 
rules or policies in place to coordinate individual security trading 
halts corresponding to significant news events.\684\
---------------------------------------------------------------------------

    \683\ See supra note 292.
    \684\ See, e.g., FINRA Rule 6120; see also Proposal, 74 FR at 
18065-18066 (discussing the background on circuit breakers).
---------------------------------------------------------------------------

    On balance, we believe that the estimates of the burdens associated 
with the collection of information requirements for trading centers 
included in the Proposal \685\ are appropriate with respect to Rule 
201. Thus, our estimates have not changed from the Proposal, except to 
the extent that total burden estimates have changed because we have 
updated the estimated number of trading centers.\686\
---------------------------------------------------------------------------

    \685\ See Proposal, 74 FR at 18087.
    \686\ The Proposal indicated that there were approximately 372 
non-SRO trading centers, including approximately 325 firms that were 
registered equity market makers or specialists at year-end 2007 
(this number was derived from annual FOCUS reports and discussion 
with SRO staff), as well as 47 ATSs that operate trading systems 
that trade NMS stocks. See Proposal, 74 FR at 18086. We now estimate 
that there are approximately 407 non-SRO trading centers, including 
approximately 357 firms that were registered equity market makers or 
specialists at year-end 2008 (this number was derived from annual 
FOCUS reports and discussion with SRO staff), as well as 50 ATSs 
that operate trading systems that trade covered securities. See 
supra note 651. We also note that the number of SRO trading centers 
has changed from 11 in the Proposal to 10. See supra note 650.
---------------------------------------------------------------------------

    Although the exact nature and extent of the policies and procedures 
that a trading center must establish likely will vary depending upon 
the nature of the trading center (e.g., SRO vs. non-SRO, full service 
broker-dealer vs. market maker), we estimate that it initially will, on 
average, take an SRO trading center approximately 220 hours \687\ of 
legal, compliance, information technology and business operations 
personnel time,\688\ and a non-SRO trading center approximately 160 
hours \689\ of legal, compliance, information technology and business 
operations personnel time,\690\ to develop the required policies and 
procedures.
---------------------------------------------------------------------------

    \687\ For purposes of this adopting release, we are basing our 
estimates on the burden hour estimates provided in connection with 
the adoption of Regulation NMS because the policies and procedures 
developed in connection with that Regulation's Order Protection Rule 
are in many ways similar to what a trading center will need to do to 
comply with Rule 201. See Regulation NMS Adopting Release, 70 FR 
37496; see also Proposal, 74 FR at 18087. We note, however, that 
these estimates may be on the high end because trading centers have 
already had to establish similar policies and procedures to comply 
with Regulation NMS.
    \688\ Based on experience and estimates provided in connection 
with Regulation NMS, we anticipate that of the 220 hours we estimate 
will be spent to establish the required policies and procedures, 70 
hours will be spent by legal personnel, 105 hours will be spent by 
compliance personnel, 20 hours will be spent by information 
technology personnel and 25 hours will be spent by business 
operations personnel of the SRO trading center.
    \689\ For purposes of this adopting release, we are basing our 
estimates on the burden hour estimates provided in connection with 
the adoption of Regulation NMS because the policies and procedures 
developed in connection with that Regulation's Order Protection Rule 
are in many ways similar to what a trading center will need to do to 
comply with the Rule 201. See Regulation NMS Adopting Release, 70 FR 
37496; see also Proposal, 74 FR at 18087. We note, however, that 
these estimates may be on the high end because trading centers have 
already had to establish similar policies and procedures to comply 
with Regulation NMS.
    \690\ Based on experience and the estimates provided in 
connection with Regulation NMS, we anticipate that of the 160 hours 
we estimate will be spent to establish policies and procedures, 37 
hours will be spent by legal personnel, 77 hours will be spent by 
compliance personnel, 23 hours will be spent by information 
technology personnel and 23 hours will be spent by business 
operations personnel of the non-SRO trading center.
---------------------------------------------------------------------------

    In addition to these estimates (of 220 hours for SRO respondents 
and 160 hours for non-SRO respondents), we expect that SRO and non-SRO 
respondents will incur one-time external costs for outsourced legal 
services. While we recognize that the amount of legal outsourcing 
utilized to help establish written policies and procedures may vary 
widely from entity to entity, we estimate that on average, each trading 
center will outsource 50 hours of legal time in order to establish 
policies and procedures in accordance with the amendments.\691\
---------------------------------------------------------------------------

    \691\ As discussed above, we base our burden estimate of 50 
hours of outsourced legal time on the burden estimate used for 
Regulation NMS because the policies and procedures developed in 
connection with that Regulation's Order Protection Rule are in many 
ways similar to what a trading center will need to do to comply with 
Rule 201. See Regulation NMS Adopting Release, 70 FR 37496; see also 
Proposal, 74 FR at 18087.
---------------------------------------------------------------------------

    We estimate that there will be an initial one-time burden of, on 
average, 220 (not including the outsourced 50 hours of legal time) 
burden hours per SRO trading center or 2,200 hours,\692\ and, on 
average, 160 (not including the outsourced 50 hours of legal time) 
burden hours per non-SRO trading center or 65,120 hours,\693\ for a 
total of 67,320 burden hours to establish the required written policies 
and procedures.\694\ We estimate a cost of, on average, approximately 
$8,340,000 for both SRO and non-SRO trading centers resulting from 
outsourced legal work.\695\
---------------------------------------------------------------------------

    \692\ The estimated 2,200 burden hours necessary for SRO trading 
centers to establish policies and procedures are calculated by 
multiplying 10 times 220 hours (10 x 220 hours = 2,200 hours).
    \693\ The estimated 65,120 burden hours necessary for non-SRO 
trading centers to establish policies and procedures are calculated 
by multiplying 407 times 160 hours (407 x 160 hours = 65,120 hours).
    \694\ See Rule 201(b).
    \695\ This figure was calculated as follows: (50 legal hours x 
$400 x 10 SRO trading centers) + (50 legal hours x $400 x 407 non-
SRO trading centers) = $8,340,000. Based on industry sources, we 
estimate that the average hourly rate for outsourced legal services 
in the securities industry is $400.
---------------------------------------------------------------------------

    Once a trading center has established the required written policies 
and procedures, we estimate that, on average, it will take an SRO and 
non-SRO trading center each approximately two hours per month of on-
going internal legal time and three hours of on-going internal 
compliance time to ensure that its written policies and procedures are 
up-to-date and remain in compliance with the amendments to Rule 201, or 
a total of 60 hours annually per respondent.\696\ In addition, we 
estimate that, on average, it will take an SRO and non-SRO trading 
center each approximately 16 hours per month of on-going compliance 
time, 8 hours per month of on-going information technology time, and 4 
hours per month of on-going legal time associated with on-going 
monitoring and surveillance for and enforcement of trading in

[[Page 11284]]

compliance with Rule 201, or a total of 336 hours annually per 
respondent.\697\
---------------------------------------------------------------------------

    \696\ This figure was calculated as follows: (2 legal hours x 12 
months) + (3 compliance hours x 12 months) = 60 hours annually per 
respondent. As discussed above, this burden estimate of 60 hours is 
based on experience and what was estimated for Regulation NMS to 
ensure that written policies and procedures were up-to-date and 
remained in compliance. See Regulation NMS Adopting Release, 70 FR 
37496; see also Proposal, 74 FR at 18087.
    \697\ This figure was calculated as follows: (16 compliance 
hours x 12 months) + (8 information technology hours x 12 months) + 
(4 legal hours x 12 months) = 336 hours annually per respondent. As 
discussed above, this burden estimate of 336 hours is based on 
experience and what was estimated for Regulation NMS regarding 
similarly required on-going monitoring and surveillance for and 
enforcement of trading in compliance with that regulation's policies 
and procedures requirement.
---------------------------------------------------------------------------

2. Policies and Procedures Requirement Under the Broker-Dealer and 
Riskless Principal Provisions
    To rely on the broker-dealer provision of Rule 201(c), a broker-
dealer marking a short sale order in a covered security ``short 
exempt'' under Rule 201(c) must identify the order as being at a price 
above the current national best bid at the time of submission to the 
trading center and must establish, maintain, and enforce written 
policies and procedures that are reasonably designed to prevent the 
incorrect identification of orders as being submitted to the trading 
center at a permissible price.\698\ At a minimum, the broker-dealer's 
policies and procedures must be reasonably designed to enable a broker-
dealer to monitor, on a real-time basis, the national best bid so as to 
determine the price at which the broker-dealer may submit a short sale 
order to a trading center in compliance with the requirements of Rule 
201(c). In addition, a broker-dealer must take such steps as necessary 
to enable it to enforce its policies and procedures effectively.\699\
---------------------------------------------------------------------------

    \698\ See Rule 201(c).
    \699\ This will include the requirement that broker-dealers 
regularly surveil to ascertain the effectiveness of their policies 
and procedures and take prompt remedial steps. This provision is 
intended to reinforce the on-going maintenance and enforcement 
requirements of the provision contained in Rule 201(c)(1) by 
explicitly assigning an affirmative responsibility to broker-dealers 
to surveil to ascertain the effectiveness of their policies and 
procedures. See Rule 201(c)(2).
---------------------------------------------------------------------------

    To rely on the riskless principal provision under Rule 201(d)(6) a 
broker-dealer must have written policies and procedures in place to 
assure that, at a minimum: (i) The customer order was received prior to 
the offsetting transaction; (ii) the offsetting transaction is 
allocated to a riskless principal or customer account within 60 seconds 
of execution; and (iii) that it has supervisory systems in place to 
produce records that enable the broker-dealer to accurately and readily 
reconstruct, in a time-sequenced manner, all orders on which the 
broker-dealer relies pursuant to this provision.\700\
---------------------------------------------------------------------------

    \700\ See Rule 201(d)(6).
---------------------------------------------------------------------------

    In the Proposal, we provided estimates of the reporting and 
recordkeeping burdens for broker-dealers to implement, monitor and 
surveil on an on-going basis the policies and procedures required to 
rely on the broker-dealer provision of Rule 201(c) or the riskless 
principal provision under Rule 201(d)(6).\701\ We also requested 
comment, in the Proposal and the Re-Opening Release, as to whether the 
proposed burden estimates were appropriate or whether such estimates 
should be increased or reduced, and if so, for which entities and by 
how much.\702\ The following discussion of comments on the proposed 
burden estimates for broker-dealers includes comments that were 
discussed above with respect to the burden estimates for trading 
centers \703\ because, in some cases, commenters provided comments and 
estimates on the costs of establishing and monitoring policies and 
procedures under the proposed short sale price tests without 
distinguishing between costs that would be applicable to trading 
centers as opposed to broker-dealers.
---------------------------------------------------------------------------

    \701\ See Proposal, 74 FR at 18088-18089.
    \702\ See Proposal, 74 FR at 18089; Re-Opening Release, 74 FR at 
42036.
    \703\ See supra Section IX.E.1. (discussing reporting and 
recordkeeping burdens for trading centers).
---------------------------------------------------------------------------

    One commenter provided a cost estimate, including costs for 
``development man-hours'' of $500,000 per firm for implementation of 
Rule 201 by broker-dealers.\704\ One commenter stated that a new short 
sale price test restriction would involve ``significant implementation 
costs'' and ``the generation and retention of voluminous compliance 
reports'' but did not provide a specific estimate of the cost or hours 
that would be involved.\705\ Several commenters expressed general 
concerns regarding the time and cost that would be imposed on market 
participants for implementation and on-going monitoring and 
surveillance of a new short sale price test restriction, including a 
policies and procedures requirement but did not provide specific 
estimates of such time and cost.\706\
---------------------------------------------------------------------------

    \704\ Letter from Wolverine. Wolverine provided an estimate of 
$500,000 per firm for implementation costs, which it applied to both 
non-SRO trading centers and other registered broker-dealers.
    \705\ Letter from EWT (Sept. 2009). EWT also did not specify 
whether this comment on our estimated annual reporting and 
recordkeeping burdens with respect to provisions of the proposed 
rules that would require a new ``collection of information'' was 
specific to the provisions applicable to trading centers or to the 
provisions applicable to broker-dealers.
    \706\ See, e.g., supra note 659. These commenters' concerns 
regarding implementation costs either were expressed with respect to 
market participants generally or included references to obligations 
that would be imposed on, or changes that would have to be made by, 
broker-dealers.
---------------------------------------------------------------------------

    In addition, several commenters noted that implementation and on-
going monitoring and surveillance of the requirements of the broker-
dealer provision would impose significant costs on broker-dealers, but 
did not provide an estimate of such costs.\707\ Several commenters 
stated that the costs of the broker-dealer provision could be 
particularly burdensome for smaller broker-dealers, but did not provide 
a time or cost estimate of such burdens.\708\
---------------------------------------------------------------------------

    \707\ See, e.g., letter from Credit Suisse (June 2009); letter 
from FIF (June 2009); letter from Lime Brokerage (June 2009); letter 
from NSCP; letter from STANY (June 2009); letter from EWT (Sept. 
2009).
    \708\ See, e.g., letter from Credit Suisse (June 2009); letter 
from NSCP; letter from T.D. Pro Ex. We received time estimates on 
the Commission's proposed implementation time, but did not receive 
comments with respect to the estimated PRA burden hours. See supra 
Section VII. (discussing comments on implementation time).
---------------------------------------------------------------------------

    We considered these comments in reviewing the burden estimates for 
broker-dealers that we proposed with respect to the collection of 
information requirements in Rule 201. We believe that the cost and time 
required for implementation and on-going monitoring and surveillance of 
the policies and procedures required to rely on the broker-dealer 
provision of Rule 201(c) will be lower than some commenters' stated 
estimates \709\ because the alternative uptick rule references only the 
current national best bid, unlike the proposed modified uptick rule and 
the proposed uptick rule, which would have required sequencing of the 
national best bid or last sale price.\710\ Because the alternative 
uptick rule does not require sequencing of the national best bid, we 
believe that the policies and procedures required in order to rely on 
the broker-dealer provision under the alternative uptick rule, which 
are similar to those required for non-SRO trading centers in complying 
with paragraph (b) of Rule 201, will be easier and less costly to

[[Page 11285]]

implement and monitor than would be the case under the proposed 
modified uptick rule or the proposed uptick rule.\711\ We note that one 
of the commenters that expressed concerns about the implementation cost 
of the broker-dealer provision also acknowledged that a rule ``that 
would not require data centralization and sequencing would be 
significantly less complex and faster to implement.'' \712\
---------------------------------------------------------------------------

    \709\ We received comments expressing concerns about the 
implementation and on-going monitoring and compliance costs to 
broker-dealers of a short sale price test restriction that were not 
specific to the alternative uptick rule. See, e.g., letter from 
Credit Suisse (June 2009); letter from RBC (June 2009); letter from 
STANY (June 2009); letter from CPIC (June 2009); letter from 
Wolverine; letter from T.D. Pro Ex; letter from FIF (June 2009); 
letter from Lime Brokerage (June 2009); letter from NSCP.
    \710\ We also note that it is possible that some smaller broker-
dealers that determine to rely on the broker-dealer provision may 
determine that it is cost-effective for them to outsource certain 
functions necessary to comply with Rule 201(c) to larger broker-
dealers, rather than performing such functions in house, to remain 
competitive in the market. This may help mitigate costs associated 
with implementing and complying with Rule 201(c). Additionally, they 
may decide to purchase order management software from technology 
firms. Order management software providers may integrate changes 
imposed by Rules 200(g) and 201 into their products, thereby 
providing another cost-effective way for smaller broker-dealers to 
comply with the requirement of Rule 201(c).
    \711\ See supra notes 660 to 669 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs).
    \712\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    We disagree with several commenters who stated that, although 
implementation and on-going monitoring and surveillance of the 
alternative uptick rule might be easier and/or less costly for trading 
centers, this would not hold true for broker-dealers.\713\ One of these 
commenters stated that ``in order to avoid rejection of short sale 
orders under an alternative uptick rule, programming would need to be 
implemented to anticipate changes in the national best bid between the 
time a short sale order is entered and the time it reaches the relevant 
market center.'' \714\ However, the broker-dealer provision of Rule 
201(c) is designed specifically to help avoid this result. Under the 
broker-dealer provision, a broker-dealer may, in accordance with the 
policies and procedures required by the provision, identify the order 
as being at a price that is above the current national best bid at the 
time the order is submitted to the trading center and mark the order 
``short exempt.'' Trading centers are required to have written policies 
and procedures in place to permit the execution or display of a short 
sale order of a covered security marked ``short exempt'' without regard 
to whether the order is at a price that is less than or equal to the 
current national best bid.\715\
---------------------------------------------------------------------------

    \713\ See, e.g., letter from Citadel et al. (Sept. 2009); letter 
from EWT (Sept. 2009); letter from Lime Brokerage (Sept. 2009).
    \714\ Letter from Citadel et al. (Sept. 2009).
    \715\ See Rule 201(b)(1)(iii).
---------------------------------------------------------------------------

    In addition, as noted in the Proposal, while we have based our 
burden estimates on the burden estimates provided in connection with 
the adoption of Regulation NMS with respect to non-SRO trading centers 
(which includes broker-dealers),\716\ we note that these estimates may 
be on the high end for those broker-dealers that have already had to 
establish policies and procedures in connection with that Regulation's 
Order Protection Rule, which could help form the basis for the policies 
and procedures for the broker-dealer provision of Rule 201(c), or the 
riskless principal provision under Rule 201(d)(6). Several commenters 
agreed, indicating that broker-dealers' previous experience with the 
policies and procedures required under Regulation NMS might reduce the 
implementation and on-going monitoring and compliance burdens on 
broker-dealers.\717\ Some commenters stated that the Commission 
overstated the benefit of such previous experience \718\ because, for 
example, ``systems re-written and architected for Reg NMS * * * did not 
include any short sale restrictions,'' \719\ or because such systems 
will require modifications in order to be used in the context of a 
short sale price test restriction.\720\ However, we considered these 
issues when considering the impact of previous experience with the 
policies and procedures requirement of Regulation NMS's Order 
Protection Rule. We continue to believe that because broker-dealers may 
already have in place systems and written policies and procedures in 
connection with Regulation NMS's Order Protection Rule, those broker-
dealers will already be familiar with establishing, maintaining, and 
enforcing trading-related policies and procedures, which will mitigate 
the burden of implementation of the policies and procedures requirement 
under the broker-dealer provision of Rule 201(c), or the riskless 
principal provision under Rule 201(d)(6). We realize, however, that the 
exact nature and extent of the policies and procedures that a broker-
dealer must establish likely will vary depending upon the type, size, 
and nature of the broker-dealer. Thus, our estimates take into account 
different types of broker-dealers and we realize that these estimates 
may be on the low-end for some broker-dealers while they may be on the 
high-end for other broker-dealers.
---------------------------------------------------------------------------

    \716\ See supra note 670.
    \717\ See, e.g., letter from EWT (Sept. 2009); letter from MFA 
(Oct. 2009).
    \718\ See, e.g., letter from FIF (June 2009); letter from NSCP; 
letter from RBC (June 2009).
    \719\ Letter from FIF (June 2009); see also letter from RBC 
(June 2009).
    \720\ See letter from NSCP; letter from RBC (June 2009).
---------------------------------------------------------------------------

    We considered whether our estimates of the burdens associated with 
the collection of information requirements for broker-dealers with 
respect to the proposed modified uptick rule included in the Proposal 
\721\ would change under the circuit breaker approach of Rule 201, but 
concluded, as discussed below, that these estimates continue to 
represent reasonable estimates under the circuit breaker approach.
---------------------------------------------------------------------------

    \721\ See Proposal, 74 FR at 18088-18089.
---------------------------------------------------------------------------

    As discussed previously,\722\ despite some commenters' concerns 
regarding the implementation costs of a circuit breaker rule,\723\ we 
believe that the circuit breaker approach will result in largely the 
same implementation costs as we estimated would be incurred if we 
adopted a permanent, market-wide short sale price test 
restriction.\724\ We believe that that there will be only minimal, if 
any, implementation costs for a circuit breaker approach in addition to 
the costs we estimated previously for the implementation of a 
permanent, market-wide short sale price test rule because broker-
dealers relying on Rule 201(c) or Rule 201(d)(6) must establish written 
policies and procedures required to comply with those provisions 
regardless of whether the short sale price test restriction is adopted 
on a permanent, market-wide basis or, in the case of Rule 201, adopted 
in conjunction with a circuit breaker. Several other commenters agreed, 
stating that the costs of the circuit breaker approach would be similar 
to, or only incrementally higher than, the costs of a permanent, 
market-wide approach.\725\
---------------------------------------------------------------------------

    \722\ See supra Section IX.E.1. (discussing estimated burdens of 
the collection of information requirements applicable to trading 
centers under Rule 201).
    \723\ See supra note 676.
    \724\ See Proposal, 74 FR at 18088.
    \725\ See, e.g., letter from Nasdaq OMX Group (Oct. 2009); 
letter from Credit Suisse (Sept. 2009); letter from STA (June 2009).
---------------------------------------------------------------------------

    In addition, with respect to on-going monitoring and surveillance 
costs of the circuit breaker approach, we recognize, as noted by one 
commenter,\726\ that broker-dealers relying on Rule 201(c) or Rule 
201(d)(6) must continuously monitor whether a security is subject to 
the provisions of Rule 201 and that there will be costs associated with 
such monitoring. However, we believe that these costs will be offset 
because, under the circuit breaker approach, the alternative uptick 
rule is time limited and will only apply on a stock by stock basis, 
which will reduce our previously estimated costs for on-going 
monitoring and surveillance. This is because broker-dealers relying on 
Rule 201(c) will only need to monitor and surveil for compliance with 
the alternative uptick rule, and broker-dealers relying on Rule 
201(d)(6) will only need to monitor for compliance with the 
requirements of that provision, during the limited period of time that 
the circuit breaker is in effect with respect to a specific security. 
As such, the circuit breaker approach will allow

[[Page 11286]]

regulatory, supervisory and compliance resources to focus on, and to 
address, those situations where a specific security is experiencing 
significant downward price pressure.\727\
---------------------------------------------------------------------------

    \726\ See letter from Glen Shipway (June 2009).
    \727\ See, e.g., letter from Nasdaq OMX Group (Oct. 2009); 
letter from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    On balance, we believe that the estimates of the burdens associated 
with the collection of information requirements for broker-dealers 
included in the Proposal \728\ are appropriate with respect to Rule 
201. Thus, our estimates have not changed from the Proposal, except to 
the extent that total burden estimates have changed because we have 
updated the estimated number of broker-dealers.\729\
---------------------------------------------------------------------------

    \728\ See Proposal, 74 FR at 18088-18089.
    \729\ The Proposal indicated that there were approximately 5,561 
broker-dealers. This number was based on a review of 2007 FOCUS 
Report filings reflecting registered broker-dealers, including 
introducing broker-dealers. This number did not include broker-
dealers that were delinquent on FOCUS Report filings. See Proposal, 
74 FR at 18086. We now estimate that there are approximately 5,178 
broker-dealers. See supra note 652 and accompanying text.
---------------------------------------------------------------------------

    Although the exact nature and extent of the required policies and 
procedures that a broker-dealer must establish under the broker-dealer 
or the riskless principal provisions likely will vary depending upon 
the nature of the broker-dealer (e.g., full service broker-dealer vs. 
market maker), we estimate that it initially will, on average, take a 
broker-dealer approximately 160 hours \730\ of legal, compliance, 
information technology and business operations personnel time,\731\ to 
develop the required policies and procedures. In addition to this 
estimate of 160 hours, we expect that broker-dealers will incur one-
time external costs for outsourced legal services. While we recognize 
that the amount of legal outsourcing utilized to help establish written 
policies and procedures will vary widely from entity to entity, we 
estimate that on average, each broker-dealer will outsource 50 hours 
\732\ of legal time in order to establish policies and procedures in 
accordance with the broker-dealer provision in Rule 201(c) and the 
riskless principal provision in Rule 201(d)(6).
---------------------------------------------------------------------------

    \730\ We base this estimate of 160 hours on the estimated burden 
hours we believe it will take a non-SRO trading center (which 
includes broker-dealers) to develop similarly required policies and 
procedures, since the policies and procedures required under the 
broker-dealer provision or the riskless principal exception will be 
similar to those required for non-SRO trading centers in complying 
with paragraph (b) of Rule 201. See Regulation NMS Adopting Release, 
70 FR 37496; see also Proposal, 74 FR at 18087.
    \731\ Based on experience and the estimates provided in 
connection with Regulation NMS, we anticipate that of the 160 hours 
we estimate will be spent to establish policies and procedures, 37 
hours will be spent by legal personnel, 77 hours will be spent by 
compliance personnel, 23 hours will be spent by information 
technology personnel and 23 hours will be spent by business 
operations personnel of the broker-dealer.
    \732\ As 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 broker-dealer will need to do to comply with 
the policies and procedures required under the broker-dealer 
provision and the riskless principal exception of Rule 201. See 
Regulation NMS Adopting Release, 70 FR 37496; see also Proposal, 74 
FR at 18087.
---------------------------------------------------------------------------

    We estimate that, on average, there will be an initial one-time 
burden of 160 burden hours per broker-dealer or 828,480 hours \733\ to 
establish policies and procedures required under the broker-dealer 
provision in Rule 201(c) and the riskless principal provision in Rule 
201(d)(6). We estimate an average cost of approximately $103,560,000 
for broker-dealers resulting from outsourced legal work.\734\
---------------------------------------------------------------------------

    \733\ The estimated 828,480 burden hours necessary for a broker-
dealer to establish policies and procedures are calculated by 
multiplying 5,178 times 160 hours (5,178 x 160 hours = 828,480 
hours). See supra note 730.
    \734\ This figure was calculated as follows: (50 legal hours x 
$400 x 5,178 broker-dealers) = $103,560,000. Based on industry 
sources, we estimate that the average hourly rate for outsourced 
legal services in the securities industry is $400.
---------------------------------------------------------------------------

    Once a broker-dealer has established written policies and 
procedures that are required under Rule 201(c) or Rule 201(d)(6), we 
estimate that it will take, on average, a broker-dealer approximately 
two hours per month of internal legal time and three hours of internal 
compliance time to ensure that its written policies and procedures are 
up-to-date and remain in compliance with Rule 201(c) or 201(d)(6), or a 
total of 60 hours annually per respondent.\735\ In addition, we 
estimate that, on average, it will take a broker-dealer approximately 
16 hours per month of on-going compliance time, 8 hours per month of 
on-going information technology time, and 4 hours per month of on-going 
legal time associated with on-going monitoring and surveillance for and 
enforcement of trading in compliance with Rule 201, or a total of 336 
hours annually per respondent.\736\
---------------------------------------------------------------------------

    \735\ This figure was calculated as follows: (2 legal hours x 12 
months) + (3 compliance hours x 12 months). As discussed above, this 
burden estimate of 60 hours is based on experience and what was 
estimated for a Regulation NMS respondent to ensure that its written 
policies and procedures were up-to-date and remained in compliance.
    \736\ This figure was calculated as follows: (16 compliance 
hours x 12 months) + (8 information technology hours x 12 months) + 
(4 legal hours x 12 months) = 336 hours annually per respondent. As 
discussed above, this burden estimate of 336 hours is based on 
experience and what was estimated for Regulation NMS for similarly 
required on-going monitoring and surveillance for and enforcement of 
trading in compliance with that regulation's policies and procedures 
requirement.
---------------------------------------------------------------------------

3. Marking Requirements
    The amendments to Rule 200(g) add a new marking requirement of 
``short exempt.'' \737\ In particular, if the broker-dealer chooses to 
rely on its own determination that it is submitting the short sale 
order to the trading center at a price that is above the current 
national best bid at the time of submission or to rely on an exception 
specified in the Rule, it must mark the order as ``short exempt.'' 
\738\
---------------------------------------------------------------------------

    \737\ See Rule 200(g); see also supra Section IV. (discussing 
the amendments to Rule 200(g)).
    \738\ See Rule 200(g)(2).
---------------------------------------------------------------------------

    In the Proposal, we provided estimates of the reporting and 
recordkeeping burdens for the ``short exempt'' marking requirement. We 
also requested comment, in the Proposal and Re-Opening Release, on the 
accuracy of such estimates.\739\
---------------------------------------------------------------------------

    \739\ See Proposal, 74 FR at 18089; Re-Opening Release, 74 FR at 
42036.
---------------------------------------------------------------------------

    Several commenters noted that the ``short exempt'' marking 
requirement would impose significant implementation costs, but did not 
provide a specific estimate of such costs.\740\ One commenter stated 
that costs of the ``short exempt'' marking requirement would be worth 
the benefits gained.\741\ We considered these comments in reviewing the 
burden estimates of the ``short exempt'' marking requirement of Rule 
200(g).
---------------------------------------------------------------------------

    \740\ See, e.g., letter from FIF (June 2009); letter from NSCP; 
letter from RBC (June 2009).
    \741\ See letter from STA (June 2009).
---------------------------------------------------------------------------

    We also considered whether our estimates of the burdens associated 
with the collection of information requirements for broker-dealers with 
respect to the amendments to Rule 200(g) in conjunction with the 
proposed modified uptick rule included in the Proposal \742\ would 
change under the circuit breaker approach of Rule 201, but concluded, 
as discussed below, that these estimates continue to represent 
reasonable estimates under the circuit breaker approach.
---------------------------------------------------------------------------

    \742\ See Proposal, 74 FR at 18089.
---------------------------------------------------------------------------

    We believe that the ``short exempt'' marking requirements of Rule 
200(g), in conjunction with a circuit breaker approach, will result in 
largely the same implementation costs as would be incurred if the 
``short exempt'' marking requirements were combined with a market-wide 
short sale price test restriction. This is because broker-dealers 
relying on the provisions of Rule 201(c) or Rule 201(d) would need to 
make systems changes to implement the ``short exempt'' marking 
requirements

[[Page 11287]]

regardless of whether the short sale price test restriction is adopted 
on a permanent, market-wide basis or, in the case of Rule 201, adopted 
in conjunction with a circuit breaker.
    In addition, with respect to on-going monitoring and surveillance 
costs of the ``short exempt'' marking requirements in conjunction with 
a circuit breaker approach, we recognize, as noted by one 
commenter,\743\ that market participants will need to continuously 
monitor whether a security is subject to the provisions of Rule 201 and 
that there will be costs associated with such monitoring. However, we 
believe that these costs will be offset because, under the circuit 
breaker approach, use of the ``short exempt'' provisions of Rule 201(c) 
and Rule 201(d) and the related marking requirements are time limited 
and will only apply on a stock by stock basis, which will reduce our 
previously estimated costs for on-going monitoring and surveillance. 
This is because broker-dealers who choose to rely on Rule 201(c) or 
Rule 201(d) will only need to monitor and surveil for compliance with 
the requirements of those provisions and will only need to mark 
qualifying orders ``short exempt'' during the limited period of time 
that the circuit breaker is in effect with respect to a specific 
security. As such, the circuit breaker approach will allow regulatory, 
supervisory and compliance resources to focus on, and to address, those 
situations where a specific security is experiencing significant 
downward price pressure.\744\
---------------------------------------------------------------------------

    \743\ See letter from Glen Shipway (June 2009).
    \744\ See, e.g., letter from Nasdaq OMX Group (Oct. 2009); 
letter from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    On balance, we believe our proposed estimates of the burdens 
associated with the collection of information requirements of the 
``short exempt'' marking requirement \745\ are appropriate with respect 
to Rule 200(g) as adopted. Thus, our estimates have not changed from 
the Proposal, except to the extent that total burden estimates have 
changed because we have updated the estimated number of broker-
dealers.\746\
---------------------------------------------------------------------------

    \745\ See Proposal, 74 FR at 18089.
    \746\ See supra note 729.
---------------------------------------------------------------------------

    We believe that the implementation cost of the ``short exempt'' 
marking requirement will likely be similar to the implementation cost 
of the order marking requirements of Rule 200(g) of Regulation SHO, 
which had originally included the category of ``short exempt.'' 
Industry sources at that time estimated initial implementation costs 
for the former ``short exempt'' marking requirement to be approximately 
$100,000 to $125,000.\747\ Based on these estimates, as adjusted for 
inflation, we estimate that the initial implementation cost of the 
``short exempt'' marking requirement will be approximately $115,000 to 
$145,000 per broker-dealer \748\ for a total initial implementation 
cost of approximately $595,470,000 to $750,810,000 for all broker-
dealers.\749\
---------------------------------------------------------------------------

    \747\ See 2004 Regulation SHO Adopting Release, 69 FR at 48023.
    \748\ The adjustment for inflation was calculated using 
information in the Consumer Price Index, U.S. Department of Labor, 
Bureau of Labor Statistics.
    \749\ These figures were calculated as follows: ($115,000 x 
5,178) = $595,470,000 and ($145,000 x 5,178) = $750,810,000.
---------------------------------------------------------------------------

    While not all broker-dealers likely will enter sell orders in 
securities covered by the amendments to Rules 200(g) and 201 in a 
manner that will subject them to this collection of information, we 
estimate, for purposes of the PRA, that all of the approximately 5,178 
registered broker-dealers will do so. For purposes of the PRA, the 
Staff has estimated that a total of approximately 12.9 billion ``short 
exempt'' orders are entered annually.\750\
---------------------------------------------------------------------------

    \750\ As we stated in the Proposal, our estimate of 12.9 billion 
``short exempt'' orders was calculated based on a review of short 
sale trades and short sale orders during August 2008. We believe 
that August 2008 data is representative of a normal month of 
trading. Specifically, we calculated that there were about 263 
million short sale trades during August 2008 for Amex, FINRA, 
Nasdaq, NYSE Arca, and NYSE market centers. Based on a review of 
Rule 605 reports from the three largest market centers during August 
2008, we estimate a ratio of 14.4 orders to trades. We gross up 263 
million short sale trades by 14.4, which yields 3.8 billion short 
sale orders during August 2008 or an annualized figure of 45.4 
billion. We estimate that approximately 28.5% of short sale orders 
are short exempt using Nasdaq short sale data from January to April 
2005. We multiply 45.4 billion times 0.285 to obtain our estimate of 
12.9 billion short exempt orders. See Proposal, 74 FR at 18089. We 
also note that, because the circuit breaker rule will not be in 
place at all times or for all securities, the frequency and, 
therefore, the estimated burden of marking ``short exempt'' is 
expected to be lower. We did not receive any comments on the 
estimated number of annual ``short exempt'' orders.
---------------------------------------------------------------------------

    This is an average of approximately 2,491,309 annual responses by 
each respondent.\751\ As we discussed in the Proposal, each response of 
marking sell orders ``short exempt'' will take approximately .000139 
hours (.5 seconds) to complete. This estimate is based on the same time 
estimate for marking sell orders ``long'' or ``short'' used upon 
adoption of Rule 200(g) under Regulation SHO.\752\ We believe this 
estimate is appropriate because, in accordance with the current marking 
requirements of Rule 200(g) of Regulation SHO, broker-dealers are 
already required to mark a sell order either ``long'' or ``short.'' 
Thus, most broker-dealers already have the necessary mechanisms and 
procedures in place and are already familiar with processes and 
procedures to comply with the marking requirements of Rule 200(g) of 
Regulation SHO and broker-dealers will be able to continue to use the 
same mechanisms, processes and procedures to comply with the amendments 
to Rules 200(g) and 200(g)(2). We note, however, that this estimate may 
be too high given technological advances, such as automation of sell 
order marking, since the adoption of Rule 200(g) in 2004.
---------------------------------------------------------------------------

    \751\ This figure was calculated as follows: 12.9 billion 
``short exempt'' orders divided by 5,178 broker-dealers.
    \752\ See 2004 Regulation SHO Adopting Release, 69 FR at 48023, 
n.140; see also 2003 Regulation SHO Proposing Release, 68 FR at 
63000, n.232.
---------------------------------------------------------------------------

    Thus, the total approximate estimated annual hour burden per year 
is 1,793,100 burden hours (12,900,000,000 orders marked ``short 
exempt'' multiplied by 0.000139 hours/order marked ``short exempt''). 
Our estimate for the paperwork compliance for the marking requirement 
of Rule 200(g) for each broker-dealer is approximately 346 burden hours 
(2,491,309 responses multiplied by 0.000139 hours/responses) or (a 
total of 1,793,100 burden hours divided by 5,178 respondents).

F. Collection of Information Is Mandatory

1. Policies and Procedures Requirements
    The collection of information required under Rule 201's policies 
and procedures requirement is mandatory for trading centers executing 
and displaying short sale orders in covered securities. The collection 
of information required under Rule 201's policies and procedures 
requirements in connection with the broker-dealer provision in Rule 
201(c) and the riskless principal exception in Rule 201(d)(6) is 
mandatory for broker-dealers relying on these provisions.
2. Marking Requirements
    The collection of information is mandatory for all broker-dealers 
submitting sale orders marked ``short exempt'' in reliance on one of 
the provisions contained in paragraph (c) or (d) of Rule 201.

G. Confidentiality

1. Policies and Procedures Requirements
    We expect that the information collected pursuant to Rule 201's 
required policies and procedures for trading centers will be 
communicated to

[[Page 11288]]

the members, subscribers, and employees (as applicable) of all trading 
centers. In addition, the information collected pursuant to Rule 201's 
required policies and procedures for trading centers will be retained 
by the trading centers and will be available to the Commission and SRO 
examiners upon request, but not subject to public availability. The 
information collected pursuant to Rule 201's broker-dealer provision 
and the riskless principal exception will be retained by the broker-
dealers and will be available to the Commission and SRO examiners upon 
request, but not subject to public availability.
2. Marking Requirements
    The information collected pursuant to the ``short exempt'' marking 
requirements in Rule 200(g) and Rule 200(g)(2) will be submitted to 
trading centers and will be available to the Commission and SRO 
examiners upon request. The information collected pursuant to the 
``short exempt'' marking requirement may be publicly available because 
it may be published, in a form that would not identify individual 
broker-dealers, by SROs that publish on their Internet Web sites 
aggregate short selling volume data in each individual equity security 
for that day and, on a one-month delayed basis, information regarding 
individual short sale transactions in all exchange-listed equity 
securities.

