34-59748fr

Monday,
April 20, 2009

Part II

Securities and
Exchange
Commission

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17 CFR Part 242
Amendments to Regulation SHO;
Proposed Rule

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

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 242
[Release No. 34–59748; File No. S7–08–09]
RIN 3235–AK35

Amendments to Regulation SHO
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:

The Securities and Exchange
Commission (‘‘Commission’’) is
proposing amendments to Regulation
SHO under the Securities Exchange Act
of 1934 (‘‘Exchange Act’’). We are
proposing two approaches to
restrictions on short selling—one is a
price test that would apply on a market
wide and permanent basis (‘‘short sale
price test’’ or ‘‘short sale price test
restriction’’) and one that would apply
only to a particular security during
severe market declines in that security
(‘‘circuit breaker’’). With respect to the
first approach, we propose two
alternative short sale price tests: One
based on the national best bid and the
second based on the last sale price. With
respect to the second approach, we
propose two basic alternatives: One
alternative is a circuit breaker rule that
would temporarily prohibit short selling
in a particular security when there is a
severe decline in the price of that
security (a ‘‘halt’’), which could operate
in place of, or in addition to, a short sale
price test rule; and the second
alternative is a circuit breaker rule that
would trigger a short sale price test rule;
we propose that such a short sale price
test either be based on the national best
bid for any security for which there has
been a severe price decline or be based
on the last sale price for any security for
which there has been a severe price
decline.
Due to the extreme market conditions
that we are currently facing and the
resulting deterioration in investor
confidence, we believe it is appropriate
at this time to re-evaluate and seek
comment on some form of short sale
price test restriction, either in the form
of a short sale price test such as the
proposed modified uptick rule or
proposed uptick rule, or a circuit
breaker rule.
For each of the proposed short sale
price test restrictions and proposed
circuit breaker rules, we are also
proposing to amend Regulation SHO to
require that a broker-dealer mark certain
sell orders ‘‘short exempt.’’ If the
Commission adopts a short sale price
test proposal or a circuit breaker

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SUMMARY:

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proposal, and adopts a ‘‘short exempt’’
marking requirement, we are proposing
that the implementation period for these
amendments would be three months
from the effective date of the
amendments.
DATES: Comments should be received on
or before June 19, 2009.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–08–09 on the subject line;
or
• Use the Federal eRulemaking Portal
(http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–08–09. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(http://www.sec.gov/rules/final.shtml).
Comments are also available for public
inspection and copying in the
Commission’s Public Reference Room,
100 F Street, NE., Washington, DC
20549, on official business days
between the hours of 10 am and 3 p.m.
All comments received will be posted
without change; we do not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT:
James Brigagliano, Deputy Director; Jo
Anne Swindler, Acting Associate
Director; Josephine Tao, Assistant
Director; Victoria Crane, Branch Chief;
Joan Collopy, Special Counsel; Christina
Adams, Special Counsel; or Matthew
Sparkes, Staff Attorney, Division of
Trading and Markets, at (202) 551–5720,
at the Commission, 100 F Street, NE.,
Washington, DC 20549–6628.
SUPPLEMENTARY INFORMATION: The
Commission is requesting public
comment on proposed amendments to
Rules 200(g) and 201 of Regulation
SHO, 17 CFR 242.200(g) and 17 CFR
242.201, under the Exchange Act. The

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Commission is soliciting comments on
all aspects of the proposed amendments.
I. Executive Summary
In July 2007, the Commission
eliminated all short sale price test
restrictions. At that time, short sale
price test restrictions included Rule
10a–1 under the Exchange Act, also
known as the ‘‘uptick rule’’ or ‘‘tick
test’’ (‘‘former Rule 10a–1’’), that
applied to exchange-listed securities,
and the National Association of
Securities Dealers, Inc.’s (‘‘NASD’’) 1 bid
test, that applied to certain Nasdaq
securities. The Commission’s removal of
short sale price test restrictions followed
a careful, deliberative rulemaking
process, carried out in multiple stages
from 1999 through 2006, and was open
to the public at every stage.2
Prior to taking that action, the
Commission took a number of steps,
including seeking extensive public
comment and staff study to consider
removing short sale price test
restrictions. For example, beginning in
1999, the Commission published a
concept release in which it sought
comment regarding short sale price test
regulation, including on whether to
eliminate such regulation.3 In 2004, the
Commission initiated a year-long pilot
to study the removal of short sale price
tests for approximately one-third of the
largest stocks.4 Short sale data was
made publicly available during this
pilot to allow the public and
Commission staff to study the effects of
eliminating short sale price test
restrictions. The findings of third party
researchers were presented and
discussed in a public Roundtable in
September 2006.5 In addition, the
results of the Commission staff study of
the pilot data were made publicly
available in draft form in September
2006 and in final form in February
2007.6
1 NASD is now known as the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’).
2 In 1999, the Commission published a concept
release in which it sought comment regarding short
sale price test regulation, including on whether to
eliminate such regulation. See Securities Exchange
Act Release No. 42037 (Oct. 20, 1999), 64 FR 57996
(Oct. 28, 1999).
3 See Securities Exchange Act Release No. 42037
(Oct. 20, 1999), 64 FR 57996 (Oct. 28, 1999).
4 See Securities Exchange Act Release No. 50104
(July 28, 2004), 69 FR 48032 (Aug. 6, 2004) (‘‘Pilot
Release’’).
5 See http://www.sec.gov/about/economic/
shopilottrans091506.pdf.
6 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 discussion of
findings of staff study, supra notes 25 to 41 and
accompanying text.

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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules
As discussed in detail below,7
concurrent with the development of the
subprime mortgage crisis and credit
crisis in 2007, market volatility,
including steep price declines,
particularly in the stocks of certain
financial services issuers, has increased
markedly in the U.S. and in every major
stock market around the world
(including markets that continued to
operate under short sale price test
restrictions). As market conditions have
continued to worsen, investor
confidence has eroded, and the
Commission has received requests from
many commenters to consider imposing
restrictions with respect to short selling,
in part in the belief that such action
would help restore investor confidence.
Due to the extreme market conditions
that we are currently facing and the
resulting deterioration in investor
confidence, we believe it is appropriate
at this time to re-examine and seek
comment on whether to restore
restrictions with respect to short selling.
Thus, we are proposing two approaches
to restrictions on short selling. One
approach would apply a price test on a
market wide and permanent basis. With
respect to this approach, we propose
two alternative price tests. The first
alternative price test, in many ways
similar to NASD’s former bid test,
would be based on the national best bid
(the ‘‘proposed modified uptick rule’’).
The second alternative price test,
similar to former Rule 10a–1, would be
based on the last sale price (the
‘‘proposed uptick rule’’).8
The other approach would apply only
to a particular security during a severe
market decline in that security
(collectively, the ‘‘proposed circuit
breaker rules’’). With respect to this
second approach, we are proposing two
basic alternatives. First, we propose a
circuit breaker rule that, when triggered
by a severe price decline in a particular
security, would temporarily prohibit
any person from selling short that
security, subject to certain exceptions
(‘‘proposed circuit breaker halt rule’’).
The proposed circuit breaker halt rule
could operate in place of, or in addition
7 See

infra Section II(C).
2003, the Commission proposed a short sale
price test based on the national best bid (‘‘uniform
bid test’’). See Securities Exchange Act Release No.
48709 (Oct. 28, 2003), 68 FR 62972 (Nov. 6, 2003)
(‘‘2003 Regulation SHO Proposing Release’’). The
Commission determined not to proceed with the
uniform bid test, but instead established a pilot
program pursuant to which it could evaluate the
overall effectiveness of short sale price test
restrictions on short sales. See Securities Exchange
Act Release No. 50103 (July 28, 2004), 69 FR 48008,
48009 (Aug. 6, 2004) (‘‘2004 Regulation SHO
Adopting Release’’). See also infra Section II(B)
(discussing the pilot program).