H. Record Retention Period

1. Policies and Procedures Requirements
    Any records generated in connection with Rule 201's requirements 
that trading centers and broker-dealers (with respect to the broker-
dealer and riskless principal provisions) establish written policies 
and procedures must be preserved in accordance with, and for the 
periods specified in, Exchange Act Rules 17a-1 \753\ for SRO trading 
centers and 17a-4(e)(7) \754\ for non-SRO trading centers and 
registered broker-dealers.
---------------------------------------------------------------------------

    \753\ 17 CFR 240.17a-1.
    \754\ 17 CFR 240.17a-4(e)(7).
---------------------------------------------------------------------------

2. Marking Requirements
    The amendments to Rule 200(g) and Rule 200(g)(2) do not contain any 
new record retention requirements. All registered broker-dealers that 
are subject to the amendments are currently required to retain records 
in accordance with Rule 17a-4(e)(7) under the Exchange Act.\755\
---------------------------------------------------------------------------

    \755\ Id.
---------------------------------------------------------------------------

X. Cost-Benefit Analysis

    We are sensitive to the costs and benefits of our rules. To assist 
us in evaluating the costs and benefits of the amendments to Regulation 
SHO, in the Proposal and the Re-Opening Release, we encouraged 
commenters to discuss any costs or benefits that the proposed rules 
might impose.\756\ In particular, we requested comment on the potential 
costs for any modification to both computer systems and surveillance 
mechanisms and for information gathering, management, and recordkeeping 
systems or procedures, as well as any potential benefits resulting from 
the proposed amendments for registrants, issuers, investors, broker-
dealers, other securities industry professionals, regulators, and 
others.\757\ We also requested comment as to the extent to which 
placing price restrictions on short selling could impact or lessen some 
of the benefits of legitimate short selling or could lead to a decrease 
in market efficiency, price discovery, or liquidity.\758\ Commenters 
were requested to provide analysis and data to support their views on 
the costs and benefits associated with the proposed amendments to Rule 
201 and Rule 200(g).\759\ We discuss below the benefits and costs, 
including cost mitigation features, of Rule 201.
---------------------------------------------------------------------------

    \756\ See Proposal, 74 FR at 18090; Re-Opening Release, 74 FR at 
42037.
    \757\ See Proposal, 74 FR at 18090.
    \758\ See id.
    \759\ See id.; Re-Opening Release, 74 FR at 42037.
---------------------------------------------------------------------------

A. Benefits

    We believe it is appropriate at this time to adopt in Rule 201 a 
circuit breaker approach combined with the alternative uptick rule. 
Specifically, Rule 201(b) requires that a trading center establish, 
maintain, and enforce written policies and procedures reasonably 
designed to prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on the prior day.\760\ In addition, the Rule requires 
that the trading center establish, maintain, and enforce written 
policies and procedures reasonably designed to impose this short sale 
price test restriction for the remainder of the day and the following 
day when a national best bid for the covered security is calculated and 
disseminated on a current and continuing basis by a plan processor 
pursuant to an effective national market system plan.\761\
---------------------------------------------------------------------------

    \760\ Rule 201(b).
    \761\ Rule 201(b).
---------------------------------------------------------------------------

    In conjunction with the amendments to Rule 201, we are amending 
Rule 200(g) of Regulation SHO to provide that a broker-dealer may mark 
certain qualifying sell orders ``short exempt.'' In particular, if the 
broker-dealer chooses to rely on its own determination that it is 
submitting the short sale order to the trading center at a price that 
is above the current national best bid at the time of submission or to 
rely on an exception specified in the Rule, it must mark the order as 
``short exempt.'' \762\
---------------------------------------------------------------------------

    \762\ See Rules 200(g) and 200(g)(2).
---------------------------------------------------------------------------

    We discuss below the benefits of Rule 201 with respect to two 
inter-related aspects of the Rule: the short sale price test 
restriction, specifically the alternative uptick rule, and the circuit 
breaker approach that triggers application of that restriction. We have 
separated the discussion into two parts in order to more clearly 
address the comments that we received with respect to the various 
aspects of Rule 201. However, the circuit breaker approach and the 
alternative uptick rule under Rule 201 operate in conjunction with one 
another and should not be considered isolated provisions.
1. Alternative Uptick Rule
    The alternative uptick rule is designed to prevent the execution or 
display of short sale orders at a price that is less than or equal to 
the current national best bid. By not allowing short sellers to sell at 
or below the current national best bid, the alternative uptick rule 
will allow long sellers, by selling at the bid, to sell first in a 
declining market for a particular security. As the Commission has noted 
previously in connection with short sale price test restrictions, a 
goal of such restrictions is to allow long sellers to sell first in a 
declining market.\763\ A short seller that is seeking to profit quickly 
from accelerated, downward market moves may find it advantageous to be 
able to short sell at the current national best bid. By placing long 
sellers ahead of short sellers in the execution queue under certain 
circumstances, Rule 201 will help promote capital formation, since 
investors may be more willing to hold long positions if they know they 
may have a preferred position over short sellers when they wish to 
sell.\764\
---------------------------------------------------------------------------

    \763\ See supra note 17.
    \764\ But see infra notes 821 to 827 and accompanying text 
(discussing the potential negative impact of Rule 201 on various 
trading strategies that include short selling).

---------------------------------------------------------------------------

[[Page 11289]]

    In addition, because the alternative uptick rule, when triggered, 
will generally permit short selling only at a price above the current 
national best bid, the alternative uptick rule will not allow short 
sales to get immediate execution at the bid.\765\ In other words, short 
sellers will not be permitted to act as liquidity takers when the 
alternative uptick rule applies, but will participate, if at all, as 
liquidity providers (unless an exception applies), adding depth to the 
market. Put another way, unless an exception applies, short sales will 
execute only when purchasers arrive willing to buy at prices above the 
national best bid. In discussing the alternative uptick rule, one 
commenter stated that ``[n]ot only does it faithfully replicate the old 
uptick rule it improves upon it by making each and every short sale a 
liquidity providing transaction.'' \766\
---------------------------------------------------------------------------

    \765\ As noted by some commenters, there may be situations in 
which a short seller could get immediate execution, such as where an 
order is executed in a facility that provides executions at the mid-
point of the national best bid and offer. See, e.g., letter from ISE 
(Sept. 2009); see also letter from BATS (Sept. 2009).
    \766\ Letter from Glen Shipway (Sept. 2009).
---------------------------------------------------------------------------

    Further, the alternative uptick rule is designed to help restore 
investor confidence in the securities markets.\767\ It will also help 
restore investor confidence during times of substantial uncertainty 
because, once the circuit breaker has been triggered for a particular 
security, long sellers will have preferred access to bids for the 
security, and the security's continued price decline will more likely 
be due to long selling and the underlying fundamentals of the issuer, 
rather than to other factors. Bolstering investor confidence in the 
markets should help to encourage investors to be more willing to invest 
in the markets, thus adding depth and liquidity to the markets. In 
addition, we note that a number of commenters stated that they believe 
that a short sale price test restriction will aid small investors.\768\
---------------------------------------------------------------------------

    \767\ See, e.g., supra note 94 (citing comment letters 
suggesting that reinstatement of short price test restrictions in 
some form will help restore investor confidence in the markets).
    \768\ See supra note 97 (citing commenters who stated that a 
short sale price test restriction would aid small investors).
---------------------------------------------------------------------------

    As we stated in the Proposal, short sale price test restrictions, 
whether a permanent market-wide restriction or in combination with a 
circuit breaker, might help prevent short selling, including 
potentially manipulative or abusive short selling, from being used as a 
tool to exacerbate a declining market in a security.\769\ Because the 
alternative uptick rule only permits short selling at a price above the 
current national best bid, unless an exception applies, we believe it 
will be more effective than the proposed uptick rule or the proposed 
modified uptick rule at achieving our goals in helping to prevent short 
selling, including potentially manipulative or abusive short selling, 
from being used as a tool to exacerbate a declining market in a 
security. Several commenters stated that the alternative uptick rule 
would dramatically decrease price pressure on a security \770\ and, 
thereby, the ability of market participants to use short selling as a 
market manipulation tool.\771\ Another commenter, in supporting the 
alternative uptick rule, stated that it would ``likely be more 
restrictive on short selling than the original Rule 10a-1 `uptick 
rule'.'' \772\
---------------------------------------------------------------------------

    \769\ See Proposal, 74 FR at 18050, 18053, 18059, 18061, 18065, 
18069; see also Securities and Exchange Commission, Special Study of 
Securities Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., at 251 
(1963).
    \770\ See, e.g., letter from BATS (Sept. 2009); letter from 
Wells Fargo (Sept. 2009); see also letter from SIFMA (Sept. 2009) 
(stating that a circuit breaker coupled with the alternative uptick 
rule ``would limit instances where a security is the subject of 
severe downward pressure'').
    \771\ See letter from BATS (Sept. 2009); letter from Wells Fargo 
(Sept. 2009); letter from STA (Sept. 2009); letter from Glen Shipway 
(Sept. 2009).
    \772\ Letter from Virtu Financial.
---------------------------------------------------------------------------

    In addition, we believe that the alternative uptick rule is 
preferable to the proposed modified uptick rule or the proposed uptick 
rule, in part, because it will be easier and less costly to implement 
and monitor. Unlike the proposed modified uptick rule and the proposed 
uptick rule, which would have required sequencing of the national best 
bid or last sale price, the alternative uptick rule references only the 
current national best bid. Several commenters expressed support for the 
alternative uptick rule, stating that the alternative uptick rule was 
preferable to the proposed modified uptick rule or the proposed uptick 
rule because it would eliminate sequencing issues \773\ and would be 
easier and less costly to implement.\774\ One commenter noted that the 
alternative uptick rule would simplify on-going surveillance and 
enforcement, as compared to the other proposed short sale price test 
restrictions.\775\ In addition, we believe that the implementation and 
on-going monitoring and compliance costs of the alternative uptick rule 
are justified by the benefits provided in preventing short selling, 
including potentially manipulative or abusive short selling, from being 
used as a tool to exacerbate a declining market in a security.
---------------------------------------------------------------------------

    \773\ See, e.g., letter from Direct Edge (June 2009); letter 
from BATS (Sept. 2009); letter from Credit Suisse (Sept. 2009); 
letter from STA (Sept. 2009); letter from Wells Fargo (Sept. 2009); 
see also letter from Hudson River Trading (expressing a preference 
for the alternative uptick rule, as opposed to the proposed modified 
uptick rule or the proposed uptick rule, if in conjunction with a 
circuit breaker); see also supra notes 661 to 664 and accompanying 
text.
    \774\ See, e.g., letter from BATS (Sept. 2009); letter from 
Credit Suisse (Sept. 2009); letter from European Investors (Sept. 
2009); letter from Goldman Sachs (Sept. 2009); letter from STA 
(Sept. 2009); letter from Glen Shipway (Sept. 2009); letter from T. 
Rowe Price (Sept. 2009); letter from Wells Fargo (Sept. 2009); see 
also letter from Hudson River Trading; see also supra notes 661 to 
664 and accompanying text.
    \775\ See letter from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

2. Circuit Breaker Approach
    Under the circuit breaker approach, the alterative uptick rule will 
apply only if the price of a covered security has declined by 10% or 
more from the covered security's closing price as determined by the 
listing market for the covered security as of the end of regular 
trading hours on the prior day.\776\ In addition, the short sale price 
test restriction will only remain in place for the remainder of the day 
and for the following day.\777\ The listing market for each covered 
security must determine whether that covered security is subject to 
Rule 201 \778\ and must immediately notify the single plan processor 
responsible for consolidation of information for the covered security 
in accordance with Rule 603(b) of Regulation NMS \779\ of the fact that 
a covered security has become subject to the short sale price test 
restriction of Rule 201. The plan processor must then disseminate this 
information.\780\
---------------------------------------------------------------------------

    \776\ See Rule 201(b).
    \777\ See id.
    \778\ See Rule 201(b)(3).
    \779\ 17 CFR 242.603(b); see supra note 368.
    \780\ See Rule 201(b)(3); 17 CFR 242.603(b).
---------------------------------------------------------------------------

    We believe that a circuit breaker approach strikes the appropriate 
balance between our goal of preventing short selling, including 
potentially manipulative or abusive short selling, from being used as a 
tool to exacerbate a declining market in a security and the need to 
allow for the continued smooth functioning of the markets, including 
the provision of liquidity and price efficiency in the markets.\781\ 
The circuit breaker approach of Rule 201 will help benefit the market 
for a particular security by allowing participants, when a security is 
undergoing a significant intra-day price decline, an opportunity to re-
evaluate circumstances and respond to volatility in that security. We 
also believe that a circuit breaker will better target short selling 
that may be related to potential bear raids \782\ and other forms of 
manipulation that may be

[[Page 11290]]

used to exacerbate a price decline in a covered security.
---------------------------------------------------------------------------

    \781\ See supra Section III.A.4.
    \782\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    In response to our requests for comment, some commenters expressed 
support for a circuit breaker approach because it would be more 
narrowly-tailored to address our concerns about the effects of short 
selling in a market subject to a significant downturn than a permanent, 
market-wide short sale price test restriction.\783\ For example, one 
commenter noted that ``by implementing the alternative uptick rule only 
after a circuit breaker threshold has been reached, [the commenter] 
believes the Commission would strike the appropriate balance between 
the desirable goals of maximizing efficiency when the market is 
operating within normal trading ranges and prohibiting potentially 
abusive short selling when it is not, while refraining from imposing 
excessive implementation costs on the industry.'' \784\ Another 
commenter stated that a circuit breaker is preferable because it ``will 
restrict short selling when prices begin to decline substantially and 
short selling becomes more likely to be abusive and potentially 
harmful.'' \785\
---------------------------------------------------------------------------

    \783\ See, e.g., letter from Direct Edge (June 2009); letter 
from Citadel et al. (Sept. 2009); letter from Direct Edge (Sept. 
2009); letter from BATS (Sept. 2009); letter from Goldman Sachs 
(Sept. 2009); letter from Hudson River Trading (Sept. 2009); letter 
from Qtrade; letter from SIFMA (Sept. 2009); letter from Virtu 
Financial; see also letter from Goldman Sachs (June 2009); letter 
from SIFMA (June 2009); letter from Nasdaq OMX Group (Oct. 2009).
    \784\ Letter from BATS (Sept. 2009).
    \785\ Letter from Nasdaq OMX Group (Oct. 2009); see also letter 
from Goldman Sachs (June 2009); letter from BATS (Sept. 2009); 
letter from SIFMA (Sept. 2009); letter from Credit Suisse (Sept. 
2009); letter from Virtu Financial.
---------------------------------------------------------------------------

    As discussed above, short selling is an important tool in price 
discovery and the provision of liquidity to the market, and we 
recognize that imposition of a short selling circuit breaker that when 
triggered imposes the alternative uptick rule could restrict otherwise 
legitimate short selling activity during periods of significant 
volatility. Under the circuit breaker approach, the alternative uptick 
rule will only be imposed when a covered security has experienced an 
intra-day price decline of 10% or more and will only apply for the 
remainder of the day and the following day. As discussed 
previously,\786\ commenters' estimates and the Staff's analysis show 
that a 10% circuit breaker threshold generally should affect only a 
limited percentage of covered securities. In addition, when triggered, 
the short sale price test restriction will apply for a limited period 
of time, i.e., the remainder of the day and the following day, rather 
than all the time. Thus, Rule 201 is structured so that it will not be 
triggered for the majority of covered securities most of the time and, 
thereby, will not interfere with the smooth functioning of the markets 
for those securities, including when prices in such securities are 
undergoing minimal downward price pressure or are stable or rising. To 
the extent that Rule 201 results in a disruption to the smooth 
functioning of the markets, including the provision of liquidity and 
price efficiency in the markets, we believe that such costs are 
justified by the benefits provided by the Rule in preventing short 
selling, including potentially manipulative or abusive short selling, 
from being used as a tool to exacerbate a declining market in a 
security.
---------------------------------------------------------------------------

    \786\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level).
---------------------------------------------------------------------------

    Several commenters stated their belief that implementing short sale 
price test restrictions on a permanent, market-wide basis, rather than 
in combination with a circuit breaker, would substantially diminish the 
benefits that short sellers bring to the markets.\787\ Another 
commenter stated that a circuit breaker is preferable to a permanent, 
market-wide short sale price test restriction because it ``permits 
normal market activity while a stock is trading in a natural range and 
short selling is more likely to benefit the market (by, for example, 
increasing price discovery and liquidity).'' \788\
---------------------------------------------------------------------------

    \787\ See, e.g., letter from Direct Edge (Sept. 2009); letter 
from Credit Suisse (Sept. 2009).
    \788\ Letter from Nasdaq OMX Group (Oct. 2009); see also letter 
from Goldman Sachs (June 2009); letter from BATS (Sept. 2009); 
letter from SIFMA (Sept. 2009); letter from Credit Suisse (Sept. 
2009); letter from Virtu Financial.
---------------------------------------------------------------------------

    The Commission has long held the view that circuit breakers may 
help restore investor confidence during times of substantial 
uncertainty.\789\ We believe that the requirements of Rule 201 will 
produce such benefits. By imposing the alternative uptick rule once a 
security's price is experiencing a significant intra-day price decline, 
the short selling circuit breaker rule in Rule 201(b) is designed to 
target only those securities that experience such declines and, 
therefore, will help to prevent short selling from being used as a tool 
to exacerbate the decline in the price of those securities. This 
approach establishes a narrowly-tailored Rule that targets only those 
securities experiencing such a decline and which only applies a short 
sale price test restriction for a limited period of time. We believe 
that addressing short selling in connection with such declines will 
help restore investor confidence in the markets generally. One 
commenter noted that ``preventing rapid declines in stock prices 
strengthens investor confidence.'' \790\ Another commenter stated that 
a circuit breaker triggering a short sale price test restriction would 
provide ``investors with confidence that short sellers will be 
restricted from conducting any perceived market manipulation strategies 
such as `bear raids.' '' \791\
---------------------------------------------------------------------------

    \789\ See, e.g., 1998 Release, 63 FR 18477; see also Proposal, 
74 FR at 18067.
    \790\ Letter from BIO.
    \791\ Letter from Brian M. Collie, Esq., Associate, Taurus 
Compliance Consulting, LLC, dated June 19, 2009 (``Taurus 
Compliance'').
---------------------------------------------------------------------------

    A circuit breaker approach will also allow regulatory, supervisory 
and compliance resources to focus on, and to address, those situations 
where a specific security is experiencing significant downward price 
pressure. As noted by one commenter, a circuit breaker ``is 
particularly efficient in stable and rising markets because it avoids 
imposing continuous monitoring and compliance costs where there is 
little or no corresponding risk of abusive short selling.'' \792\
---------------------------------------------------------------------------

    \792\ Letter from Nasdaq OMX Group (Oct. 2009); see also letter 
from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    Requiring the listing market for a covered security to determine 
whether the security has become subject to the short sale price test 
restrictions of Rule 201 will help ensure consistency for each covered 
security with respect to such determinations as only the listing market 
for that covered security will be making the determination. In 
addition, we believe that listing markets will be in the best position 
to respond to anomalous or unforeseeable events that may impact a 
covered security's price, such as an erroneous trade, because the 
listing markets generally have in place specific procedures designed to 
address such events.\793\ Further, because the single plan processors 
currently receive information from listing markets regarding trading 
restrictions (i.e. Regulatory Halts as defined in those plans) on 
individual securities and disseminate such information, the 
requirements of Rule 201(b)(3) are similar to existing obligations on 
plan processors pursuant to the requirements of Regulation NMS, the CTA 
and CQ Plans and the Nasdaq UTP Plan.
---------------------------------------------------------------------------

    \793\ See supra note 327 (discussing NYSE's procedures to ensure 
the accuracy and reliability of its closing price).
---------------------------------------------------------------------------

3. Marking Requirements
    The ``short exempt'' marking requirements under Rule 200(g) will 
provide a record that a broker-dealer is availing itself of the 
provisions of

[[Page 11291]]

paragraph (c) or (d) of Rule 201. Thus, the records created pursuant to 
the ``short exempt'' marking requirements of Rule 200(g) will aid 
surveillance by SROs and the Commission for compliance with the 
provisions of Rule 201. In addition, the ``short exempt'' marking 
requirement will provide an indication to a trading center regarding 
when it must execute or display a short sale order without regard to 
whether the order is at a price that is less than or equal to the 
current national best bid and will aid broker-dealers in complying with 
their legal requirements.
    In response to our requests for comment, several commenters 
indicated that requiring broker-dealers to mark all sell orders 
``long,'' ``short,'' or ``short exempt'' would provide valuable 
information to the Commission \794\ and that such information would be 
worth the costs of requiring such marking.\795\ One commenter stated 
that the information provided by a ``short exempt'' marking requirement 
would provide the Commission with data on the extent to which 
exceptions are being used to circumvent the requirements of Rule 
201.\796\
---------------------------------------------------------------------------

    \794\ See, e.g., letter from STA (June 2009); letter from CFA.
    \795\ See, e.g., letter from STA (June 2009).
    \796\ See letter from STA (June 2009).
---------------------------------------------------------------------------

B. Costs

    In the Proposal, we discussed the anticipated costs of the proposed 
short sale price test restrictions, both on a permanent, market-wide 
basis and in conjunction with a circuit breaker.\797\ We requested 
comment, in the Proposal and Re-Opening Release, on the costs 
associated with the proposed amendments.\798\ In particular, we 
requested comment on the potential costs for any modification to both 
computer systems and surveillance mechanisms and for information 
gathering, management, and recordkeeping systems or procedures.\799\ We 
also requested comment as to the extent to which placing price 
restrictions on short selling could impact or lessen some of the 
benefits of legitimate short selling or could lead to a decrease in 
market efficiency, price discovery, or liquidity.\800\ We discuss the 
comments that we received with respect to the costs of Rule 201 in 
detail in Sections X.B.1., X.B.2., X.B.3 and X.B.4., below.
---------------------------------------------------------------------------

    \797\ See Proposal, 74 FR at 18092-18100.
    \798\ See Proposal, 74 FR at 18100; Re-Opening Release, 74 FR at 
42037.
    \799\ See Proposal, 74 FR at 18090.
    \800\ See id.
---------------------------------------------------------------------------

    We recognize that Rule 201 will impose costs on market participants 
to implement and assure compliance with the requirements of the Rule. 
After considering empirical evidence regarding former Rule 10a-1 and 
the comments that we received in response to the Proposal and the Re-
Opening Release, as discussed below, we believe that Rule 201 will have 
a minimal, if any, negative effect on market liquidity, price 
efficiency, and quote depths.\801\ In addition, we recognize that there 
will be market costs associated with Rule 201 in terms of the potential 
impact of such a short sale-related circuit breaker on execution speed 
and probability. By requiring for a limited time-period that short 
sales may only be executed or displayed above the current national best 
bid once a covered security has experienced an intra-day price decline 
of 10% or more, Rule 201 may slow the speed of executions and impose 
additional costs on market participants, including buyers.\802\ Such 
costs may increase the costs of legitimate short selling.
---------------------------------------------------------------------------

    \801\ See infra note 878 (citing empirical evidence showing that 
former Rule 10a-1 did not have an effect on market liquidity and 
price efficiency and that price test restrictions resulted in an 
increase in quote depths). We note that, although the alternative 
uptick rule is by definition more restrictive than the proposed 
modified uptick rule, differences between the operation of the 
proposed uptick rule and the alternative uptick rule mean that one 
approach or the other would be more restrictive in particular 
circumstances. See, e g., supra note 242 and accompanying text 
(discussing automated trade matching systems).
    \802\ As discussed above, on the day the Pilot went into effect, 
listed Pilot securities underperformed listed control group 
securities by approximately 24 basis points. The Pilot and control 
group securities, however, had similar returns over the first six 
months of the Pilot. See supra note 52 (referencing Staff's Summary 
Pilot Report at 8).
---------------------------------------------------------------------------

    To the extent that Rule 201 results in increased costs for short 
selling in covered securities that trigger the alternative uptick rule, 
it may increase the trading costs of legitimate short selling for these 
securities and may result in a reduction in short selling generally. 
Restricting short selling may also reduce ``long'' activity where the 
short selling is part of a larger trading strategy.
    We believe, however, that such costs will be mitigated by the 
circuit breaker approach of Rule 201. Under the circuit breaker 
approach, the alternative uptick rule will only be imposed when a 
covered security has experienced an intra-day price decline of 10% or 
more and will only apply for the remainder of the day and the following 
day. As discussed previously,\803\ commenters' estimates and the 
Staff's analysis show that a 10% circuit breaker threshold generally 
should affect only a limited percentage of covered securities. In 
addition, when triggered, the short sale price test restriction will 
apply for a limited period of time, i.e., the remainder of the day and 
the following day, rather than all the time. Thus, Rule 201 is 
structured so that it will not be triggered for the majority of covered 
securities most of the time and, thereby, will not interfere with the 
smooth functioning of the markets for those securities, including when 
prices in such securities are undergoing minimal downward price 
pressure or are stable or rising. To the extent that Rule 201 results 
in increased costs for short selling in covered securities that trigger 
the alternative uptick rule, a reduction in short selling generally, 
and a reduction in ``long'' activity where the short selling is part of 
a larger trading strategy, we believe that such costs are justified by 
the benefits provided by the Rule in preventing short selling, 
including potentially manipulative or abusive short selling, from being 
used as a tool to exacerbate a declining market in a security.
---------------------------------------------------------------------------

    \803\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level).
---------------------------------------------------------------------------

    In addition, we recognize that Rule 201, when triggered, will 
impose a short sale price test restriction, when, currently, there is 
an absence of any short sale price test restrictions. This will result 
in costs in terms of modifications to systems and surveillance 
mechanisms, as well as changes to processes and procedures. We 
anticipate that these changes will likely result in immediate 
implementation costs for trading centers and SROs and other market 
participants associated with reprogramming trading and surveillance 
systems to account for short sale price test restrictions based on best 
bid information, as discussed in more detail below. We also believe 
Rule 201 will impose costs on trading centers and SROs and other market 
participants related to systems changes to computer software, 
reprogramming costs, and surveillance and compliance costs, as well as 
staff time and technology resources, associated with monitoring 
compliance with Rule 201, as discussed below.
    Moreover, imposing a short sale-related circuit breaker that, if 
triggered, will impose a short sale price test restriction, when there 
are currently no short sale price test restrictions in place also may 
mean that staff (compliance personnel, associated persons, etc.) may 
need to be trained or re-trained regarding rules related to short sale 
price test restrictions. As such, we believe Rule 201 may impose 
training and compliance costs for trading

[[Page 11292]]

centers, SROs, and other market participants.
    However, as discussed below, because the alternative uptick rule 
references only the current national best bid, unlike the proposed 
modified uptick rule and the proposed uptick rule, which would have 
required sequencing of the national best bid or last sale price, we 
believe that the alternative uptick rule will be easier and less costly 
to implement and monitor than the proposed modified uptick rule or the 
proposed uptick rule.\804\
---------------------------------------------------------------------------

    \804\ See infra Section X.B.1.b.i. and Section X.B.1.b.ii. 
(discussing the implementation and on-going monitoring and 
surveillance costs of the alternative uptick rule on trading centers 
and broker-dealers).
---------------------------------------------------------------------------

    Further, we note that the policies and procedures that are required 
to be implemented under Rule 201 are similar to those that are required 
under the Order Protection Rule of Regulation NMS.\805\ Thus, we 
believe trading centers and broker-dealers may already be familiar with 
establishing, maintaining, and enforcing 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 Rule 201 and may make Rule 201 less 
burdensome to implement.
---------------------------------------------------------------------------

    \805\ See Regulation NMS Adopting Release, 70 FR 37496; see also 
Proposal, 74 FR at 18087; 17 CFR 242.611.
---------------------------------------------------------------------------

    In addition, we believe that the implementation, and on-going 
monitoring and compliance costs of Rule 201 are justified by the 
benefits provided by the Rule in preventing short selling, including 
potentially manipulative or abusive short selling, from being used as a 
tool to exacerbate a declining market in a security.
    We discuss below the costs of Rule 201 with respect to two inter-
related aspects of the Rule: The short sale price test restriction, 
specifically the alternative uptick rule, and the circuit breaker 
approach that triggers application of that restriction. We have 
separated the discussion into two parts in order to more clearly 
address the comments that we received with respect to the various 
aspects of Rule 201. However, the circuit breaker approach and the 
alternative uptick rule under Rule 201 operate in conjunction with one 
another and should not be considered isolated provisions.
1. Alternative Uptick Rule
    Rule 201 requires a trading center to have written policies and 
procedures reasonably designed to prevent the execution or display of a 
short sale order of a covered security at a price that is less than or 
equal to the current national best bid if the price of that covered 
security decreases by 10% or more from the covered security's closing 
price as determined by the listing market for the covered security as 
of the end of regular trading hours on the prior day.\806\
---------------------------------------------------------------------------

    \806\ See Rule 201(b)(1).
---------------------------------------------------------------------------

a. Impact on Market Quality
    As stated above, in the Proposal and Re-Opening Release, we 
requested comment on the costs of a short sale price test 
restriction,\807\ and specifically as to the extent to which placing 
price restrictions on short selling could impact or lessen some of the 
benefits of legitimate short selling or could lead to a decrease in 
market efficiency, price discovery, or liquidity.\808\
---------------------------------------------------------------------------

    \807\ See Proposal, 74 FR at 18090, 18100; Re-Opening Release, 
74 FR at 42037.
    \808\ See Proposal, 74 FR at 18090.
---------------------------------------------------------------------------

    The Commission received comments stating that the alternative 
uptick rule, or any short sale price restriction for that matter, would 
reduce the benefits that short selling provides to the markets.\809\ 
For example, commenters stated that a short sale price test restriction 
would negatively impact liquidity,\810\ market volume,\811\ bid-ask 
spreads and price discovery.\812\ Several commenters also stated that a 
short sale price test restriction might increase volatility.\813\
---------------------------------------------------------------------------

    \809\ See, e.g., letter from Prof. Lipkin; letter from Citadel 
et al. (June 2009); letter from GETCO (June 2009); letter from 
Goldman Sachs (June 2009); letter from ICI (June 2009); letter from 
ISDA; letter from Lime Brokerage (June 2009); letter from RBC (June 
2009); letter from Vanguard (June 2009); letter from Allston Trading 
(Sept. 2009); letter from TD Asset Management; letter from EWT 
(Sept. 2009); letter from BATS (Sept. 2009); letter from Citadel et 
al. (Sept. 2009); letter from CPIC (Sept. 2009); letter from Credit 
Suisse (Sept. 2009); letter from EWT (Sept. 2009); letter from 
Dialectic Capital (Sept. 2009); letter from GETCO (Sept. 2009); 
letter from Hudson River Trading; letter from Lime Brokerage (Sept. 
2009); letter from RBC (Sept. 2009); letter from STA (Sept. 2009); 
letter from STANY (Sept. 2009); letter from Vanguard (Sept. 2009); 
letter from Bingham McCutchen; letter from MFA (Oct. 2009); letter 
from Nasdaq OMX Group (Oct. 2009); see also letter from Credit 
Suisse (Mar. 2009).
    \810\ See, e.g., letter from Chad Stogel, Trillium Trading, LLC, 
dated May 26, 2009 (``Chad Stogel''); letter from Citadel et al. 
(June 2009); letter from Credit Suisse (June 2009); letter from Lime 
Brokerage (June 2009); letter from MFA (June 2009); letter from STA 
(June 2009); letter from EWT (Sept. 2009); letter from BATS (Sept. 
2009); letter from Citadel et al. (Sept. 2009); letter from Lime 
Brokerage (Sept. 2009); letter from RBC (Sept. 2009); letter from 
STA (Sept. 2009); letter from Bingham McCutchen; see also letter 
from Credit Suisse (Mar. 2009).
    \811\ See, e.g., letter from Chad Stogel; letter from Citadel et 
al. (June 2009); letter from Credit Suisse (June 2009); letter from 
MFA (June 2009); letter from STA (June 2009); letter from EWT (Sept. 
2009); letter from BATS (Sept. 2009); letter from Citadel et al. 
(Sept. 2009); letter from RBC (Sept. 2009); letter from Bingham 
McCutchen; see also letter from Credit Suisse (Mar. 2009).
    \812\ See, e.g., letter from Credit Suisse (June 2009); letter 
from MFA (June 2009); letter from Lime Brokerage (June 2009); letter 
from STA (June 2009); letter from RBC (Sept. 2009); see also letter 
from Credit Suisse (Mar. 2009).
    \813\ See, e.g., letter from Prof. Lipkin; letter from AIMA; 
letter from Citadel et al. (June 2009); letter from Credit Suisse 
(June 2009); letter from RBC (June 2009); letter from SIFMA (June 
2009); letter from Citadel et al. (Sept. 2009); letter from TD Asset 
Management; letter from Barclays (Sept. 2009); see also letter from 
NSCP.
---------------------------------------------------------------------------

    We believe, however, that the short sale price test restriction of 
Rule 201 will have a limited negative effect on liquidity, market 
volume, bid-ask spreads, price discovery and volatility. The Pilot 
Results found that the former tick test of Rule 10a-1 and former bid 
test of NASD, which were permanent, market-wide short sale price tests, 
did not have a significant impact on daily volatility, and also found 
some evidence that the short sale price tests dampened intra-day 
volatility for smaller stocks.\814\ In addition, the Pilot Results 
found that the Pilot data provided limited evidence that then-current 
short sale price test restrictions distort a security's price. The 
Pilot Results also found that the short sale price test restrictions 
resulted in an increase in quote depths.\815\ Realized liquidity 
levels, however, were unaffected by the removal of such short sale 
price test restrictions.\816\ In addition, one study concluded that 
former Rule 10a-1 had little or no effect on price efficiency.\817\ 
Another study found no evidence that former Rule 10a-1 negatively 
impacted price discovery.\818\ Due to differences in the operation of 
former Rule 10a-1 and Rule 201, when it applies, the alternative uptick 
rule under Rule 201 will be more restrictive than former Rule 10a-1 in 
some circumstances and less restrictive in others.\819\ As discussed 
above, however, due to the circuit breaker approach in Rule 201, the 
alternative uptick rule of Rule 201 generally will apply to a limited 
number of covered securities \820\ and will apply only when

[[Page 11293]]

the circuit breaker has been triggered for a covered security. As such, 
it will not be triggered for the majority of covered securities at any 
given time and, when triggered, will remain in effect for a short 
duration--that day and the following day. Considering the empirical 
studies and the comments, and because of the limited scope and duration 
of Rule 201, we believe that the impact of Rule 201, if any, on 
liquidity, market volume, bid-ask spreads, price discovery and 
volatility will be limited. To the extent that Rule 201 negatively 
impacts liquidity, market volume, bid-ask spreads, price discovery and 
volatility, we believe that such costs are justified by the benefits 
provided by the Rule in preventing short selling, including potentially 
manipulative or abusive short selling, from being used as a tool to 
exacerbate a declining market in a security.
---------------------------------------------------------------------------

    \814\ See Staff's Summary Pilot Report at 55-56.
    \815\ See Staff's Summary Pilot Report at 55; see also Karl B. 
Diether, Kuan Hui Lee and Ingrid M. Werner, 2009, It's SHO Time! 
Short-Sale Price-Tests and Market Quality, Journal of Finance 64:37.
    \816\ See supra note 54.
    \817\ See J. Julie Wu, Uptick Rule, short selling and price 
efficiency, Aug. 14, 2006.
    \818\ See 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.
    \819\ See, e g., supra note 242 and accompanying text 
(discussing automated trade matching systems).
    \820\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level and duration).
---------------------------------------------------------------------------

    The Commission received a number of comments addressing the extent 
to which a short sale price test restriction might cause a reduction in 
short selling.\821\ For example, commenters stated that a reduction in 
short selling might result from: The implementation costs and on-going 
compliance costs of a short sale price test restriction; \822\ 
uncertainty about whether a short sale order can be executed; \823\ and 
reduced use of trading strategies that are market neutral or that rely 
on the ability to hedge through short sales.\824\ Several commenters 
stated that the alternative uptick rule would restrict short sales more 
than the other proposed short sale price test restrictions, 
specifically because it would not allow immediate execution, and fewer 
short sales might be executed as a result.\825\ A number of commenters 
stated that a reduction in short selling would result in decreased 
liquidity, wider price spreads, and more costly trading for investors 
overall.\826\ Some commenters stated that such an increase in costs to 
investors would have a negative effect on investor confidence.\827\
---------------------------------------------------------------------------