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to, a short sale price test restriction.
Second, we propose a circuit breaker
rule that, when triggered by a severe
price decline in a particular security,
would trigger a temporary short sale
price test for that security. In connection
with this approach, we are proposing
two price tests. One is the modified
uptick rule—that is, we propose a
circuit breaker rule that would, when
triggered by a severe decline in a
particular security, temporarily impose
the proposed modified uptick rule for
that security (‘‘proposed circuit breaker
modified uptick rule’’). The other is the
uptick rule—that is, we propose a
circuit breaker rule that would, when
triggered by a severe market decline in
a particular security, temporarily
impose the proposed uptick rule for that
security (‘‘proposed circuit breaker
uptick rule’’). A circuit breaker that
triggers a short sale price test rule such
as the proposed modified uptick rule or
the proposed uptick rule would operate
in place of a short sale price test rule
(collectively, the ‘‘circuit breaker price
test rules’’).
As discussed in detail below, we
preliminarily believe that of the short
sale price test proposals, a price test
based on the national best bid would
have advantages over a test based on the
last sale price in today’s markets.
Among other reasons, we believe that
bids generally are a more accurate
reflection of current prices for a security
than last sale prices due to delays that
can occur in the reporting of last sale
price information and the manner in
which last sale price information is
published to the markets. For example,
sale transactions may be reported
manually up to 90 seconds after they
occur. Even sale transactions that are
reported automatically can be reported
out-of-sequence if trades are occurring
in multiple trading venues. This may
make the proposed uptick rule more
difficult to implement. In addition, last
sale price information is published to
the markets in reporting sequence rather
than in transaction sequence. Thus, we
preliminarily believe that if we were to
adopt a short sale price test restriction,
whether as a full-time rule or as part of
a circuit breaker rule, that it would be
more appropriate for such short sale
price test restrictions to be based on the
national best bid rather than on the last
sale price.
A short sale price test similar to
former Rule 10a–1 that is based on the
last sale price, a short sale price test
based on a national best bid, and a
circuit breaker rule resulting in a short
sale halt, should generally be familiar to
investors and market participants.
Former Rule 10a–1 was in place for

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almost 70 years. NASD adopted its bid
test in 1994 and that rule was in place
for over a decade. Various circuit
breaker rules have been in place
throughout the markets for many years.9
A circuit breaker rule resulting in a
short sale price test for particular stocks
that have suffered a severe price decline
would be an amalgamation of these
familiar rules.
To offer straight-forward alternatives,
this release proposes a modified uptick
rule based on the national best bid that
would apply to trading centers 10 and
applies a policies and procedures
approach that would require that
trading centers have policies and
procedures reasonably designed to
prevent the execution or display of short
sales at impermissible prices. As an
alternative short sale price test, this
release proposes an uptick rule based on
the last sale price that, similar to former
Rule 10a–1, applies a straight
prohibition approach that would
prohibit any person from effecting short
sales at impermissible prices. However,
either alternative could ultimately be
implemented through a policies and
procedures approach or through a
prohibition approach or some
combination thereof.11
We are also proposing circuit breaker
rules.12 As noted above, these are the
proposed circuit breaker halt rule, the
proposed circuit breaker modified
uptick rule, and the proposed circuit
breaker uptick rule. In addition, we are
proposing that a broker-dealer be
required to mark a sell order ‘‘short
exempt’’ if the seller is relying on an
exemption under the proposed short
sale price test rules or proposed circuit
breaker rules.
II. Background on Short Sale
Restrictions
Short selling involves a sale of a
security that the seller does not own or
a sale that is consummated by the
delivery of a security borrowed by, or
for the account of, the seller.13 In order
9 See,

e.g., infra note 239 and accompanying text.
‘‘trading center’’ means a national securities
exchange or national securities association that
operates an SRO trading facility, an alternative
trading system, an exchange market maker, an OTC
market maker, or any other broker or dealer that
executes orders internally by trading as principal or
crossing orders as agent. See infra note 111 and
supporting text.
11 For instance, the approaches could be
combined so that persons are prohibited from
selling short on a downbid and trading centers are
also required to have reasonable policies and
procedures to prevent the execution or display of
a short sale on a downbid.
12 See Section III.C below discussing the proposed
circuit breaker rules.
13 See 17 CFR 242.200(a).
10 A

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to deliver the security to the purchaser,
the short seller will borrow the security,
typically from a broker-dealer or an
institutional investor. Typically, the
short seller later closes out the position
by purchasing equivalent securities on
the open market and returning the
security to the lender. In general, short
selling is used to profit from an
expected downward price movement, to
provide liquidity in response to
unanticipated demand, or to hedge the
risk of an economic long position in the
same security or in a related security.14

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A. Short Selling and Its Market Impact
The Commission has long held the
view that short selling provides the
market with important benefits,
including market liquidity and pricing
efficiency.15 Market liquidity is often
provided through short selling by
market professionals, such as market
makers (including specialists) and block
positioners, who offset temporary
imbalances in the buying and selling
interest for securities. Short sales
effected in the market add to the selling
interest of stock available to purchasers
and reduce the risk that the price paid
by investors is artificially high because
of a temporary imbalance between
buying and selling interest. Short sellers
covering their sales also may add to the
buying interest of stock available to
sellers.16
Short selling also can contribute to
the pricing efficiency of the equities
markets.17 When a short seller
speculates or hedges against a
downward movement in a security, his
transaction is a mirror image of the
person who purchases the security in
anticipation that the security’s price
will rise or to hedge against such an
increase. Both the purchaser and the
short seller hope to profit, or hedge
against loss, by buying the security at
one price and selling at a higher price.
The strategies primarily differ in the
sequence of transactions. Market
participants who believe a stock is
overvalued may engage in short sales in
an attempt to profit from a perceived
divergence of prices from true economic
14 See, e.g., Securities Exchange Act Release No.
54891 (Dec. 7, 2006), 71 FR 75068, 75069 (Dec. 13,
2006) (‘‘2006 Price Test Elimination Proposing
Release’’); 2003 Regulation SHO Proposing Release,
68 FR at 62974.
15 See id. See also Securities Exchange Act
Release No. 29278 (June 7, 1991), 56 FR 27280 (June
13, 1991); 2004 Regulation SHO Adopting Release,
69 FR 48008, n. 6; Boehmer, Ekkehart and Wu,
Julie, Short Selling and the Informational Efficiency
of Prices (Jan. 8, 2009).
16 See, e.g., 2006 Price Test Elimination Proposing
Release, 71 FR at 75069; 2003 Regulation SHO
Proposing Release, 68 FR at 62974.
17 See id.

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values. Such short sellers add to stock
pricing efficiency because their
transactions inform the market of their
evaluation of future stock price
performance. This evaluation is
reflected in the resulting market price of
the security.18
We recognize that, to the extent that
the proposed short sale price test
restrictions would result in increased
costs to short selling in equity
securities, it may lessen some of the
benefits of legitimate short selling. Such
a reduction may lead to a decrease in
market efficiency and price discovery,
less protection against upward stock
price manipulations, a less efficient
allocation of capital, an increase in
trading costs, and a decrease in
liquidity. Thus, we believe there may be
potential costs associated with the
proposed short sale price tests in terms
of potential impact of such price tests
on quote depths, spread widths, and
market liquidity. We also believe costs
may be incurred in terms of execution
and pricing inefficiencies. For example,
requiring all short sale orders to be
executed or displayed above the best
bid, or last sale price, in a declining
market may slow the speed of
executions and impose additional costs
on market participants, including
buyers. Also, by not allowing short
sellers to sell at the bid, or last sale
price, the proposed short sale price tests
may impede trading and distort market
pricing.
Although short selling serves useful
market purposes, it also may be used to
illegally manipulate stock prices.19 One
example is the ‘‘bear raid’’ where an
equity security is sold short in an effort
to drive down the price of the security
by creating an imbalance of sell-side
interest.20 This unrestricted short
selling could exacerbate a declining
market in a security by increasing
pressure from the sell-side, eliminating
18 See id. Arbitrageurs also contribute to pricing
efficiency by utilizing short sales to profit from
price disparities between a stock and a derivative
security, such as a convertible security or an option
on that stock. For example, an arbitrageur may
purchase a convertible security and sell the
underlying stock short to profit from a current price
differential between two economically similar
positions. See id.
19 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. March 27, 1991) (alleged
manipulation by sales representative by directing or
inducing customers to sell stock short in order to
depress its price).
20 Many people blamed ‘‘bear raids’’ for the 1929
stock market crash and the market’s prolonged
inability to recover from the crash. See 8 Louis Loss
and Joel Seligman, Securities Regulation, section 8–
B–3 (3d ed. 2006).

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bids, and causing a further reduction in
the price of a security by creating an
appearance that the security price is
falling for fundamental reasons, when
the decline, or the speed of the decline,
is being driven by other factors.21
B. History of Short Sale Price Test
Restrictions in the U.S.
Section 10(a) of the Exchange Act 22
gives the Commission plenary authority
to regulate short sales of securities
registered on a national securities
exchange, as necessary or appropriate in
the public interest or for the protection
of investors.23 After conducting an
inquiry into the effects of concentrated
short selling during the market break of
1937,24 the Commission adopted former
Rule 10a–1 (also known as the ‘‘tick
test’’ or ‘‘uptick rule’’) in 1938 to restrict
short selling in a declining market.25
The core provisions of former Rule
10a–1 remained virtually unchanged for
almost 70 years. Over the years,
however, in response to changes in the
securities markets, including changes in
trading strategies and systems used in
the marketplace, the Commission added
exceptions to former Rule 10a–1 and
granted numerous written requests for
relief from the rule’s restrictions. These
market changes included
decimalization, the increased use of
matching systems that execute trades at
independently derived prices during
random times within specific time
intervals,26 and the spread of fully
automated markets. In addition, market
developments over the years led to the
application of different price tests to
securities trading in different markets.27
21 See 2006 Price Test Elimination Proposing
Release, 71 FR at 75069; 2003 Regulation SHO
Proposing Release, 68 FR at 62074.
22 15 U.S.C. 78j(a).
23 See also 2006 Price Test Elimination Proposing
Release, 71 FR at 75068; 2003 Regulation SHO
Proposing Release, 68 FR at 62973.
24 The study covered two weekly periods, that of
September 7–13, 1937, and that of October 18–23,
1937. See Securities Exchange Act Release No. 1548
(Jan. 24, 1938), 3 FR 213 (Jan. 26, 1938) (‘‘Former
Rule 10a–1 Adopting Release’’).
25 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).
26 See, e.g., Letter from Larry E. Bergmann, Senior
Associate Director, Division of Market Regulation,
SEC, to Andre E. Owens, Schiff Hardin & Waite,
dated April 23, 2003 (granting exemptive relief from
former Rule 10a–1 for trades executed through an
alternative trading system that matches buying and
selling interest among institutional investors and
broker-dealers at various set times during the day).
27 See, e.g., Securities Exchange Act Release No.
55245 (Feb. 5, 2007), 72 FR 6635 (Feb. 12, 2007).
Former Rule 10a–1 applied only to short sale
transactions in exchange-listed securities. In 1994,
the Commission granted temporary approval to

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In July 2004, the Commission adopted
Rule 202T of Regulation SHO,28 which
established procedures for the
Commission to temporarily suspend
short sale price tests for a prescribed set
of securities so that the Commission
could study the effectiveness of these
tests.29 Pursuant to the process
established in Rule 202T, the
Commission issued an order creating a
one year pilot (‘‘Pilot’’) temporarily
suspending the tick test of former Rule
10a–1(a) and any price test of any
exchange or national securities
association for short sales of certain
securities.30 The Pilot was designed to
assist the Commission in assessing
whether changes to current short sale
price test regulation were appropriate at
that time in light of then-current market
practices and the purposes underlying
short sale price test regulation.31
NASD to apply its own short sale rule, known as
the ‘‘bid test,’’ on a pilot basis that was renewed
annually until the Commission repealed short sale
price tests. NASD’s bid test prohibited short sales
in Nasdaq Global Market securities (then known as
Nasdaq National Market securities) at or below the
current (inside) bid when the current best (inside)
bid was below the previous best (inside) bid in a
security. As a result, until the Commission
eliminated former Rule 10a–1, and prohibited any
self-regulatory organization (‘‘SRO’’) from having a
short sale price test in July 2007, Nasdaq Global
Market securities traded on Nasdaq or the OTC
market and reported to a NASD facility were subject
to a bid test. Other listed securities traded on an
exchange, or otherwise, were subject to former Rule
10a–1. Nasdaq securities traded on exchanges other
than Nasdaq were not subject to any price test. In
addition, many thinly-traded securities, such as
Nasdaq Capital Market securities, and securities
quoted on the over-the-counter (‘‘OTC’’) Bulletin
Board and Pink Sheets, were not subject to any
price test wherever traded. According to the
Commission’s Office of Economic Analysis
(‘‘OEA’’), in 2005, prior to the start of the Pilot,
NASD Rule 3350 applied to approximately 2,800
securities, while former Rule 10a–1 applied to
approximately 4,000 securities.
28 17 CFR 242.202T.
29 See 17 CFR 242.202T; see also 2004 Regulation
SHO Adopting Release, 69 FR at 48012–48013.
30 See Pilot Release, 69 FR 48032 (commencing
the Pilot on January 3, 2005 and terminating the
Pilot on December 31, 2005). On November 29,
2004, the Commission issued an order resetting the
Pilot to commence on May 2, 2005 and end on
April 28, 2006 to give market participants
additional time to make systems changes necessary
to comply with the Pilot. See Securities Exchange
Act Release No. 50747 (Nov. 29, 2004), 69 FR 70480
(Dec. 6, 2004). On April 20, 2006, the Commission
issued an order extending the termination date of
the Pilot to August 6, 2007. See Securities Exchange
Act Release No. 53684 (April 20, 2006), 71 FR
24765 (April 26, 2006).
31 See Pilot Release, 69 FR at 48032. In the 2004
Regulation SHO Adopting Release we noted that
‘‘the purpose of the [P]ilot is to assist the
Commission in considering alternatives, such as: (1)
Eliminating a Commission-mandated price test for
an appropriate group of securities, which may be
all securities; (2) adopting a uniform bid test, and
any exceptions, with the possibility of extending a
uniform bid test to securities for which there is
currently no price test; or (3) leaving in place the
current price tests.’’ 2004 Regulation SHO Adopting
Release, 69 FR at 48010.

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OEA gathered the data made public
during the Pilot, analyzed the data and
provided the Commission with a
summary report on the Pilot (‘‘OEA
Staff’s Summary Pilot Report’’).32 The
OEA Staff’s Summary Pilot Report,
which was made public, examined
several aspects of market quality
including the overall effect of price tests
on short selling, liquidity, volatility and
price efficiency.33 The Pilot was also
designed to allow the Commission and
members of the public to examine
whether the effects of short sale price
tests were similar across stocks.34
As set forth in the OEA Staff’s
Summary Pilot Report, OEA found little
empirical justification at that time for
maintaining short sale price test
restrictions, especially for actively
traded securities. Amongst its results,
OEA found that short sale price tests did
not have a significant impact on daily
volatility. However, OEA also found
some evidence that short sale price tests
dampened intraday volatility for smaller
stocks.35
OEA also found that the Pilot data
provided limited evidence that price
test restrictions distort a security’s
price.36 In addition, OEA found that
price test restrictions resulted in an
32 See