    \821\ See, e.g., letter from Peter J. Driscoll, Chairman, John 
C. Giesea, President and CEO, Security Traders Association, dated 
May 4, 2009 (``STA (May 2009)''); letter from Citadel et al. (June 
2009); letter from CPIC (June 2009); letter from MFA (June 2009); 
letter from Allston Trading (Sept. 2009); letter from Barclays 
(Sept. 2009); letter from CBOE (Sept. 2009); letter from Citadel et 
al. (Sept. 2009); letter from CPIC (Sept. 2009); letter from EWT 
(Sept. 2009); letter from GETCO (Sept. 2009); letter from ICI (Sept. 
2009); letter from ISE (Sept. 2009); letter from RBC (Sept. 2009); 
letter from MFA (Oct. 2009).
    \822\ See, e.g., letter from CPIC (June 2009); letter from 
Barclays (Sept. 2009).
    \823\ See, e.g., letter from STA (May 2009); letter from Citadel 
et al. (June 2009); letter from STA (June 2009); letter from 
Barclays (Sept. 2009); letter from STA (Sept. 2009); see also letter 
from Lime Brokerage (June 2009) (explaining specifically the 
increased risk that would be associated with virtual market making 
strategies).
    \824\ See, e.g., letter from STA (May 2009); letter from Credit 
Suisse (June 2009); letter from STA (June 2009); letter from 
Barclays (Sept. 2009); letter from STA (Sept. 2009); letter from MFA 
(Oct. 2009); see also letter from Lime Brokerage (June 2009) 
(explaining specifically the increased risk that would be associated 
with virtual market making strategies).
    \825\ See, e.g., letter from Allston Trading (Sept. 2009); 
letter from Barclays (Sept. 2009); letter from CBOE (Sept. 2009); 
letter from Citadel et al. (Sept. 2009); letter from CPIC (Sept. 
2009); letter from EWT (Sept. 2009); letter from GETCO (Sept. 2009); 
letter from ICI (Sept. 2009); letter from ISE (Sept. 2009); letter 
from RBC (Sept. 2009); letter from MFA (Oct. 2009).
    \826\ See, e.g., letter from STA (May 2009); letter from Chad 
Stogel; letter from Allston Trading (June 2009); letter from Credit 
Suisse (June 2009); letter from STA (June 2009); letter from STA 
(Sept. 2009); letter from MFA (June 2009).
    \827\ See, e.g., letter from Citadel et al. (June 2009); letter 
from Vanguard (June 2009); letter from Allston Trading (Sept. 2009); 
letter from EWT (Sept. 2009); letter from GETCO (Sept. 2009); see 
also letter from NSCP (stating that, without empirical evidence of 
inefficiency or failure in the equity markets that both caused 
deterioration of investor confidence and that would be remedied by a 
short sale price test restriction, a loss in confidence in the 
Commission as a fair and impartial regulator could do more harm in 
the long-run to damage the confidence of investors); letter from STA 
(June 2009) (stating that ``[p]romulgating a rule that would not 
have any impact on the execution of abusive short sales may, in 
fact, foster further deterioration of investor confidence'').
---------------------------------------------------------------------------

    The short sale price test restriction of Rule 201 may cause a 
limited reduction in short selling as a result of the implementation 
costs and on-going compliance costs of a short sale price test 
restriction; uncertainty about whether a short sale order can be 
executed; and reduced use of trading strategies that are market neutral 
or that rely on the ability to hedge through short sales. However, the 
alternative uptick rule will only be imposed when a covered security 
has experienced an intra-day price decline of 10% or more and will only 
apply for the remainder of the day and the following day. Due to the 
limited scope and applicability of Rule 201, we believe that any 
reduction in short selling will be limited.\828\ In addition, we 
believe that any such reduction in short selling will have a minimal, 
if any, resulting negative impact on liquidity and price efficiency. As 
noted above, the Pilot Results found that the Pilot data provided 
limited evidence that then-current short sale price test restrictions, 
which were permanent and market-wide, distort a security's price. The 
Pilot Results also found that the short sale price test restrictions 
resulted in an increase in quote depths.\829\ Realized liquidity 
levels, however, were unaffected by the removal of such short sale 
price test restrictions.\830\ In addition, one study concluded that 
former Rule 10a-1 had little or no negative effect on price 
efficiency.\831\ Another study found no evidence that former Rule 10a-1 
negatively impacted price discovery.\832\ Due to differences in the 
operation of former Rule 10a-1 and Rule 201, when it applies, the 
alternative uptick rule under Rule 201 will be more restrictive than 
former Rule 10a-1 in some circumstances and less restrictive in 
others.\833\ As discussed above, however, due to the circuit breaker 
approach in Rule 201, the alternative uptick rule of Rule 201 generally 
will apply to a limited number of covered securities \834\ and will 
apply only when the circuit breaker has been triggered for a covered 
security. As such, it will not be triggered for the majority of covered 
securities at any given time and, when triggered, will remain in effect 
for a short duration--that day and the following day. Considering the 
empirical studies and the comments, and due to the limited scope and 
duration of Rule 201, we believe that any reduction in short selling as 
a result of Rule 201 will have a minimal, if any, negative impact on 
liquidity and price efficiency. To the extent that Rule 201 has a 
negative impact on liquidity and price efficiency, we believe that such 
costs are justified by the benefits provided by the Rule in preventing 
short selling, including potentially manipulative or abusive short 
selling, from being used as a tool to exacerbate a declining market in 
a security.
---------------------------------------------------------------------------

    \828\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level and duration).
    \829\ See Staff's Summary Pilot Report at 55 and supporting 
text; see also Karl B. Diether, Kuan Hui Lee and Ingrid M. Werner, 
2009, It's SHO Time! Short-Sale Price-Tests and Market Quality, 
Journal of Finance 64:37.
    \830\ See supra note 54.
    \831\ See J. Julie Wu, Uptick Rule, short selling and price 
efficiency, Aug. 14, 2006.
    \832\ See 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.
    \833\ See, e g., supra note 242 and accompanying text 
(discussing automated trade matching systems).
    \834\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level and duration).
---------------------------------------------------------------------------

    In addition, commenters stated that a short sale price test 
restriction in general, or the alternative uptick rule specifically, 
might negatively impact various trading strategies that include short 
selling,\835\ such as high frequency

[[Page 11294]]

trading,\836\ options valuation models that are used to value and hedge 
equity derivatives transactions,\837\ market neutral trading strategies 
or those that rely on hedging,\838\ convertible arbitrage,\839\ 
statistical arbitrage,\840\ program or portfolio trading baskets,\841\ 
and hedging strategies that significantly contribute to market 
liquidity, such as computerized liquidity providers or ``virtual market 
makers.'' \842\ Commenters noted what they believe would be the 
negative consequences of such an impact, including increasing bid-ask 
spreads, reducing market volume,\843\ reducing market liquidity,\844\ 
reducing market efficiency,\845\ complicating the raising of capital by 
corporate issuers,\846\ and causing investors to exit the market.\847\ 
Other commenters expressed the belief that restrictions on short 
selling might encourage the use of other trading strategies that 
largely mirror the benefits of short selling (such as sales of calls, 
purchase of puts, synthetic short sales of OTC derivatives, and sales 
of security futures), but that impose additional costs, such as reduced 
efficiency or inaccessibility to small investors.\848\
---------------------------------------------------------------------------

    \835\ See, e.g., letter from Citadel et al. (June 2009); letter 
from Credit Suisse (June 2009); letter from ISDA; letter from RBC 
(June 2009); letter from STA (June 2009); letter from Vanguard (June 
2009); letter from EWT (Sept. 2009); letter from TD Asset 
Management; letter from Lime Brokerage (Sept. 2009); letter from 
Bingham McCutchen; letter from MFA (Oct. 2009); see also letter from 
Credit Suisse (Mar. 2009).
    \836\ See, e.g., letter from Bingham McCutchen.
    \837\ See, e.g., letter from ISDA.
    \838\ See, e.g., letter from Citadel et al. (June 2009); letter 
from Credit Suisse (June 2009); letter from EWT (Sept. 2009); letter 
from TD Asset Management; letter from MFA (Oct. 2009). This category 
includes such trading methods as long short equity strategies, 
convertible securities investors, and hedged strategies such as 130/
30 portfolios. See id.
    \839\ See, e.g., letter from Citadel et al. (June 2009); letter 
from Credit Suisse (June 2009); letter from Goldman Sachs (June 
2009); letter from SIFMA (June 2009).
    \840\ See, e.g., letter from Citadel et al. (June 2009).
    \841\ See letter from TD Asset Management.
    \842\ See, e.g., letter from Lime Brokerage (June 2009); letter 
from Lime Brokerage (Sept. 2009).
    \843\ See, e.g., letter from Citadel et al. (June 2009); letter 
from Lime Brokerage (Sept. 2009); letter from Bingham McCutchen; 
letter from Credit Suisse (June 2009).
    \844\ See, e.g., letter from Chad Stogel; letter from Citadel et 
al. (June 2009); letter from Lime Brokerage (June 2009); letter from 
STA (June 2009); letter from EWT (Sept. 2009); letter from BATS 
(Sept. 2009); letter from Citadel et al. (Sept. 2009); letter from 
Lime Brokerage (Sept. 2009); letter from STA (Sept. 2009); letter 
from Bingham McCutchen.
    \845\ See e.g., letter from Citadel et al. (June 2009); letter 
from Citadel et al. (Sept. 2009).
    \846\ See, e.g., letter from Citadel et al. (June 2009); letter 
from Credit Suisse (June 2009); letter from Goldman Sachs (June 
2009); letter from SIFMA (June 2009).
    \847\ See, e.g., letter from Credit Suisse (June 2009).
    \848\ See, e.g., letter from Prof. Rosenthal; letter from 
Barclays (June 2009) (warning that a mere transfer of short selling 
activity to other types of markets would impair the price discovery, 
efficiency, safety, and soundness of the public equity markets); 
letter from STA (June 2009) (discussing a possible shift to the 
derivative markets); letter from RBC (June 2009) (discussing sales 
of calls, purchases of puts, and short selling of security futures 
as methods to bypass the price restrictions); letter from Vanguard 
(June 2009) (discussing the use of synthetic short sales through OTC 
derivatives); see also supra Section III.A.1. (discussing the 
creation of ``synthetic'' short positions that are the economic 
equivalent of a short sale through the use of derivative 
securities).
---------------------------------------------------------------------------

    To the extent that Rule 201 may have a negative effect on various 
trading strategies that include short selling, we believe any such 
negative effect will be limited. Under Rule 201, although short selling 
will be restricted for a limited time by the alternative uptick rule if 
the price of a covered security decreases by 10% or more, unlike with 
securities subject to the Short Sale Ban Emergency Order, Rule 201 will 
permit short selling at a price above the current national best bid in 
the covered security even when the restriction is in place. Thus, short 
sellers engaged in various trading strategies that include short 
selling will generally continue to be able to sell short for the 
limited period of time when the short sale price test restriction is in 
effect. In addition, we note that many of the above comments on 
potential market-wide impacts of a short sale price test restriction on 
various trading strategies that include short selling were not specific 
to a short sale price test applied in conjunction with a circuit 
breaker.\849\ Under the circuit breaker approach, the alternative 
uptick rule will only be imposed when a covered security has 
experienced an intra-day price decline of 10% or more and will only 
apply for the remainder of the day and the following day.\850\ We 
believe that the negative impact of Rule 201, if any, on various 
trading strategies that include short selling will be limited because 
of the limited scope and duration of Rule 201. To the extent that Rule 
201 has a negative impact on various trading strategies that include 
short selling, we believe that such costs are justified by the benefits 
provided by the Rule in preventing short selling, including potentially 
manipulative or abusive short selling, from being used as a tool to 
exacerbate a declining market in a security.
---------------------------------------------------------------------------

    \849\ See, e.g., letter from Bingham McCutchen; letter from 
ISDA; letter from TD Asset Management; letter from EWT (Sept. 2009); 
letter from Lime Brokerage (Sept. 2009); letter from Citadel et al. 
(Sept. 2009); letter from STA (Sept. 2009); letter from BATS (Sept. 
2009); letter from MFA (Oct. 2009).
    \850\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level and duration).
---------------------------------------------------------------------------

    We recognize that imposing a short sale price test restriction with 
respect to NMS stocks, without a similar restriction on derivative 
securities, could increase the use of derivative securities to create a 
short position and that such ``synthetic'' short positions could 
increase as a result of Rule 201. As discussed in Section III.A.1., 
above, however, short sales in the equity markets to hedge derivatives 
transactions are subject to Rule 201. In addition, we remain concerned 
that the ability to create a short position through the use of 
derivative securities may undermine the goals of short sale price test 
restrictions. At a later time, we may reconsider whether additional 
regulation of derivative securities and the use of ``synthetic'' short 
positions may be appropriate.
    Several commenters discussed how constraints on short selling might 
harm price discovery and pricing efficiency.\851\ Commenters stated 
that, under the alternative uptick rule, only long sellers could hit 
bids displayed as part of the national market system, which would 
result in long sellers exclusively dictating the market price of 
purchases, which would harm price discovery.\852\ Additionally, 
commenters stated that the alternative uptick rule would restrict the 
informational content that short sale orders contain to only passive 
orders, meaning that the information would not be fully communicated in 
the price discovery process and pricing inefficiency would arise.\853\ 
Other commenters stated that the alternative uptick rule might result 
in an inflated transaction price \854\ or upward stock price 
manipulation.\855\
---------------------------------------------------------------------------

    \851\ See, e.g., letter from Matlock Capital (May 2009); letter 
from Prof. Rosenthal; letter from Goldman Sachs (June 2009); Autore, 
Billingsley, and Kovacs, Short Sale Constraints, Dispersion of 
Opinion, and Market Quality: Evidence from the Short Sale Ban on 
U.S. Financial Stocks (June 19, 2009); letter from GETCO (June 
2009); letter from STA (June 2009); letter from Allston Trading 
(Sept. 2009); letter from Bingham McCutchen; letter from Citadel et 
al. (Sept. 2009); letter from CPIC (Sept. 2009); letter from 
Dialectic Capital (Sept. 2009); letter from EWT (Sept. 2009); letter 
from Hudson River Trading; letter from STA (Sept. 2009); letter from 
TD Asset Management.
    \852\ See, e.g., letter from Citadel et al. (Sept. 2009); letter 
from Dialectic Capital (Sept. 2009); letter from Bingham McCutchen; 
see also letter from GETCO (June 2009); letter from Charles A. 
Trzcinka, Professor of Finance and Chairman of the Finance 
Department, Kelly School of Business, Indiana University, dated May 
10, 2009; letter from Prof. Rosenthal; Autore, Billingsley, and 
Kovacs, Short Sale Constraints, Dispersion of Opinion, and Market 
Quality: Evidence from the Short Sale Ban on U.S. Financial Stocks 
(June 19, 2009).
    \853\ See, e.g., letter from TD Asset Management; letter from 
CPIC (Sept. 2009); see also letter from GETCO (June 2009); letter 
from Goldman Sachs (June 2009).
    \854\ See, e.g., letter from Allston Trading (Sept. 2009); 
letter from Citadel et al. (Sept. 2009); letter from CPIC (Sept. 
2009); letter from Dialectic Capital (Sept. 2009); letter from EWT 
(Sept. 2009); letter from Hudson River Trading; letter from STA 
(Sept. 2009).
    \855\ See, e.g., letter from Allston Trading (Sept. 2009); 
letter from Citadel et al. (Sept. 2009); letter from RBC (Sept. 
2009); see also letter from AIMA; letter from Citadel et al. (June 
2009); letter from Goldman Sachs (June 2009); letter from RBC (June 
2009).

---------------------------------------------------------------------------

[[Page 11295]]

    We believe that Rule 201 will have a limited negative effect on 
price discovery and price efficiency. As discussed above, the Pilot 
Results \856\ found that the Pilot data provided limited evidence that 
the former tick test of Rule 10a-1(a) and former bid test of NASD, 
which were permanent, market-wide short sale price tests, distorted a 
security's price. In addition, one study concluded that former Rule 
10a-1 had little or no effect on price efficiency.\857\ Another study 
found no evidence that former Rule 10a-1 negatively impacted price 
discovery.\858\ Due to differences in the operation of former Rule 10a-
1 and Rule 201, when it applies, the alternative uptick rule under Rule 
201 will be more restrictive than former Rule 10a-1 in some 
circumstances and less restrictive in others.\859\ As discussed above, 
however, due to the circuit breaker approach in Rule 201, the 
alternative uptick rule of Rule 201 generally will apply to a limited 
number of covered securities \860\ and will apply only when the circuit 
breaker has been triggered for a covered security. As such, it will not 
be triggered for the majority of covered securities at any given time 
and, when triggered, will remain in effect for a short duration--that 
day and the following day. Considering the empirical studies and the 
comments and because of the limited scope and duration of Rule 201, we 
believe that Rule 201 will have little, if any, negative effect on 
price discovery and price efficiency. To the extent that Rule 201 
negatively affects price discovery and price efficiency, we believe 
that such costs are justified by the benefits provided by the Rule in 
preventing short selling, including potentially manipulative or abusive 
short selling, from being used as a tool to exacerbate a declining 
market in a security.
---------------------------------------------------------------------------

    \856\ See Staff's Summary Pilot Report at 55; Karl B. Diether, 
Kuan Hui Lee and Ingrid M. Werner, 2009, It's SHO Time! Short-Sale 
Price-Tests and Market Quality, Journal of Finance 64:37-73; Gordon 
J. Alexander and Mark A. Peterson, 2008, The Effect of Price Tests 
on Trader Behavior and Market Quality: An Analysis of Reg. SHO, 
Journal of Financial Markets 11:84-111; J. Julie Wu, Uptick Rule, 
short selling and price efficiency, Aug. 14, 2006; Lynn Bai, 2008, 
The Uptick Rule of Short Sale Regulation--Can it Alleviate Downward 
Price Pressure from Negative Earnings Shocks? Rutgers Business Law 
Journal 5:1-63.
    \857\ See J. Julie Wu, Uptick Rule, short selling and price 
efficiency, Aug. 14, 2006.
    \858\ See 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.
    \859\ See, e g., supra note 242 and accompanying text 
(discussing automated trade matching systems).
    \860\ See supra notes 305 to 311 and accompanying text 
(discussing data reflecting that, on average, a limited number of 
covered securities would hit a 10% trigger level each day).
---------------------------------------------------------------------------

    A number of commenters discussed the impact that the alternative 
uptick rule might have on execution.\861\ Several commenters stated 
that, under the alternative uptick rule, short sales would be 
ineligible for immediate execution, causing increased trading costs and 
opportunity costs, decreased liquidity, and widened spreads.\862\ 
Commenters also stated that the alternative uptick rule would increase 
the risk of non-execution of a short sale, which would reduce the speed 
of price discovery and increase execution prices.\863\ Commenters also 
noted that the alternative uptick rule could cause missed execution 
opportunities, thereby causing retail investors to pay artificially 
high prices to obtain execution.\864\
---------------------------------------------------------------------------

    \861\ See, e.g., letter from Citadel et al. (Sept. 2009); letter 
from Group One Trading (Sept. 2009); letter from TD Asset 
Management; letter from CPIC (Sept. 2009); letter from Lime 
Brokerage (Sept. 2009); letter from RBC (Sept. 2009); letter from 
SIFMA (Sept. 2009); letter from STA (Sept. 2009); letter from 
Barclays (Sept. 2009).
    \862\ See, e.g., letter from Citadel et al. (Sept. 2009); letter 
from TD Asset Management; letter from CPIC (Sept. 2009); letter from 
STA (Sept. 2009). As noted by some commenters, however, there may be 
situations in which a short seller could get immediate execution, 
such as where an order is executed in a facility that provides 
executions at the mid-point of the national best bid and offer. See, 
e.g., letter from ISE (Sept. 2009); see also letter from BATS (Sept. 
2009).
    \863\ See, e.g., letter from Barclays (Sept. 2009); letter from 
STA (Sept. 2009).
    \864\ See, e.g., letter from Allston Trading (Sept. 2009); 
letter from Citadel et al. (Sept. 2009); letter from Dialectic 
Capital (Sept. 2009); see also letter from Chad Stogel.
---------------------------------------------------------------------------

    As we stated in the Re-Opening Release, because the alternative 
uptick rule will only permit short selling at a price above the current 
national best bid, the alternative uptick rule will generally not allow 
short sales to get immediate execution, even in an advancing 
market,\865\ which may slow the speed of executions and impose 
additional costs on market participants, including buyers.\866\ We 
note, however, that the above comments on the potential impacts of the 
alternative uptick rule on execution were not specific to a short sale 
price test in conjunction with a circuit breaker.\867\ Under the 
circuit breaker approach, the alternative uptick rule will only be 
imposed when a covered security has experienced an intra-day price 
decline of 10% or more and will only apply for the remainder of the day 
and the following day.\868\ We believe that the negative impact of Rule 
201, if any, on execution speed and probability will be limited because 
of the limited scope and duration of Rule 201. To the extent that Rule 
201 negatively impacts execution speed and probability, we believe that 
such costs are justified by the benefits provided by the Rule in 
preventing short selling, including potentially manipulative or abusive 
short selling, from being used as a tool to exacerbate a declining 
market in a security.
---------------------------------------------------------------------------

    \865\ See Re-Opening Release, 74 FR at 42034; see also supra 
note 227 (noting that under some circumstances a short seller may be 
able to get immediate execution).
    \866\ See supra note 52 (discussing returns for listed Pilot 
securities and listed control group securities during the first six 
months of the Pilot and referencing Staff's Summary Pilot Report at 
8).
    \867\ See, e.g., letter from Allston Trading (Sept. 2009); 
letter from Barclays (Sept. 2009); letter from Citadel et al. (Sept. 
2009); letter from Dialectic Capital (Sept. 2009); letter from TD 
Asset Management; letter from CPIC (Sept. 2009); letter from STA 
(Sept. 2009).
    \868\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level and duration).
---------------------------------------------------------------------------

    Several commenters suggested that short sellers who remain in the 
markets, as well as other market participants, might change their 
trading behavior in response to a short sale price test 
restriction.\869\ For example, commenters expressed the belief that 
other traders might use computer algorithms to identify the presence of 
short sellers who have sell orders exactly one increment above the bid 
and quickly adjust their bid price downward in anticipation of the 
stock price dropping, which would result in the price of the security 
declining even further overall.\870\ Similarly, several commenters 
stated that short sale limit orders might be perceived by other market 
participants as a negative view on a covered security, which might have 
negative implications on market efficiency, market liquidity, and bid-
ask spreads and might cause buyers to withdraw their bids.\871\ One 
commenter noted that displayed short sale limit orders could be 
``subject to the risk that long sellers would use the information in 
the orders to their advantage and front-run or pick off the orders.'' 
\872\ Additionally, commenters stated that short sellers who seek to 
execute above the best bid without displaying the offer would be driven 
to transact in market centers that do not display their better-priced 
bids as part of the national

[[Page 11296]]

market system, such as dark pools, or through broker-dealers that offer 
internalization.\873\ Commenters noted that such an increase in volume 
directed to non-public markets would decrease overall market 
transparency, liquidity, and pricing efficiency.\874\
---------------------------------------------------------------------------

    \869\ See, e.g., letter from STA (May 2009); letter from Group 
One Trading (Sept. 2009); letter from Lime Brokerage (Sept. 2009).
    \870\ See letter from Group One Trading (Sept. 2009); letter 
from STANY (Sept. 2009).
    \871\ See, e.g., letter from Barclays (Sept. 2009); letter from 
MFA (Oct. 2009); see also letter from STA (Sept. 2009) (stating that 
because short sale orders would have to be priced one increment 
above the national best bid, and would drop in price as bids were 
exhausted, the alternative uptick rule ``would also prolong and 
deepen downward moves by forcing there to be overhanging, passive 
supply'').
    \872\ Letter from Citadel et al. (Sept. 2009).
    \873\ See, e.g., letter from EWT (Sept. 2009); letter from Group 
One Trading (Sept. 2009); letter from STANY (Sept. 2009).
    \874\ See id.; see also letter from STA (May 2009).
---------------------------------------------------------------------------

    Although we recognize that short sellers who remain in the markets, 
as well as other market participants, might change their trading 
behavior in response to a short sale price test restriction, we believe 
any such effect will be limited by the circuit breaker approach of Rule 
201. Under the circuit breaker approach, the alternative uptick rule 
will only be imposed when a covered security has experienced an intra-
day price decline of 10% or more and will only apply for the remainder 
of the day and the following day.\875\ To the extent that Rule 201 
results in changes in trading behavior, we believe that such an impact 
is justified by the benefits provided by the Rule in preventing short 
selling, including potentially manipulative or abusive short selling, 
from being used as a tool to exacerbate a declining market in a 
security.
---------------------------------------------------------------------------

    \875\ See supra Section III.A.5. (discussing the circuit breaker 
trigger level and duration).
---------------------------------------------------------------------------

    In addition, we note that, as discussed in Section II.D., above, we 
reviewed the empirical analyses that commenters submitted to us or 
discussed in their comments. Consistent with the Pilot Results, a study 
of the effect that rescission of former Rule 10a-1 had on market 
quality found that the elimination had no measurable effect on market 
volatility,\876\ while the results of other studies on the effect of 
the lack of a short sale price test restriction on volatility were 
mixed.\877\ However, we note that the study showing no measurable 
effect on market volatility only analyzed daily volatility during a 
six-week period following the elimination of former Rule 10a-1 and, 
thus, may have limited statistical significance. In addition, the 
studies evidencing an increase in volatility do not address the extent 
to which other factors may have contributed to or caused the increased 
volatility.
---------------------------------------------------------------------------

    \876\ See Ekkehart Boehmer, Charles M. Jones, and Xiaoyan Zhang, 
Unshackling Short Sellers: The Repeal of the Uptick Rule (Nov. 
2008).
    \877\ See, e.g., letter from NAREIT; letter from High Street 
Advisors; letter from European Investors (Sept. 2009).
---------------------------------------------------------------------------

    Studies of other aspects of market quality suggest little 
measurable impact of a short sale price test restriction on price 
discovery, market efficiency, liquidity or market quality in 
general.\878\ Several commenters cited empirical evidence showing that 
restrictions on short selling, particularly bans on short selling, may 
impede liquidity, price discovery, and market efficiency,\879\ but the 
cited studies do not address the effects of a short sale price test 
restriction in general or Rule 201 in particular. The empirical 
analyses that commenters submitted on whether a short sale price test 
restriction dampens price pressure from short sellers are mixed, but 
generally focus on long time horizons, such as weeks or months, as 
opposed to short time horizons, such as seconds or minutes, which are 
more relevant to the impact of a short sale price test restriction on 
price pressure.\880\
---------------------------------------------------------------------------

    \878\ See, e.g., the Pilot Results; see also supra note 856 and 
accompanying text. Numerous commenters also sent analyses on short 
selling restrictions in general or on the short selling ban. See, 
e.g., letter from AIMA; letter Allston Trading (June 2009); Autore, 
Billingsley, and Kovacs, Short Sale Constraints, Dispersion of 
Opinion, and Market Quality: Evidence from the Short Sale Ban on 
U.S. Financial Stocks (June 19, 2009); letter from BATS (May 2009); 
letter from CBOE (June 2009); letter from Citadel et al. (June 
2009); letter from Credit Suisse (June 2009), letter from CPIC (June 
2009); letter from GETCO (June 2009); letter from Goldman Sachs 
(Sept. 2009); letter from Hudson River Trading; letter from ICI 
(June 2009); letter from NSCP; letter from NYSE Euronext (June 
2009); letter from TD Asset Management; letter from STANY (June 
2009); letter from Wolverine.
    \879\ See supra note 128.
    \880\ See, e.g., J. Julie Wu, Uptick Rule, short selling and 
price efficiency, Aug. 14, 2006.
---------------------------------------------------------------------------

    In summary, after considering the empirical evidence and the 
comments that we received in response to the Proposal and the Re-
Opening Release, we believe that Rule 201 will have a minimal, if any, 
negative effect on market liquidity, price efficiency, and quote 
depths.\881\ In addition, we recognize that there will be market costs 
associated with Rule 201 in terms of the potential impact of such a 
short sale-related circuit breaker on execution speed and probability. 
Such costs may increase the costs of legitimate short selling. To the 
extent that Rule 201 results in increased costs for short selling in 
covered securities, it may increase the trading costs of legitimate 
short selling for these securities and may result in a reduction in 
short selling generally. Restricting short selling may also reduce 
``long'' activity where the short selling is part of a larger trading 
strategy. As discussed above, we believe that these costs will be 
limited because of the circuit breaker approach of Rule 201.
---------------------------------------------------------------------------

    \881\ See supra note 878 (citing empirical evidence showing that 
former Rule 10a-1 did not have an effect on market liquidity and 
price efficiency and that price test restrictions resulted in an 
increase in quote depths). We note that, although the alternative 
uptick rule is by definition more restrictive than the proposed 
modified uptick rule, differences between the operation of the 
proposed uptick rule and the alternative uptick rule mean that one 
approach or the other would be more restrictive in particular 
circumstances. See, e. g., supra note 242 and accompanying text 
(discussing automated trade matching systems).
---------------------------------------------------------------------------

    We believe that the potential costs of Rule 201 are justified by 
its design, such that, when Rule 201 is triggered, it will allow long 
sellers, by selling at the bid, to sell first, ahead of short sellers, 
in a declining market for a particular security. As the Commission has 
noted previously in connection with short sale price test restrictions, 
a goal of such restrictions is to allow long sellers to sell first in a 
declining market.\882\ A short seller that is seeking to profit quickly 
from accelerated, downward market moves may find it advantageous to be 
able to short sell at the current national best bid. In addition, by 
making bids accessible only by long sellers when a security's price is 
undergoing significant downward price pressure, Rule 201 will help to 
facilitate and maintain stability in the markets and help ensure that 
they function efficiently. It will also help restore investor 
confidence during times of substantial uncertainty because, once the 
circuit breaker has been triggered for a particular security, long 
sellers will have preferred access to bids for the security, and the 
security's continued price decline will more likely be due to long 
selling and the underlying fundamentals of the issuer, rather than to 
other factors. In addition, combining the alternative uptick rule with 
a circuit breaker strikes the appropriate balance between our goal of 
preventing short selling, including potentially manipulative or abusive 
short selling, from being used as a tool to exacerbate a declining 
market in a security and the need to allow for the continued smooth 
functioning of the markets, including the provision of liquidity and 
price efficiency in the markets.
---------------------------------------------------------------------------

    \882\ See supra note 17.
---------------------------------------------------------------------------

    In addition, we believe several of the provisions contained in 
paragraph (d) of Rule 201 will help to mitigate any potential price 
distortions or costs associated with Rule 201. These provisions are 
designed to help promote the workability of Rule 201, while at the same 
time furthering our goals for adopting short sale price test 
regulation.
    As discussed above,\883\ we are adopting the seller's delay in 
delivery exception under Rule 201(d)(1) to allow sale orders of owned 
but restricted

[[Page 11297]]

securities to be displayed or executed at a price that is less than or 
equal to the current national best bid, thereby mitigating the negative 
impact of Rule 201, if any, on execution speed and probability and 
helping to promote the workability of Rule 201.
---------------------------------------------------------------------------

    \883\ See supra Section III.B.2. (discussing the ``short 
exempt'' provision for seller's delay in delivery).
---------------------------------------------------------------------------

    Rule 201(d)(2) allows a broker-dealer to mark a short sale order as 
``short exempt'' if the broker-dealer has a reasonable basis to believe 
that the short sale order is by a market maker to 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.\884\ We 
believe that the odd-lot exception will promote the workability of Rule 
201 and help mitigate potential price distortions or costs associated 
with the Rule, if any, because it will allow those acting in the 
capacity of a ``market maker'' to off-set customer odd-lot orders 
without regard to whether the sale order is at a price that is less 
than or equal to the current national best bid, thereby facilitating 
the liquidity providing function of market makers.
---------------------------------------------------------------------------

    \884\ See supra Section III.B.3. (discussing the ``short 
exempt'' provision for odd lot transactions).
---------------------------------------------------------------------------

    Rule 201(d)(3) permits a broker-dealer to mark as ``short exempt'' 
short sale orders associated with certain bona fide domestic arbitrage 
transactions.\885\ Moreover, to facilitate arbitrage transactions in 
which a short position is taken in a security in the U.S. markets, and 
which is to be immediately covered on a foreign market, Rule 201(d)(4) 
permits a broker-dealer to mark as ``short exempt'' short sale orders 
associated with certain international arbitrage transactions.\886\ 
Because domestic arbitrage and international arbitrage transactions 
promote market efficiency by equalizing prices at an instant in time in 
different markets or between relatively equivalent securities,\887\ we 
believe these provisions will help mitigate the negative effect of Rule 
201, if any, on market and pricing efficiency and help to promote the 
workability of Rule 201.
---------------------------------------------------------------------------

    \885\ See supra Section III.B.4. (discussing the ``short 
exempt'' provision for domestic arbitrage transactions).
    \886\ See supra Section III.B.5. (discussing the ``short 
exempt'' provision for international arbitrage transactions).
    \887\ See supra Sections III.B.4. and III.B.5. (discussing the 
benefits of bona fide arbitrage activities to market efficiency 
because they tend to reduce pricing disparities between related 
securities).
---------------------------------------------------------------------------

    Rule 201(d)(5) permits a broker-dealer to mark as ``short exempt'' 
short sale orders by underwriters or syndicate members participating in 
a distribution in connection with an over-allotment, and any short sale 
orders for purposes of lay-off sales by such persons in connection with 
a distribution of securities through a rights or standby underwriting 
commitment.\888\ We are including a ``short exempt'' marking provision 
for syndicate and lay-off sales because, as discussed above, we have 
historically excepted such activity from short sale rules.\889\ In 
addition, we note that the public offering process is key to capital 
formation. By facilitating price support during the offering process, 
Rule 201(d)(5) will mitigate the negative effects of Rule 201, if any, 
on capital formation.
---------------------------------------------------------------------------

    \888\ See supra Section III.B.6. (discussing the ``short 
exempt'' provision for over-allotments and lay-off sales).
    \889\ See id.
---------------------------------------------------------------------------

    Rule 201(d)(6) allows a broker-dealer to mark as ``short exempt'' 
short sale orders where broker-dealers are facilitating customer buy 
orders or sell orders where the customer is net long, and the broker-
dealer is net short but is effecting the sale as riskless 
principal.\890\ We believe that the riskless principal exception of 
Rule 201(d)(6) will facilitate broker-dealers' ability to provide best 
execution to certain customer orders, thus mitigating the negative 
impact of Rule 201, if any, on execution speed and probability and 
helping to promote the workability of Rule 201.
---------------------------------------------------------------------------

    \890\ See supra Section III.B.7. (discussing the ``short 
exempt'' provision for riskless principal transactions).
---------------------------------------------------------------------------

    Rule 201(d)(7) permits a broker-dealer to mark as ``short exempt'' 
certain short sale orders executed on a VWAP basis.\891\ We believe 
that the exception for VWAP short sale transactions will provide an 
additional source of liquidity for investors' VWAP orders and will help 
enable investors to achieve their objective of obtaining an execution 
at the VWAP, thus mitigating the negative impact of Rule 201, if any, 
on liquidity and execution speed and probability and helping to promote 
the workability of Rule 201.
---------------------------------------------------------------------------

    \891\ See supra Section III.B.8. (discussing the ``short 
exempt'' provision for transactions on a volume weighted average 
price basis).
---------------------------------------------------------------------------

b. Implementation and On-Going Monitoring and Surveillance Costs
i. Policies and Procedures Requirement Under Rule 201
    Rule 201 requires a trading center to have written policies and 
procedures reasonably designed to prevent the execution or display of a 
short sale order of a covered security at a price that is less than or 
equal to the current national best bid if the price of that covered 
security decreases by 10% or more from the covered security's closing 
price as determined by the listing market for the covered security as 
of the end of regular trading hours on the prior day.\892\ In addition, 
the Rule requires that the trading center establish, maintain, and 
enforce written policies and procedures reasonably designed to impose 
this short sale price test restriction for the remainder of the day and 
the following day when a national best bid for the covered security is 
calculated and disseminated on a current and continuing basis by a plan 
processor pursuant to an effective national market system plan.\893\ In 
addition, trading centers are required to regularly surveil to 
ascertain the effectiveness of the policies and procedures required 
under the Rule and to take prompt action to remedy deficiencies in such 
policies and procedures.\894\
---------------------------------------------------------------------------

    \892\ See Rule 201(b)(1)(i).
    \893\ See Rule 201(b)(1)(ii).
    \894\ See Rule 201(b)(2).
---------------------------------------------------------------------------

    As stated previously, we discussed in the Proposal the anticipated 
costs of the proposed short sale price test restrictions and, in the 
Proposal and Re-Opening Release, we requested comment on the costs 
associated with the proposed amendments.\895\ In particular, we 
requested comment on the potential costs for any modification to both 
computer systems and surveillance mechanisms and for information 
gathering, management, and recordkeeping systems or procedures.\896\
---------------------------------------------------------------------------

    \895\ See Proposal, 74 FR at 18090, 18092-18103; Re-Opening 
Release, 74 FR at 42037.
    \896\ See Proposal, 74 FR at 18090.
---------------------------------------------------------------------------

    A number of commenters expressed concerns that the costs of 
implementing a short sale price test restriction would be 
significant.\897\ However, many of these comments were not specific to 
the alternative uptick rule.\898\ While some commenters discussed the 
potential implementation costs of the alternative uptick rule, they did 
not provide specific estimates of such costs.\899\ Most commenters 
compared estimated implementation costs of the alternative uptick rule 
to the other proposed rules.\900\
---------------------------------------------------------------------------

    \897\ See, e.g., letter from NSCP; letter from STANY (June 
2009); letter from RBC (June 2009); letter from Wolverine; letter 
from CPIC (Sept. 2009); letter from EWT (Sept. 2009); letter from 
RBC (Sept. 2009); letter from STA (Sept. 2009).
    \898\ See, e.g., letter from NSCP; letter from STANY (June 
2009); letter from RBC (June 2009); letter from Wolverine.
    \899\ See, e.g., letter from CPIC (Sept. 2009); letter from EWT 
(Sept. 2009); letter from RBC (Sept. 2009); letter from STA (Sept. 
2009).
    \900\ See, e.g., letter from EWT (Sept. 2009) (stating that the 
net savings of the alternative uptick rule to the broader industry 
compared to the other proposals would at best be minimal); letter 
from STA (Sept. 2009); letter from BATS (Sept. 2009); letter from 
Goldman Sachs (Sept. 2009); letter from Wells Fargo (Sept. 2009); 
letter from SIFMA (Sept. 2009); letter from ICI (Sept. 2009); letter 
from Credit Suisse (Sept. 2009).