supra note 6.
selected the securities to be included in
the Pilot by sorting the 2004 Russell 3000, first by
listing market and then by average daily dollar
volume from June 2003 through May 2004, and then
within each listing market, selecting every third
company starting with the second. Because the
selection process relied on average daily dollar
volume, companies that had their Initial Public
Offering (‘‘IPO’’) in May or June 2004, just prior to
the Russell reconstitution, were not included. The
securities in the control group came from the
remainder of the 2004 Russell 3000 not included in
the Pilot (excluding the IPOs in May or June 2004
and any securities added to the Russell 3000 after
June 2004). See OEA Staff’s Summary Pilot Report
at 22 (discussing the selection of securities included
in the Pilot and the control group).
34 In the 2004 Regulation SHO Adopting Release,
the Commission stated its expectation that data on
trading during the Pilot would be made available
to the public to encourage independent researchers
to study the Pilot. See 2004 Regulation SHO
Adopting Release, 69 FR at 48009, n.9. Accordingly,
nine SROs began publicly releasing transactional
short selling data on January 3, 2005. The nine
SROs at that time were the Amex, ARCA, BSE,
CHX, NASD, Nasdaq, National Stock Exchange,
NYSE and Phlx. The SROs agreed to collect and
make publicly available trading data on each
executed short sale involving equity securities
reported by the SRO to a securities information
processor. The SROs published the information on
a monthly basis on their Internet Web sites.
35 See OEA Staff’s Summary Pilot Report, at 55 n.
61–63 and supporting text.
36 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 OEA Staff’s Summary Pilot Report at 8.
33 OEA

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increase in quote depths.37 Realized
liquidity levels, however, were
unaffected by the removal of short sale
price test restrictions.38 The Pilot data
also provided evidence that short sale
price test restrictions reduce the volume
of executed short sales to total volume
and, therefore, act as a constraint on
short selling.39 OEA did not find,
however, a significant difference in
short interest positions between those
securities subject to a short sale price
test versus those securities that were not
subject to such a test during the Pilot.40
In addition, the Commission
encouraged outside researchers to
examine the Pilot data. In response to
this request, the Commission received
four completed studies (the ‘‘Academic
Studies’’) from outside researchers that
specifically examined the Pilot data.41
The Commission also held a public
roundtable (the ‘‘Regulation SHO
Roundtable’’) that focused on the
empirical evidence learned from the
Pilot data (the OEA Staff’s Summary
Pilot Report, Academic Studies, and
Regulation SHO Roundtable are referred
to collectively herein as, the ‘‘Pilot
Results’’).42 The Pilot Results contained
a variety of observations, which the
Commission considered in determining
whether or not to propose removal of
then-current short sale price test
restrictions and subsequently whether
or not to eliminate such restrictions.
Generally, the Pilot Results supported
removal of short sale price test
restrictions at that time.43 In addition to
the Pilot Results, thirteen other analyses
by SEC staff and various third party
37 See OEA Staff’s Summary Pilot Report, at 55 n.
61–63 and supporting text.
38 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 intraday volatility. However,
OEA concluded that overall, the Pilot data did not
suggest a deleterious impact on market quality or
liquidity. See OEA Staff’s Summary Pilot Report at
42, 56.
39 See OEA Staff’s Summary Pilot Report at 35.
40 See id.
41 See Karl B. Diether, Kuan Hui Lee and Ingrid
M. Werner, 2009, It’s SHO Time! Short-Sale PriceTests and Market Quality, Journal of Finance 64:37–
73; Gordon J. Alexander and Mark A. Peterson,
2008, The Effect of Price Tests on Trader Behavior
and Market Quality: An Analysis of Reg. SHO,
Journal of Financial Markets 11:84–111; J. Julie Wu,
Uptick Rule, short selling and price efficiency,
August 14, 2006; Lynn Bai, 2008, The Uptick Rule
of Short Sale Regulation—Can it Alleviate
Downward Price Pressure from Negative Earnings
Shocks? Rutgers Business Law Journal 5:1–63
(‘‘Bai’’).
42 See supra note 5.
43 See 2006 Price Test Elimination Proposing
Release, 71 FR at 75072–75075 (discussing the Pilot
Results).

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researchers were conducted between
1963 and 2004 addressing price test
restrictions.44 Among these were several
studies that evaluated short sale price
tests during times of severe market
decline, including the market break of
May 28, 1962, the market decline in
September and October 1976, the
market break of October 19, 1987, and
the Nasdaq market decline of 2000–
2001. The results of these studies were
mixed, but generally they found that
former Rule 10a–1 did not prevent short
sales in extreme down markets and did
limit short selling in up markets and
provided additional support for the
removal of short sale price restrictions.
In December 2006, the Commission
proposed to eliminate former Rule 10a–
1 by removing restrictions on the
execution prices of short sales, as well
as prohibiting any SRO from having a
price test.45 The Commission received
27 comment letters in response to its
proposal to eliminate former Rule 10a–
1 and prohibit any SRO from having a
short sale price test. The comments in
response to the proposed amendments
varied. Most commenters (including
individual traders, academics, brokerdealers, SROs and trade associations)
advocated removing all price test
restrictions.46 Generally, these
commenters believed that price test
restrictions were no longer necessary
due to increased market transparency
and the existence of real-time regulatory
surveillance that could monitor for and
detect any potential short sale
manipulation.47
44 See OEA Staff’s Summary Pilot Report at 14,
17–22 (discussing the thirteen studies).
45 See 2006 Price Test Elimination Proposing
Release, 71 FR 75068.
46 See, e.g., letter from Howard Teitelman, CSO,
Trillium Trading (Feb. 6, 2007) (‘‘Teitelman
Letter’’); letter from S. Kevin An, Deputy General
Counsel, E*TRADE (Feb. 9, 2007) (‘‘E*TRADE
Letter’’); letter from Carl Giannone (Feb. 11, 2007)
(‘‘Giannone Letter’’); letter from David Schwarz
(Feb. 12, 2007) (‘‘Schwarz Letter’’); letter from John
G. Gaine, President, MFA (Feb. 12, 2007) (‘‘MFA
Letter’’); letter from Lisa M. Utasi, Chairman of the
Board and John C. Giesea, President and CEO, STA
(Feb. 12, 2007) (‘‘STA Letter’’); letter from Gerard
S. Citera, Executive Director, U.S. Equities, UBS
(Feb. 14, 2007) (‘‘UBS Letter’’); letter from Mary
Yeager, Assistant Secretary, NYSE (Feb. 14, 2007)
(‘‘NYSE Letter’’); letter from James J. Angel, Ph.D.,
CFA, Associate Professor of Finance, McDonough
School of Business, Georgetown University (Feb.
14, 2007) (‘‘Angel Letter’’); letter from Ira D.
Hammerman, SIFMA Managing Director and
General Counsel (Feb. 16, 2007) (‘‘SIFMA Letter’’);
see also Securities Exchange Act Release No. 55970
(June 28, 2007), 72 FR 36348, 36350–36351 (July 3,
2007) (‘‘2007 Price Test Adopting Release’’)
(discussing the comment letters).
47 See, e.g., Giannone Letter; E*TRADE Letter;
STA Letter; UBS Letter; see also Securities
Exchange Act Release No. 55970 (June 28, 2007), 72
FR 36348, 36350–36351 (July 3, 2007) (discussing
the comment letters).