---------------------------------------------------------------------------

[[Page 11298]]

    As discussed in the PRA section above, we believe that the 
implementation and on-going monitoring and surveillance costs of the 
alternative uptick rule will be lower than the implementation and on-
going monitoring and surveillance costs that would be associated with 
adoption of the proposed modified uptick rule or the proposed uptick 
rule.\901\ Unlike the proposed modified uptick rule and the proposed 
uptick rule, which would have required sequencing of the national best 
bid or last sale price (i.e., whether the current national best bid or 
last sale price is above or below the previous national best bid or 
last sale price), the alternative uptick rule references only the 
current national best bid. In addition, we believe that the 
implementation and on-going monitoring and surveillance costs of the 
alternative uptick rule are justified by the benefits provided by 
preventing short selling, including potentially manipulative or abusive 
short selling, from being used as a tool to exacerbate a declining 
market in a security.
---------------------------------------------------------------------------

    \901\ See supra Section IX.E.1. (discussing estimated burdens on 
trading centers of the collection of information requirements in 
connection with Rule 201).
---------------------------------------------------------------------------

    A number of commenters stated that because the alternative uptick 
rule would not require monitoring of the sequence of bids or last sale 
prices, implementing the alternative uptick rule would be less costly 
\902\ or easier than implementing the proposed modified uptick rule or 
the proposed uptick rule.\903\ In addition, several commenters stated 
that the alternative uptick rule would be easier to program into 
trading and surveillance systems than the proposed modified uptick rule 
or the proposed uptick rule.\904\ Another commenter stated, with 
respect to the alternative uptick rule, that ``actual implementation 
costs in terms of time and capital expenditure would be negligible when 
compared to those involved in implementing either the uptick rule or 
modified uptick rule.'' \905\
---------------------------------------------------------------------------

    \902\ See, e.g., letter from BATS (May 2009); letter from BATS 
(Sept. 2009); letter from GETCO (Sept. 2009); letter from ICI (Sept. 
2009); letter from Glen Shipway (Sept. 2009). In addition, several 
commenters acknowledged that implementation of the alternative 
uptick rule will likely be less costly, without referencing the 
sequencing issue. See, e.g., letter from STANY (Sept. 2009).
    \903\ See, e.g., letter from Glen Shipway (Sept. 2009); letter 
from SIFMA (Sept. 2009); letter from STA (Sept. 2009); see also 
letter from Credit Suisse (June 2009). In addition, one commenter 
acknowledged that implementation of the alternative uptick rule will 
likely be easier, without referencing the sequencing issue. See 
letter from Allston Trading (Sept. 2009).
    \904\ See, e.g., letter from BATS (May 2009); letter from Glen 
Shipway (Sept. 2009); letter from ICI (Sept. 2009); see also letter 
from National Stock Exchange et al.
    \905\ Letter from BATS (Sept. 2009).
---------------------------------------------------------------------------

    Several commenters indicated that implementation of the alternative 
uptick rule would not be easier or less costly than implementation of 
the proposed modified uptick rule or the proposed uptick rule.\906\ 
However, we note that some of these commenters presented concerns that 
were not directly related to the alternative uptick rule \907\ or to 
implementation costs or difficulties.\908\ Additionally, one commenter 
did not provide the reasoning for its belief that the alternative 
uptick rule would not be easier or less costly to implement.\909\
---------------------------------------------------------------------------

    \906\ See, e.g., letter from Matlock Capital (Sept. 2009); 
letter from NYSE Euronext (Sept. 2009); letter from Knight Capital 
(Sept. 2009).
    \907\ See, e.g., letter from NYSE Euronext (Sept. 2009) (stating 
that implementation of the alternative uptick rule would be more 
difficult on the basis that the alternative uptick rule would be 
paired with a circuit breaker and attributing implementation 
difficulties to the circuit breaker approach, not the alternative 
uptick rule).
    \908\ See, e.g., letter from Knight Capital (Sept. 2009) 
(characterizing a potential increase in friction, confusion, or 
inefficiency in the market as an implementation difficulty that may 
arise from the alternative uptick rule).
    \909\ See letter from Matlock Capital (Sept. 2009).
---------------------------------------------------------------------------

    Several commenters indicated their belief that other commenters' 
estimates regarding the difficulty or costs of implementing and 
monitoring the proposed modified uptick rule and the proposed uptick 
rule were exaggerated.\910\ We recognize that some commenters' 
estimates of the costs of the proposed modified uptick rule or the 
proposed uptick rule may have been conservative. We also believe that 
because the alternative uptick rule does not include a sequencing 
requirement, the implementation and on-going monitoring and 
surveillance costs of the alternative uptick rule will be less than 
such costs would be with respect to the other proposed short sale price 
test restrictions.
---------------------------------------------------------------------------

    \910\ See, e.g., letter from Matlock Capital (Sept. 2009); 
letter from ISE (Sept. 2009); letter from Bingham McCutchen.
---------------------------------------------------------------------------

    One commenter stated that the Commission ``underestimate[s] the 
time and expense that will be required for market participants to 
comply with the [alternative uptick] rule (or any other of the proposed 
alternatives)'' and that such costs ``will include expenses * * * for 
the initial implementation of any restriction.'' \911\ However, this 
commenter did not specify why or how the implementation cost of the 
alternative uptick rule may be greater than we estimated.\912\
---------------------------------------------------------------------------

    \911\ Letter from RBC (Sept. 2009).
    \912\ In addition, with respect to the commenter's concern that 
we underestimated the time required for implementation, we note 
that, as discussed in Section VII., above, we believe that a six 
month implementation period is appropriate. This implementation 
period, which is longer than the implementation periods proposed in 
the Proposal and the Re-Opening Release, takes into consideration 
commenters' concerns that implementation of a price test could be 
complex. We do not believe that a longer implementation time is 
warranted because, for example, Rule 201 does not require monitoring 
of the sequence of bids or last sale prices, unlike other proposed 
price tests, and because Rule 201 requires the implementation of 
policies and procedures similar to those required for trading 
centers under Regulation NMS.
---------------------------------------------------------------------------

    One commenter indicated that implementation costs would be 
approximately $500,000 per firm, for a total of $191,000,000 for all 
non-SRO trading centers subject to Rule 201,\913\ including costs for 
``the purchase of additional costly data feeds'' but not including 
``costs associated with developing appropriate internal supervisory 
procedures and compliance programs.'' \914\ The implementation cost 
estimates provided by this commenter, which are significantly higher 
than our estimate of, on average, $68,381 per non-SRO trading 
center,\915\ were not specific to the alternative uptick rule. Because 
the alternative uptick rule references only the current national best 
bid, unlike the proposed modified uptick rule and the proposed uptick 
rule, which would have required sequencing of the national best bid or 
last sale price, we believe that the alternative uptick rule will be 
easier and less costly to implement and monitor than the proposed 
modified uptick rule or the proposed uptick rule.\916\ In addition, we 
note that implementation of Rule 201 will not require modifications to 
how data feeds are currently received. As discussed above, Rule 201 
does not mandate that the receipt of the current national best bid must 
be from any one particular data feed; thus, trading centers will be 
able to continue using the data feed they currently use, and for which 
they

[[Page 11299]]

currently pay.\917\ As a result, we believe this commenter's estimates 
of the implementation costs are higher than our estimated 
implementation costs for Rule 201.
---------------------------------------------------------------------------

    \913\ See letter from Wolverine. In its letter, Wolverine 
multiplied its implementation cost estimate of $500,000 by 382 non-
SRO trading centers for a total of $191,000,000. See id. As 
indicated above, however, we now estimate that there are 407 non-SRO 
trading centers. See supra note 686.
    \914\ Id.
    \915\ See infra note 960 and accompanying text (discussing our 
estimated implementation costs for trading centers).
    \916\ See supra notes 661 to 669 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs).
    \917\ See supra notes 404 to 411 and accompanying text 
(discussing the use of various data feeds in determining the current 
national best bid).
---------------------------------------------------------------------------

    Another commenter conducted a survey of firms with respect to 
implementation cost estimates. Cost estimates in response to the survey 
indicated that a circuit breaker triggering a short sale price test 
based on the national best bid would have implementation costs that 
averaged between $235,000 and $2,000,000 per firm.\918\ This estimated 
implementation cost range is significantly higher than our estimated 
range of, on average, $68,381 per non-SRO trading center to $86,880 per 
SRO trading center for implementation.\919\ We note that the 
commenter's survey results covered fifty firms, categorized as large 
firms, regional firms, and clearing firms, rather than SRO trading 
centers, non-SRO trading centers and broker-dealers. Thus, it is 
difficult to determine the implementation costs to trading centers, 
including non-SRO trading centers, from these survey results. In 
addition, these cost estimates were based on a circuit breaker 
triggering the proposed modified uptick rule and, as such, were not 
specific to the alternative uptick rule. Because the alternative uptick 
rule references only the current national best bid, unlike the proposed 
modified uptick rule and the proposed uptick rule, which would have 
required sequencing of the national best bid or last sale price, we 
believe that the alternative uptick rule will be easier and less costly 
to implement and monitor than the proposed modified uptick rule or the 
proposed uptick rule.\920\
---------------------------------------------------------------------------

    \918\ See letter from SIFMA (June 2009). SIFMA did not 
categorize estimates of the implementation costs of a circuit 
breaker triggering a short sale price test based on the national 
best bid by SRO trading centers, non-SRO trading centers, and other 
broker-dealers, but categorized responses by larger firms, with 
implementation cost estimates that averaged $2,000,000 per firm, 
with the highest estimate at $9,000,000 per firm, regional firms, 
with estimates that averaged $235,000 per firm, with the highest 
estimate at $500,000 per firm, and clearing firms, with estimates 
that averaged $1,200,000 per firm, with the highest estimate at 
$1,900,000 per firm. SIFMA only provided the average and highest 
cost estimates per category. See id.
    \919\ See infra note 960 and accompanying text (discussing our 
estimated implementation costs for trading centers).
    \920\ See supra notes 661 to 669 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs).
---------------------------------------------------------------------------

    Commenters indicated that implementation costs would include costs 
for modifications to multiple systems, including blue sheet, OATS, and 
OTS reporting systems, trading system interfaces, execution management 
systems, and order management systems; modifications to data feeds; 
\921\ adjustments to data retention capabilities; revisions to written 
policies and procedures; and personnel training regarding the new 
requirements.\922\ We recognize that implementation of Rule 201 will 
impose surveillance and reprogramming costs for enforcing, monitoring, 
and updating trading, order management, execution management, 
surveillance, and reporting systems under Rule 201, systems changes to 
computer software, adjustments to data retention capabilities, as well 
as staff time and technology resources. These costs are included in our 
estimates of the costs of implementing Rule 201.\923\
---------------------------------------------------------------------------

    \921\ As discussed above, implementation of Rule 201 will not 
require modifications to how data feeds are currently received. See 
supra notes 404 to 411 and accompanying text (discussing the use of 
various data feeds in determining the current national best bid).
    \922\ See, e.g., letter from NSCP; letter from STANY (June 
2009); letter from RBC (June 2009); letter from Wolverine; letter 
from EWT (Sept. 2009).
    \923\ See infra note 960 and accompanying text (discussing our 
estimates of the implementation costs of Rule 201 by trading 
centers).
---------------------------------------------------------------------------

    In addition, commenters expressed concerns that the costs of on-
going monitoring and surveillance of a short sale price test 
restriction would be significant.\924\ Only one commenter specifically 
discussed concerns about the on-going monitoring and surveillance costs 
of the alternative uptick rule, and this commenter did not provide 
specific cost estimates.\925\ One commenter stated that the alternative 
uptick rule would be easier to surveil and monitor than the proposed 
modified uptick rule or the proposed uptick rule, and thus would 
present lower on-going costs to the industry.\926\ The alternative 
uptick rule references only the current national best bid, unlike the 
proposed modified uptick rule and the proposed uptick rule, which would 
have required sequencing of the national best bid or last sale price. 
Thus, we believe that the alternative uptick rule will be easier and 
less costly to implement and monitor than the proposed modified uptick 
rule or the proposed uptick rule.\927\
---------------------------------------------------------------------------

    \924\ See, e.g., letter from NSCP; letter from RBC (June 2009); 
letter from SIFMA (June 2009); letter from Wolverine; letter from 
RBC (Sept. 2009).
    \925\ See letter from RBC (Sept. 2009).
    \926\ See letter from STA (Sept. 2009).
    \927\ See supra notes 661 to 669 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs).
---------------------------------------------------------------------------

    Another commenter estimated that on-going system maintenance would 
cost $20,000 annually per firm.\928\ This estimate is lower than our 
estimated total cost of, on average, $121,356 annually per trading 
center for on-going monitoring and surveillance.\929\ This commenter 
stated that this estimate covers the cost ``annually to maintain the 
system.'' It is not clear what specific on-going monitoring and 
surveillance functions are included in the commenter's estimate but we 
believe that our estimate is more inclusive, in that it specifically 
takes into account costs for the commitment of resources associated 
with compliance administration and oversight, response to regulatory 
inquiries and examinations, response to internal inquiries, market 
surveillance, data retention, testing, training, and enforcement, with 
attendant opportunity costs.\930\
---------------------------------------------------------------------------

    \928\ See letter from Wolverine. Wolverine does not apply this 
estimate to exchanges and ATSs, but only to other non-SRO trading 
centers (such as market makers), noting that on-going costs for 
exchanges and ATSs ``should be minimal because they would be limited 
to system testing and maintenance, not the regulation of hundreds of 
members' systems, procedures and trading activity.'' Id.
    \929\ See infra notes 961 to 962 and accompanying text 
(discussing our estimates of the on-going monitoring and 
surveillance costs of Rule 201 by trading centers).
    \930\ See infra notes 934 and 935 and accompanying text 
(discussing the scope of our on-going monitoring and compliance cost 
estimates).
---------------------------------------------------------------------------

    One commenter conducted a survey of fifty firms with respect to on-
going monitoring cost estimates. Cost estimates in response to the 
survey indicated that a circuit breaker triggering a short sale price 
test based on the national best bid would have on-going monitoring 
costs that averaged between $45,000 and $175,000 per firm.\931\ 
Although our estimated cost of, on average, $121,356 per trading center 
for on-going monitoring and surveillance,\932\ falls within this 
commenter's estimated range of on-going monitoring cost, we note that 
the survey results covered fifty firms,

[[Page 11300]]

categorized as large firms, regional firms, and clearing firms, rather 
than SRO trading centers, non-SRO trading centers and broker-dealers. 
Thus, it is difficult to determine the implementation costs to trading 
centers, including non-SRO trading centers, from these survey results. 
In addition, these cost estimates were not specific to the alternative 
uptick rule. Because the alternative uptick rule references only the 
current national best bid, unlike the proposed modified uptick rule and 
the proposed uptick rule, which would have required sequencing of the 
national best bid or last sale price, we believe that the alternative 
uptick rule will be easier and less costly to implement and monitor 
than the proposed modified uptick rule or the proposed uptick 
rule.\933\
---------------------------------------------------------------------------

    \931\ See letter from SIFMA (June 2009). SIFMA did not 
categorize estimates of the on-going monitoring costs of a circuit 
breaker triggering a short sale price test based on the national 
best bid by SRO trading centers, non-SRO trading centers, and other 
broker-dealers, but categorized responses by larger firms, with on-
going monitoring cost estimates that averaged $130,000 per firm, 
with the highest estimate at $1,500,000 per firm, regional firms, 
with estimates that averaged $45,000 per firm, with the highest 
estimate at $350,000 per firm, and clearing firms, with estimates 
that averaged $175,000 per firm, with the highest estimate at 
$250,000 per firm. SIFMA only provided the average and highest cost 
estimates per category. See id.
    \932\ See infra notes 961 to 962 and accompanying text 
(discussing our estimated on-going monitoring and surveillance costs 
for trading centers).
    \933\ See supra notes 661 to 669 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs).
---------------------------------------------------------------------------

    Commenters indicated that the on-going costs to trading centers of 
a short sale price test restriction would include surveillance, 
testing, training, administration and supervision, data retention, 
response to regulatory inquiries and examinations, and response to 
internal inquiries.\934\ We agree with these comments and believe that 
Rule 201 will require the commitment of resources associated with 
compliance administration and oversight, response to regulatory 
inquiries and examinations, response to internal inquiries, market 
surveillance, data retention, testing, training, and enforcement, with 
attendant opportunity costs. These costs are included in our estimates 
of the costs of on-going monitoring and surveillance of Rule 201.\935\
---------------------------------------------------------------------------

    \934\ See, e.g., letter from NSCP; letter from RBC (June 2009); 
letter from SIFMA (June 2009); letter from Wolverine; letter from 
RBC (Sept. 2009).
    \935\ See infra notes 961 to 962 and accompanying text 
(discussing our estimates of the on-going monitoring and 
surveillance costs of Rule 201 to trading centers).
---------------------------------------------------------------------------

    In estimating the costs to trading centers of implementing Rule 
201, we considered that the policies and procedures required to be 
implemented for purposes of Rule 201 are similar to those that are 
required under Regulation NMS.\936\ In accordance with Regulation NMS, 
trading centers must have in place written policies and procedures in 
connection with that Regulation's Order Protection Rule, which could 
help form the basis for implementing the policies and procedures for 
Rule 201.\937\ Thus, we believe trading centers may already be familiar 
with establishing, maintaining, and enforcing trading-related policies 
and procedures, including programming their trading systems in 
accordance with such policies and procedures. We believe this 
familiarity will reduce the implementation costs of Rule 201 on trading 
centers and will make Rule 201 less burdensome to implement. Moreover, 
because trading centers have already developed or modified their 
surveillance mechanisms in order to comply with Regulation NMS's 
policies and procedures requirement, trading centers may already have 
retained and trained the necessary personnel to ensure compliance with 
that Regulation's policies and procedures requirements and, therefore, 
may already have in place most of the infrastructure and potential 
policies and procedures necessary to comply with Rule 201.\938\ 
Further, we believe that the implementation and on-going monitoring and 
surveillance costs of the alternative uptick rule are justified by the 
benefits provided in preventing short selling, including potentially 
manipulative or abusive short selling, from being used as a tool to 
exacerbate a declining market in a security.
---------------------------------------------------------------------------

    \936\ See Regulation NMS Adopting Release, 70 FR 37496; see also 
Proposal, 74 FR at 18087; 17 CFR 242.611.
    \937\ See Regulation NMS Adopting Release, 70 FR 37496; see also 
17 CFR 242.611.
    \938\ We also believe some trading centers may have retained 
personnel familiar with the former SRO bid tests, which may make 
Rule 201 even less burdensome to implement. See, Proposal, 74 FR at 
18095, n.393 and 18053, n.125.
---------------------------------------------------------------------------

    Several commenters indicated that the Commission overstated the 
benefit of previous implementation of Regulation NMS in mitigating the 
costs of implementing a short sale price test restriction,\939\ 
because, for example, ``systems re-written and architected for Reg NMS 
* * * did not include any short sale restrictions,'' \940\ or because 
such systems will require modifications in order to be used in the 
context of a short sale price test restriction.\941\ However, we took 
into account that Regulation NMS was implemented after elimination of 
the prior short sale price tests when considering the impact of 
previous experience with the policies and procedures requirement of 
Regulation NMS's Order Protection Rule. And, although we recognize that 
systems and processes will have to be modified for implementation of 
Rule 201, we continue to believe that because most trading centers 
already have in place systems and written policies and procedures in 
order to comply with Regulation NMS's Order Protection Rule, most 
trading centers will already be familiar with establishing, 
maintaining, and enforcing trading-related policies and procedures, 
which will mitigate the burden of implementation of the policies and 
procedures requirement under Rule 201.
---------------------------------------------------------------------------

    \939\ See, e.g., letter from FIF (June 2009); letter from NSCP; 
letter from RBC (June 2009).
    \940\ Letter from FIF (June 2009); see also letter from RBC 
(June 2009).
    \941\ See letter from NSCP; letter from RBC (June 2009).
---------------------------------------------------------------------------

    Several commenters agreed, stating that previous experience with 
the policies and procedures required under Regulation NMS might reduce 
the implementation and on-going monitoring and compliance burdens on 
trading centers.\942\ One commenter stated that implementation of a 
circuit breaker approach combined with the alternative uptick rule 
would be easier to implement than the other proposed short sale price 
tests or proposed circuit breaker rules, ``provided that the Commission 
permits firms to leverage the numerous systems changes made to 
facilitate compliance with Regulation NMS (including the use of 
internal market data rather than consolidated data supplied by the 
industry plans).'' \943\ And one commenter stated that prior 
implementation of Regulation NMS could ease implementation of a short 
sale price test restriction, ``provided that broker-dealers' 
implementations of Regulation NMS was sufficiently modular and 
extensible.'' \944\ We believe that Rule 201 is structured so that 
trading centers will be able to leverage their existing systems and 
experience with implementing the policies and procedures required by 
Regulation NMS's Order Protection Rule. For example, Rule 201 does not 
mandate that the receipt of the current national best bid must be from 
any one particular data feed; thus, trading centers will be able to use 
internal market data if they choose.\945\ Thus, as stated above, we 
believe that familiarity with trading-related policies and procedures 
under Regulation NMS will mitigate the burden of implementation of the 
policies and procedures requirement under Rule 201.
---------------------------------------------------------------------------

    \942\ See, e.g., letter from EWT (Sept. 2009); letter from 
Goldman Sachs (Sept. 2009); letter from MFA (Oct. 2009).
    \943\ Letter from Goldman Sachs (Sept. 2009); see also letter 
from MFA (Oct. 2009).
    \944\ Letter from EWT (Sept. 2009).
    \945\ See supra notes 404 to 411 and accompanying text 
(discussing the use of various data feeds in determining the current 
national best bid).
---------------------------------------------------------------------------

    Moreover, the written policies and procedures requirement of Rule 
201 is designed to provide trading centers with significant flexibility 
in determining how to comply with the requirements of

[[Page 11301]]

the Rule. For example, Rule 201 is designed to provide trading centers 
and their customers with flexibility in determining how to handle 
orders that are not immediately executable or displayable by the 
trading center because the order is impermissibly priced. Thus, if an 
order were impermissibly priced, the trading center could, in 
accordance with policies and procedures reasonably designed to prevent 
the execution or display of a short sale at a price that is less than 
or equal to the current national best bid, re-price the order upwards 
to the lowest permissible price and hold it for later execution at its 
new price or better.\946\ As quoted prices change, Rule 201 allows a 
trading center to repeatedly 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, Rule 201 may allow for the more efficient functioning 
of the markets because trading centers do not have to reject or cancel 
impermissibly priced orders unless instructed to do so by the trading 
center's customer submitting the short sale order. We note that a 
number of commenters expressed support for a policies and procedures 
approach to any short sale price test restriction, in part, because it 
would add flexibility to the Rule's requirements.\947\
---------------------------------------------------------------------------

    \946\ For example, if a trading center receives a short sale 
order priced at $47.00 when the current national best bid in the 
security is $47.00, the trading center could re-price the order at 
the permissible offer price of $47.01, and display the order for 
execution at this new limit price.
    \947\ See, e.g., letter from T. Rowe Price (June 2009); letter 
from AIMA; letter from RBC (June 2009); letter from Citadel et al. 
(Sept. 2009).
---------------------------------------------------------------------------

    Moreover, while latencies in obtaining data regarding the national 
best bid from consolidated market data feeds, as discussed in detail 
above, may impact implementation costs associated with Rule 201, a 
trading center could have policies and procedures that would provide 
for a snapshot of the applicable national best bid of the security. We 
note that some commenters expressed concerns regarding latencies in 
obtaining data regarding the national best bid disseminated by 
proprietary data feeds and/or by SIPs.\948\ We believe that a policies 
and procedures approach that provides for a snapshot of the applicable 
current national best bid will aid trading centers in dealing with time 
lags in receiving data regarding the national best bid from different 
data sources, as well as lead to reduced initial and on-going costs 
associated with Rule 201 for trading centers by facilitating 
verification of whether a short sale order was executed or displayed at 
a permissible price.
---------------------------------------------------------------------------

    \948\ See, e.g., letter from Glen Shipway (Sept. 2009); see also 
letter from Credit Suisse (June 2009); letter from FIF (June 2009); 
letter from Lime Brokerage (June 2009); letter from RBC (June 2009); 
letter from SIFMA (June 2009); letter from Direct Edge (June 2009); 
letter from BATS (Sept. 2009); letter from Credit Suisse (Sept. 
2009); letter from Lime Brokerage (Sept. 2009).
---------------------------------------------------------------------------

    We considered whether our estimates of the costs to trading centers 
for implementation and on-going monitoring and surveillance of the 
proposed modified uptick rule included in the Proposal \949\ would 
change under the circuit breaker approach of Rule 201, but concluded, 
as discussed below, that these estimates continue to represent 
reasonable estimates under the circuit breaker approach.
---------------------------------------------------------------------------

    \949\ See Proposal, 74 FR at 18093.
---------------------------------------------------------------------------

    Despite some commenters' concerns regarding the implementation 
costs of a circuit breaker rule,\950\ we believe that the circuit 
breaker approach will result in largely the same implementation costs 
as we estimated would be incurred if we adopted a permanent, market-
wide short sale price test restriction.\951\ As one commenter stated, 
``[o]nce the price test is in place, there is minimal incremental 
effort required to add a Circuit Breaker that controls the application 
of the price test.'' \952\ Similarly, another commenter stated that 
``[t]he additional coding required to implement a circuit breaker is 
minimal * * *'' \953\ We believe that there will be only minimal, if 
any, implementation costs for a circuit breaker approach in addition to 
the costs that we estimated previously for the implementation of a 
permanent, market-wide short sale price test rule because trading 
centers will need to establish written policies and procedures to 
implement the short sale price test restriction regardless of whether 
the short sale price test restriction is adopted on a permanent, 
market-wide basis or, in the case of Rule 201, adopted in conjunction 
with a circuit breaker. Several other commenters agreed, stating that 
the costs of the circuit breaker approach would be similar to, or only 
incrementally higher than, the costs of a permanent, market-wide 
approach.\954\
---------------------------------------------------------------------------

    \950\ See supra note 676.
    \951\ See Proposal, 74 FR at 18093.
    \952\ Letter from Nasdaq OMX Group (Oct. 2009).
    \953\ Letter from Credit Suisse (Sept. 2009).
    \954\ See, e.g., letter from STA (June 2009).
---------------------------------------------------------------------------

    In addition, with respect to on-going monitoring and surveillance 
costs of the circuit breaker approach, we recognize, as noted by one 
commenter,\955\ that trading centers will need to continuously monitor 
whether a security is subject to the provisions of Rule 201 and that 
there will be costs associated with such monitoring. However, we 
believe that these costs will be offset because, under the circuit 
breaker approach, the alternative uptick rule will be time limited and 
will only apply on a stock-by-stock basis, which will reduce our 
previously estimated costs for on-going monitoring and surveillance. 
This is because trading centers will only need to monitor and surveil 
for compliance with the alternative uptick rule during the limited 
period of time that the circuit breaker is in effect with respect to a 
specific security. As such, the circuit breaker approach will allow 
regulatory, supervisory and compliance resources to focus on, and to 
address, those situations where a specific security is experiencing 
significant downward price pressure.\956\ Further, although, under the 
circuit breaker approach, market participants will need to monitor 
whether a stock is subject to Rule 201 or not, we believe that 
familiarity with a circuit breaker approach may help mitigate such 
compliance costs.\957\
---------------------------------------------------------------------------

    \955\ See letter from Glen Shipway (June 2009).
    \956\ See, e.g., letter from Nasdaq OMX Group (Oct. 2009); 
letter from SIFMA (Sept. 2009).
    \957\ See supra notes 292 and 684 and accompanying text 
(discussing stock exchanges' and FINRA's rules or policies to 
implement coordinated circuit breaker halts and SRO rules or polices 
to coordinate individual security trading halts corresponding to 
significant news events).
---------------------------------------------------------------------------

    On balance, we believe that the estimates of the costs to trading 
centers for implementation and on-going monitoring and surveillance of 
the proposed modified uptick rule included in the Proposal \958\ are 
appropriate with respect to Rule 201. Thus, our estimates have not 
changed from the Proposal, except to the extent that total burden 
estimates have changed because we have updated the estimated number of 
trading centers.\959\ As detailed in PRA Section IX.E.1., above, we 
realize that the exact nature and extent of the policies and procedures 
that a trading center is required to establish likely will vary 
depending upon the type, size, and nature of the trading center (e.g., 
SRO vs. non-SRO, full service broker-dealer vs. market maker). Thus, 
our estimates take into account different types of trading centers and 
we realize that these estimates may be on the low-end for some trading 
centers while they may be on the high-end for other trading centers.
---------------------------------------------------------------------------

    \958\ See Proposal, 74 FR at 18093.
    \959\ See supra note 686 (discussing the change in the estimated 
number of trading centers).

---------------------------------------------------------------------------

[[Page 11302]]

    As detailed in PRA Section IX.E.1., above, we estimate a total one-
time initial cost of $28,699,867 \960\ for all trading centers subject 
to Rule 201 to establish the written policies and procedures reasonably 
designed to prevent the execution or display of short sale orders at a 
price that is less than or equal to the current national best bid.
---------------------------------------------------------------------------

    \960\ This figure was calculated by adding $20,359,867 and 
$8,340,000 (for outsourced legal work). The $20,359,867 figure was 
calculated as follows: (70 legal hours x $305) + (105 compliance 
hours x $313) + (20 information technology hours x $292) + (25 
business operation hours x $273) = $66,880 per SRO x 10 SROs = 
$668,800 total cost for SROs; (37 legal hours x $305) + (77 
compliance hours x $313) + (23 information technology hours x $292) 
+ (23 business operation hours x $273) = $48,381 per broker-dealer x 
407 broker-dealers = $19,691,067 total cost for broker-dealers; 
$668,800 + $19,691,067 = $20,359,867. The $8,340,000 figure for 
outsourced legal work was calculated as follows: (50 legal hours x 
$400 x 10 SROs) + (50 legal hours x $400 x 407 broker-dealers) = 
$8,340,000.
    Based on industry sources, we estimate that the average hourly 
rate for outsourced legal services in the securities industry is 
$400. For in-house legal services, we estimate that the average 
hourly rate for an attorney in the securities industry is 
approximately $305 per hour. The $305/hour figure for an attorney is 
from SIFMA's Management & Professional Earnings in the Securities 
Industry 2008, modified to account for an 1800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead. In addition, we estimate that the average 
hourly rate for an assistant compliance director, a senior computer 
programmer, and a senior operations manager in the securities 
industry is approximately $313, $292, and $273 per hour, 
respectively. These figures are from SIFMA's Management & 
Professional Earnings in the Securities Industry 2008, modified to 
account for an 1800-hour work-year and multiplied by 5.35 to account 
for bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    Once a trading center has established written policies and 
procedures reasonably designed to prevent the execution or display of a 
short sale order at a price that is less than or equal to the current 
national best bid, we estimate a total annual on-going cost of 
$7,751,196 \961\ for all trading centers subject to Rule 201 to ensure 
that their written policies and procedures are up-to-date and remain in 
compliance with Rule 201. In addition, with regard to on-going 
monitoring for and enforcement of trading in compliance with Rule 201, 
as detailed in PRA Section IX.E.1., above, we believe that, once the 
tools necessary to carry out on-going monitoring have been put in 
place, a trading center will be able to incorporate on-going monitoring 
and enforcement within the scope of its existing surveillance and 
enforcement policies and procedures without a substantial additional 
burden. We recognize, however, that this on-going compliance will not 
be cost-free, and that trading centers will incur some additional 
annual costs associated with on-going compliance, including compliance 
costs of reviewing transactions. We estimate that each trading center 
will incur an average annual on-going compliance cost of $102,768, for 
a total annual cost of $42,854,256 for all trading centers.\962\
---------------------------------------------------------------------------

    \961\ This figure was calculated as follows: (2 legal hours x 12 
months x $305) x (10 + 407) + (3 compliance hours x 12 months x 
$313) x (10 + 407) = $7,751,196.
    \962\ We estimate that each trading center will incur an average 
annual on-going compliance cost of $102,768 for a total annual cost 
of $42,854,256 for all trading centers. This figure was calculated 
as follows: (16 compliance hours x $313) + (8 information technology 
hours x $292) + (4 legal hours x $305) x 12 months = $102,768 per 
trading center x 417 trading centers = $42,854,256. As discussed 
above, we base our burden hour estimates on the estimates used for 
Regulation NMS because it requires similar on-going monitoring and 
surveillance for and enforcement of trading in compliance with that 
regulation's policies and procedures requirement.
    For in-house legal services, we estimate that the average hourly 
rate for an attorney in the securities industry is approximately 
$305 per hour. The $305/hour figure for an attorney is from SIFMA's 
Management & Professional Earnings in the Securities Industry 2008, 
modified to account for an 1800-hour work-year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits and 
overhead. In addition, we estimate that the average hourly rate for 
an assistant compliance director, a senior computer programmer, and 
a senior operations manager in the securities industry is 
approximately $313, $292, and $273 per hour, respectively. These 
figures are from SIFMA's Management & Professional Earnings in the 
Securities Industry 2008, modified to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

    To summarize, we estimate an average one-time initial cost of 
$86,880 per SRO trading center and $68,381 per non-SRO trading center 
for a total one-time initial cost of $28,699,867 \963\ for all trading 
centers subject to Rule 201 to establish the written policies and 
procedures reasonably designed to prevent the execution or display of 
short sale orders at a price that is less than or equal to the current 
national best bid. We estimate an average annual on-going cost of 
$18,588 per trading center for a total annual on-going cost of 
$7,751,196 \964\ for all trading centers subject to Rule 201 to ensure 
that their written policies and procedures are up-to-date and remain in 
compliance with Rule 201. In addition, we estimate an average annual 
cost of $102,768 per trading center for a total annual cost of 
$42,854,256 for all trading centers for on-going monitoring for and 
enforcement of trading in compliance with Rule 201.\965\
---------------------------------------------------------------------------

    \963\ See supra note 960.
    \964\ See supra note 961.
    \965\ See supra note 962.
---------------------------------------------------------------------------

ii. Policies and Procedures Requirement Under the Broker-Dealer and 
Riskless Principal Provisions
    A broker-dealer marking an order ``short exempt'' under Rule 201(c) 
must identify the order as being at a price above the current national 
best bid at the time of submission to the trading center \966\ and must 
establish, maintain, and enforce written policies and procedures 
reasonably designed to prevent the incorrect identification of orders 
as being priced in accordance with the requirements of Rule 
201(c).\967\
---------------------------------------------------------------------------

    \966\ See Rule 201(c). As a result, a trading center's policies 
and procedures will need to be reasonably designed to permit the 
execution or display of such orders without regard to whether the 
order is at a price that is less than or equal to the current 
national best bid. See Rule 201(b)(1)(iii).
    \967\ See Rule 201(c)(1). As part of its written policies and 
procedures, a broker-dealer also is required to regularly surveil to 
ascertain the effectiveness of its policies and procedures and take 
prompt remedial steps. See Rule 201(c)(2). This provision is 
intended to reinforce the on-going maintenance and enforcement 
requirements of the provision contained in Rule 201(c)(1) by 
explicitly assigning an affirmative responsibility to broker-dealers 
to surveil to ascertain the effectiveness of their policies and 
procedures. See id.
---------------------------------------------------------------------------

    Rule 201(d)(6) allows 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.\968\ 
A broker-dealer marking an order ``short exempt'' under this provision 
is required to have written policies and procedures in place to assure 
that, at a minimum: (i) The customer order was received prior to the 
offsetting transaction; (ii) the offsetting transaction is allocated to 
a riskless principal or customer account within 60 seconds of 
execution; and (iii) that it has supervisory systems in place to 
produce records that enable the broker-dealer to accurately and readily 
reconstruct, in a time-sequenced manner, all orders on which the 
broker-dealer relies pursuant to this provision.\969\
---------------------------------------------------------------------------

    \968\ See Rule 201(d)(6). As a result, a trading center's 
policies and procedures must be reasonably designed to permit the 
execution or display of such orders without regard to whether the 
order is at a price that is less than or equal to the current 
national best bid. See Rule 201(b)(1)(iii).
    \969\ See Rule 201(d)(6).
---------------------------------------------------------------------------

    As stated previously, we discussed in the Proposal the anticipated 
costs of the proposed short sale price test restrictions and we 
requested comment, in the Proposal and Re-Opening Release, on the costs 
associated with the proposed amendments.\970\ In particular, we 
requested comment on the potential costs for any modification to both 
computer systems and surveillance mechanisms and for information 
gathering, management, and recordkeeping systems or procedures.\971\

[[Page 11303]]

In response to our request for comment, commenters that specifically 
addressed the riskless principal provision of Rule 201(d)(6) supported 
its inclusion.\972\
---------------------------------------------------------------------------

    \970\ See Proposal, 74 FR at 18090, 18092-18103; Re-Opening 
Release, 74 FR at 42037.
    \971\ See Proposal, 74 FR at 18090.
    \972\ See, e.g., letter from BATS (May 2009); letter from SIFMA 
(June 2009); letter from Credit Suisse (June 2009); letter from NYSE 
Euronext (Sept. 2009).
---------------------------------------------------------------------------

    Several commenters expressed concerns with respect to the costs of 
the broker-dealer provision of Rule 201(c), but did not provide a 
specific estimate of such costs.\973\ Several commenters stated that 
the broker-dealer provision would place responsibility for ensuring 
order compliance with Rule 201 on broker-dealers, rather than 
exchanges, and noted that this is a significant difference from former 
Rule 10a-1 and NASD's former bid test.\974\ Similarly, one commenter 
stated that the broker-dealer provision would significantly expand the 
implementation cost of Rule 201, without providing a specific estimate 
of such cost.\975\ Although we agree that implementation of the broker-
dealer provision of Rule 201(c) will impose costs on broker-dealers who 
choose to rely on this provision, we note that Rule 201(c) is not a 
requirement of the Rule, but rather provides that a broker-dealer may 
mark a sell order for a security that has triggered the circuit breaker 
as ``short exempt,'' provided that the broker-dealer identifies the 
order as being at a price above the current national best bid at the 
time of submission to the trading center and otherwise complies with 
the requirements of the provision.
---------------------------------------------------------------------------

    \973\ See, e.g., letter from Credit Suisse (June 2009); letter 
from STANY (June 2009); letter from FIF (June 2009); letter from 
Lime Brokerage (June 2009); letter from NSCP; letter from Direct 
Edge (June 2009).
    \974\ See, e.g., letter from Credit Suisse (June 2009); letter 
from STANY (June 2009).
    \975\ See letter from Lime Brokerage (June 2009).
---------------------------------------------------------------------------

    In addition, as discussed throughout this adopting release, the 
alternative uptick rule references only the current national best bid, 
unlike the proposed modified uptick rule and the proposed uptick rule, 
which would have required sequencing of the national best bid or last 
sale price. In order to rely on the broker-dealer provision, a broker-
dealer must establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the incorrect identification 
of orders as being at a price above the current national best bid at 
the time of submission of the order to the trading center. Because the 
alternative uptick rule does not require sequencing of the national 
best bid, we believe that the policies and procedures required in order 
to rely on the broker-dealer provision under the alternative uptick 
rule will be easier and less costly to implement and monitor than would 
be the case under the proposed modified uptick rule or the proposed 
uptick rule.\976\ We note that one of the commenters that expressed 
concerns about the implementation cost of the broker-dealer provision 
also acknowledged that a rule ``that would not require data 
centralization and sequencing would be significantly less complex and 
faster to implement.'' \977\
---------------------------------------------------------------------------

    \976\ See supra notes 709 to 715 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs).
    \977\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    We disagree with several commenters who stated that, although 
implementation and on-going monitoring and surveillance of the 
alternative uptick rule might be easier and/or less costly for trading 
centers, this would not hold true for broker-dealers.\978\ One of these 
commenters stated that ``in order to avoid rejection of short sale 
orders under an alternative uptick rule, programming would need to be 
implemented to anticipate changes in the national best bid between the 
time a short sale order is entered and the time it reaches the relevant 
market center.'' \979\ However, the broker-dealer provision of Rule 
201(c) is designed specifically to help avoid this result. Under the 
broker-dealer provision, a broker-dealer may, in accordance with the 
policies and procedures required by the provision, identify the order 
as not being at a price that is less than or equal to the current 
national best bid at the time the order is submitted to the trading 
center and mark the order ``short exempt.'' Trading centers are 
required to have written policies and procedures in place to permit the 
execution or display of a short sale order of a covered security marked 
``short exempt'' without regard to whether the order is at a price that 
is less than or equal to the current national best bid.\980\
---------------------------------------------------------------------------

    \978\ See, e.g., letter from Citadel et al. (Sept. 2009); letter 
from EWT (Sept. 2009); letter Lime Brokerage (Sept. 2009).
    \979\ Letter from Citadel et al. (Sept. 2009).
    \980\ See Rule 201(b)(1)(iii).
---------------------------------------------------------------------------

    Commenters also expressed concerns about the competitive pressure 
of the broker-dealer provision, stating either that broker-dealers 
would feel compelled to undertake implementation of the provision, 
despite the high cost,\981\ which would be particularly burdensome for 
smaller firms,\982\ or that smaller firms would find the costs 
prohibitive, placing them at a competitive disadvantage.\983\ We 
recognize that broker-dealers are faced with competitive concerns and 
that such concerns may influence their decision whether or not to rely 
on the broker-dealer provision of Rule 201(c). With respect to the 
cost, as stated above, although we recognize that the broker-dealer 
provision will impose implementation costs on broker-dealers who choose 
to rely on this provision, we believe that this cost will not be as 
great as stated by some commenters because the alternative uptick rule 
does not require sequencing of the national best bid, unlike the 
proposed modified uptick rule and the proposed uptick rule, which would 
have required sequencing of the national best bid or last sale 
price.\984\ We believe that, without a sequencing requirement, the 
policies and procedures required in order to rely on the broker-dealer 
provision under the alternative uptick rule will be easier and less 
costly to implement and monitor, for all broker-dealers including 
smaller broker-dealers, than would be the case under the proposed 
modified uptick rule or the proposed uptick rule.\985\
---------------------------------------------------------------------------

    \981\ See, e.g., letter from STANY (June 2009); letter from FIF 
(June 2009); letter from Lime Brokerage (June 2009).
    \982\ See, e.g., letter from T.D. Pro Ex; letter from Taurus 
Compliance; letter from Credit Suisse (June 2009).
    \983\ See, e.g., letter from Credit Suisse (June 2009); letter 
from NSCP.
    \984\ We also note that it is possible that some smaller broker-
dealers that determine to rely on the broker-dealer provision may 
determine that it is cost-effective for them to outsource certain 
functions necessary to comply with Rule 201(c) to larger broker-
dealers, rather than performing such functions in house, to remain 
competitive in the market. This may help mitigate costs associated 
with implementing and complying with Rule 201(c). Additionally, they 
may decide to purchase order management software from technology 
firms. Order management software providers may integrate changes 
imposed by Rules 200(g) and 201 into their products, thereby 
providing another cost-effective way for smaller broker-dealers to 
comply with the requirement of Rule 201(c).
    \985\ See supra notes 709 to 715 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs to 
broker-dealers).
---------------------------------------------------------------------------

    Further, we believe that the implementation and on-going monitoring 
and compliance costs for broker-dealers who choose to rely on the 
broker-dealer provision are justified by the benefits of providing 
broker-dealers with the option to manage their order flow, rather than 
having to always rely on their trading centers to manage their order 
flow on their behalf.
    One commenter stated that the broker-dealer provision would impose 
significant on-going costs in the form of data storage, surveillance, 
and review, but did not provide a specific estimate

[[Page 11304]]

of such cost.\986\ We agree that broker-dealers who choose to rely on 
the broker-dealer provision of Rule 201(c) will face on-going costs for 
data storage, surveillance and review. However, we believe that broker-
dealers' on-going monitoring and surveillance costs under Rule 201(c) 
will be mitigated by the alternative uptick rule, as compared to the 
proposed modified uptick rule or the proposed uptick rule, because the 
alternative uptick rule will reference only the current national best 
bid in determining permissible short sales.\987\ In order to rely on 
the broker-dealer provision, a broker-dealer must establish, maintain, 
and enforce written policies and procedures reasonably designed to 
prevent the incorrect identification of orders as being at a price 
above the current national best bid at the time of submission of the 
order to the trading center. Under the alternative uptick rule, broker-
dealers who choose to rely on Rule 201(c) will need to monitor the 
current national best bid, but will not be required to monitor the 
sequence of bids or last sale prices, as would have been required under 
the proposed modified uptick rule or the proposed uptick rule, 
respectively. Several commenters noted that the lack of a sequencing 
requirement would make the alternative uptick rule, in comparison to 
the other proposed short sale price tests, less costly \988\ or easier 
to monitor on an on-going basis.\989\ One commenter stated that the 
alternative uptick rule would reduce the data retention requirements of 
a new short sale price test restriction.\990\
---------------------------------------------------------------------------

    \986\ See letter from NSCP; see also letter from Credit Suisse 
(June 2009).
    \987\ See supra notes 709 to 715 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs to 
broker-dealers).
    \988\ See supra note 661.
    \989\ See, e.g., letter from Glen Shipway (Sept. 2009); letter 
from SIFMA (Sept. 2009); letter from STA (Sept. 2009); see also 
letter from Credit Suisse (June 2009). In addition, one commenter 
acknowledged that monitoring of the alternative uptick rule will 
likely be easier, without referencing the sequencing issue. See 
letter from Allston Trading (Sept. 2009).
    \990\ See letter from STA (Sept. 2009).
---------------------------------------------------------------------------

    Another commenter stated that the ``Commission's cost estimates 
seem to underestimate the cost to large, full service broker-dealers, 
since the volume of orders handled by these firms are likely to lead to 
significantly greater technology and storage costs alone as well as 
more frequent reviews'' but did not provide a specific cost 
estimate.\991\ As we stated in the Proposal,\992\ we recognize that the 
exact nature and extent of the required policies and procedures, and 
thus the costs associated with such policies and procedures, that a 
broker-dealer is required to establish under the broker-dealer 
provision in Rule 201(c) likely will vary depending upon the nature of 
the broker-dealer, and we have taken this into account in our cost 
estimates.\993\
---------------------------------------------------------------------------

    \991\ Letter from NSCP.
    \992\ See Proposal, 74 FR at 18093.
    \993\ See infra notes 1022 to 1024 and accompanying text 
(discussing our estimates of implementation and on-going monitoring 
and surveillance costs to broker-dealers).
---------------------------------------------------------------------------

    The following discussion of comments on the costs to broker-dealers 
includes comments that were discussed above with respect to the costs 
to trading centers \994\ because, in some cases, commenters provided 
comments and estimates on the costs of establishing and monitoring 
policies and procedures under the proposed short sale price tests 
without distinguishing between costs that would be applicable to 
trading centers as opposed to broker-dealers. One commenter provided a 
dollar estimate of broker-dealer implementation costs at approximately 
$500,000 per broker-dealer, for a total of $2,780,500,000 for all 
broker-dealers subject to Rule 201,\995\ including costs for ``the 
purchase of additional costly data feeds'' but not including ``costs 
associated with developing appropriate internal supervisory procedures 
and compliance programs.'' \996\ However, we note that this 
implementation cost estimate for the broker-dealer provision, which is 
significantly higher than our estimate of, on average, $68,381 per 
broker-dealer,\997\ was not specific to the alternative uptick rule. As 
discussed above, we believe that the alternative uptick rule will be 
easier and less costly to monitor than the proposed modified uptick 
rule or the proposed uptick rule because under the alternative uptick 
rule, broker-dealers who choose to rely on Rule 201(c) will need to 
monitor the current national best bid, but will not be required to 
monitor the sequence of bids or last sale prices, as would have been 
required under the proposed modified uptick rule or the proposed uptick 
rule, respectively.\998\ In addition, we note that implementation of 
Rule 201 will not require modifications to how data feeds are currently 
received. As discussed above, Rule 201 does not mandate that the 
receipt of the current national best bid must be from any one 
particular data feed; thus, broker-dealers will be able to continue 
using the data feed they currently use and for which they currently 
pay.\999\
---------------------------------------------------------------------------

    \994\ See supra Section X.B.1.b.i. (discussing costs to trading 
centers).
    \995\ See letter from Wolverine. Wolverine provided an estimate 
of $500,000 per firm for implementation costs, which it applied to 
both non-SRO trading centers and other registered broker-dealers. In 
its letter, Wolverine multiplied its implementation cost estimate of 
$500,000 by 5,561 for a total of $2,780,500,000. See id. As 
indicated above, the Commission now estimates the number of broker-
dealers at 5,178 based on a review of 2008 FOCUS Report filings 
reflecting registered broker-dealers, including introducing broker-
dealers. This number does not include broker-dealers that are 
delinquent on FOCUS Report filings. See supra note 652.
    \996\ Letter from Wolverine.
    \997\ See infra note 1022 and accompanying text (discussing our 
estimated implementation costs for broker-dealers).
    \998\ See supra notes 709 to 715 and accompanying text and notes 
978 to 980 and accompanying text (discussing comments on the impact 
of the alternative uptick rule on implementation and on-going 
monitoring and compliance costs).
    \999\ See supra notes 404 to 411 and accompanying text 
(discussing the use of various data feeds in determining the current 
national best bid).
---------------------------------------------------------------------------

    Another commenter conducted a survey of fifty firms with respect to 
implementation and on-going monitoring cost estimates. Cost estimates 
in response to the survey indicated that a circuit breaker triggering a 
short sale price test based on the national best bid would have 
implementation costs that averaged between $235,000 and $2,000,000 per 
firm.\1000\ This estimated implementation cost range is significantly 
higher than our cost estimate of, on average, $68,381 per broker-dealer 
for implementation.\1001\ In addition, cost estimates in response to 
the survey indicated that a circuit breaker triggering a short sale 
price test based on the national best bid would have on-going 
monitoring costs that averaged between $45,000 and $175,000 per 
firm.\1002\ Our estimated cost of $121,356 per broker-dealer for on-
going monitoring and surveillance \1003\ falls within this commenter's 
estimated range of on-going monitoring cost. We note that the estimated 
costs were categorized by large firms, regional firms, and clearing 
firms, rather than by SRO trading centers, non-SRO trading centers and 
broker-dealers. As a result, it is difficult to determine the 
applicability of these cost estimates to the expected implementation 
and on-

[[Page 11305]]

going monitoring and compliance costs of Rule 201 to broker-dealers. In 
addition, this commenter's cost estimates were not specific to the 
alternative uptick rule. As discussed above, because the alternative 
uptick rule references only the current national best bid, unlike the 
proposed modified uptick rule and the proposed uptick rule, which would 
have required sequencing of the national best bid or last sale price, 
we believe that the alternative uptick rule will be easier and less 
costly to implement and monitor than the proposed modified uptick rule 
or the proposed uptick rule.\1004\
---------------------------------------------------------------------------

    \1000\ See supra note 918 (discussing the results of SIFMA's 
cost estimate survey with respect to the costs of implementing a 
circuit breaker triggering a short sale price test based on the 
national best bid); see also letter from Wolverine.
    \1001\ See infra note 1022 and accompanying text (discussing our 
estimated implementation costs for broker-dealers).
    \1002\ See supra note 931 (discussing the results of SIFMA's 
cost estimate survey with respect to the on-going monitoring costs 
of a circuit breaker triggering a short sale price test based on the 
national best bid).
    \1003\ See infra note 1022 and accompanying text (discussing our 
estimated implementation costs for broker-dealers).
    \1004\ See supra notes 709 to 715 and accompanying text and 
notes 978 to 980 and accompanying text (discussing comments on the 
impact of the alternative uptick rule on implementation and on-going 
monitoring and compliance costs).
---------------------------------------------------------------------------

    We considered these comments in evaluating the costs of 
implementation and on-going monitoring and surveillance of the broker-
dealer provision of Rule 201(c) and the riskless principal provision of 
Rule 201(d)(6). We note that the policies and procedures that must be 
implemented under the broker-dealer provision are similar to those that 
are required under the Order Protection Rule of Regulation NMS.\1005\ 
Thus, we believe broker-dealers will already be familiar with 
establishing, maintaining, and enforcing trading-related policies and 
procedures, including programming their trading systems in accordance 
with such policies and procedures.
---------------------------------------------------------------------------

    \1005\ See Regulation NMS Adopting Release, 70 FR 37496; see 
also 17 CFR 242.611.
---------------------------------------------------------------------------

    Although, as discussed above with respect to trading centers, 
several commenters stated that previous implementation of Regulation 
NMS would not mitigate the costs to broker-dealers of implementing a 
short sale price test restriction,\1006\ we considered these comments, 
as well as comments stating that previous implementation of Regulation 
NMS could ease implementation provided that broker-dealers could 
leverage existing systems in implementing Rule 201,\1007\ and continue 
to believe that familiarity with Regulation NMS policies and procedures 
will reduce the implementation costs of the broker-dealer provision 
under Rule 201(c) on broker-dealers. Moreover, because broker-dealers 
may have already developed or modified their surveillance mechanisms in 
order to comply with the policies and procedures requirement of the 
Order Protection Rule under Regulation NMS, broker-dealers may already 
have retained and trained the necessary personnel to ensure compliance 
with that Regulation's policies and procedures requirements and, 
therefore, may already have in place most of the infrastructure and 
potential policies and procedures necessary to comply with the broker-
dealer provision of Rule 201(c). In addition, one commenter supported 
using a policies and procedures approach to any short sale price test 
restriction because it would ease implementation for broker-
dealers.\1008\
---------------------------------------------------------------------------

    \1006\ See, e.g., letter from FIF (June 2009); letter from RBC 
(June 2009).
    \1007\ See, e.g., letter from MFA (Oct. 2009).
    \1008\ See, e.g., letter from GE.
---------------------------------------------------------------------------

    Moreover, while latencies in obtaining data regarding the national 
best bid from consolidated market data feeds, as discussed in detail 
above, may impact implementation costs associated with Rule 201, a 
broker-dealer could have policies and procedures that would provide for 
a snapshot of the applicable national best bid of the security. Several 
commenters expressed concerns that implementing ``snapshot'' capability 
to preserve an auditable record of the current national best bid would 
be difficult and costly for broker-dealers,\1009\ particularly because 
this is not a capability currently supported by many broker-
dealers.\1010\ Commenters also noted that ``snapshot'' capability would 
require increased data storage.\1011\
---------------------------------------------------------------------------

    \1009\ See, e.g., letter from Credit Suisse (June 2009); letter 
from STANY (June 2009); letter from FIF (June 2009); letter from 
Lime Brokerage (June 2009); letter from NSCP.
    \1010\ See, e.g., letter from STANY (June 2009); letter from FIF 
(June 2009).
    \1011\ See, e.g., letter from STANY (June 2009); letter from FIF 
(June 2009); letter from NSCP; letter from Direct Edge (June 2009).
---------------------------------------------------------------------------

    Although we recognize commenters' concerns that implementing 
``snapshot'' capability could be costly for some broker-dealers, we 
note that most broker-dealers may already have developed ``snapshot'' 
capability in connection with Regulation NMS's Order Protection Rule. 
We also agree that ``snapshot'' capability will require data storage by 
broker-dealers; however, as noted by one commenter,\1012\ because the 
alternative uptick rule does not require sequencing of the national 
best bid, the data storage requirements under the alternative uptick 
rule are lower than they would be under the proposed modified uptick 
rule or the proposed uptick rule. In addition, we believe that the 
costs of a policies and procedures approach that provides for a 
snapshot of the applicable current national best bid of the security 
are justified because snapshot capability will aid broker-dealers in 
dealing with time lags in receiving data regarding the national best 
bid from different data sources and facilitate verification of whether 
a short sale order was executed or displayed at a permissible price.
---------------------------------------------------------------------------

    \1012\ See letter from STA (Sept. 2009).
---------------------------------------------------------------------------

    We considered whether our estimates of the costs to broker-dealers 
for implementation and on-going monitoring and surveillance of the 
proposed modified uptick rule included in the Proposal \1013\ would 
change under the circuit breaker approach of Rule 201, but, as 
discussed below, concluded that these estimates continue to represent 
reasonable estimates under the circuit breaker approach combined with 
the alternative uptick rule.
---------------------------------------------------------------------------

    \1013\ See Proposal, 74 FR at 18093-18094.
---------------------------------------------------------------------------

    As discussed previously,\1014\ despite some commenters' concerns 
regarding the implementation costs of a circuit breaker rule,\1015\ we 
believe that the circuit breaker approach will result in largely the 
same implementation costs as we estimated would be incurred if we 
adopted a permanent, market-wide short sale price test 
restriction.\1016\ We believe that that there will be only minimal, if 
any, implementation costs for a circuit breaker approach in addition to 
the costs we estimated previously for the implementation of a 
permanent, market-wide short sale price test rule because broker-
dealers relying on Rule 201(c) or Rule 201(d)(6) are required to 
establish written policies and procedures required to comply with those 
provisions regardless of whether the short sale price test restriction 
is adopted on a permanent, market-wide basis or, in the case of Rule 
201, adopted in conjunction with a circuit breaker. Several other 
commenters agreed, stating that the costs of the circuit breaker 
approach would be similar to, or only incrementally higher than, the 
costs of a permanent, market-wide approach.\1017\
---------------------------------------------------------------------------

    \1014\ See supra Section IX.E.1. (discussing estimated burdens 
of the collection of information requirements applicable to trading 
centers under Rule 201).
    \1015\ See supra note 676.
    \1016\ See Proposal, 74 FR at 18093-18094.
    \1017\ See, e.g., letter from Nasdaq OMX Group (Oct. 2009); 
letter from Credit Suisse (Sept. 2009); letter from STA (June 2009).
---------------------------------------------------------------------------

    In addition, with respect to on-going monitoring and surveillance 
costs of the circuit breaker approach, we recognize, as noted by one 
commenter,\1018\ that broker-dealers relying on Rule 201(c) or Rule 
201(d)(6) will need to continuously monitor whether a security is 
subject to the provisions of Rule 201 and that there will be costs 
associated with such

[[Page 11306]]

monitoring. However, we believe that these costs will be offset 
because, under the circuit breaker approach, the alternative uptick 
rule will be time limited and will only apply on a stock by stock 
basis, which will reduce our previously estimated costs for on-going 
monitoring and surveillance. This is because broker-dealers relying on 
Rule 201(c) will only need to monitor and surveil for compliance with 
the alternative uptick rule, and broker-dealers relying on Rule 
201(d)(6) will only need to monitor for compliance with the 
requirements of that provision, during the limited period of time that 
the circuit breaker is in effect with respect to a specific security. 
As such, the circuit breaker approach will allow regulatory, 
supervisory and compliance resources to focus on, and to address, those 
situations where a specific security is experiencing significant 
downward price pressure.\1019\
---------------------------------------------------------------------------

    \1018\ See letter from Glen Shipway (June 2009).
    \1019\ See, e.g., letter from Nasdaq OMX Group (Oct. 2009); 
letter from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    On balance, we believe that the estimates of the costs to broker-
dealers for implementation and on-going monitoring and surveillance of 
the proposed modified uptick rule included in the Proposal \1020\ are 
appropriate with respect to the broker-dealer provision of Rule 201(c) 
and the riskless principal provision of Rule 201(d)(6). Thus, our 
estimates have not changed from the Proposal, except to the extent that 
total cost estimates have changed because we have updated the estimated 
number of broker-dealers.\1021\ Our estimates of the implementation 
costs to broker-dealers include the costs of surveillance and 
reprogramming costs for enforcing, monitoring, and updating trading, 
execution management, and surveillance systems under Rule 201, systems 
changes to computer software, as well as staff time and technology 
resources. Our estimates of the on-going monitoring and surveillance 
costs include the commitment of resources associated with compliance 
oversight, market surveillance, data storage and enforcement, with 
attendant opportunity costs.
---------------------------------------------------------------------------

    \1020\ See Proposal, 74 FR at 18093-18094.
    \1021\ See supra note 729 (discussing the change in the 
estimated number of broker-dealers).
---------------------------------------------------------------------------

    As detailed in PRA Section IX.E.2., above, we realize that the 
exact nature and extent of the required policies and procedures that a 
broker-dealer is required to establish under the broker-dealer 
provision in Rule 201(c), as well as under the riskless principal 
provision in Rule 201(d)(6), likely will vary depending upon the type, 
size and nature of the broker-dealer (e.g., full service broker-dealer 
vs. market maker). Thus, our estimates take into account different 
types of broker-dealers and we realize that these estimates may be on 
the low-end for some broker-dealers while they may be on the high-end 
for other broker-dealers.
    As detailed in PRA Section IX.E.2., above, we estimate a total one-
time initial cost of $354,076,818 for all broker-dealers relying on the 
broker-dealer provision in Rule 201(c) and the riskless principal 
provision in Rule 201(d)(6) to establish written policies and 
procedures reasonably designed to prevent the incorrect identification 
of orders as being priced in accordance with the broker-dealer 
provision or, in the case of the riskless principal provision, to 
assure that, at a minimum: (i) The customer order was received prior to 
the offsetting transaction; (ii) the offsetting transaction is 
allocated to a riskless principal or customer account within 60 seconds 
of execution; and (iii) that it has supervisory systems in place to 
produce records that enable the broker-dealer to accurately and readily 
reconstruct, in a time-sequenced manner, all orders on which the 
broker-dealer relies pursuant to this provision.\1022\
---------------------------------------------------------------------------

    \1022\ This figure was calculated by adding $250,516,818 and 
$103,560,000 (for outsourced legal work). The $250,516,818 figure 
was calculated as follows: (37 legal hours x $305) + (77 compliance 
hours x $313) + (23 information technology hours x $292) + (23 
business operation hours x $273) = $48,381 per broker-dealer x 5,178 
broker-dealers = $250,516,818 total cost for broker-dealers. The 
$103,560,000 figure was calculated as follows: (50 legal hours x 
$400 x 5,178) = $103,560,000.
     Based on industry sources, we estimate that the average hourly 
rate for outsourced legal services in the securities industry is 
$400. For in-house legal services, we estimate that the average 
hourly rate for an attorney in the securities industry is 
approximately $305 per hour. In addition, we estimate that the 
average hourly rate for an assistant compliance director, a senior 
computer programmer, and a senior operations manager in the 
securities industry is approximately $313, $292, and $273 per hour, 
respectively. The estimates for in-house legal services, assistant 
compliance director, senior computer programmer, and senior 
operations manager are from SIFMA's Management & Professional 
Earnings in the Securities Industry 2008, modified to account for an 
1800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    Once a broker-dealer has established written policies and 
procedures so that it may rely on the broker-dealer provision in Rule 
201(c) and the riskless principal provision in Rule 201(d)(6), we 
estimate a total annual on-going cost of $96,248,664 for all broker-
dealers relying on either of these provisions to ensure that their 
written policies and procedures are up-to-date and remain in compliance 
with Rule 201.\1023\ In addition, with regard to on-going monitoring 
for and enforcement of trading in compliance with the broker-dealer 
provision in Rule 201(c) and the riskless principal provision in Rule 
201(d)(6), as detailed in PRA Section IX.E.2., above, we believe that, 
once the tools necessary to carry out on-going monitoring have been put 
in place, a broker-dealer will be able to incorporate on-going 
monitoring and enforcement within the scope of its existing 
surveillance and enforcement policies and procedures without a 
substantial additional burden. We recognize, however, that this on-
going compliance will not be cost-free, and that broker-dealers will 
incur some additional annual costs associated with on-going compliance, 
including compliance costs of reviewing transactions. We estimate that 
each broker-dealer will incur an average annual on-going compliance 
cost of $102,768, for a total annual cost of $532,132,704 for all 
broker-dealers.\1024\
---------------------------------------------------------------------------

    \1023\ This figure was calculated as follows: (2 legal hours x 
12 months x $305) x 5,178 + (3 compliance hours x 12 months x $313) 
x 5,178 = $96,248,664.
    \1024\ This figure was calculated as follows: (16 compliance 
hours x $313) + (8 information technology hours x $292) + (4 legal 
hours x $305) x 12 months = $102,768 per broker-dealer x 5,178 
broker-dealers = $532,132,704. As discussed above, we base our 
estimate of burden hours on the estimates used for Regulation NMS 
because it requires similar on-going monitoring and surveillance for 
and enforcement of trading in compliance with that regulation's 
policies and procedures requirement.
     For in-house legal services, we estimate that the average 
hourly rate for an attorney in the securities industry is 
approximately $305 per hour. In addition, we estimate that the 
average hourly rate for an assistant compliance director and a 
senior computer programmer in the securities industry is 
approximately $313 and $292 per hour, respectively. These figures 
are from SIFMA's Management & Professional Earnings in the 
Securities Industry 2008, modified to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

    To summarize, we estimate an average one-time initial cost of 
$68,381 per broker-dealer for a total one-time initial cost of 
$354,076,818 for all broker-dealers relying on the broker-dealer 
provision in Rule 201(c) and the riskless principal provision in Rule 
201(d)(6) to establish the written policies and procedures required to 
rely on the broker-dealer provision or the riskless principal 
provision.\1025\ We estimate an average annual on-going cost of $18,588 
per broker-dealer for a total annual on-going cost of $96,248,664 for 
all broker-dealers relying on either of these provisions to ensure that 
their written policies and procedures are up-to-date and remain in 
compliance with Rule 201.\1026\ In addition, we estimate an average 
annual cost of $102,768 per

[[Page 11307]]

broker-dealer for a total annual cost of $532,132,704 for all broker-
dealers for on-going monitoring for and enforcement of trading in 
compliance with the broker-dealer provision in Rule 201(c) and the 
riskless principal provision in Rule 201(d)(6).\1027\
---------------------------------------------------------------------------

    \1025\ See supra note 1022.
    \1026\ See supra note 1023.
    \1027\ See supra note 1024.
---------------------------------------------------------------------------

2. Circuit Breaker Approach
    Under the circuit breaker approach, the alterative uptick rule will 
apply only if the price of a covered security has declined by 10% or 
more from the covered security's closing price as determined by the 
listing market for the covered security as of the end of regular 
trading hours on the prior day.\1028\ In addition, this short sale 
price test restriction will apply for the remainder of the day and the 
following day when a national best bid for the covered security is 
calculated and disseminated on a current and continuing basis by a plan 
processor pursuant to an effective national market system plan.\1029\
---------------------------------------------------------------------------

    \1028\ See Rule 201(b)(i).
    \1029\ See Rule 201(b)(ii).
---------------------------------------------------------------------------

a. Impact on Market Quality
    As stated above, in the Proposal and Re-Opening Release, we 
requested comment on the costs of a circuit breaker rule,\1030\ and 
specifically on the extent to which the proposed amendments to 
Regulation SHO, including the proposed circuit breaker rules, could 
impact or lessen some of the benefits of legitimate short selling or 
could lead to a decrease in market efficiency, price discovery, or 
liquidity.\1031\
---------------------------------------------------------------------------

    \1030\ See Proposal, 74 FR at 18090, 18100; Re-Opening Release, 
74 FR at 42037.
    \1031\ See Proposal, 74 FR at 18090.
---------------------------------------------------------------------------

    As we stated in the Proposal, we understand that there are concerns 
about a potential ``magnet effect'' that could arise as an unintended 
consequence of a circuit breaker that imposes a short selling price 
test restriction.\1032\ This ``magnet effect'' could result in short 
sellers driving down the price of an equity security in a rush to 
execute short sales before the circuit breaker is triggered. We are 
also concerned about short selling demand building until the circuit 
breaker is lifted.
---------------------------------------------------------------------------

    \1032\ See Proposal, 74 FR at 18067.
---------------------------------------------------------------------------

    In response to our requests for comments, several commenters stated 
that a short sale circuit breaker could exacerbate downward pressure on 
stocks as their value reached the threshold level.\1033\ Commenters 
also discussed the possibility that short selling demand could be built 
up until the short selling restriction is lifted.\1034\ Other 
commenters, however, discounted the possibility or impact of a ``magnet 
effect,'' \1035\ including some commenters who cited empirical studies 
that question whether a circuit breaker would result in artificial 
pressure on the price of individual securities.\1036\
---------------------------------------------------------------------------

    \1033\ See, e.g., letter from Matlock Capital (May 2009); letter 
from Schwab; letter from Lime Brokerage (June 2009); letter from STA 
(June 2009); letter from Glen Shipway (June 2009); letter NYSE 
Euronext (June 2009); letter from Wolverine; letter from Direct Edge 
(June 2009); letter from Amer. Bankers Assoc.; letter from NYSE 
Euronext (Sept. 2009); see also letter from SIFMA (June 2009) 
(indicating that an ``on/off'' circuit breaker trigger could dampen 
any magnet effect); letter from Direct Edge (Mar. 2009).
    \1034\ See letter from STA (June 2009); letter from Wolverine.
    \1035\ See letter from BATS (May 2009); letter from Credit 
Suisse (June 2009); letter from Credit Suisse (Sept. 2009); letter 
from Hudson River Trading; letter from Virtu Financial; see also 
letter from Credit Suisse (Mar. 2009).
    \1036\ See letter from Credit Suisse (June 2009); letter from 
Credit Suisse (Sept. 2009); see also letter from Credit Suisse (Mar. 
2009); letter from Nasdaq OMX Group (Oct. 2009).
---------------------------------------------------------------------------

    After considering the comments, including studies cited by 
commenters, we do not believe that the evidence is clear regarding a 
``magnet effect.'' \1037\ In fact, many academic studies that have 
analyzed circuit breakers in other contexts found no evidence of such 
trading patterns.\1038\ We recognize, however, that some of these 
studies were conducted in markets dissimilar from the highly automated 
markets currently existing in the United States and, therefore, that 
limits their utility in this context. Overall, however, the most 
relevant studies fail to demonstrate a magnet effect and we believe 
that adopting the circuit breaker approach best serves our goals.
---------------------------------------------------------------------------

    \1037\ See supra notes 280 to 285 and accompanying text 
(discussing comments on the ``magnet effect'' and our response).
    \1038\ See supra note 285.
---------------------------------------------------------------------------

    Commenters also stated that a circuit breaker could have a 
stigmatizing effect on affected securities by creating the impression 
that a stock is ``down so significantly that the trading rules must 
change.'' \1039\ Other commenters expressed concerns that the circuit 
breaker could have a negative effect on affected securities because 
``if a security has suffered a significant decline, additional 
constraints that affect the ability of market makers to provide high-
quality markets may actually hasten the decline, as decreased size and 
wider spreads will further undermine the already battered investor 
confidence in the security.'' \1040\ Another commenter noted that a 
circuit breaker ``may exacerbate market dislocations by suddenly and 
unexpectedly altering the regulatory regime and liquidity 
characteristics of a particular security, precisely when it is under 
duress.'' \1041\
---------------------------------------------------------------------------

    \1039\ Letter from Schwab; see also letter from Amer. Bankers 
Assoc.
    \1040\ Letter from EWT (June 2009).
    \1041\ Letter from EWT (June 2009); see also letter from Matlock 
Capital (May 2009).
---------------------------------------------------------------------------

    We recognize that the circuit breaker approach of Rule 201 could 
result in some perception of stigmatization of stocks that trigger the 
short sale price test restriction of Rule 201. As discussed above in 
Section X.B.1.a., we also recognize that imposing a short sale price 
test restriction may negatively impact market quality with respect to a 
covered security that has triggered the circuit breaker. In addition, 
although we agree that a circuit breaker combined with a halt on short 
selling could cause or exacerbate market dislocations, we do not 
believe that the circuit breaker approach of Rule 201 will have the 
same impact because it will continue to allow short selling at a price 
above the national best bid, even when the short sale price test 
restriction is in effect. Further, to the extent that the circuit 
breaker approach results in stigmatization, market dislocations, or 
other negative impacts on market quality, we believe any such costs are 
justified by the benefits provided by the Rule.
    As discussed in detail in Section III.A.5., above, commenters' 
estimates and the Staff's analysis show that a 10% circuit breaker 
threshold generally should affect only a limited percentage of covered 
securities, thus will not interfere with the smooth functioning of the 
markets for the majority of covered securities most of the time. And, 
although a permanent market-wide approach that would apply to all 
covered securities all the time may, as one commenter stated, provide 
an element of predictability,\1042\ we believe that the circuit breaker 
approach of Rule 201 is appropriate because it provides a balance 
between achieving our goals for adopting a short sale price test 
restriction and limiting impediments to the normal operations of the 
market. As discussed above, due to the changes in market conditions and 
erosion of investor confidence that occurred recently, investors have 
become increasingly concerned about sudden and excessive declines in 
prices that appear to be unrelated to issuer fundamentals.\1043\ We 
believe that a time-limited circuit breaker that is triggered by a 
significant intra-day decline in price of an individual

[[Page 11308]]

security is a targeted response to address these concerns.
---------------------------------------------------------------------------

    \1042\ See letter from NYSE Euronext (Sept. 2009).
    \1043\ See supra Section II.C. (discussing investor confidence); 
see also Proposal, 74 FR at 18046-18049.
---------------------------------------------------------------------------

    Commenters also expressed concerns that, during periods of 
volatility, ``circuit breakers could potentially impact far too many 
stocks on any given day and damage the benefits of short 
selling.''\1044\ Similarly, a number of commenters expressed concerns 
that, if the trigger level for a circuit breaker were set too low, the 
circuit breaker would impose a short sale price test restriction that 
would impair trading in a stock not only due to a price decline that 
might indicate abusive or abnormal trading activity, but also during 
normal market conditions, thus impairing normal trading activity, 
further limiting the provision of market benefits such as liquidity and 
price efficiency, and causing disruptions to investors and 
markets.\1045\
---------------------------------------------------------------------------

    \1044\ Letter from Atherton Lane; see also letter from Citadel 
et al. (June 2009); letter from Goldman Sachs (June 2009); letter 
from ISE (June 2009); letter from MFA (June 2009); letter from SIFMA 
(June 2009); letter from Wells Fargo (June 2009); letter from SIFMA 
(Sept. 2009).
    \1045\ See, e.g., letter from Citadel et al. (June 2009); letter 
from Goldman Sachs (June 2009); letter from MFA (June 2009); letter 
from SIFMA (June 2009); letter from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    When the markets experience periods of extreme volatility, we 
expect that the circuit breaker will be triggered for more securities 
than during periods of low volatility. We believe this is an 
appropriate result of Rule 201 because it is designed to impose 
restrictions on short selling when individual securities are undergoing 
significant intra-day price declines. In addition, we recognize that a 
10% trigger level may capture some ``normal'' trading activity. 
However, as discussed in detail in Section III.A.5., above, commenters' 
estimates and the Staff's analysis show that a 10% circuit breaker 
threshold generally should affect only a limited percentage of covered 
securities. This supports the conclusion that Rule 201 provides a 
tailored approach that reaches a limited subset of covered securities 
that are experiencing a significant intra-day price decline, while 
generally not restricting short selling in the majority of covered 
securities. To the extent that Rule 201 impairs normal trading 
activity, we believe that such costs are justified by the benefits 
provided by the Rule in preventing short selling, including potentially 
manipulative or abusive short selling, from being used as a tool to 
exacerbate a declining market in a security.
    Several commenters expressed concerns that a circuit breaker 
approach ``does not adequately address the negative implications of 
unregulated short selling'' because it would permit relatively 
unrestricted, and potentially manipulative, short selling up to the 
trigger point.\1046\ One commenter stated that a circuit breaker would 
not be effective to address manipulative short selling because 
``predatory short selling is not a one-day event, but the culmination 
of a series of events.'' \1047\
---------------------------------------------------------------------------

    \1046\ Letter from T. Rowe Price (June 2009); see also letter 
from Atherton Lane; letter from Chlebina (Apr. 2009); letter from 
Equity Insight; letter from Wells Fargo (June 2009); letter from 
Glen Shipway (Sept. 2009).
    \1047\ Letter from Equity Insight.
---------------------------------------------------------------------------

    While it is true that, under a circuit breaker approach, the short 
sale price test restriction of Rule 201 will not apply to short selling 
in a security before the 10% intra-day decline trigger is reached, or 
after the duration of the restriction has passed, we believe that the 
circuit breaker approach is designed to strike the appropriate balance 
between our goal of preventing potential short sale abuse and the need 
to limit impediments to the normal operations of the market. As we 
stated in the Proposal, in discussing a short selling circuit breaker, 
one commenter noted that such a measure could address the issue of 
``bear raids'' while limiting the market impact that may arise from 
other forms of short sale price test restrictions.\1048\ As discussed 
above, short selling is an important tool in price discovery and the 
provision of liquidity to the market, and we recognize that imposition 
of a short selling circuit breaker that when triggered imposes the 
alternative uptick rule could restrict otherwise legitimate short 
selling activity during periods of significant volatility. To the 
extent that Rule 201 permits relatively unrestricted, and potentially 
manipulative, short selling during times when the circuit breaker has 
not been triggered for a particular security, we believe that such 
costs are justified by the benefits provided by the circuit breaker 
approach in not interfering with the provision of market benefits such 
as liquidity and price efficiency for the majority of covered 
securities most of the time.
---------------------------------------------------------------------------