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Two commenters (both individual
investors) opposed the proposed
amendments noting the need for price
tests to prevent ‘‘bear raids.’’ 48 One
commenter, although generally in
support of removing all price test
restrictions, stated the belief that at
some level unrestricted short selling
should be collared.49 This commenter
supported having a 10% circuit breaker
to prevent panic in the event there is a
major market collapse.50 The NYSE also
noted its concern about unrestricted
short selling during periods of
unusually rapid and large market
declines. The NYSE stated that the
effects of an unusually rapid and large
market decline could not be measured
or analyzed during the Pilot because
such decline did not occur during the
period studied.51
Effective July 3, 2007, the
Commission eliminated former Rule
10a–1 and added Rule 201 of Regulation
SHO prohibiting any SRO from having
a short sale price test.52 The
Commission stated that it determined to
eliminate all short sale price test
restrictions after reviewing the
comments received in response to its
proposal to eliminate all short sale price
test restrictions, the Pilot Results, and
taking into account the market
developments that had occurred in the
securities industry since the
Commission adopted former Rule 10a–
1 in 1938.53 In addition, the
Commission stated that it believed that
the amendments would bring increased
uniformity to short sale regulation, level
the playing field for market participants,
and remove an opportunity for
regulatory arbitrage.54
C. Changes in Market Conditions Since
Elimination of Rule 10a–1
Recently, market volatility has
increased markedly in the U.S., as well
as in every major stock market around
the world. Although we are not aware
of specific empirical evidence that the
elimination of short sale price tests has
contributed to the increased volatility in
U.S. markets, many members of the
public currently associate the removal
of former Rule 10a–1 with the recent
volatility, including steep declines in
some securities’ prices, and the loss of
investor confidence in our markets.
48 See, e.g., letter from Jim Ferguson (Dec. 19,
2006); letters from David Patch (Jan. 1, 2007; Jan.
12, 2007) (‘‘Patch Letters’’).
49 See Giannone Letter.
50 See id.
51 See NYSE Letter.
52 See 2007 Price Test Adopting Release, 72 FR
36348.
53 See id at 36352.
54 See id.

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In addition, we have received
numerous requests for reinstatement of
short sale price test restrictions from a
variety of individuals, including
investors, issuers, academics, trade
associations, and members of
Congress.55 Most of these commenters
have asked that we reinstate short sale
price test restrictions because they
believe that such a measure would help
restore investor confidence.56
55 See, e.g., letter to Mary Schapiro, Chairman,
from Rep. Barney Frank and other Members of the
House Financial Services Committee, dated March
11, 2009; letter to Mary Schapiro, Chairman,
Commission, from Professor Constantine Katsoris
(‘‘Katsoris letter’’), Fordham University School of
Law, dated March 4, 2009; letter from Albert C.
Roelse, dated Feb. 20, 2009; letter from Robert A.
Lee, dated Feb. 10, 2009; letter from Giulio Liotine,
dated Jan. 22, 2009 (‘‘Liotine Letter’’); letter from
Edward L. Yingling, American Bankers Association,
dated Dec. 16, 2008 (‘‘American Bankers Assn. 2008
Letter’’); letter from Peter Brown, dated Dec. 12,
2008 (‘‘Brown Letter’’); letter to Christopher Cox,
Chairman, Commission, from Peter T. King,
Member of Congress, dated Oct. 7, 2008; letter to
Christopher Cox, Chairman, Commission, from Bill
Sali, Member of Congress, dated Oct. 1, 2008; letter
to Christopher Cox, Chairman, Commission, from
T.J. Rodgers, President and CEO, Cypress
Semiconductor Corp., dated October 1, 2008; letter
to Christopher Cox, Chairman, Commission, from
Carl H. Tiedmann, General Partner, Tiedmann
Investment Group, dated Sept. 22, 2008; letter to
Christopher Cox, Chairman, Commission, from
Hillary Rodham Clinton, Senator, dated Sept. 17,
2008 (‘‘Clinton Letter’’). The Commission’s Office of
Investor Education and Advocacy estimates that it
has received over 4,000 requests (including
duplicate requests) from individuals regarding
reinstating a short sale price test.
56 See, e.g., letter from Chris Baratta, dated March
9, 2009 (‘‘Baratta Letter’’); letter from Paul Kent,
dated March 7, 2009; letter from Troy Williams,
dated March 6, 2009; letter from Briggs Diuguid,
dated March 5, 2009 (‘‘Diuguid Letter’’); letter from
Bob Young, dated March 5, 2009; letter from Kevin
Girard, dated March 4, 2009; letter from Mike
Rogers, dated March 3, 2009; letter from George
Flagg, dated March 3, 2009; letter from Arleen
Golden, dated March 2, 2009; letter from Doug
Cameron, dated March 2, 2009; letter from Dr. Bill
Daniel, dated Feb. 26, 2009; letter from Glenn
Webster, dated Feb. 26, 2009; letter from Robert
Lounsbury, dated Feb. 25, 2009; letter from Karl
Findorff, dated Feb. 19, 2009; letter from Robert
Levine, dated Feb. 17, 2009; letter from Robert Lee,
dated Feb. 10, 2009; American Bankers Assn. 2008
letter; letter from David Campbell and Natalie Win,
dated Nov. 25, 2008; letter from Josh Dodson, dated
Nov. 21, 2008; letter from J. Geddes Parsons, dated
Nov. 21, 2008; letter from Charles Rudisill, dated
Nov. 21, 2008; letter from Mike Ryan, dated Nov.
21, 2008; letter from Jeff Brower, dated Nov. 20,
2008; letter from Mike Abraham, dated Nov. 20,
2008; letter from Marvin Dingott, dated Nov. 20,
2008; letter from W. Romain Spell, dated Nov. 19,
2008; letter from Phil Mason, dated Nov. 19, 2008;
letter from David Sheridan, dated Nov. 18, 2008;
letter from Lynn Miller, dated Nov. 13, 2008; letter
from Patrick McQuaid, dated Oct. 29, 2008; letter
from Scotland Settle, dated Oct. 27, 2008; letter
from Jenna Spurrier, dated Oct. 24, 2008; letter from
Joe Garrett, dated Oct. 15, 2008; letter from Peter
Eckle, dated Oct. 11, 2008; letter from Maureen
Christensen, dated Oct. 9, 2008; letter from Richard
Vulpi, dated Sept. 24, 2008; see also Katsoris Letter
(stating that elimination of former Rule 10a–1
‘‘* * * hardly generates confidence on the part of
a true investor who is entrusting his or her life’s
savings * * * to the current market’’).

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Some of these commenters have
stated that a lack of price test
restrictions makes them question
whether they should invest in the stock
market.57 Other commenters have stated
that they believe a short sale price test
would aid small investors.58 In addition,
some commenters have asserted that
restricting the prices at which securities
may be sold short would help address
recent steep declines in securities’
prices. For example, the American
Bankers Association (the ‘‘ABA’’) noted
that its members, ‘‘both large and small,
are telling [the ABA] that short sellers
are taking advantage of the uptick rule’s
absence and that their stock prices are
experiencing excessive downward price
pressure * * *.’’ 59 This commenter
further noted that ‘‘its members strongly
believe that reinstatement of the uptick
rule in some format would help limit
these downward stock spirals and
restore investor confidence.’’ 60
In commenting on the recent market
volatility and the absence of a short sale
price test, one member of Congress
recently stated that ‘‘[o]ne of the
simplest but most important and
effective initiatives that the SEC could
undertake immediately to combat
market volatility is the reinstatement of
a * * * ‘uptick rule’.’’ 61 A former U.S.
Senator urged the Commission to
‘‘* * * give close consideration to the
many calls for the immediate restoration
of the uptick rule whose repeal has been
linked to the recent market volatility
and proliferation of abusive short sale
57 See, e.g., letter from Tim Zanni, dated Feb. 19,
2009; letter from Jeff Boyd, dated Feb. 10, 2009.
58 See, e.g., Baratta Letter (noting that while price
test restrictions could not reasonably be expected to
prevent market downturns, they would, in his
opinion, ‘‘give the little investor a chance’’ in the
current conditions). See also Young Letter
(suggesting that reinstatement of the uptick rule
‘‘will not be a quick or total fix, but it will help’’);
letter to Mary Schapiro, Chairman, Commission,
from Paul D. Mendelsohn, President of Windham
Financial Services, Inc., dated March 6, 2009
(stating that he believes former Rule 10a–1
‘‘protected’’ the markets and that ‘‘suspension of the
uptick rule has opened a security hole into our
financial system’’).
59 See American Bankers Assn. 2009 Letter.
60 See id. See also letter to Christopher Cox,
Chairman, Commission, from Paul Tudor Jones II,
Tudor Investment Corporation, dated Oct. 10, 2008
(stating that he believes that one way to
‘‘immediately stem the decline’’ in the stock market
would be to reinstate the uptick rule); letter to Mary
Schapiro, Chairman, Commission, from James F.
Kane, Jr., dated Feb. 6, 2009 (stating that he believes
that reinstating ‘‘the Up-tick Rule will go a long way
in preventing speculators from ganging up on a
particular stock and forcing it down’’); Diuguid
Letter (stating that while short sellers ‘‘make
efficient markets,’’ he is nonetheless concerned that
short selling may be a tool of manipulators when
short sales are ‘‘piled on’’ a particular company).
61 See letter to Mary Schapiro, Chairman,
Commission, from Gary L. Ackerman, Member of
Congress, dated Jan. 27, 2009.

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transactions.’’ 62 SRO representatives
and others have also commented on the
need for a short sale price test.63
Researchers have also indicated that
they believe that they have collected
data that establishes a possible
association between the current market
downturn and the elimination of former
Rule 10a–1.64 In addition, we note that
recently there are reports of significant
short selling in connection with credit
default swaps, particularly in the
securities of significant financial
institutions.65 One commenter has
suggested that the interaction between
and amplifying effects of credit default
swaps and short selling may be a reason
to reinstate a short sale price test.66
Questions and comments have been
raised about the role that short selling,
and in particular potentially abusive
short selling, may have in connection
with the price fluctuations and
disruption in our markets. As such,
recently we took a number of short salerelated actions aimed at addressing
62 See

Clinton Letter.
e.g., Edgar Ortega, Short-Sale Rule
Undermined as Bernanke Backs Review, Bloomberg
News Service, March 4, 2009 (noting comments by
Duncan Niederauer, CEO, The NYSE/Euronext
Group, Inc., that imposing a measure such as former
Rule 10a–1 ‘‘would go a long way to adding
confidence’’ in our markets); Ben Stein, How to
Deal with a 3 A.M. Fear, The New York Times,
March 8, 2009; Charles R. Schwab, Restore the
Uptick Rule, Restore Confidence, Wall Street
Journal Online, December 9, 2008. The Federal
Reserve Chairman also recently noted that, while
the ‘‘traditional literature on this doesn’t seem to
find much effect of the uptick rule,’’ short sale price
test restrictions are ‘‘worth looking at’’ and that the
rule (i.e., former Rule 10a–1) ‘‘might have had some
benefit.’’ Monetary Policy and the State of the
Economy: Hearing Before the House Financial
Services Comm., 111th Cong., 1st Sess. (Lexis
Federal News Service at 33) (Feb. 25, 2009). See
also letter from Duncan Niederauer, CEO, The
NYSE/Euronext Group, Inc., Robert Greifeld, CEO,
The NASDAQ OMX Group, Inc., Joe Ratterman,
CEO, BATS Exchange, Inc., Joseph Rizzello, CEO,
National Stock Exchange, dated March 24, 2009
(‘‘National Exchanges Letter’’) (stating that the
United States national securities exchanges
welcome the announcement that the Commission
will consider a proposal to adopt a rule to combat
abusive short selling and suggesting that any such
rule proposal include a circuit breaker in the form
discussed therein).
64 See D. Harmon and Y. Bar-Yam, 2008,
Technical Report on the SEC Uptick Repeal Pilot,
New England Complex Systems Institute; see also
Robert C. Pozen and Dr. Yaneer Bar-Yam, There’s
a Better Way to Prevent Bear Raids, The Wall Street
Journal, Opinion, November 18, 2008 (stating that
the ‘‘uptick rule’’ is an effective way to prevent
‘‘bear raids’’). But cf. John C. Bogle, Jr. and Howard
Flinker, Uptick Rule Won’t Prevent More Raids by
the Bear, The Wall Street Journal, Opinion Section
(November 26, 2008).
65 See George Soros, The Game Changer, available
at http://www.ft.com/cms/s/0/49b1654a-ed60-11ddbd60-0000779fd2ac.html.
66 See id. (concluding that Lehman, AIG and other
financial institutions were destroyed by ‘‘bear
raids’’ in which the shorting of stocks and buying
of CDS amplified and reinforced each other).
63 See,

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these concerns. For example, due to our
concerns that false rumors spread by
short sellers regarding financial
institutions of significance in the U.S.
may have fueled market volatility in the
securities of some of these institutions,
on July 15, 2008, we issued an
emergency order (‘‘July Emergency
Order’’) 67 pursuant to Section 12(k)(2)
of the Exchange Act 68 which imposed
borrowing and delivery requirements on
short sales of the equity securities of
certain financial institutions. We noted
in the July Emergency Order that false
rumors can lead to a loss of confidence
in our markets. Such loss of confidence
can lead to panic selling, which may be
further exacerbated by ‘‘naked’’ short
selling. As a result, the prices of
securities may artificially and
unnecessarily decline well below the
price level that would have resulted
from the normal price discovery
process.69 If significant financial
institutions are involved, this chain of
events can threaten disruption of our
markets.70
Due to our concerns regarding the
impact of short selling on the prices of
financial institution securities, on
September 18, 2008, we issued another
emergency order prohibiting short
selling in the publicly traded securities
of certain financial institutions.71 Our
concerns, however, have not been
limited to financial institutions given
the importance of confidence in our
markets and recent rapid and steep
declines in the prices of securities
generally.72 Such rapid and steep price
declines can give rise to questions about
the underlying financial condition of an
institution, which in turn can erode
confidence even without an underlying
fundamental basis.73 This erosion of
confidence can impair the liquidity and
ultimate viability of an institution, with
potentially broad market
consequences.74
These concerns resulted in our
issuance on September 17, 2008 of an
emergency order under Section 12(k)(2)
of the Exchange Act, in part targeting
67 See Securities Exchange Act Release No. 58166
(July 15, 2008), 73 FR 42379 (July 21, 2008).
68 15 U.S.C. 78l(k).
69 See July Emergency Order, 73 FR 42379.
70 See id.
71 See Securities Exchange Act Release No. 58592
(Sept. 18, 2008), 73 FR 55169 (Sept. 24, 2008).
72 See, e.g., July Emergency Order, 73 FR 42379;
Securities Exchange Act Release No. 58592 (Sept.
18, 2008), 73 FR 55169 (Sept. 24, 2008) (‘‘Short Sale
Ban Emergency Order’’); Securities Exchange Act
Release No. 58572 (Sept. 17, 2008), 73 FR 54875
(Sept. 23, 2008) (‘‘September Emergency Order’’).
73 See Short Sale Ban Emergency Order, 73 FR
55169; September Emergency Order, 73 FR 54875.
74 See id.

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short selling in all equity securities.75
Pursuant to the September Emergency
Order we imposed enhanced delivery
requirements on sales of all equity
securities under Rule 204T of
Regulation SHO.76
The enhanced close-out requirements
of Rule 204T of Regulation SHO in the
September Emergency Order, which,
among other things, require participants
of a registered clearing agency to closeout fails to deliver resulting from short
sales of any equity security by
purchasing or borrowing the security by
no later than the beginning of trading on
the day after the fail to deliver occurs,
appear to be having a positive effect
toward achieving our goal of reducing
fails to deliver.77 As we stated in the
October 2008 release adopting Rule
204T as an interim final temporary rule,
we are concerned about the potentially
negative market impact of large and
persistent fails to deliver.78 Thus, our
adoption of Rule 204T followed a series
of other steps aimed at reducing such
fails to deliver and addressing
potentially abusive short selling. Such
steps included eliminating the
‘‘grandfather’’ and options market maker
exceptions to Regulation SHO’s closeout requirement,79 and proposing and
subsequently adopting a ‘‘naked’’ short
selling anti-fraud rule, Rule 10b–21.80
Although we recognize that fails to
deliver can occur for legitimate reasons,
we are concerned about the impact of
75 See