    \1048\ See Proposal, 74 FR at 18067, n.252 (noting a letter from 
Peter Brown, dated Dec. 12, 2008).
---------------------------------------------------------------------------

    After considering the comments, as discussed above, that we 
received with respect to the potential market impacts of a circuit 
breaker approach, we believe that such potential market impacts do not 
undermine our goals of preventing potential short sale abuse and 
addressing investor confidence, while balancing these goals with the 
need to limit impediments to the normal operations of the market. The 
Commission has long held the view that circuit breakers may help 
restore investor confidence during times of substantial 
uncertainty.\1049\ We believe that the requirements of Rule 201 will 
produce such benefits. By imposing the alternative uptick rule once a 
security's price is experiencing a significant price decline, the short 
selling circuit breaker rule in Rule 201(b) is designed to target only 
those securities that experience significant intra-day price declines 
and, therefore, will help to prevent short selling from being used as a 
tool to exacerbate the decline in the price of those securities. This 
approach establishes a narrowly-tailored Rule that will target only 
those securities experiencing such a decline. We believe that 
addressing short selling in connection with such declines in individual 
securities will help restore investor confidence in the markets 
generally.
---------------------------------------------------------------------------

    \1049\ See, e.g., 1998 Release, 63 FR 18477; see also Proposal, 
74 FR at 18067.
---------------------------------------------------------------------------

    Further, as discussed above, short selling is an important tool in 
price discovery and the provision of liquidity to the market, and we 
recognize that imposition of a short selling circuit breaker that when 
triggered imposes the alternative uptick rule could restrict otherwise 
legitimate short selling activity during periods of significant 
volatility. Under the circuit breaker approach, the alternative uptick 
rule will only be imposed when a covered security has experienced an 
intra-day price decline of 10% or more and will only apply for the 
remainder of the day and the following day. We believe that the 
negative impact of Rule 201, if any, on the market will be limited 
because of the limited scope and duration of Rule 201. Further, to the 
extent that Rule 201 negatively impacts market quality, we believe that 
such costs are justified by the benefits provided by the Rule in 
preventing short selling, including potentially manipulative or abusive 
short selling, from being used as a tool to exacerbate a declining 
market in a security.
b. Implementation and On-Going Monitoring and Surveillance Costs
    We discussed in the Proposal and the Re-Opening Release the 
anticipated costs of the proposed circuit breaker rules \1050\ and we 
requested comment on the costs associated with the proposed circuit 
breaker rules.\1051\ In particular, we requested comment on the 
potential

[[Page 11309]]

costs for any modification to both computer systems and surveillance 
mechanisms and for information gathering, management, and recordkeeping 
systems or procedures.\1052\
---------------------------------------------------------------------------

    \1050\ See Proposal, 74 FR at 18097-18100; Re-Opening Release, 
74 FR at 42035.
    \1051\ See Proposal, 74 FR at 18101-18103; Re-Opening Release, 
74 FR at 42037.
    \1052\ See Proposal, 74 FR at 18090.
---------------------------------------------------------------------------

    Several commenters expressed concerns regarding the implementation 
costs of a circuit breaker approach in comparison to the costs of 
implementing a permanent, market-wide test, but did not provide 
specific cost estimates.\1053\ One commenter stated that ``the circuit 
breaker proposal would be the least cost effective'' but did not 
provide a specific cost estimate with respect to a circuit breaker 
rule.\1054\
---------------------------------------------------------------------------

    \1053\ See supra note 676.
    \1054\ Letter from T. Rowe Price (June 2009).
---------------------------------------------------------------------------

    One commenter conducted a survey of fifty firms with respect to 
implementation cost and on-going monitoring costs estimates of a new 
short sale price test restriction.\1055\ Cost estimates in response to 
the survey indicated that a permanent, market-wide short sale price 
test based on the national best bid would have implementation costs 
that averaged between $200,000 and $1,100,000 per firm,\1056\ while a 
circuit breaker triggering a short sale price test based on the 
national best bid would have implementation costs that averaged between 
$235,000 and $2,000,000 per firm.\1057\ This represents an estimated 
increase in implementation costs for a circuit breaker approach, as 
compared to a permanent, market-wide approach, of $35,000 to $900,000 
per firm. However, we note that these cost estimates were based on a 
circuit breaker triggering the proposed modified uptick rule and, as 
such, were not specific to the alternative uptick rule.\1058\ As 
discussed throughout this adopting release, because the alternative 
uptick rule does not require sequencing of the national best bid, 
unlike the proposed modified uptick rule and the proposed uptick rule, 
which would have required sequencing of the national best bid or last 
sale price, we believe that the policies and procedures required under 
the alternative uptick rule will be easier and less costly to implement 
and monitor than would be the case under the proposed modified uptick 
rule or the proposed uptick rule.
---------------------------------------------------------------------------

    \1055\ See letter from SIFMA (June 2009).
    \1056\ See letter from SIFMA (June 2009). SIFMA did not 
categorize estimates of the implementation costs of a permanent, 
market-wide short sale price test based on the national best bid by 
SRO trading centers, non-SRO trading centers, and other broker-
dealers, but categorized responses by larger firms, with 
implementation cost estimates that averaged $1,000,000 per firm, 
with the highest estimate at $7,000,000 per firm, regional firms 
with estimates that averaged $200,000 per firm, with the highest 
estimate at $500,000 per firm, and clearing firms, with estimates 
that averaged $1,100,000 per firm, with the highest estimate at 
$1,900,000 per firm. SIFMA provided cost estimates in terms of the 
average estimated cost and the highest estimated cost. See id.
    \1057\ See supra note 918 (discussing SIFMA's survey of cost 
estimates with respect to the implementation costs of a circuit 
breaker triggering a short sale price test based on the national 
best bid).
    \1058\ We also note that the commenter's survey results covered 
fifty firms, categorized as large firms, regional firms, and 
clearing firms, rather than SRO trading centers, non-SRO trading 
centers and broker-dealers. Thus, it is difficult to determine costs 
of a circuit breaker approach to trading centers as opposed to 
broker-dealers from the survey results.
---------------------------------------------------------------------------

    We recognize that imposing a short sale-related circuit breaker 
rule when, currently, there is an absence of a short sale-related 
circuit breaker may result in costs in terms of modifications to 
systems and surveillance mechanisms, as well as changes to processes 
and procedures.\1059\ Such costs will include implementation costs for 
market participants associated with reprogramming trading and 
surveillance systems to account for the requirements of the short sale 
related circuit breaker. We also recognize that the circuit breaker 
approach may impose costs on market participants related to systems 
changes to computer software, reprogramming costs, and surveillance and 
compliance costs, as well as staff time and technology resources, 
associated with monitoring compliance with the short sale related 
circuit breaker. Moreover, imposing a short sale related circuit 
breaker rule when there are currently no short sale related circuit 
breakers in place also may mean that staff (compliance personnel, 
associated persons, etc.) may need to be trained or re-trained 
regarding rules related to the circuit breaker requirements.
---------------------------------------------------------------------------

    \1059\ Although under the circuit breaker approach, a price test 
will not be in place all the time or for all securities, trading 
centers, and broker-dealers relying on Rule 201(c) or Rule 
201(d)(6), will need to establish reasonable policies and procedures 
in advance to ensure compliance whenever the circuit breaker is 
triggered. We note that it would not be reasonable for a trading 
center, or a broker-dealer relying on Rule 201(c) or Rule 201(d)(6) 
to wait until the circuit breaker is triggered to begin establishing 
reasonable policies and procedures to prevent the execution or 
display of the particular covered security at a price that is less 
than or equal to the current national best bid. Thus, we recognize 
that the circuit breaker approach will result in immediate upfront 
costs to trading centers and to broker-dealers intending to rely on 
Rule 201(c) or Rule 201(d)(6). See supra Section X.B.1. (discussing 
costs of the alternative uptick rule).
---------------------------------------------------------------------------

    As discussed previously,\1060\ despite some commenters' concerns 
regarding the implementation costs of a circuit breaker rule, we 
believe that the circuit breaker approach will result in largely the 
same implementation costs as we estimated would be incurred if we 
adopted a permanent, market-wide short sale price test 
restriction.\1061\ We believe that there will be only minimal, if any, 
implementation costs for a circuit breaker approach in addition to the 
costs we estimated previously for the implementation of a permanent, 
market-wide short sale price test rule.\1062\
---------------------------------------------------------------------------

    \1060\ See supra notes 676 to 684 and 723 to 727 and 
accompanying text (discussing the impact of the circuit breaker 
approach on implementation and on-going monitoring and surveillance 
costs to trading centers and broker-dealers).
    \1061\ See Proposal, 74 FR 18093-18094.
    \1062\ Several commenters agreed, stating that the costs of the 
circuit breaker approach would be similar to, or only incrementally 
higher than, the costs of a permanent, market-wide approach. See, 
e.g., letter from Nasdaq OMX Group (Oct. 2009); letter from Credit 
Suisse (Sept. 2009); letter from STA (June 2009).
---------------------------------------------------------------------------

    In addition, with respect to on-going monitoring and surveillance 
costs of the circuit breaker approach, we recognize, as noted by one 
commenter,\1063\ that market participants will need to continuously 
monitor whether a security is subject to the provisions of Rule 201 and 
that there will be costs associated with such monitoring. However, we 
believe that these costs will be offset because, under the limited 
scope and duration of the circuit breaker approach, market participants 
will only need to monitor and surveil for compliance with the 
alternative uptick rule during the limited period of time that the 
circuit breaker is in effect with respect to a specific security. This 
will reduce our previously estimated costs for on-going monitoring and 
surveillance.\1064\
---------------------------------------------------------------------------

    \1063\ See letter from Glen Shipway (June 2009).
    \1064\ Commenters noted that the circuit breaker approach will 
allow regulatory, supervisory and compliance resources to focus on, 
and to address, those situations where a specific security is 
experiencing significant downward price pressure. See, e.g., letter 
from Nasdaq OMX Group (Oct. 2009); letter from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    In addition, although, under the circuit breaker approach, market 
participants will need to monitor whether a stock is subject to Rule 
201 or not, we believe that familiarity with a circuit breaker approach 
may help mitigate such compliance costs. As discussed in the Proposal, 
currently, all stock exchanges and FINRA have rules or policies to 
implement coordinated circuit breaker halts.\1065\ Moreover, SROs have 
rules or policies in place to coordinate individual security trading 
halts corresponding to significant news events.\1066\
---------------------------------------------------------------------------

    \1065\ See supra note 292.
    \1066\ See, e.g., FINRA Rule 6120; see also Proposal, 74 FR at 
18065-18066 (discussing the background on circuit breakers).

---------------------------------------------------------------------------

[[Page 11310]]

    We also note that one commenter conducted a survey of firms with 
respect to on-going monitoring costs estimates of a new short sale 
price test restriction.\1067\ Cost estimates in response to the survey 
indicated that a permanent, market-wide short sale price test based on 
the national best bid would have on-going monitoring costs that 
averaged between $50,000 and $175,000 per firm,\1068\ while a circuit 
breaker triggering a short sale price test based on the national best 
bid would have on-going monitoring costs that averaged between $45,000 
and $175,000 per firm.\1069\ This seems to support our view that the 
on-going monitoring costs of a circuit breaker approach, as compared to 
a permanent, market-wide approach, would be largely the same.
---------------------------------------------------------------------------

    \1067\ See letter from SIFMA (June 2009).
    \1068\ See letter from SIFMA (June 2009). SIFMA did not 
categorize estimates of the on-going costs of a permanent, market-
wide short sale price test based on the national best bid by SRO 
trading centers, non-SRO trading centers, and other broker-dealers, 
but categorized responses by larger firms, with on-going monitoring 
cost estimates that averaged $100,000 per firm, with the highest 
estimate at $1,500,000 per firm, regional firms with estimates that 
averaged $50,000 per firm, with the highest estimate at $450,000 per 
firm, and clearing firms, with estimates that averaged $175,000 per 
firm, with the highest estimate at $250,000 per firm. SIFMA only 
provided the average and highest cost estimates per category. See 
id.
    \1069\ See supra note 931 (discussing SIFMA's survey of cost 
estimates with respect to the on-going monitoring costs of a circuit 
breaker triggering a short sale price test based on the national 
best bid).
---------------------------------------------------------------------------

    After considering the comments, we believe that the implementation, 
on-going monitoring and surveillance costs of a circuit breaker 
triggering a short sale price test restriction will be similar to the 
implementation, on-going monitoring and surveillance costs of the same 
short sale price test restriction on a permanent, market-wide basis. 
Thus, we believe that our estimates of the implementation and on-going 
monitoring and surveillance costs of Rule 201 for trading centers and 
broker-dealers, as reflected in Sections X.B.1.b.i and X.B.1.b.ii., 
discussing the implementation and on-going monitoring and compliance 
costs of the alternative uptick rule, are appropriate after taking into 
consideration the circuit breaker approach of Rule 201. Further, we 
believe that such costs are justified by the benefits provided by the 
Rule in preventing short selling, including potentially manipulative or 
abusive short selling, from being used as a tool to exacerbate a 
declining market in a security.
    Under the circuit breaker approach of Rule 201, the listing market 
for each covered security must determine whether that covered security 
is subject to Rule 201.\1070\ Once the listing market has determined 
that a security has become subject to the requirements of Rule 201, the 
listing market shall immediately notify the single plan processor 
responsible for consolidation of information for the covered security 
in accordance with Rule 603(b) of Regulation NMS \1071\ of this fact. 
The plan processor must then disseminate this information.\1072\ We 
recognize that these requirements will require changes by the listing 
markets and single plan processors to systems currently supported by 
each.\1073\ We note that, because listing markets and single plan 
processors will require time in which to reprogram and test their 
systems and procedures to comply with Rule 201, the systems and 
programming costs associated with Rule 201 might be higher without a 
sufficient implementation period.\1074\ We believe that the six month 
implementation period will provide listing markets and single plan 
processors with time to make required changes in a measured fashion, 
which will help alleviate some of the potential disruptions that may be 
associated with implementing Rule 201.\1075\
---------------------------------------------------------------------------

    \1070\ See Rule 201(b)(3).
    \1071\ See supra note 368 (discussing the single plan processors 
for NMS stocks).
    \1072\ See Rule 201(b)(3); 17 CFR 242.603(b).
    \1073\ See letter from FIF (June 2009); see also supra Section 
III.A.6. (discussing the determination regarding securities subject 
to Rule 201 and dissemination of such information).
    \1074\ For example, commenters indicated that a circuit breaker 
rule triggering the alternative uptick rule would require an 
implementation period of between three and twelve months. See letter 
from NSCP; letter from NYSE Euronext (June 2009); letter from RBC 
(June 2009); letter from STA (June 2009); letter from FIF (Sept. 
2009); letter from Citadel et al. (Sept. 2009); letter from Credit 
Suisse (Sept. 2009); letter from Direct Edge (Sept. 2009); letter 
from EWT (Sept. 2009); letter from RBC (Sept. 2009); letter from 
SIFMA (Sept. 2009); letter from MFA (Oct. 2009); see also letter 
from Amer. Bankers Assoc.; letter from NYSE Euronext (Sept. 2009); 
letter from Goldman Sachs (Sept. 2009).
    \1075\ See supra Section VII. (discussing the implementation 
period for Rule 201); see also supra Section III.A.6.
---------------------------------------------------------------------------

    While we recognize that listing markets will incur initial up-front 
costs associated with having to update their systems, including systems 
changes to computer software, as well as staff time and technology 
resources to update their systems and surveillance mechanisms to ensure 
compliance with the Rule's requirements,\1076\ familiarity with a 
circuit breaker approach may help mitigate the implementation and 
compliance costs. In addition, we believe that listing markets may be 
able to leverage some of their existing procedures to ease the 
implementation of Rule 201's requirements. For example, as discussed in 
the Proposal, currently, all stock exchanges and FINRA have rules or 
policies to implement coordinated circuit breaker halts \1077\ and 
listing markets also already send information to single plan processors 
regarding Regulatory Halts as defined in those plans. Moreover, SROs 
have rules or policies in place to coordinate individual security 
trading halts corresponding to significant news events.\1078\ In 
addition, we note that listing markets are familiar with making 
determinations regarding, and imposing trading restrictions on, 
individual NMS stocks.\1079\ Similarly, in connection with such 
activities, listing markets currently monitor price changes in covered 
securities relative to the closing price as of the end of regular 
trading hours on the prior day.
---------------------------------------------------------------------------

    \1076\ See supra Section X.B.1. (discussing costs of the 
alternative uptick rule).
    \1077\ See supra note 292.
    \1078\ See supra note 684.
    \1079\ For example, listing markets already have rules or 
policies in place to coordinate trading suspensions or halts in 
individual NMS stocks. See, e.g., Nasdaq Rule 4120 (relating to 
trading halts in Nasdaq-listed securities); NYSE Rule 123D (relating 
to delayed openings and trading halts in NYSE-listed securities).
---------------------------------------------------------------------------

    Further, we note that listing markets are also trading centers, as 
defined by Rule 201,\1080\ and as such, will have costs in connection 
with systems changes to implement the policies and procedures 
requirements of Rule 201 applicable to trading centers.\1081\ We 
believe that the costs to listing markets associated with having to 
update their systems to ensure compliance with the Rule's requirements 
applicable to listing markets will be an incremental addition to the 
costs associated with the implementation of the policies and procedures 
requirements applicable to trading centers.\1082\ We believe that the 
implementation and compliance costs for listing markets are justified 
by the benefits provided by requiring the listing market for a covered 
security to determine whether the security has become subject to the 
short sale price test restrictions of Rule 201 because this will help 
to ensure consistency for each covered security with respect to such 
determinations.
---------------------------------------------------------------------------

    \1080\ See Rule 201(a)(9).
    \1081\ See supra Section IX.E.1. (discussing implementation 
costs to trading centers).
    \1082\ See id.
---------------------------------------------------------------------------

    We recognize that single plan processors will also incur initial 
up-front costs associated with having to update their systems, 
including systems changes to computer software, as well as staff time 
and technology resources to update their systems and surveillance 
mechanisms in order to ensure

[[Page 11311]]

compliance with the circuit breaker requirements.\1083\ We believe, 
however, that the single plan processors' current familiarity with 
receiving and disseminating information regarding individual NMS stocks 
will help mitigate these implementation and compliance costs. For 
example, the single plan processors currently receive information from 
listing markets regarding trading restrictions, such as Regulatory 
Halts as defined in those plans, on individual securities and 
disseminate such information. As a result, the requirements of Rule 
201(b)(3) are similar to existing obligations on plan processors 
pursuant to the requirements of Regulation NMS, the CTA and CQ Plans 
and the Nasdaq UTP Plan. Two commenters agreed that dissemination of 
information regarding the triggering of Rule 201 would be a function 
similar to other functions currently performed by the plan 
processors.\1084\ Further, we believe that the implementation and 
compliance costs for single plan processors are justified by the 
benefits provided by requiring the single plan processors to 
disseminate information on whether a security has become subject to the 
short sale price test restrictions of Rule 201 because the similarity 
of this function to current functions performed by the single plan 
processors will help to ensure the workability and smooth functioning 
of the Rule.
---------------------------------------------------------------------------

    \1083\ See supra Section X.B.1. (discussing costs of the 
alternative uptick rule).
    \1084\ See letter from NYSE Euronext (Sept. 2009); letter from 
Virtu Financial.
---------------------------------------------------------------------------

3. Implementation Period
    We believe that a six month implementation period will provide 
trading centers, broker-dealers, listing markets, the single plan 
processors and other market participants with a sufficient amount of 
time in which to modify their systems and procedures in order to comply 
with the requirements of Rule 201.\1085\ The six month implementation 
period will provide market participants with time to make required 
changes in a measured fashion, which will help alleviate some of the 
potential disruptions that may be associated with implementing Rule 
201. Because trading centers, listing markets, the single plan 
processors and other market participants will require time in which to 
reprogram and test their systems and procedures to comply with Rule 
201, the systems and programming costs associated with Rule 201 might 
be higher without a sufficient implementation period. For example, 
commenters indicated that a circuit breaker rule triggering the 
alternative uptick rule would require an implementation period of 
between three and twelve months.\1086\
---------------------------------------------------------------------------

    \1085\ See supra Section VII. (discussing the implementation 
period).
    \1086\ See letter from NSCP; letter from NYSE Euronext (June 
2009); letter from RBC (June 2009); letter from STA (June 2009); 
letter from FIF (Sept. 2009); letter from Citadel et al. (Sept. 
2009); letter from Credit Suisse (Sept. 2009); letter from Direct 
Edge (Sept. 2009); letter from EWT (Sept. 2009); letter from RBC 
(Sept. 2009); letter from SIFMA (Sept. 2009); letter from MFA (Oct. 
2009); see also letter from Amer. Bankers Assoc.; letter from NYSE 
Euronext (Sept. 2009); letter from Goldman Sachs (Sept. 2009).
---------------------------------------------------------------------------

    The six month implementation period, which is longer than the 
implementation periods proposed in the Proposal and the Re-Opening 
Release, takes into consideration commenters' concerns that 
implementation of a short sale price test could be complex.\1087\ We do 
not believe that an implementation period longer than 6 months is 
warranted because Rule 201 does not require monitoring of the sequence 
of bids or last sale prices, unlike other proposed short sale price 
tests,\1088\ and because Rule 201 requires the implementation of 
policies and procedures similar to those required for trading centers 
under Regulation NMS.\1089\ In addition, as discussed above, market 
participants will be able to leverage the numerous systems changes made 
and current architecture developed to facilitate compliance with 
Regulation NMS. These factors should reduce implementation time.
---------------------------------------------------------------------------

    \1087\ See, e.g., letter from NSCP; letter from RBC (June 2009); 
letter from SIFMA (June 2009); letter from RBC (Sept. 2009); see 
also letter from Direct Edge (Sept. 2009) (stating that adoption of 
a circuit breaker approach will add approximately four to six weeks 
to the implementation time of the alternative uptick rule); letter 
from NYSE Euronext (Sept. 2009) (stating that ``a circuit breaker 
approach raises significant implementation complexities''). But cf. 
letter from Credit Suisse (Sept. 2009) (stating that a circuit 
breaker approach will not significantly increase implementation 
time); letter from Nasdaq OMX Group (Oct. 2009) (stating that 
``[o]nce the price test is in place, there is minimal incremental 
effort required to add a Circuit Breaker that controls the 
application of the price test'').
    \1088\ Several commenters noted that because the alternative 
uptick rule, unlike the other proposed price tests, does not require 
sequencing of bids or last sale prices, the alternative uptick rule 
could be implemented more quickly than the other proposed price 
tests, in three to six months. See, e.g., letter from Credit Suisse 
(June 2009); letter from STA (June 2009); letter from Credit Suisse 
(Sept. 2009); letter from FIF (Sept. 2009). But cf. letter from 
Citadel et al. (Sept. 2009); letter from NYSE Euronext (Sept. 2009); 
letter from RBC (Sept. 2009); letter from SIFMA (Sept. 2009).
    \1089\ One commenter stated that implementation concerns with 
respect to a short sale price test restriction could be mitigated, 
provided that trading centers ``could leverage existing architecture 
developed to comply with the order protection rule in Reg NMS (Rule 
611).'' Letter from MFA (Oct. 2009). Another commenter stated that 
implementation of a circuit breaker triggering the alternative 
uptick rule would be easier to implement, ``provided that the 
Commission permits firms to leverage the numerous systems changes 
made to facilitate compliance with Regulation NMS (including the use 
of internal market data rather than consolidated data supplied by 
the industry plans).'' Letter from Goldman Sachs (Sept. 2009). But 
cf. letter from FIF (June 2009); letter from NSCP; letter from RBC 
(June 2009).
---------------------------------------------------------------------------

4. Marking Requirements
    While the current marking requirements in Rule 200(g) of Regulation 
SHO, which require broker-dealers to mark all sell orders of any equity 
security as either ``long'' or ``short,'' \1090\ will remain in effect, 
the amendments to Rule 200(g) will add a new marking requirement of 
``short exempt.'' \1091\ In particular, if the broker-dealer chooses to 
rely on its own determination that it is submitting the short sale 
order to the trading center at a price that is above the current 
national best bid at the time of submission or to rely on an exception 
specified in the Rule, it must mark the order as ``short exempt.'' 
\1092\ We discussed in the Proposal the anticipated costs of the 
proposed amendments \1093\ and, in the Proposal and Re-Opening Release, 
we requested comment on the costs associated with the proposed 
amendments.\1094\
---------------------------------------------------------------------------

    \1090\ 17 CFR 242.200(g).
    \1091\ See Rule 200(g); see also supra Section IV. (discussing 
the amendments to Rule 200(g)).
    \1092\ See Rule 200(g)(2).
    \1093\ See Proposal, 74 FR at 18100.
    \1094\ See Proposal, 74 FR at 18103; Re-Opening Release, 74 FR 
at 42037.
---------------------------------------------------------------------------

    Several commenters expressed concerns regarding the implementation 
costs of the ``short exempt'' marking requirements.\1095\ Several 
commenters noted that the ``short exempt'' marking requirements would 
require modifications to multiple systems, including modifications to 
blue sheet, OATS and OTS reporting systems.\1096\ One commenter noted 
that such modifications would be in addition to changes to order entry 
and routing applications.\1097\ Another commenter noted that one of its 
primary implementation concerns was related to ``re-implementation of 
`Short Sale Exempt' order types in interfaces between [the commenter] 
and [its] Customers as well as the venues that support such exempt 
order types.'' \1098\ In contrast, one commenter, in supporting 
adoption of the ``short

[[Page 11312]]

exempt'' marking requirements (in the event that the Commission decided 
to adopt a short sale price test restriction), stated that ``[t]he 
costs of marking the orders appropriately will be worth the benefits 
gained.'' \1099\
---------------------------------------------------------------------------

    \1095\ See, e.g., letter from FIF (June 2009); letter from NSCP; 
letter from RBC (June 2009); letter from Lime Brokerage (Sept. 
2009); letter from FIF (Sept. 2009).
    \1096\ See, e.g., letter from NSCP; letter from RBC (June 2009); 
letter from FIF (June 2009); letter from FIF (Sept. 2009).
    \1097\ See letter from FIF (June 2009); letter from FIF (Sept. 
2009).
    \1098\ Letter from Lime Brokerage (Sept. 2009).
    \1099\ Letter from STA (June 2009).
---------------------------------------------------------------------------

    We recognize commenters' concerns with respect to the costs of the 
``short exempt'' marking requirement and we considered these comments 
in evaluating the costs of the ``short exempt'' marking requirement. 
Such costs will include one-time costs for broker-dealers for 
reprogramming and systems changes, including modifications to reporting 
systems, order entry and routing applications. In addition, the costs 
of the ``short exempt'' marking requirement will include on-going 
monitoring and surveillance costs for broker-dealers. However, we 
believe that such costs will be limited because broker-dealers already 
have established systems, processes, and procedures in place to comply 
with the current marking requirements of Rule 200(g) of Regulation SHO 
with respect to marking a sell order either ``long'' or ``short'' and, 
therefore, will likely leverage such systems, processes and procedures 
to comply with the ``short exempt'' marking requirements in Rules 
200(g) and 200(g)(2). Further, we believe that the implementation and 
compliance costs of the ``short exempt'' marking requirements are 
justified by the benefits provided by the requirements in aiding 
surveillance by SROs and the Commission for compliance with the 
provisions of Rule 201 and providing an indication to a trading center 
regarding when it must execute or display a short sale order without 
regard to whether the order is at a price that is less than or equal to 
the current national best bid.
    We also considered whether our estimates of the implementation and 
on-going monitoring and compliance costs associated with the ``short 
exempt'' marking requirements under the amendments to Rule 200(g), as 
proposed in conjunction with the proposed modified uptick rule \1100\ 
would change under the circuit breaker approach of Rule 201, but 
concluded, as discussed below, that these estimates continue to 
represent reasonable estimates under the circuit breaker approach.
---------------------------------------------------------------------------

    \1100\ See Proposal, 74 FR at 18089.
---------------------------------------------------------------------------

    We believe that the ``short exempt'' marking requirements of Rule 
200(g), in conjunction with a circuit breaker approach, will result in 
largely the same implementation costs as we estimated would be incurred 
if the ``short exempt'' marking requirements were combined with a 
market-wide short sale price test restriction.\1101\ This is because 
broker-dealers relying on the provisions of Rule 201(c) or Rule 201(d) 
will need to make systems changes to implement the ``short exempt'' 
marking requirements regardless of whether the short sale price test 
restriction is adopted on a permanent, market-wide basis or, in the 
case of Rule 201, adopted in conjunction with a circuit breaker.
---------------------------------------------------------------------------

    \1101\ See Proposal, 74 FR at 18100.
---------------------------------------------------------------------------

    In addition, with respect to on-going monitoring and surveillance 
costs of the ``short exempt'' marking requirements in conjunction with 
a circuit breaker approach, we recognize, as noted by one 
commenter,\1102\ that market participants will need to continuously 
monitor whether a security is subject to the provisions of Rule 201 and 
that there will be costs associated with such monitoring. However, we 
believe that these costs will be offset because, under the circuit 
breaker approach, use of the ``short exempt'' provisions of Rule 201(c) 
and Rule 201(d) and the related marking requirements will be time 
limited and will only apply on a stock by stock basis. As a result, 
broker-dealers who choose to rely on Rule 201(c) or Rule 201(d) will 
only need to monitor and surveil for compliance with the requirements 
of those provisions and will only need to mark qualifying orders 
``short exempt'' during the limited period of time that the circuit 
breaker is in effect with respect to a specific security. The circuit 
breaker approach will allow regulatory, supervisory and compliance 
resources to focus on, and to address, those situations where a 
specific security is experiencing significant downward price 
pressure.\1103\
---------------------------------------------------------------------------

    \1102\ See letter from Glen Shipway (June 2009).
    \1103\ See, e.g., letter from Nasdaq OMX Group (Oct. 2009); 
letter from SIFMA (Sept. 2009).
---------------------------------------------------------------------------

    On balance, we believe our proposed estimates of the costs 
associated with the ``short exempt'' marking requirement \1104\ are 
appropriate with respect to Rule 200(g) as adopted. Thus, our estimates 
have not changed from the Proposal, except to the extent that total 
burden estimates have changed because we have updated the estimated 
number of broker-dealers.\1105\
---------------------------------------------------------------------------

    \1104\ See Proposal, 74 FR at 18089.
    \1105\ See supra note 729.
---------------------------------------------------------------------------

    We believe that the implementation cost of the ``short exempt'' 
marking requirement will likely be similar to the implementation cost 
of the order marking requirements of Rule 200(g) of Regulation SHO, 
which had originally included the category of ``short exempt.'' 
Industry sources at that time estimated initial implementation costs 
for the former ``short exempt'' marking requirement to be approximately 
$100,000 to $125,000.\1106\ Based on these estimates, as adjusted for 
inflation, we estimate that the initial implementation cost of the 
``short exempt'' marking requirement will be approximately $115,000 to 
$145,000 per broker-dealer \1107\ for a total initial implementation 
cost of approximately $595,470,000 to $750,810,000 for all broker-
dealers.\1108\
---------------------------------------------------------------------------

    \1106\ See 2004 Regulation SHO Adopting Release, 69 FR at 48023.
    \1107\ The adjustment for inflation was calculated using 
information in the Consumer Price Index, U.S. Department of Labor, 
Bureau of Labor Statistics.
    \1108\ These figures were calculated as follows: ($115,000 x 
5,178) = $595,470,000 and ($145,000 x 5,178) = $750,810,000.
---------------------------------------------------------------------------

    We recognize that there will be an on-going paperwork burden cost 
associated with adding the ``short exempt'' marking requirements. For 
example, as detailed in PRA Section IX.E.3., above, we estimate that 
the total annual cost for each broker-dealer subject to the ``short 
exempt'' marking requirements will be $93,420 \1109\ for a total annual 
on-going cost of $483,728,760 for all broker-dealers subject to the 
``short exempt'' marking requirements.\1110\
---------------------------------------------------------------------------

    \1109\ This figure was calculated as follows: (346 hours x $270) 
= $93,420 per broker-dealer. The 346 hour estimate was calculated as 
follows: 12.9 billion ``short exempt'' orders/5,178 broker-dealers = 
2,491,309 annual responses by each broker-dealer. Each response of 
marking sell orders ``short exempt'' will take approximately .000139 
hours (.5 seconds) to complete. (2,491,309 responses x 0.000139 
hours) = 346 burden hours.
     Based on industry sources, we estimate that the average hourly 
rate for compliance attorneys is $270. The $270/hour figure for 
compliance attorneys is from SIFMA's Management & Professional 
Earnings in the Securities Industry 2008, modified to account for an 
1800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits and overhead.
    \1110\ This figure was calculated as follows: ($93,420 x 5,178) 
= $483,728,760.
---------------------------------------------------------------------------

    To provide market participants with the time needed to make the 
changes required to comply with Rule 200(g), we are adopting an 
implementation period under which market participants will have to 
comply with these requirements six months following the effective date 
of the adoption of these amendments. In the Proposal, we proposed a 
three month implementation period for the ``short exempt'' marking 
requirements under Rule 200(g). In response to our request for comment, 
several commenters stated that the ``short exempt'' marking requirement 
would require systems changes.\1111\ Another commenter stated that the 
``short exempt'' marking requirement would require coding for new 
fields in order

[[Page 11313]]

records, which should be accomplished in approximately three 
months.\1112\
---------------------------------------------------------------------------

    \1111\ See, e.g., letter from RBC (June 2009); letter from NSCP; 
letter from FIF (June 2009).
    \1112\ See letter from STA (June 2009).
---------------------------------------------------------------------------

    We are sensitive to commenters' concerns that implementation of the 
``short exempt'' marking requirement could be complex, and believe that 
a six month implementation period, which is longer than the 3 month 
implementation period proposed in the Proposal, will afford market 
participants sufficient time to make the necessary modifications to 
their systems and procedures. In addition, we believe that because it 
will provide broker-dealers with time to make required changes in a 
measured fashion, the six month implementation period will help 
alleviate some of the potential disruptions that may be associated with 
implementing the ``short exempt'' marking requirements.

XI. Consideration of Burden on Competition and Promotion of Efficiency, 
Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action would promote efficiency, competition, and capital 
formation.\1113\ In addition, Section 23(a)(2) of the Exchange Act 
requires the Commission, when adopting rules under the Exchange Act, to 
consider the impact such rules would have on competition.\1114\ 
Exchange Act Section 23(a)(2) prohibits the Commission from adopting 
any rule that would impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \1113\ 15 U.S.C. 78c(f).
    \1114\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    A number of commenters noted concerns about the impact of a short 
sale price test restriction on efficiency, competition and capital 
formation.\1115\ One commenter stated that ``the empirical evidence 
from the many academic and Commission studies and experiences of [the 
commenters] * * * raise a substantial question about whether the 
proposed short sale restrictions can satisfy these standards.'' \1116\ 
Another commenter noted the beneficial impact of short selling on 
efficiency and competition, quoting the Commission's statements that 
short selling provides the market with liquidity and pricing 
efficiency.\1117\ As discussed below, we considered these concerns, and 
took them into account in formulating Rules 200(g) and 201, as adopted, 
to address, to the extent possible, these concerns.
---------------------------------------------------------------------------

    \1115\ See, e.g., letter from Joseph A. Dear, Chief Investment 
Officer, California Public Employees' Retirement System, dated June 
19, 2009; letter from Citadel et al. (June 2009); letter from 
Pershing Square; letter from Vanguard (June 2009); letter from Amer. 
Bar Assoc. (July 2009); letter from Amer. Bar Assoc. (Sept. 2009); 
letter from MFA (Oct. 2009).
    \1116\ Letter from Citadel et al. (June 2009).
    \1117\ See letter from Pershing Square (citing 2006 Price Test 
Elimination Proposing Release, 71 FR at 75069-75070).
---------------------------------------------------------------------------

A. Competition

    We begin our consideration of potential competitive impacts with 
observations of the current structure of the markets with respect to 
trading centers and broker-dealers, mindful of the statutory 
requirements regarding competition. Based on our experience in 
regulating the securities markets, including reviewing information 
provided by trading centers and broker-dealers in their registrations 
and filings with us, and approving such registration applications, we 
discuss below the basic framework of the markets they comprise.
1. Market Structure for Trading Centers and Broker-Dealers
    Trading centers include national securities exchanges or national 
securities associations that operate an SRO trading facility, 
ATSs,\1118\ exchange market makers and OTC market makers, and any other 
broker-dealer that executes orders internally, whether as agent or 
principal.\1119\ All of these entities will be required to alter their 
trading mechanisms to comply with Rule 200(g) and Rule 201.
---------------------------------------------------------------------------

    \1118\ Under Regulation ATS, any entity that falls within the 
definition of a securities exchange must apply to be a securities 
exchange or must register as an ATS, subject to certain exceptions. 
See 17 CFR 242.300, 301; see also 15 U.S.C. 78c(a)(1); 17 CFR 
240.3b-16.
    \1119\ See 17 CFR 242.600(b)(78). Currently, no national 
securities association is a trading center, as that term is defined 
in Rule 600(b)(78) of Regulation NMS.
---------------------------------------------------------------------------

    The equity trading industry is a competitive one, with reasonably 
low barriers to entry. The intensity of competition across trading 
platforms in this industry has increased in the past decade as a result 
of a number of factors, including market reforms and technological 
advances. This increase in competition has resulted in decreases in 
market concentration, more competition among trading centers, a 
proliferation of trading platforms competing for order flow, and 
decreases in trading fees.
    The reasonably low barriers to entry for trading centers are 
evidenced, in part, by the fact that new entities, primarily ATSs, 
continue to enter the market.\1120\ For example, currently there are 
approximately 50 registered ATSs that trade covered securities. In 
addition, the Commission within the past few years has approved 
applications by two entities--BATS and Nasdaq--to become registered as 
national securities exchanges for trading equities, and approved 
proposed rule changes by two existing exchanges--ISE and CBOE--to add 
equity trading facilities to their existing options business. We 
believe that competition among trading centers has been facilitated by 
Rule 611 of Regulation NMS,\1121\ which encourages quote-based 
competition between trading centers; Rule 605 of Regulation NMS,\1122\ 
which empowers investors and broker-dealers to compare execution 
quality statistics across trading centers; and Rule 606 of Regulation 
NMS,\1123\ which enables customers to monitor order routing practices.
---------------------------------------------------------------------------

    \1120\ See Exchange Act Release No. 60997 (Nov. 13, 2009), 74 FR 
61208, 61234 (Nov. 23, 2009) (discussing the reasonably low barriers 
to entry for ATSs and that these reasonably low barriers to entry 
have generally helped to promote competition and efficiency).
    \1121\ 17 CFR 242.611.
    \1122\ 17 CFR 242.605.
    \1123\ 17 CFR 242.606.
---------------------------------------------------------------------------

    Broker-dealers are required to register with the Commission and at 
least one SRO. The broker-dealer industry, including market makers, is 
a competitive industry, with most trading activity concentrated among 
several dozen larger participants and with thousands of smaller 
participants competing for niche or regional segments of the market.
    There are 5,178 registered broker-dealers, of which 890 are small 
broker-dealers.\1124\ Larger broker-dealers often enjoy economies of 
scale over smaller broker-dealers and compete with each other to 
service the smaller broker-dealers, who are both their competitors and 
customers. The reasonably low barriers to entry for broker-dealers are 
evidenced, for example, by the fact that the average number of new 
broker-dealers entering the market each year between 2001 and 2008 was 
389.\1125\
---------------------------------------------------------------------------

    \1124\ These numbers are based on a review of 2007 and 2008 
FOCUS Report filings reflecting registered broker-dealers, and 
discussions with SRO staff. The number does not include broker-
dealers that are delinquent on FOCUS Report filings. We discuss the 
impact of Rule 201 on small broker-dealers in Section XII.B., below.
    \1125\ This number is based on a review of FOCUS Report filings 
reflecting registered broker-dealers from 2001 through 2008. The 
number does not include broker-dealers that are delinquent on FOCUS 
Report filings. New registered broker-dealers for each year during 
the period from 2001 through 2008 were identified by comparing the 
unique registration number of each broker-dealer filed for the 
relevant year to the registration numbers filed for each year 
between 1995 and the relevant year.