September Emergency Order, 73 FR 54875.
id. We subsequently issued an interim final
temporary rule imposing the delivery requirements
of Rule 204T of Regulation SHO until July 31, 2009.
See Securities Exchange Act Release No. 58773
(Oct. 14, 2008), 73 FR 61706 (Oct. 17, 2008)
(‘‘Interim Final Temporary Rule 204T’’). We and
Commission staff are currently reviewing the
comment letters received in response to that rule.
In addition, we issued an emergency order, and
subsequent interim final temporary rule, to require
disclosure of short sales and short positions in
certain securities. The temporary rule expires on
August 1, 2009. We and Commission staff are
currently reviewing comment letters received in
response to the temporary rule. See Securities
Exchange Act Release No. 58591 (Sept. 18, 2008).
See also Securities Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008).
77 See September Emergency Order, 73 FR 54875.
78 See Interim Final Temporary Rule 204T, 73 FR
at 61708.
79 See Securities Exchange Act Release No. 56212
(Aug. 7, 2007), 72 FR 45544 (Aug. 14, 2007)
(eliminating the ‘‘grandfather’’ exception to
Regulation SHO’s close-out requirement);
September Emergency Order, 73 FR 54875
(eliminating the options market maker exception to
Regulation SHO’s close-out requirement). Following
the issuance of the September Emergency Order, we
adopted amendments making permanent the
elimination of the options market maker exception.
See Securities Exchange Act Release No. 58775
(Oct. 14, 2008), 73 FR 61690 (Oct. 17, 2008).
80 See Securities Exchange Act Release No. 58774
(Oct. 14, 2008), 73 FR 61666 (Oct. 17, 2008);
Securities Exchange Act Release No. 57511 (March
17, 2008), 73 FR 15376 (March 21, 2008).

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large and persistent fails to deliver on
market confidence. Preliminary results
from OEA indicate that our actions to
further reduce fails to deliver and,
thereby, address potentially abusive
short selling are having their intended
effect. For example, preliminary results
from OEA indicate that fails to deliver
in all equity securities have declined
significantly since the adoption of Rule
204T.81
Questions persist, however, about the
rapid and steep declines in the prices of
securities, and we recognize the concern
over the continuing erosion of investor
confidence in our markets. Thus, we
have continued to examine whether
there are other actions that the
Commission might consider, including
re-evaluating whether a short sale price
test ought to be reintroduced or a circuit
breaker rule should be imposed, in light
of the extreme market declines and
volatility, as well as the loss of investor
confidence we continue to experience.
We also note that when we eliminated
all short sale price test restrictions in
July 2007, we acknowledged that
circumstances may develop that would
warrant relief from the prohibition in
Rule 201 of Regulation SHO for a short
sale price test, including a short sale
price test of an SRO, to apply to short
sales in any security.82 Thus, in
determining whether or not to propose
a short sale price test rule or circuit
breaker rule, we have considered the
recent turmoil in the financial sector
and steep declines and extreme
volatility in securities prices. The
turbulence in the financial markets has
been underscored over the past 18
months by events such as the March
2008 sale of Bear Stearns Corporation,
and the crisis surrounding the collapse
of Lehman Brothers in September 2008.
In addition, between July 2007 and
March 2009, the Dow Jones Industrial
Average (‘‘DJIA’’) lost roughly 50% of its
value, while the Standard and Poor’s
500 Index fell approximately 54%.83
The publicly traded securities of
81 See Memorandum from OEA Re: Impact of
Recent SHO Rule Changes on Fails to Deliver,
November 26, 2008 at http://www.sec.gov/
comments/s7-30-08/s73008-37.pdf; Memorandum
from OEA Re: Impact of Recent SHO Rule Changes
on Fails to Deliver, March 20, 2009 at http://
www.sec.gov/comments/s7-30-08/s73008-107.pdf
(stating, among other things, that the average daily
number of aggregate fails to deliver for all securities
decreased from 1.1 billion to 582 million for a total
decline of 47.2% when comparing a pre-Rule to
post-Rule period).
82 See 2007 Price Test Adopting Release, 72 FR
36348.
83 On July 3, 2007, the DJIA closed at 13,577, and
on March 3, 2009, the DJIA closed at 6,726. On July
3, 2007, the S&P 500 Index closed at 1524.87, and
on March 3, 2009, the S&P 500 Index closed at
700.82.

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significant financial institutions have
experienced large reductions in value in
2008 and early 2009.84 For example, one
significant financial institution’s stock
price declined from approximately $49
per share in the beginning of July 2007,
to approximately $1 per share in March
2009. Similarly, in July 2007, another
significant financial institution’s stock
price declined from approximately $49
per share to approximately $3 per share
in March 2009. In addition, in 2008, a
number of major banks became the
subjects of federal seizure.85 A total of
25 banks failed in 2008, resulting in a
$33.5 billion expenditure of the fund
used by the Federal Deposit Insurance
Corporation (‘‘FDIC’’) to protect
individual depositors’ savings.86 Put
simply, market conditions have changed
dramatically in recent months.87
In addition, as noted above, in
response to the proposed amendments
to eliminate former Rule 10a–1, one
commenter expressed its concern about
unrestricted short selling during periods
of unusually rapid and large market
declines.88 This concern has been
echoed in recent comment letters to the
Commission.89 We note, however, that
in the 2007 Price Test Adopting Release,
we noted that because of the
Commission’s stated objective when it
adopted Rule 10a–1 and our concerns
about the potential use of short sales to
manipulate stock prices, OEA examined
the Pilot data for any indication that
there is an association between extreme
price movements and price test
84 We note that we have no empirical evidence
that such falling prices are the result of short selling
activity and the lack of short sale price test
restrictions.
85 See, e.g., Office of Thrift Supervision,
Receivership Of A Federal Saving Association,
dated Sept. 25, 2008 at http://files.ots.treas.gov/
680024.pdf; Office of Thrift Supervision, PassThrough Receivership Of A Federal Savings
Association Into A De Novo Federal Savings
Association That Is Placed Into Conservatorship
With the FDIC, dated July 11, 2008 at http://
files.ots.treas.gov/680018.pdf.
86 See Alison Vekshin, Bair Says Insurance Fund
Could Be Insolvent This Year, http://
www.bloomberg.com/apps/
news?pid=washingtonstory&sid=alsJZqIFuN3k,
March 4, 2009.
87 We note, however, that stock markets have
incurred significant declines in value under former
short sale price test restrictions, most notably the
1987 Market Crash and the 2000 Tech Bubble Burst.
88 See NYSE letter.
89 See, e.g., Brown Letter (noting that ‘‘the
investigation performed before the uptick rule was
rescinded was insufficient, particularly [because] it
covered a period of relative market stability and
studied the side effects of the rule rather than the
primary effect of the rule which would only be seen
in a sharply down market such as we have just
suffered’’); Liotine Letter (stating that ‘‘[t]he
research done prior to the [amendment] of rule 10–
A was far too short’’ and that the study should have
lasted longer to ‘‘ensure at least one bear market
was involved in the study’’).