---------------------------------------------------------------------------

[[Page 11314]]

2. Discussion of Impacts of Rules 200(g) and 201 on Competition
    We believe that the estimated costs associated with implementing 
and complying with Rules 200(g) and 201 are not so large as to raise 
significant barriers to entry, or otherwise significantly alter the 
competitive landscape of the industries involved. In industries 
characterized by reasonably low barriers to entry and intense 
competition, the viability of some of the less successful competitors 
may be sensitive to regulatory costs. Nonetheless, given the reasonably 
low barriers to entry into the market for execution services, we 
believe that the trading center and broker-dealer industries will 
remain competitive, despite the costs associated with implementing and 
complying with Rules 200(g) and 201, even if those costs influence to 
some degree the entry or exit decisions of individual trading centers 
or broker-dealers at the margin.
    Several commenters expressed concerns about the impact of a short 
sale price test restriction on competition among broker-dealers.\1126\ 
For example, one commenter noted concerns with respect to decreased 
competition and increased broker-dealer ``internalization.'' \1127\ 
Specifically, this commenter stated that, as a result of short sale 
price test restrictions, ``a widening of bid/offer spreads and decrease 
in liquidity provided by professional market makers could reverse the 
consolidation of liquidity in the public markets, permitting some 
brokers once again to take advantage of decreased competition in price 
discovery and offer substantially inferior (but still technically 
legal) internalization prices to their customers.'' \1128\ Although we 
considered this commenter's concerns, we note that, as discussed above, 
due to the circuit breaker approach of Rule 201, as well as findings by 
the Pilot Results regarding the market impact of former Rule 10a-1, we 
believe that the short sale price test restrictions of Rule 201 will 
have a limited, if any, negative market impact, such as widening of 
bid/offer spreads or decreased liquidity.\1129\ Thus, we do not believe 
that Rule 201 will result in decreased competition in price discovery 
or increased internalization.
---------------------------------------------------------------------------

    \1126\ See, e.g., letter from Credit Suisse (June 2009); letter 
from EWT (June 2009); letter from FIF (June 2009); letter from NSCP.
    \1127\ Letter from EWT (June 2009).
    \1128\ Id.
    \1129\ See supra Section X.B.1.a. (discussing the impact of Rule 
201 on liquidity, market volume, bid-ask spreads, price discovery 
and volatility).
---------------------------------------------------------------------------

    Another commenter stated that ``while it will not be mandated that 
firms avail themselves of the [broker-dealer provision], competitive 
pressure is likely to mean that broker dealers will need to invest 
resources and time in building this functionality.'' \1130\ We 
recognize that broker-dealers are faced with competitive concerns and 
that such concerns may influence their decision whether or not to rely 
on the broker-dealer provision of Rule 201(c). We also recognize that 
if a broker-dealer chooses to rely on the broker-dealer provision it 
will impose costs on such broker-dealers, and we considered these costs 
in determining to adopt in Rule 201 the alternative uptick rule rather 
than a rule that requires sequencing of the national best bid.\1131\ 
Although commenters expressed concerns with respect to the costs of the 
broker-dealer provision of Rule 201(c) and the resulting impact on 
competition, many of these comments were not specific to the 
alternative uptick rule.\1132\ Without a sequencing requirement under 
the alternative uptick rule, we believe that the policies and 
procedures required to rely on the broker-dealer provision under Rule 
201(c) will be easier and less costly to implement and monitor than the 
cost concerns and estimates provided by some commenters.
---------------------------------------------------------------------------

    \1130\ Letter from FIF (June 2009). In addition, some commenters 
raised concerns with respect to competitive pressure on smaller 
broker-dealers, in particular, in connection with a short sale price 
test restriction. As noted above, we discuss the impact of Rule 201 
on small broker-dealers in Section XII.B., below.
    \1131\ See supra Section IX.E.2. (discussing the implementation 
and on-going monitoring and compliance costs of the broker-dealer 
provision).
    \1132\ See, e.g., letter from STANY (June 2009); letter from FIF 
(June 2009); letter from Lime Brokerage (June 2009); letter from 
T.D. Pro Ex; letter from Taurus Compliance; letter from Credit 
Suisse (June 2009); letter from NSCP.
---------------------------------------------------------------------------

    Other commenters noted concerns regarding reduced competition among 
market makers in the absence of a bona fide market making 
exception.\1133\ We believe, however, that due to the approach of Rule 
201, that is, the combination of a circuit breaker with the alternative 
uptick rule, the lack of such a bona fide market maker exception will 
have minimal, if any, impact on competition among market makers. This 
is because, as noted by some commenters, equity market makers for the 
most part sell at their offer quote.\1134\ Thus, the short sale price 
test restriction of Rule 201, which requires short selling at a price 
above the national best bid and only if the circuit breaker has been 
triggered, is consistent with equity market making strategies because 
these market makers generally sell at prices above the national best 
bid.\1135\ This is particularly true where a security's price is 
declining, as market makers often provide liquidity on the opposite 
side of price moves to help reduce volatility. Thus, even during times 
when a covered security is undergoing significant downward price 
pressure, market makers are generally required to provide liquidity in 
that security.\1136\
---------------------------------------------------------------------------

    \1133\ See, e.g., letter from EWT (June 2009); letter from EWT 
(Sept. 2009); letter from GETCO (June 2009); letter from Goldman 
Sachs (June 2009); but cf. letter from Dr. Jim DeCosta (noting that 
there are currently few barriers to entry for market makers and 
abuse can arise from small market makers, who are in need of 
business, being willing to misuse a bona fide market making 
exemption in exchange for order flow). See also supra Section 
III.B.9. (discussing the decision not to include an exemption for 
bona fide market making).
    \1134\ See, e.g., letter from CBOE (June 2009).
    \1135\ See letter from Direct Edge (Sept. 2009); see also supra 
note 532 (discussing a 1997 study indicating that during a sample 
month in 1997, market maker short sales at or below the inside bid 
accounted for only 2.41% of their total share volume).
    \1136\ See, e.g., NYSE Rule 104(f) (stating that ``it is 
commonly desirable that a member acting as [a designated market 
maker] engage to a reasonable degree under existing circumstances in 
dealings for the [designated market maker's] own account when lack 
of price continuity, lack of depth, or disparity between supply and 
demand exists or is reasonably to be anticipated''); CBOE Rule 
53.23(a)(1) (stating that ``[w]ith respect to each security for 
which it holds an Appointment, a CBSX Remote Market Maker has a 
continuous obligation to engage, to a reasonable degree under the 
existing circumstances, in dealings for its own account when there 
exists, or it is reasonably anticipated that there will exist, a 
lack of price continuity, or a temporary disparity between the 
supply of and demand for a particular security'').
---------------------------------------------------------------------------

    Weighing against the competitive concerns for the trading center 
and broker-dealer industries, Rule 201 will advance the purposes of the 
Exchange Act in a number of significant ways. It will help benefit the 
market for a particular security by allowing market participants, when 
a security is undergoing a significant intra-day price decline, an 
opportunity to re-evaluate circumstances and respond to volatility in 
that security. It will also help restore investor confidence during 
times of substantial uncertainty because, once the circuit breaker has 
been triggered for a particular security, long sellers will have 
preferred access to bids for the security, and the security's continued 
price decline will more likely be due to long selling and the 
underlying fundamentals of the issuer, rather than to other factors. We 
also believe that a circuit breaker will better target short selling 
that may be related to potential

[[Page 11315]]

bear raids \1137\ and other forms of manipulation that may be used to 
exacerbate a price decline in a covered security.
---------------------------------------------------------------------------

    \1137\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    At the same time, however, we recognize the benefits to the market 
of legitimate short selling, such as the provision of liquidity and 
price efficiency, and considered these benefits in adopting the circuit 
breaker approach of Rule 201. Under the circuit breaker approach, the 
alternative uptick rule will only be imposed when a covered security 
has experienced an intra-day price decline of 10% or more and will only 
apply for the remainder of the day and the following day. We believe 
that because of the limited scope and duration of Rule 201, it will not 
interfere with the smooth functioning of the markets for the majority 
of securities, including when prices in such securities are undergoing 
minimal downward price pressure or are stable or rising. To the extent 
that Rule 201 impacts the benefits of legitimate short selling, such as 
the provision of liquidity and price efficiency, we believe that such 
costs are justified by the benefits provided by the Rule in preventing 
short selling, including potentially manipulative or abusive short 
selling, from being used as a tool to exacerbate a declining market in 
a security.
    After due consideration of all these factors and the comments we 
have received, we have determined that any burden on competition that 
Rules 200(g) and 201 may impose is necessary or appropriate in the 
furtherance of the purposes of the Exchange Act noted above.

B. Capital Formation

    A purpose of Rule 201 is to strengthen investor confidence in the 
markets we regulate which should help make investors more willing to 
invest, resulting in the promotion of capital formation. Fair and 
robust secondary markets, in which legitimate short selling can play a 
positive role, supports the public offerings by which issuers raise 
capital and, as a result, investors who provided private capital 
realize profits and obtain liquidity. In addition, long holdings are 
integral to capital formation. By placing long holders ahead of short 
sellers in the execution queue under certain limited circumstances, 
Rule 201 promotes capital formation, since investors should be more 
willing to hold long positions if they know they may have a preferred 
position over short sellers when they wish to sell in the market for 
that security during a significant price decline in that security.
    In addition, paragraphs (c) and (d) of Rule 201 include provisions 
that are designed to limit any adverse effects on the public offering 
process, which is necessary to capital formation, while at the same 
time not undermining the goals of Rule 201.\1138\ In particular, Rule 
201(d)(5) is designed to facilitate price support during the offering 
process by allowing broker-dealers to mark short sale orders ``short 
exempt'' if the short sale is by an underwriter or syndicate member 
participating in a distribution in connection with an over-allotment or 
if the short sale order is by an underwriter or syndicate member for 
purposes of a lay-off sale in connection with a distribution of 
securities through a rights or standby underwriting commitment.\1139\
---------------------------------------------------------------------------

    \1138\ See supra Section III.B. (discussing ``short exempt'' 
provisions to Rule 201). Under these provisions, if a broker-dealer 
chooses to rely on its own determination that it is submitting the 
short sale order to the trading center at a price that is above the 
current national best bid at the time of submission or to rely on an 
exception specified in the Rule, it must mark the order as ``short 
exempt.''
    \1139\ See Rule 201(d)(5).
---------------------------------------------------------------------------

    We note that short sales can facilitate convertible securities 
offerings, and, as stated by some commenters,\1140\ we recognize that 
hedges for this subset of offerings may become more expensive under 
Rule 201 due to the absence of an exception from Rule 201 for short 
selling in connection with convertible instruments. In this regard, 
however, we note that as adopted, as opposed to some of our alternative 
proposals, Rule 201 will not prohibit short selling to hedge a 
position, although it could marginally increase the cost of adjusting a 
hedge after a significant market decline. Even if these indirect costs 
could, at the margin, reduce the attractiveness and, therefore, the 
volume of certain types of offerings, we do not believe that any such 
reduction will be significant because short sellers will be able to 
sell at a price above the national best bid even during the limited 
time the circuit breaker is in effect. Moreover, as described above, 
Rule 201 includes an exception for short selling in connection with 
certain types of capital-raising structures. Thus, while there may be a 
change in the total mix of offering types, we have no reason to believe 
that, in light of the anticipated positive effect of Rule 201 on 
investor confidence, particularly confidence in long holdings, that 
there will be any overall negative effect on capital formation as a 
result of our adoption of this Rule.
---------------------------------------------------------------------------

    \1140\ See supra notes 425 to 426 and accompanying text (noting 
requests by commenters for exceptions for short sales in connection 
with the facilitation of capital raising transactions through 
convertible instruments by issuers and selling shareholders, and to 
allow investors purchasing a convertible instrument to hedge their 
long exposure).
---------------------------------------------------------------------------

    We believe, and commenters agreed, that by helping to prevent short 
selling, including manipulative or abusive short selling, from driving 
down further the price of a security that has already experienced a 
significant intra-day price decline, Rule 201 will help restore and 
maintain investor confidence in the securities markets.\1141\ 
Bolstering investor confidence in the markets will help to encourage 
investors to be more willing to invest in the markets, including during 
times of substantial uncertainty, thereby adding depth and liquidity to 
the markets and promoting capital formation.
---------------------------------------------------------------------------

    \1141\ See supra Section II.C. (discussing restoring investor 
confidence); see also letter from Edward C. Springer, dated May 3, 
2009; letter from Richard Anderson, dated May 5, 2009; letter from 
Mike Pascale, dated May 11, 2009; letter from Sigmon Wealth 
Management (June 2009); form letter type C, a petition drafted by 
Jim Cramer, William Furber, Eric Oberg, and Scott Rothbort and 
signed by 5,605 investors. Another commenter stated that adoption of 
the alternative uptick rule would have a beneficial impact on 
capital formation, stating that ``[t]he most important function of 
the capital markets is to raise capital for American corporations,'' 
and that ``by adopting the alternative uptick rule, the Commission 
will have chosen the best approach to deal with the loss of 
confidence by Congress and most importantly the investing public.'' 
Letter from Glen Shipway (Sept. 2009). We note, however, that this 
commenter did not support adoption of the alternative uptick rule in 
conjunction with a circuit breaker.
---------------------------------------------------------------------------

C. Efficiency

    Rule 201 is designed to achieve the appropriate balance between our 
goal of preventing short selling, including manipulative or abusive 
short selling, from being used as a tool to exacerbate a declining 
market in a security and the need to allow for the continued smooth 
functioning of the markets, including the provision of liquidity and 
price efficiency in the markets. By not allowing short sellers to sell 
at or below the current national best bid while the circuit breaker is 
in effect, the short sale price test restriction in Rule 201 will allow 
long sellers in certain limited circumstances, by selling at the bid, 
to sell first in a declining market for a particular security. As the 
Commission has noted previously in connection with short sale price 
test restrictions, a goal of such restrictions is to allow long sellers 
to sell first in a declining market.\1142\
---------------------------------------------------------------------------

    \1142\ See supra note 17.
---------------------------------------------------------------------------

    The term ``price efficiency'' has a technical meaning in financial 
economics, which is not the only way the term can be interpreted in the

[[Page 11316]]

Exchange Act.\1143\ We have, nonetheless, considered the effect of Rule 
201 on price efficiency in terms of financial economic theory.\1144\
---------------------------------------------------------------------------

    \1143\ See supra note 18 (defining the term ``price 
efficiency'').
    \1144\ See, e.g., Edward M. Miller, 1977, Risk, uncertainty, and 
divergence of opinion, Journal of Finance 32, 1151-1168; Douglas W. 
Diamond and Robert E. Verrecchia, 1987, Constraints on short-selling 
and asset price adjustment to private information, Journal of 
Financial Economics 18, 277-311.
---------------------------------------------------------------------------

    We have structured Rule 201 to mitigate its impact on price 
efficiency. In response to the Proposal and Re-Opening Release, several 
commenters cited empirical evidence showing that short selling 
contributes to price efficiency and that restrictions on short selling, 
particularly bans on short selling, may negatively impact price 
efficiency.\1145\ We note, however, that empirical evidence on former 
Rule 10a-1 suggests that the former rule, which applied to all short 
selling all the time unless an exception or exemption applied, had 
minimal effect on price efficiency.\1146\ Due to differences in the 
operation of former Rule 10a-1 and Rule 201, when it applies, the 
alternative uptick rule under Rule 201 will be more restrictive than 
former Rule 10a-1 in some circumstances and less restrictive in 
others.\1147\ As discussed above, however, due to the circuit breaker 
approach in Rule 201, the alternative uptick rule of Rule 201 generally 
will apply to a limited number of covered securities \1148\ and will 
apply only to a particular security for a limited period of time when 
the circuit breaker has been triggered for a covered security. As such, 
it will not be triggered for the majority of covered securities at any 
given time and, when triggered, will remain in effect for a short 
duration--that day and the following day. Thus, consistent with the 
empirical evidence on former Rule 10a-1, we expect that the alternative 
uptick rule will have a minimal impact on price efficiency.
---------------------------------------------------------------------------

    \1145\ See, e.g., letter from Pershing Square (citing 2006 Price 
Test Elimination Proposing Release, 71 FR at 75069-75070); letter 
from CPIC (June 2009) (citing Pedro A. C. Saffi and Kari Sigurdson, 
Price Efficiency and Short Selling, lESE Business School Working 
Paper No. 748 (Apr. 2008); letter from Citadel et al. (June 2009).
    \1146\ See, e.g., supra Section II.B. (discussing the Pilot 
Results).
    \1147\ See, e g., supra note 242 and accompanying text 
(discussing automated trade matching systems).
    \1148\ See supra notes 305 to 311 and accompanying text 
(discussing data reflecting that, on average, a limited number of 
covered securities would hit a 10% trigger level each day).
---------------------------------------------------------------------------

    Moreover, paragraphs (c) and (d) of Rule 201 include provisions 
designed to limit any adverse effects on price efficiency and 
liquidity, while at the same time not undermining the goals of Rule 
201.\1149\ In particular, paragraphs (d)(3) and (d)(4) of Rule 201 are 
designed to facilitate pricing efficiency through certain domestic and 
international arbitrage transactions. As stated above, allowing 
arbitrage at a price that is less than or equal to the current national 
best bid will potentially promote market efficiency. In addition, 
paragraph (d)(6) of Rule 201, which relates to riskless principal 
transactions, is designed to facilitate liquidity.
---------------------------------------------------------------------------

    \1149\ See supra Section III.B. (discussing ``short exempt'' 
provisions to Rule 201); see also supra note 1138.
---------------------------------------------------------------------------

XII. Final Regulatory Flexibility Analysis

    The Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA''), in accordance with the provisions of the Regulatory 
Flexibility Act.\1150\ This FRFA relates to the amendments to Rules 
200(g) and 201 of Regulation SHO under the Exchange Act. Rule 201 of 
Regulation SHO implements a short sale-related circuit breaker that, if 
triggered, will impose a short sale price test restriction. 
Specifically, Rule 201 requires that a trading center establish, 
maintain, and enforce written policies and procedures reasonably 
designed to prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on the prior day. In addition, the Rule requires that the 
trading center establish, maintain, and enforce written policies and 
procedures reasonably designed to impose this short sale price test 
restriction for the remainder of the day and the following day when a 
national best bid for the covered security is calculated and 
disseminated on a current and continuing basis by a plan processor 
pursuant to an effective national market system plan.\1151\ In 
addition, Rule 201 provides that the listing market for each covered 
security must determine whether that covered security is subject to 
Rule 201.\1152\ Once the listing market has determined that a security 
has become subject to the requirements of Rule 201, the listing market 
shall immediately notify the single plan processor responsible for 
consolidation of information for the covered security in accordance 
with Rule 603(b) of Regulation NMS \1153\ of the fact that a covered 
security has become subject to the short sale price test restriction of 
Rule 201. The plan processor must then disseminate this 
information.\1154\ The amendments to Rule 200(g) of Regulation SHO add 
a new marking requirement of ``short exempt.'' \1155\ In particular, if 
the broker-dealer chooses to rely on its own determination that it is 
submitting the short sale order to the trading center at a price that 
is above the current national best bid at the time of submission or to 
rely on an exception specified in the Rule, it must mark the order as 
``short exempt.'' \1156\
---------------------------------------------------------------------------

    \1150\ 5 U.S.C. 604.
    \1151\ See Rule 201(b); see also supra Section III.A.7. 
(discussing the policies and procedures approach).
    \1152\ See Rule 201(b)(3).
    \1153\ Rule 603(b) of Regulation NMS provides that ``[e]very 
national securities exchange on which an NMS stock is traded and 
national securities association shall act jointly pursuant to one or 
more effective national market system plans to disseminate 
consolidated information, including a national best bid and national 
best offer, on quotations for and transactions in NMS stocks. Such 
plan or plans shall provide for the dissemination of all 
consolidated information for an individual NMS stock through a 
single plan processor.'' 17 CFR 242.603(b).
    \1154\ See Rule 201(b)(3); 17 CFR 242.603(b).
    \1155\ See Rule 200(g); see also supra Section IV. (discussing 
the amendments to Rule 200(g)).
    \1156\ See Rule 200(g)(2).
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule

    We believe it is appropriate to adopt a circuit breaker in 
combination with the alternative uptick rule because, when triggered, 
it will prevent short selling, including potentially manipulative or 
abusive short selling, from being used as a tool to exacerbate a 
declining market in a security and will facilitate the ability of long 
sellers to sell first upon such decline. This approach establishes a 
narrowly-tailored Rule that will target only those securities that are 
experiencing significant intra-day price declines. We believe that 
addressing short selling in connection with such declines in individual 
securities will help address erosion of investor confidence in our 
markets generally. We are also adopting amendments to Rule 200(g) of 
Regulation SHO in order to aid surveillance by SROs and the Commission 
for compliance with the provisions of Rule 201.
    As discussed above, following changes in market conditions since 
the elimination of former Rule 10a-1, including marked increases in 
market volatility in the U.S. and in every major stock market around 
the world, we proposed to re-examine and seek comment on whether to 
impose short sale price test restrictions or circuit breaker 
restrictions on short selling.\1157\

[[Page 11317]]

Although in recent months there has been an increase in stability in 
the securities markets, we remain concerned that excessive downward 
price pressure on individual securities accompanied by the fear of 
unconstrained short selling can undermine investor confidence in our 
markets generally. In addition, we are concerned about potential future 
market turmoil, including significant increases in market volatility 
and steep price declines. Thus, as discussed in more detail throughout 
this adopting release, after considering the comments, we have 
determined that it is appropriate to adopt in Rule 201 a targeted short 
sale price test restriction that will apply the alternative uptick rule 
for the remainder of the day and the following day if the price of an 
individual security declines intra-day by 10% or more from the prior 
day's closing price for that security as determined by the covered 
security's listing market.
---------------------------------------------------------------------------

    \1157\ See Proposal, 74 FR at 18043, 18046; see also supra 
Section II.C. (discussing the Proposal).
---------------------------------------------------------------------------

    By not allowing short sellers to sell at or below the current 
national best bid while the circuit breaker is in effect, the short 
sale price test restriction in Rule 201 will allow long sellers, by 
selling at the bid, to sell first in a declining market for a 
particular security. As the Commission has noted previously in 
connection with short sale price test restrictions, a goal of such 
restrictions is to allow long sellers to sell first in a declining 
market.\1158\ A short seller that is seeking to profit quickly from 
accelerated, downward market moves may find it advantageous to be able 
to short sell at the current national best bid. In addition, by making 
bids accessible only by long sellers when a security's price is 
undergoing significant downward price pressure, Rule 201 will help to 
facilitate and maintain stability in the markets and help ensure that 
they function efficiently. It will also help restore investor 
confidence during times of substantial uncertainty because, once the 
circuit breaker has been triggered for a particular security, long 
sellers will have preferred access to bids for the security, and the 
security's continued price decline will more likely be due to long 
selling and the underlying fundamentals of the issuer, rather than to 
other factors.
---------------------------------------------------------------------------

    \1158\ See supra note 17.
---------------------------------------------------------------------------

    In addition, combining the alternative uptick rule with a circuit 
breaker strikes the appropriate balance between our goal of preventing 
short selling, including potentially manipulative or abusive short 
selling, from being used as a tool to exacerbate a declining market in 
a security and the need to allow for the continued smooth functioning 
of the markets, including the provision of liquidity and price 
efficiency in the markets. The circuit breaker approach of Rule 201 
will help benefit the market for a particular security by allowing 
participants, when a security is undergoing a significant intra-day 
price decline, an opportunity to re-evaluate circumstances and respond 
to volatility in that security. We also believe that a circuit breaker 
will better target short selling that may be related to potential bear 
raids\1159\ and other forms of manipulation that may be used as a tool 
to exacerbate a price decline in a covered security.
---------------------------------------------------------------------------

    \1159\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    At the same time, however, we recognize the benefits to the market 
of legitimate short selling, such as the provision of liquidity and 
price efficiency. Thus, by imposing a short sale price test restriction 
only when an individual security is undergoing significant price 
pressure, rather than on all securities all the time, the short sale 
price test restrictions of Rule 201 will apply to a limited number of 
securities and for a limited duration.\1160\ Rule 201 is structured so 
that generally it will not be triggered for the majority of covered 
securities at any given time and, thereby, will not interfere with the 
smooth functioning of the markets for those securities, including when 
prices in such securities are undergoing minimal downward price 
pressure or are stable or rising. If the short sale price test 
restrictions of Rule 201 apply to a covered security it will be because 
and when that security is undergoing significant downward price 
pressure. To the extent that Rule 201 negatively affects the benefits 
of legitimate short selling, such as the provision of liquidity and 
price efficiency, we believe that such costs are justified by the 
benefits provided by the Rule in preventing short selling, including 
potentially manipulative or abusive short selling, from being used as a 
tool to exacerbate a declining market in a security.
---------------------------------------------------------------------------

    \1160\ See supra Section III.A.5. (discussing the circuit 
breaker trigger level).
---------------------------------------------------------------------------

    In addition, to help ensure the Rule's workability, we are amending 
Rule 200(g) of Regulation SHO, as proposed, to provide that, once the 
circuit breaker has been triggered for a covered security, if a broker-
dealer chooses to rely on its own determination that it is submitting a 
short sale order to a trading center at a price that is above the 
current national best bid at the time of submission or to rely on an 
exception specified in the Rule, it must mark the order ``short 
exempt.'' The short sale price test restriction of Rule 201 generally 
will apply to a small number of securities for a limited duration, and 
will continue to permit short selling rather than, for example, halting 
short selling when the restriction is in place. As such, we believe 
that the circumstances under which a broker-dealer may need to mark a 
short sale order ``short exempt'' under Rule 201 are limited.

B. Significant Issues Raised by Public Comment

    In the Initial Regulatory Flexibility Analysis included in the 
Proposal, we requested comment on the number of small entities that 
would be affected by the proposed amendments and on the impact the 
proposed amendments would have on small entities and how to quantify 
the impact.\1161\ The Commission did not receive any comment letters 
addressing the number of small entities that would be affected by the 
proposed amendments.
---------------------------------------------------------------------------

    \1161\ See Proposal, 74 FR at 18107.
---------------------------------------------------------------------------

    Several commenters stated that the costs of implementing and 
complying with the broker-dealer provision of Rule 201(c) could be 
particularly burdensome for smaller broker-dealers, but did not provide 
a cost estimate of such burdens.\1162\ One commenter stated that this 
burden would ``adversely affect the ability of smaller broker-dealers 
to compete or the level of service that they can provide to their 
customers,'' \1163\ while another stated that a short sale price test 
would ``disproportionately burden smaller broker-dealers, who would 
likely be forced to route their flow through a handful of larger 
brokers, impeding competition and adding to systemic risk as flow is 
consolidated among fewer players.'' \1164\
---------------------------------------------------------------------------

    \1162\ See, e.g., letter from Credit Suisse (June 2009); letter 
from NSCP; letter from T.D. Pro Ex.
    \1163\ Letter from NSCP.
    \1164\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    Although we agree that implementation of the broker-dealer 
provision of Rule 201(c) will impose costs on broker-dealers who choose 
to rely on this provision, we note that Rule 201(c) is not a 
requirement of the Rule, but rather provides that a broker-dealer may 
mark a sell order for a security that has triggered the circuit breaker 
as ``short exempt,'' provided that the broker-dealer identifies the 
order as being at a price above the current national best bid at the 
time of submission to the trading center and otherwise complies with 
the requirements of the provision.
    In addition, as discussed throughout this adopting release, the 
alternative

[[Page 11318]]

uptick rule references only the current national best bid, unlike the 
proposed modified uptick rule and the proposed uptick rule, which would 
have required sequencing of the national best bid or last sale price. 
Although commenters expressed concerns with respect to the costs of the 
broker-dealer provision of Rule 201(c), these comments were not 
specific to the alternative uptick rule.\1165\ In order to rely on the 
broker-dealer provision, a broker-dealer must establish, maintain, and 
enforce written policies and procedures reasonably designed to prevent 
the incorrect identification of orders as being at a price above the 
current national best bid at the time of submission of the order to the 
trading center. Without a sequencing requirement under the alternative 
uptick rule, we believe that the policies and procedures required to 
rely on the broker-dealer provision under Rule 201(c) will be easier 
and less costly to implement and monitor than would be the case under 
the proposed modified uptick rule or the proposed uptick rule,\1166\ 
and, therefore, lower than the cost concerns and estimates provided by 
commenters. We note that one of the commenters that expressed concerns 
about the implementation cost of the broker-dealer provision 
acknowledged that a rule ``that would not require data centralization 
and sequencing would be significantly less complex and faster to 
implement.''\1167\
---------------------------------------------------------------------------

    \1165\ See, e.g., letter from Credit Suisse (June 2009); letter 
from NSCP; letter from T.D. Pro Ex.
    \1166\ See supra notes 709 to 715 and accompanying text 
(discussing comments on the impact of the alternative uptick rule on 
implementation and on-going monitoring and compliance costs).
    \1167\ Letter from Credit Suisse (June 2009).
---------------------------------------------------------------------------

    We disagree with several commenters who stated that, although 
implementation and on-going monitoring and surveillance of the 
alternative uptick rule might be easier and/or less costly for trading 
centers, this would not hold true for broker-dealers.\1168\ One of 
these commenters stated that ``in order to avoid rejection of short 
sale orders under an alternative uptick rule, programming would need to 
be implemented to anticipate changes in the national best bid between 
the time a short sale order is entered and the time it reaches the 
relevant market center.'' \1169\ However, the broker-dealer provision 
of Rule 201(c) is designed specifically to avoid this result. Under the 
broker-dealer provision, a broker-dealer may, in accordance with the 
policies and procedures required by the provision, identify the order 
as being at a price above the current national best bid at the time the 
order is submitted to the trading center and mark the order ``short 
exempt.'' Trading centers are required to have written policies and 
procedures in place to permit the execution or display of a short sale 
order of a covered security marked ``short exempt'' without regard to 
whether the order is at a price that is less than or equal to the 
current national best bid.\1170\
---------------------------------------------------------------------------

    \1168\ See, e.g., letter from Citadel et al. (Sept. 2009); 
letter from EWT (Sept. 2009); letter Lime Brokerage (Sept. 2009).
    \1169\ Letter from Citadel et al. (Sept. 2009).
    \1170\ See Rule 201(b)(1)(iii).
---------------------------------------------------------------------------

    Commenters also expressed concerns about the competitive pressure 
of the broker-dealer provision, stating either that broker-dealers 
would feel compelled to undertake implementation of the provision, 
despite the high cost,\1171\ which would be particularly burdensome for 
smaller firms,\1172\ or that smaller firms would find the costs 
prohibitive, placing them at a competitive disadvantage.\1173\ We 
recognize that broker-dealers are faced with competitive concerns and 
that such concerns may influence their decision whether or not to rely 
on the broker-dealer provision of Rule 201(c).
---------------------------------------------------------------------------

    \1171\ See, e.g., letter from STANY (June 2009); letter from FIF 
(June 2009); letter from Lime Brokerage (June 2009).
    \1172\ See, e.g., letter from T.D. Pro Ex; letter from Taurus 
Compliance; letter from Credit Suisse (June 2009).
    \1173\ See, e.g., letter from Credit Suisse (June 2009); letter 
from NSCP.
---------------------------------------------------------------------------

    However, with respect to the cost, although we recognize that the 
broker-dealer provision will impose implementation costs on broker-
dealers who choose to rely on this provision, we believe that this cost 
will not be as great as stated by some commenters because the 
alternative uptick rule does not require sequencing of the national 
best bid, unlike the proposed modified uptick rule and the proposed 
uptick rule, which would have required sequencing of the national best 
bid or last sale price.\1174\ We believe that, without a sequencing 
requirement, the policies and procedures required in order to rely on 
the broker-dealer provision under the alternative uptick rule will be 
easier and less costly to implement and monitor than would be the case 
under the proposed modified uptick rule or the proposed uptick rule.
---------------------------------------------------------------------------

    \1174\ See supra note 1165 and accompanying text (discussing 
impact of the alternative uptick rule on commenters' cost concerns 
with respect to the broker-dealer provision of Rule 201(c)).
---------------------------------------------------------------------------

    In addition, we note that it is possible that some smaller broker-
dealers that determine to rely on the broker-dealer provision may 
determine that it is cost-effective for them to outsource certain 
functions necessary to comply with Rule 201(c) to larger broker-
dealers, rather than performing such functions in house, to remain 
competitive in the market. This may help mitigate costs associated with 
implementing and complying with Rule 201(c). Additionally, they may 
decide to purchase order management software from technology firms. 
Order management software providers may integrate changes imposed by 
Rules 200(g) and 201 into their products, thereby providing another 
cost-effective way for smaller broker-dealers to comply with the 
requirements of Rule 201(c).
    Although we agree that the broker-dealer provision will impose 
costs for implementation and on-going monitoring and surveillance, we 
note that the policies and procedures that are required to be 
implemented under the broker-dealer provision are similar to those that 
are required under the Order Protection Rule of Regulation NMS.\1175\ 
In order to rely on the broker-dealer provision, a broker-dealer must 
establish, maintain, and enforce written policies and procedures 
reasonably designed to prevent the incorrect identification of orders 
as being at a price above the current national best bid at the time of 
submission of the order to the trading center. Because some broker-
dealers, including small broker-dealers, may have already developed or 
modified their surveillance mechanisms in order to comply with the 
policies and procedures requirement of the Order Protection Rule under 
Regulation NMS, broker-dealers may already have retained and trained 
the necessary personnel to ensure compliance with that Regulation's 
policies and procedures requirements and, therefore, may already have 
in place most of the infrastructure and potential policies and 
procedures necessary to comply with the broker-dealer provision of Rule 
201(c). In addition, one commenter supported using a policies and 
procedures approach to any short sale price test restriction because it 
would ease implementation for broker-dealers.\1176\ Thus, we believe 
broker-dealers will already be familiar with establishing, maintaining, 
and enforcing trading-related policies and procedures, including 
programming their trading systems in accordance with such policies and 
procedures.
---------------------------------------------------------------------------

    \1175\ See Regulation NMS Adopting Release, 70 FR 37496; see 
also 17 CFR 242.611.
    \1176\ See, e.g., letter from GE.
---------------------------------------------------------------------------

    Although several commenters stated that previous implementation of 
Regulation NMS would not mitigate the costs to broker-dealers of 
implementing

[[Page 11319]]

a short sale price test restriction,\1177\ we considered these 
comments, as well as comments stating that previous implementation of 
Regulation NMS could ease implementation provided that broker-dealers 
could leverage existing systems in implementing Rule 201,\1178\ and 
continue to believe that familiarity with Regulation NMS policies and 
procedures will reduce the implementation costs of the broker-dealer 
provision under Rule 201(c) on broker-dealers.\1179\
---------------------------------------------------------------------------

    \1177\ See, e.g., letter from FIF (June 2009); letter from RBC 
(June 2009).
    \1178\ See, e.g., letter from MFA (Oct. 2009).
    \1179\ See supra Section X.B.1.b.ii. (discussing implementation 
and on-going monitoring and surveillance costs to broker-dealers 
under Rule 201(c) and Rule 201(d)(6)).
---------------------------------------------------------------------------

    Further, we believe that the implementation and on-going monitoring 
and compliance costs for broker-dealers who choose to rely on the 
broker-dealer provision are justified by the benefits of providing 
broker-dealers with the option to manage their order flow, rather than 
having to always rely on their trading centers to manage their order 
flow on their behalf.

C. Small Entities Affected by the Rule

    Rule 201 requires that a trading center establish, maintain, and 
enforce written policies and procedures reasonably designed to prevent 
the execution or display of a short sale order of a covered security at 
a price that is less than or equal to the current national best bid if 
the price of that covered security decreases by 10% or more from the 
covered security's closing price as determined by the listing market 
for the covered security as of the end of regular trading hours on the 
prior day. In addition, the Rule requires that the trading center 
establish, maintain, and enforce written policies and procedures 
reasonably designed to impose this short sale price test restriction 
for the remainder of the day and the following day when a national best 
bid for the covered security is calculated and disseminated on a 
current and continuing basis by a plan processor pursuant to an 
effective national market system plan.\1180\ Rule 201(a)(9) states that 
the term ``trading center'' shall have the same meaning as in Rule 
600(b)(78) of Regulation NMS, which defines a ``trading center'' as ``a 
national securities exchange or national securities association that 
operates an SRO trading facility, an alternative trading system, an 
exchange market maker, an OTC market maker, or any other broker or 
dealer that executes orders internally by trading as principal or 
crossing orders as agent.'' \1181\
---------------------------------------------------------------------------

    \1180\ See Rule 201(b)(1).
    \1181\ See Rule 201(a)(9); see also 17 CFR 242.600(b)(78).
---------------------------------------------------------------------------

    Rule 0-10(e) under the Exchange Act provides that the term ``small 
business'' or ``small organization,'' when referring to an exchange, 
means any exchange that: (i) Has been exempted from the reporting 
requirements of Rule 601 under the Exchange Act; \1182\ and (ii) is not 
affiliated with any person (other than a natural person) that is not a 
small business or small organization, as defined by Rule 0-10.\1183\ No 
national securities exchanges are small entities because none meets 
these criteria. Thus, the current national securities exchanges that 
are subject to Rule 201 are not ``small entities'' for purposes of the 
Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \1182\ See 17 CFR 242.601.
    \1183\ See 17 CFR 240.0-10(e); 13 CFR 121.201 (setting size 
standards to define small business concerns).
---------------------------------------------------------------------------

    The remaining non-SRO trading centers that are subject to Rule 201 
are registered broker-dealers. The Commission has determined that there 
are approximately 407 broker-dealers registered with the Commission 
that may meet the definition of a trading center,\1184\ which includes 
broker-dealers operating as equity ATSs, broker-dealers registered as 
market makers or specialists in covered securities, and any broker-
dealer that is in the business of executing orders internally in 
covered securities. Pursuant to Rule 0-10(c) under the Exchange Act, a 
broker-dealer is defined as a small entity for purposes of the Exchange 
Act and the Regulatory Flexibility Act if the broker-dealer had a total 
capital (net worth plus subordinated liabilities) of less than $500,000 
on the date in the prior fiscal year as of which its audited financial 
statements were prepared, and it is not affiliated with any person 
(other than a natural person) that is not a small entity.\1185\ Of 
these 407 non-SRO trading centers, only five \1186\ are ``small 
entities'' for purposes of the Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \1184\ See supra note 651.
    \1185\ See 17 CFR 240.0-10(c)(1).
    \1186\ This number was derived from a review of 2008 FOCUS 
Report filings and discussion with SRO staff.
---------------------------------------------------------------------------

    In addition, the broker-dealer provision of Rule 201(c) and the 
riskless principal provision of Rule 201(d)(6) include policies and 
procedures requirements to help prevent incorrect identification of 
orders by broker-dealers for purposes of the provisions. The entities 
covered by the broker-dealer provision of Rule 201(c), the riskless 
principal provision of Rule 201(d)(6) and the marking requirements of 
Rule 200(g) include small broker-dealers. Paragraph (c)(1) of Rule 0-10 
under the Exchange Act, as mentioned above, states that the term 
``small business'' or ``small organization,'' when referring to a 
broker-dealer, means a broker-dealer that had total capital (net worth 
plus subordinated liabilities) of less than $500,000 on the date in the 
prior fiscal year as of which its audited financial statements were 
prepared, and is not affiliated with any person (other than a natural 
person) that is not a small entity.\1187\ We estimate that as of 2008 
there were approximately 890 broker-dealers that are ``small entities'' 
for purposes of the Regulatory Flexibility Act.\1188\
---------------------------------------------------------------------------

    \1187\ 17 CFR 240.0-10(c)(1).
    \1188\ These numbers are based on a review of 2008 FOCUS Report 
filings reflecting registered broker-dealers, including introducing 
broker-dealers. This number does not include broker-dealers that are 
delinquent on FOCUS Report filings.
---------------------------------------------------------------------------

    In addition, Rule 201(b)(3) provides that the listing market for 
each covered security must determine whether that covered security is 
subject to Rule 201 and must notify the single plan processor 
responsible for that covered security that the covered security has 
become subject to the short sale price test restriction of Rule 201. 
The plan processor must then disseminate this information.\1189\ As 
discussed below, the entities covered by the determination and 
dissemination requirements of Rule 201(b)(3) do not include small 
entities.
---------------------------------------------------------------------------

    \1189\ See Rule 201(b)(3).
---------------------------------------------------------------------------

    Rule 201(a)(3) defines the term ``listing market'' to have the same 
meaning as defined in the effective transaction reporting plan for the 
covered security.\1190\ Under the definitions of ``listing market'' of 
the two effective transaction reporting plans, the CTA Plan and the 
Nasdaq UTP Plan, ``listing markets'' are national securities 
exchanges.\1191\ Rule 0-10(e) under the Exchange Act provides that the 
term ``small business'' or ``small organization,'' when referring to an 
exchange, means any exchange that: (i) Has been exempted from the 
reporting requirements of Rule 601 under the Exchange Act; \1192\ and 
(ii) is not affiliated with any person (other than a natural person) 
that is not a small

[[Page 11320]]

business or small organization, as defined by Rule 0-10.\1193\ No 
national securities exchanges are small entities because none meets 
these criteria. Thus, the listing markets that are subject to Rule 201 
are not ``small entities'' for purposes of the Regulatory Flexibility 
Act.
---------------------------------------------------------------------------

    \1190\ See Rule 201(a)(3). Rule 201(a)(2) provides that ``[t]he 
term effective transaction reporting plan for a covered security 
shall have the same meaning as in Sec.  242.600(b)(22).'' Rule 
201(a)(2); 17 CFR 600(b)(22).
    \1191\ See supra note 364 (discussing the definition of 
``listing market'' in the CTA Plan and the Nasdaq UTP Plan).
    \1192\ See 17 CFR 242.601.
    \1193\ See 17 CFR 240.0-10(e); 13 CFR 121.201.
---------------------------------------------------------------------------

    There are two effective transaction reporting plans, the CTA Plan 
and the Nasdaq UTP Plan. In accordance with Rule 603(b) of Regulation 
NMS,\1194\ these plans, together with the CQ Plan, provide for the 
dissemination of all consolidated information for individual NMS stocks 
through a single plan processor. The plan processor for the CTA Plan is 
SIAC and the plan processor for the Nasdaq UTP Plan is Nasdaq. Rule 
201(a)(6) defines the term ``plan processor'' to have the same meaning 
as in Rule 600(b)(55) of Regulation NMS.\1195\ Under Rule 600(b)(55), 
the term ``plan processor'' means ``any self-regulatory organization or 
securities information processor acting as an exclusive processor in 
connection with the development, implementation and/or operation of any 
facility contemplated by an effective national market system plan.'' 
\1196\ Paragraph (g) of Rule 0-10 defines the term ``small business'' 
or ``small organization,'' when referring to a securities information 
processor, to mean a securities information processor that had gross 
revenues of less than $10 million during the preceding fiscal year; 
provided service to fewer than 100 interrogation devices or moving 
tickers at all times during the preceding fiscal year; and is not 
affiliated with any person (other than a natural person) that is not a 
small business or small organization.\1197\ Neither SIAC nor Nasdaq 
meet these criteria. Thus, the plan processors that are subject to Rule 
201 are not ``small entities'' for purposes of the Regulatory 
Flexibility Act.
---------------------------------------------------------------------------

    \1194\ See 17 CFR 242.603(b).
    \1195\ See Rule 201(a)(6); 17 CFR 242.600(b)(55).
    \1196\ 17 CFR 242.600(b)(55).
    \1197\ See 17 CFR 240.0-10(g).
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    Rule 201 imposes some new or additional reporting, recordkeeping, 
or compliance costs on trading centers and other broker-dealers that 
are small entities. Rule 201 focuses on a trading center's written 
policies and procedures as the mechanism through which to help prevent 
the execution or display of short sale orders at a price that is less 
than or equal to the current national best bid, unless an exception 
applies. In addition, the broker-dealer provision of Rule 201(c) and 
the riskless principal provision of Rule 201(d)(6) include policies and 
procedures requirements to help prevent incorrect identification of 
orders by broker-dealers for purposes of those provisions.
    In regard to implementation and on-going monitoring and 
surveillance costs of Rule 201 on trading centers that are small 
entities,\1198\ we considered commenters' concerns that the cost and 
time required for trading centers' implementation and on-going 
monitoring and surveillance of a short sale price test restriction 
could be high.\1199\ However, we note that the alternative uptick rule 
references only the current national best bid, unlike the proposed 
modified uptick rule and the proposed uptick rule, which would have 
required sequencing of the national best bid or last sale price. Thus, 
we believe that the alternative uptick rule will be easier and less 
costly to implement and monitor for trading centers that are small 
entities than the proposed modified uptick rule or the proposed uptick 
rule.\1200\
---------------------------------------------------------------------------

    \1198\ As discussed above, there are no SRO trading centers that 
are ``small entities'' for purposes of the Regulatory Flexibility 
Act. Of the estimated 407 non-SRO trading centers (which include 
broker-dealers operating as equity ATSs, broker-dealers registered 
as market makers or specialists in covered securities, and any 
broker-dealer that is in the business of executing orders internally 
in covered securities) we estimate that there are only 5 non-SRO 
trading centers that are ``small entities'' for purposes of the 
Regulatory Flexibility Act. See supra Section XII.C.
    \1199\ See supra Section X.B.1.b.i. (discussing comments on the 
implementation and on-going monitoring and compliance costs of the 
policies and procedures requirement of Rule 201).
    \1200\ See supra notes 661 to 669 and accompanying text 
(discussing comments on the effect of the alternative uptick rule on 
implementation and on-going monitoring and surveillance costs).
---------------------------------------------------------------------------

    In addition, we note that the policies and procedures required to 
be implemented for purposes of Rule 201 are similar to those that 
trading centers are required to have in place under the Order 
Protection Rule of Regulation NMS.\1201\ Thus, we believe trading 
centers that are small entities may already be familiar with 
establishing, maintaining, and enforcing trading-related policies and 
procedures, including programming their trading systems in accordance 
with such policies and procedures.
---------------------------------------------------------------------------

    \1201\ See Regulation NMS Adopting Release, 70 FR 37496; see 
also Proposal, 74 FR at 18087; 17 CFR 242.611.
---------------------------------------------------------------------------

    Although, as discussed above, several commenters stated that 
previous implementation of Regulation NMS would not mitigate the costs 
of implementing a short sale price test restriction,\1202\ we 
considered these comments, as well as comments stating that previous 
implementation of Regulation NMS could ease implementation provided 
that trading centers could use existing systems in implementing Rule 
201,\1203\ and continue to believe that familiarity with Regulation NMS 
policies and procedures will reduce the implementation costs for 
trading centers of the policies and procedures requirement under Rule 
201.
---------------------------------------------------------------------------

    \1202\ See supra notes 939 to 941 and accompanying text 
(discussing comments that prior implementation of Regulation NMS 
would not mitigate the costs of implementing a short sale price test 
restriction).
    \1203\ See supra notes 942 to 945 and accompanying text 
(discussing comments that prior implementation of Regulation NMS 
could mitigate the costs of implementing a short sale price test 
restriction).
---------------------------------------------------------------------------

    Further, we believe that the implementation and on-going monitoring 
and compliance costs for trading centers are justified by the benefits 
provided by the Rule in preventing short selling, including potentially 
manipulative or abusive short selling, from being used as a tool to 
exacerbate a declining market in a security.
    In regard to implementation and on-going monitoring and 
surveillance costs of the broker-dealer provision of Rule 201(c) or the 
riskless principal provision of Rule 201(d)(6) on small broker-
dealers,\1204\ as discussed in Section XII.B., above, several 
commenters stated that the costs of implementing and complying with the 
broker-dealer provision of Rule 201(c) could be particularly burdensome 
for smaller broker-dealers.\1205\ Commenters also expressed concerns 
about the competitive pressure of the broker-dealer provision, stating 
either that broker-dealers would feel compelled to undertake 
implementation of the provision, despite the high cost,\1206\ which 
would be particularly burdensome for smaller firms,\1207\ or that 
smaller firms would find the costs prohibitive, placing them at a 
competitive disadvantage.\1208\
---------------------------------------------------------------------------

    \1204\ As discussed above, we estimate that as of 2008 there 
were approximately 890 broker-dealers that are ``small entities'' 
for purposes of the Regulatory Flexibility Act. See supra Section 
XII.C.
    \1205\ See supra notes 1162 to 1173 and accompanying text 
(discussing comments on the costs of the broker-dealer provision of 
Rule 201(c) for smaller broker-dealers).
    \1206\ See, e.g., letter from STANY (June 2009); letter from FIF 
(June 2009); letter from Lime Brokerage (June 2009).
    \1207\ See, e.g., letter from T.D. Pro Ex; letter from Taurus 
Compliance; letter from Credit Suisse (June 2009).
    \1208\ See, e.g., letter from Credit Suisse (June 2009); letter 
from NSCP.

---------------------------------------------------------------------------

[[Page 11321]]

    We considered these comments in evaluating the costs of 
implementation and on-going monitoring and surveillance of the broker-
dealer provision of Rule 201(c) on small broker-dealers. Although we 
agree that implementation of the broker-dealer provision of Rule 201(c) 
will impose costs on broker-dealers who choose to rely on this 
provision, we note that Rule 201(c) is not a requirement of the Rule, 
but rather provides that a broker-dealer may mark a sell order for a 
security that has triggered the circuit breaker as ``short exempt,'' 
provided that the broker-dealer identifies the order as being at a 
price above the current national best bid at the time of submission to 
the trading center and otherwise complies with the requirements of the 
provision. We recognize, however, that broker-dealers are faced with 
competitive concerns and that such concerns may influence their 
decision whether or not to rely on the broker-dealer provision of Rule 
201(c).
    With respect to the cost, although we recognize that the broker-
dealer provision will impose implementation costs on broker-dealers who 
choose to rely on this provision, we believe that this cost will not be 
as great as stated by some commenters because the alternative uptick 
rule does not require sequencing of the national best bid, unlike the 
proposed modified uptick rule and the proposed uptick rule, which would 
have required sequencing of the national best bid or last sale 
price.\1209\ We believe that, without a sequencing requirement, the 
policies and procedures required in order to rely on the broker-dealer 
provision under the alternative uptick rule will be easier and less 
costly to implement and monitor than would be the case under the 
proposed modified uptick rule or the proposed uptick rule.\1210\
---------------------------------------------------------------------------

    \1209\ See supra notes 1165 to 1167 and accompanying text 
(discussing impact of the alternative uptick rule on commenters' 
cost concerns with respect to the broker-dealer provision of Rule 
201(c)).
    \1210\ See supra notes 709 to 715 and accompanying text 
(discussing comments on the effect of the alternative uptick rule on 
implementation and on-going monitoring and surveillance costs).
---------------------------------------------------------------------------

    In addition, we note that it is possible that some smaller broker-
dealers that determine to rely on the broker-dealer provision may 
determine that it is cost-effective for them to outsource certain 
functions necessary to comply with Rule 201(c) to larger broker-
dealers, rather than performing such functions in house, to remain 
competitive in the market. This may help mitigate costs associated with 
implementing and complying with Rule 201(c). Additionally, they may 
decide to purchase order management software from technology firms. 
Order management software providers may integrate changes imposed by 
Rules 200(g) and 201 into their products, thereby providing another 
cost-effective way for smaller broker-dealers to comply with the 
requirement of Rule 201(c).
    In addition, we note that the policies and procedures that are 
required to be implemented under the broker-dealer provision are 
similar to those that are required under the Order Protection Rule of 
Regulation NMS.\1211\ Thus, we believe broker-dealers will already be 
familiar with establishing, maintaining, and enforcing trading-related 
policies and procedures, including programming their trading systems in 
accordance with such policies and procedures.
---------------------------------------------------------------------------

    \1211\ See Regulation NMS Adopting Release, 70 FR 37496; see 
also 17 CFR 242.611.
---------------------------------------------------------------------------

    Although several commenters stated that previous implementation of 
Regulation NMS would not mitigate the costs to broker-dealers of 
implementing a short sale price test restriction,\1212\ we considered 
these comments, as well as comments stating that previous 
implementation of Regulation NMS could ease implementation provided 
that broker-dealers could leverage existing systems in implementing 
Rule 201,\1213\ and continue to believe that familiarity with 
Regulation NMS policies and procedures will reduce the implementation 
costs of the broker-dealer provision under Rule 201(c) on broker-
dealers.
---------------------------------------------------------------------------

    \1212\ See, e.g., letter from FIF (June 2009); letter from RBC 
(June 2009).
    \1213\ See, e.g., letter from MFA (Oct. 2009).
---------------------------------------------------------------------------

    Further, we believe that the implementation and on-going monitoring 
and compliance costs for broker-dealers who choose to rely on the 
broker-dealer provision are justified by the benefits of providing 
broker-dealers with the option to manage their order flow, rather than 
having to always rely on their trading centers to manage their order 
flow on their behalf.
    The amendments to Rule 200(g), to add a new marking requirement of 
``short exempt'' \1214\ and to provide that a broker-dealer may mark a 
sell order ``short exempt'' only if the provisions in paragraph (c) or 
(d) of Rule 201 are met,\1215\ may impose some new or additional 
reporting, recordkeeping, or compliance costs on broker-dealers that 
are small entities. We recognize commenters' concerns with respect to 
the costs of the ``short exempt'' marking requirement and we considered 
these comments in evaluating the costs of the ``short exempt'' marking 
requirement.\1216\ However, we believe that such costs will be limited 
because small broker-dealers already have established systems, 
processes, and procedures in place to comply with the current marking 
requirements of Rule 200(g) of Regulation SHO with respect to marking a 
sell order either ``long'' or ``short'' and, therefore, will likely 
leverage such systems, processes and procedures to comply with the 
``short exempt'' marking requirements in Rules 200(g) and 
200(g)(2).\1217\ Further, we believe that the implementation and 
compliance costs of the ``short exempt'' marking requirements are 
justified by the benefits provided by the requirements in aiding 
surveillance by SROs and the Commission for compliance with the 
provisions of Rule 201 and providing an indication to a trading center 
regarding when it must execute or display a short sale order without 
regard to whether the order is at a price that is less than or equal to 
the current national best bid.
---------------------------------------------------------------------------

    \1214\ See Rule 200(g); see also supra Section IV. (discussing 
the amendments to Rule 200(g)).
    \1215\ See Rule 200(g)(2).
    \1216\ See supra notes 582 to 588 (discussing comments on the 
costs of the ``short exempt'' marking requirement).
    \1217\ See supra notes 747 to 752 (discussing estimated costs of 
the amendment to Rule 200(g)(2)).
---------------------------------------------------------------------------

    In addition, to provide market participants with the time needed to 
make the changes required to comply with Rule 200(g), we are adopting 
an implementation period under which market participants will have to 
comply with these requirements six months following the effective date 
of the adoption of these amendments. We are sensitive to commenter's 
concerns that implementation of the ``short exempt'' marking 
requirement could be complex,\1218\ and believe that a six month 
implementation period, which is longer than the 3 month implementation 
period proposed in the Proposal, will afford market participants 
sufficient time to make the necessary modifications to their systems 
and procedures. In addition, we believe the six month implementation 
period will help alleviate some of the potential disruptions that may 
be associated with implementing the ``short exempt'' marking 
requirements.
---------------------------------------------------------------------------

    \1218\ See supra notes 582 to 588 and accompanying text 
(discussing comments on the implementation time for the ``short 
exempt'' marking requirement).

---------------------------------------------------------------------------

[[Page 11322]]

E. Agency Action to Minimize Effect on Small Entities

    As required by the Regulatory Flexibility Act, we have considered 
alternatives that would accomplish our stated objectives, while 
minimizing any significant adverse impact on small entities. As noted 
above, Rule 201 imposes some new or additional reporting, 
recordkeeping, or compliance costs on trading centers and other broker-
dealers that are small entities. However, we expect the impact of the 
new or additional reporting, recordkeeping, or compliance costs will be 
limited by the similarity of the policies and procedures requirements 
of Rule 201 to the policies and procedures requirement of the Order 
Protection Rule under Regulation NMS. Although, as discussed above, 
several commenters stated that previous implementation of Regulation 
NMS would not mitigate the costs of implementing a short sale price 
test restriction,\1219\ we considered these comments, as well as 
comments stating that previous implementation of Regulation NMS could 
ease implementation provided that firms could use existing systems in 
implementing Rule 201,\1220\ and continue to believe that familiarity 
with Regulation NMS policies and procedures will reduce the 
implementation costs of the broker-dealer provision under Rule 201(c) 
on broker-dealers.
---------------------------------------------------------------------------

    \1219\ See supra notes 939 to 941 and accompanying text 
(discussing comments that prior implementation of Regulation NMS 
would not mitigate the costs of implementing a short sale price test 
restriction).
    \1220\ See supra notes 942 to 944 and accompanying text 
(discussing comments that prior implementation of Regulation NMS 
could mitigate the costs of implementing a short sale price test 
restriction).
---------------------------------------------------------------------------

    Thus, the five non-SRO trading centers that qualify as small 
entities and the approximately 890 broker-dealers that qualify as small 
entities should already have in place most of the infrastructure 
necessary to comply with Rule 201. The marking requirements of the 
amendments to Rule 200(g) are not expected to adversely affect small 
entities because they impose minimal reporting, recordkeeping, or 
compliance requirements. Rule 200(g) currently requires that broker-
dealers mark all sell orders of any equity security as either ``long'' 
or ``short.'' \1221\ Broker-dealers that are small entities should 
already be familiar with the current marking requirements and should 
already have in place mechanisms that could be used to comply with the 
new ``short exempt'' marking requirement of Rule 200(g). Moreover, it 
is not appropriate to develop separate requirements for small entities 
under either Rule 201 or Rule 200(g) because we believe that to 
accomplish the Commission's goals, as well as to avoid the possibility 
of regulatory arbitrage that would undermine the Commission's goals, 
all trading centers and broker-dealers, regardless of size, should be 
subject to the same circuit breaker short sale price test restrictions 
and all broker-dealers, regardless of size, should be subject to the 
same order marking requirements.
---------------------------------------------------------------------------

    \1221\ See 17 CFR 242.200(g).
---------------------------------------------------------------------------

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish our stated objective, while 
minimizing any significant adverse impact on small entities.\1222\ In 
connection with Rules 201 and 200(g), we considered the following 
alternatives: (i) Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities; (ii) clarifying, consolidating, or 
simplifying compliance and reporting requirements under the Rule for 
small entities; (iii) using performance rather than design standards; 
and (iv) exempting small entities from coverage of the Rule, or any 
part of the Rule. First, we note that Rule 201 as adopted and the 
amendments to Rule 200(g) use performance standards, which we believe 
will help to minimize any significant adverse impact on small entities.
---------------------------------------------------------------------------

    \1222\ See 5 U.S.C. 603(a)(5).
---------------------------------------------------------------------------

    A primary goal of the short sale-related circuit breaker under Rule 
201 is to help restore investor confidence by not allowing sellers to 
sell short at or below the current national best bid if the price of 
that covered security decreases by 10% or more from the covered 
security's closing price as determined by the listing market for the 
covered security as of the end of regular trading hours on the prior 
day, unless an exception applies. Rule 201 will allow long sellers, by 
selling at the bid, to sell first in a declining market for a 
particular security. As the Commission has noted previously in 
connection with short sale price test restrictions, a goal of such 
restrictions is to allow long sellers to sell first in a declining 
market.\1223\ A short seller that is seeking to profit quickly from 
accelerated, downward market moves may find it advantageous to be able 
to short sell at the current national best bid. In addition, by making 
bids accessible only by long sellers when a security's price is 
undergoing significant downward price pressure, Rule 201 will help to 
facilitate and maintain stability in the markets and help ensure that 
they function efficiently. It will also help restore investor 
confidence during times of substantial uncertainty because, once the 
circuit breaker has been triggered for a particular security, long 
sellers will have preferred access to bids for the security, and the 
security's continued price decline will more likely be due to long 
selling and the underlying fundamentals of the issuer, rather than to 
other factors.
---------------------------------------------------------------------------

    \1223\ See supra note 17.
---------------------------------------------------------------------------

    In addition, combining the alternative uptick rule with a circuit 
breaker strikes the appropriate balance between our goal of preventing 
short selling, including potentially manipulative or abusive short 
selling, from being used as a tool to exacerbate a declining market in 
a security and the need to allow for the continued smooth functioning 
of the markets, including the provision of liquidity and price 
efficiency in the markets. The circuit breaker approach of Rule 201 
will help benefit the market for a particular security by allowing 
participants, when a security is undergoing a significant intra-day 
price decline, an opportunity to re-evaluate circumstances and respond 
to volatility in that security. We also believe that a circuit breaker 
will better target short selling that may be related to potential bear 
raids \1224\ and other forms of manipulation that may be used as a tool 
to exacerbate a price decline in a covered security.
---------------------------------------------------------------------------

    \1224\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    As discussed throughout this adopting release, we have designed 
Rule 201 to accomplish its objectives with lower costs to trading 
centers and broker-dealers than some of the alternatives we proposed 
and considered. We believe the alternative uptick rule will require 
less time and less costs for implementation because it does not require 
sequencing of bids or last sale prices.\1225\ In addition, we believe 
that the circuit breaker approach, which limits the short sale price 
test restriction for an individual security to a two-day period 
following a significant intra-day decline in share price in that 
security, will also limit compliance costs for all participants.\1226\
---------------------------------------------------------------------------

    \1225\ See supra Section X.B.1. (discussing the costs of the 
alternative uptick rule).
    \1226\ See supra Section III.A.4. (discussing the circuit 
breaker approach).
---------------------------------------------------------------------------

    The costs of compliance with Rules 201 and 200(g) are likely to 
vary among individual trading centers and broker-dealer firms. As 
detailed in PRA Section IX.E.1., above, we realize that the

[[Page 11323]]

policies and procedures that a trading center is required to establish 
will likewise vary depending upon the type, size, and nature of the 
trading center. In addition, as detailed in PRA Section IX.E.2., above, 
we note that the nature and extent of policies and procedures that a 
broker-dealer must establish under Rule 201(c) or 201(d)(6), if it 
determines to rely on either provision to mark an order ``short 
exempt,'' likely will vary based upon the type, size, and nature of the 
broker-dealer.\1227\ Our estimates take into account different types of 
trading centers and broker-dealers (including large versus small), and 
we realize that the applicable estimates may be on the low-end for some 
trading centers and broker-dealers while they may be on the high-end 
for others.
---------------------------------------------------------------------------

    \1227\ We note that one commenter stated that the ``Commission's 
cost estimates seem to underestimate the cost to large, full service 
broker-dealers, since the volume of orders handled by these firms 
are likely to lead to significantly greater technology and storage 
costs alone as well as more frequent reviews'' but did not provide a 
specific cost estimate. See letter from NSCP.
---------------------------------------------------------------------------

    Although we recognize that the costs of the Rules may vary based 
upon the type, size, and nature of the trading center or broker-dealer, 
we believe that uniform application of Rules 201 and 200(g) to all 
trading centers and broker-dealers is necessary to prevent damaging 
opportunities for regulatory arbitrage and to avoid confusion in the 
markets. In addition, different application of the Rules' requirements 
for small entities could undermine the goals of the short sale related 
circuit breaker by potentially providing an avenue for short sellers to 
evade the requirements of Rule 201. Further, in relation to the 
already-mentioned concerns, we believe that our goal of restoring 
investor confidence could be undermined by actual or perceived 
regulatory arbitrage, market confusion, and/or evasion of Rule 201's 
requirements as a result of different requirements for different market 
participants in Rules 201 and 200(g).
    Due to these concerns, we have concluded that in order for Rules 
201 and 200(g) to be effective in helping to restore investor 
confidence by preventing short selling, including potentially 
manipulative or abusive short selling, from being used as a tool to 
exacerbate a declining market in a security, the Rules' requirements 
must apply uniformly to all trading centers and broker-dealers. Thus, 
we have determined not to adopt different compliance requirements or a 
different timetable for compliance requirements for small entities. In 
addition, and for the same reasons, we have determined not to clarify, 
consolidate, simplify, or otherwise modify Rules 201 and 200(g) for 
small entities. Finally, we believe that it is inconsistent with the 
purposes of the Exchange Act and the goals of adopting Rules 201 and 
200(g) to except small entities from having to comply with Rules 201 
and 200(g).

XIII. Statutory Authority

    Pursuant to the Exchange Act and, particularly, Sections 2, 3(b), 
6, 9(h), 10, 11A, 15, 15A, 17, 19, 23(a), and 36 thereof, 15 U.S.C. 
78b, 78c(b), 78(f), 78i(h), 78j, 78k-1, 78o, 78o-3, 78q, 78s, 78w(a), 
and 78mm, the Commission is amending Sec. Sec.  242.200 and 242.201 of 
Regulation SHO.

XIV. Text of the Amendments to Regulation SHO

List of Subjects in 17 CFR Part 242

    Brokers, Fraud, Reporting and recordkeeping requirements, 
Securities.

0
For the reasons set out in the preamble, Title 17, Chapter II, Part 
242, of the Code of Federal Regulations is amended as follows.

PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN 
REQUIREMENTS FOR SECURITY FUTURES

0
1. The authority citation for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-l(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.

0
2. Section 242.200 is amended by revising paragraph (g) introductory 
text and adding paragraph (g)(2) to read as follows:

Sec.  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 Sec.  242.201(c) or (d) are met.
* * * * *

0
3. Section 242.201 is revised to read as follows:

Sec.  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 Sec.  242.600(b)(47).
    (2) The term effective transaction reporting plan for a covered 
security shall have the same meaning as in Sec.  242.600(b)(22).
    (3) The term listing market shall have the same meaning as the term 
``listing market'' as defined in the effective transaction reporting 
plan for the covered security.
    (4) The term national best bid shall have the same meaning as in 
Sec.  242.600(b)(42).
    (5) The term odd lot shall have the same meaning as in Sec.  
242.600(b)(49).
    (6) The term plan processor shall have the same meaning as in Sec.  
242.600(b)(55).
    (7) The term regular trading hours shall have the same meaning as 
in Sec.  242.600(b)(64).
    (8) The term riskless principal shall mean a transaction in which a 
broker or dealer, after having received an order to buy a security, 
purchases the security as principal at the same price to satisfy the 
order to buy, exclusive of any explicitly disclosed markup or markdown, 
commission equivalent, or other fee, or, after having received an order 
to sell, sells the security as principal at the same price to satisfy 
the order to sell, exclusive of any explicitly disclosed markup or 
markdown, commission equivalent, or other fee.
    (9) The term trading center shall have the same meaning as in Sec.  
242.600(b)(78).
    (b)(1) A trading center shall establish, maintain, and enforce 
written policies and procedures reasonably designed to:
    (i) Prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on the prior day; and
    (ii) Impose the requirements of paragraph (b)(1)(i) of this section 
for the remainder of the day and the following day when a national best 
bid for the covered security is calculated and disseminated on a 
current and continuing basis by a plan processor pursuant to an 
effective national market system plan.
    (iii) Provided, however, that the policies and procedures must be 
reasonably designed to permit:
    (A) The execution of a displayed short sale order of a covered 
security by a trading center if, at the time of initial display of the 
short sale order, the order was at a price above the current national 
best bid; and
    (B) The execution or display of a short sale order of a covered 
security marked ``short exempt'' without regard to whether the order is 
at a price that is

[[Page 11324]]

less than or equal to the current national best bid.
    (2) A trading center shall regularly surveil to ascertain the 
effectiveness of the policies and procedures required by paragraph 
(b)(1) of this section and shall take prompt action to remedy 
deficiencies in such policies and procedures.
    (3) The determination regarding whether the price of a covered 
security has decreased by 10% or more from the covered security's 
closing price as determined by the listing market for the covered 
security as of the end of regular trading hours on the prior day shall 
be made by the listing market for the covered security and, if such 
decrease has occurred, the listing market shall immediately notify the 
single plan processor responsible for consolidation of information for 
the covered security pursuant to Sec.  242.603(b). The single plan 
processor must then disseminate this information.
    (c) Following any determination and notification pursuant to 
paragraph (b)(3) of this section with respect to a covered security, a 
broker or dealer submitting a short sale order of the covered security 
in question to a trading center may mark the order ``short exempt'' if 
the broker or dealer identifies the order as being at a price above the 
current national best bid at the time of submission; provided, however:
    (1) The broker or dealer that identifies a short sale order of a 
covered security as ``short exempt'' in accordance with this paragraph 
(c) must establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent incorrect identification of 
orders for purposes of this paragraph; and
    (2) The broker or dealer shall regularly surveil to ascertain the 
effectiveness of the policies and procedures required by paragraph 
(c)(1) of this section and shall take prompt action to remedy 
deficiencies in such policies and procedures.
    (d) Following any determination and notification pursuant to 
paragraph (b)(3) of this section with respect to a covered security, a 
broker or dealer may mark a short sale order of a covered security 
``short exempt'' if the broker or dealer has a reasonable basis to 
believe that:
    (1) The short sale order of a covered security is by a person that 
is deemed to own the covered security pursuant to Sec.  242.200, 
provided that the person intends to deliver the security as soon as all 
restrictions on delivery have been removed.
    (2) The short sale order of a covered security is by a market maker 
to offset customer odd-lot orders or to liquidate an odd-lot position 
that changes such broker's or dealer's position by no more than a unit 
of trading.
    (3) The short sale order of a covered security is for a good faith 
account of a person who then owns another security by virtue of which 
he is, or presently will be, entitled to acquire an equivalent number 
of securities of the same class as the securities sold; provided such 
sale, or the purchase which such sale offsets, is effected for the bona 
fide purpose of profiting from a current difference between the price 
of the security sold and the security owned and that such right of 
acquisition was originally attached to or represented by another 
security or was issued to all the holders of any such securities of the 
issuer.
    (4) The short sale order of a covered security is for a good faith 
account and submitted to profit from a current price difference between 
a security on a foreign securities market and a security on a 
securities market subject to the jurisdiction of the United States, 
provided that the short seller has an offer to buy on a foreign market 
that allows the seller to immediately cover the short sale at the time 
it was made. For the purposes of this paragraph (d)(4), a depository 
receipt of a security shall be deemed to be the same security as the 
security represented by such receipt.
    (5)(i) The short sale order of a covered security is by an 
underwriter or member of a syndicate or group participating in the 
distribution of a security in connection with an over-allotment of 
securities; or
    (ii) The short sale order of a covered security is for purposes of 
a lay-off sale by an underwriter or member of a syndicate or group in 
connection with a distribution of securities through a rights or 
standby underwriting commitment.
    (6) The short sale order of a covered security is by a broker or 
dealer effecting the execution of a customer purchase or the execution 
of a customer ``long'' sale on a riskless principal basis. In addition, 
for purposes of this paragraph (d)(6), a broker or dealer must have 
written policies and procedures in place to assure that, at a minimum:
    (i) The customer order was received prior to the offsetting 
transaction;
    (ii) The offsetting transaction is allocated to a riskless 
principal or customer account within 60 seconds of execution; and
    (iii) The broker or dealer has supervisory systems in place to 
produce records that enable the broker or dealer to accurately and 
readily reconstruct, in a time-sequenced manner, all orders on which a 
broker or dealer relies pursuant to this exception.
    (7) The short sale order is for the sale of a covered security at 
the volume weighted average price (VWAP) that meets the following 
criteria:
    (i) The VWAP for the covered security is calculated by:
    (A) Calculating the values for every regular way trade reported in 
the consolidated system for the security during the regular trading 
session, by multiplying each such price by the total number of shares 
traded at that price;
    (B) Compiling an aggregate sum of all values; and
    (C) Dividing the aggregate sum by the total number of reported 
shares for that day in the security.
    (ii) The transactions are reported using a special VWAP trade 
modifier.
    (iii) The VWAP matched security:
    (A) Qualifies as an ``actively-traded security'' pursuant to Sec.  
242.101 and Sec.  242.102; or
    (B) The proposed short sale transaction is being conducted as part 
of a basket transaction of twenty or more securities in which the 
subject security does not comprise more than 5% of the value of the 
basket traded.
    (iv) The transaction is not effected for the purpose of creating 
actual, or apparent, active trading in or otherwise affecting the price 
of any security.
    (v) A broker or dealer shall be permitted to act as principal on 
the contra-side to fill customer short sale orders only if the broker's 
or dealer's position in the covered security, as committed by the 
broker or dealer during the pre-opening period of a trading day and 
aggregated across all of its customers who propose to sell short the 
same security on a VWAP basis, does not exceed 10% of the covered 
security's relevant average daily trading volume.
    (e) No self-regulatory organization shall have any rule that is not 
in conformity with, or conflicts with, this section.
    (f) Upon written application or upon its own motion, the Commission 
may grant an exemption from the provisions of this section, either 
unconditionally or on specified terms and conditions, to any person or 
class of persons, to any transaction or class of transactions, or to 
any security or class of securities to the extent that such exemption 
is necessary or appropriate, in the public interest, and is consistent 
with the protection of investors.

    Dated: February 26, 2010.

[[Page 11325]]

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-4409 Filed 3-9-10; 8:45 am]
BILLING CODE 8011-01-P