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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules
restrictions. OEA, however, did not find
any such association.90
Due to the extreme market conditions
with which we are currently faced and
the resulting deterioration in investor
confidence, we believe it is appropriate
at this time to propose amending
Regulation SHO to add a short sale price
test or a circuit breaker rule. In issuing
this proposing release, we seek
empirical data regarding the costs and
benefits of reinstating short sale price
test restrictions or imposing circuit
breaker rules, including the potential
impact on legitimate short selling. We
note that although we have received
numerous letters requesting
reinstatement of short sale price test
restrictions, such requests have not
included empirical data, but rather
focus on what such commenters believe
might be the impact on the markets of
reinstating such restrictions. In
addition, such requests do not discuss
the potential impact of short sale price
test restrictions on the benefits of
legitimate short selling.
As discussed in this release, we
remain mindful that there are benefits of
short selling. For example, legitimate
short selling can play an important and
constructive functional role in the
markets, providing liquidity and price
efficiency. Short sellers also play an
important role in correcting upward
stock price manipulation.91 Because
short sale price test restrictions may
lessen some of these benefits, it is
important that any short sale price test
regulation be designed to limit any
potentially unnecessary impact on
legitimate short selling.
We also recognize that some market
participants may be advocating for a
short sale price test because such
participants may believe that it would
put them at a competitive advantage
over other participants who may be less
able to implement or adjust their trading
strategies to account for a short sale
price test or may otherwise benefit at
the expense of investors. Other market
participants may favor a short sale price
test due to concerns about the
imposition of a greater restriction on
short selling.
We believe that all arguments, both
for and against a short sale price test
rule and a possible circuit breaker rule,
should be considered and addressed in
light of current market conditions and
recent experience. Thus, we believe it is
important at this time to propose and
obtain informed public comment
regarding restricting the prices at which
90 See 2007 Price Test Adopting Release, 72 FR
at 36351.
91 See OEA Staff’s Summary Pilot Report, at 9.

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securities can be sold short before
determining whether or not to impose
any such restrictions, and what any
such restrictions should be, as well as
the proposed circuit breaker rules.
As discussed in detail below, we are
proposing two alternative price tests.
The first test would be the proposed
modified uptick rule that would be
based on the national best bid. The
second test would be the proposed
uptick rule that would be a modified
version of the tick test under former
Rule 10a–1. We are also proposing
amendments to Rule 200(g) of
Regulation SHO that would require that
a broker-dealer mark certain sell orders
‘‘short exempt.’’
In considering whether to reinstitute
short sale price test restrictions, it is
important that the Commission take into
account any extant empirical data and
analyses that would shed light on the
potential impact of such restrictions on
capital markets. In that connection, we
note that OEA has analyzed the impact
that a short sale price test might have
had during a thirteen day period in
September of 2008 92 as well as whether
and the extent to which short selling
drove prices downward during a
volatile period in early September
2008.93 The first of these studies noted
that, although its data were limited to
historical trade and quote data from a
period when no price test was in place
and the shape of order book and trading
sequences might have differed had a
price test been in place, a price test
would likely have been most restrictive
during periods of low volatility, with
greatest impact on short selling in lower
priced and more active stocks.94 The
second study found that long sellers
were primarily responsible for price
declines during this period. It also
found that, on average, short sale
volume as a fraction of total volume was
highest during periods of positive
returns, noting, however, that it was
also possible that there were instances
in which short selling activity peaked
during periods of extreme negative
returns.95 The Commission looks
forward to receiving additional analysis
of relevant data and factors.
Similarly, it is important that the
Commission take into account any
extant empirical data and analyses that
92 See Office of Economic Analysis, Analysis of a
short sale price test using intraday quote and trade
data, Dec. 17, 2008.
93 See Office of Economic Analysis, Analysis of
Short Selling Activity during the First Weeks of
September, 2008, Dec. 16, 2008.
94 See OEA analysis (Dec. 17, 2008), supra note
92.
95 See OEA analysis (Dec. 16, 2008), supra note
93.

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would shed light on the potential
impact of such restrictions on capital
markets, and it looks forward to
receiving analysis of relevant data.
III. Discussion of Proposed Short Sale
Restrictions
We discuss below our price test
approach, the alternatives contained
therein and our circuit breaker
approach. As noted above, we
preliminarily believe that a price test
based on the national best bid would
have advantages over a test based on the
last sale price in today’s markets. In
particular, we believe that bids
generally are a more accurate reflection
of current prices for a security than last
sale prices due to delays that can occur
in the reporting of last sale price
information and because last sale price
information is published to the markets
in reporting rather than trade sequence.
In adopting a final rule, we could take
several different approaches, or a
combination of approaches. For
example, we could consider a straight
prohibition approach prohibiting all
persons from effecting short sales under
a price test that references either the
national best bid or the last sale price;
a policies and procedures approach
imposing obligations on market
participants to adopt policies and
procedures to guard against
impermissible short selling; or a
combination of a straight prohibition
and a policies and procedures approach.
We discuss below the proposed
modified uptick rule which would
require trading centers to have policies
and procedures reasonably designed to
prevent the execution or display of short
sales at impermissible prices. As an
alternative, in Section II.B, below, we
discuss the proposed uptick rule that is
based on the last sale price and that,
similar to former Rule 10a–1, would
apply a straight prohibition approach
that would prohibit any person from
effecting short sales at impermissible
prices. However, either alternative
could ultimately be implemented
through a policies and procedures or
through a straight prohibition approach
or some combination thereof.
We also discuss below our circuit
breaker approach, which includes two
basic alternatives—a halt and a price
test. The proposed circuit breaker price
test rule would temporarily result in
either the proposed modified uptick
rule or the proposed uptick rule
applying to a specific security if there
was a severe decline in the price of that
security. As with the proposed short
sale price test rules, the proposed circuit
breaker price test rules could also be in
the form of either a straight prohibition

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or a policies and procedures approach.
The proposed circuit breaker halt rule,
which would temporarily halt short
selling in a specific security if there is
a severe price decline in that security,
could operate either in addition to, or in
place of, a proposed short sale price test
rule.

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A. Proposed Modified Uptick Rule
1. Operation of the Proposed Modified
Uptick Rule
We are proposing to amend Rule 201
of Regulation SHO to add a short sale
price test that would use the national
best bid as a reference point for short
sale orders. Specifically, the proposed
modified uptick rule would provide that
‘‘[a] trading center shall establish,
maintain, and enforce written policies
and procedures reasonably designed to
prevent the execution or display of a
short sale order in a covered security at
a down-bid price.’’ 96 The proposed
modified uptick rule defines a ‘‘downbid price’’ as ‘‘a price that is less than
the current national best bid or, if the
last differently priced national best bid
was greater than the current national
best bid, a price that is less than or
equal to the current national best
bid.’’ 97
Thus, under the proposed modified
uptick rule, a trading center would be
required to have policies and
procedures reasonably designed to
prevent it from executing or displaying
any short sale order, absent an
exception, at a price that is below the
national best bid. If the current national
best bid is below the last differently
priced national best bid, a trading center
would be required to have policies and
procedures reasonably designed to
prevent it from executing or displaying
the order unless the order is priced
above the current national best bid.
Such a rule might help prevent short
sellers from driving the market down. In
addition, the proposed modified uptick
rule might help prevent short sales from
being used as a tool to accelerate a
declining market.
The following example demonstrates
the operation of the proposed modified
uptick rule. If the current national best
bid in a security is $47.00, and the
immediately preceding national best bid
was $46.99 (i.e., the current bid is above
the previous bid), a trading center could
immediately execute a short sale order
at $47.00 or above. Similarly, a trading
center could display a short sale order
priced at $47.00 or above.98 If the
96 See

Proposed Rule 201(b)(1).
Rule 201(a)(2).
98 A trading center could display a short sale
order priced at $47.00 provided such order would
97 Proposed

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current national best bid in a security is
$47.00, and the immediately preceding
bid was $47.01 (i.e., the current bid is
below the previous bid), a trading center
could execute or display a short sale
order at a price above $47.00.99 If the
current national best bid in a security is
$47.00, and the immediately preceding
national best bid was $47.00, but that
bid was above the prior national best
bid (i.e., the last differently priced
national best bid), a trading center could
execute a short sale order at $47.00 or
above. Similarly, a trading center could
display a short sale order priced at
$47.00 or above.100 If the current
national best bid is $47.00, and the
immediately preceding national best bid
was $47.00, but that was below the prior
national best bid (i.e., the last differently
priced national best bid), a trading
center could execute or display a short
sale at a price above $47.00.101
The proposed modified uptick rule
would apply to any ‘‘covered security,’’
which is defined as an ‘‘NMS stock’’
under Rule 600(b)(47) of Regulation
NMS.102 Rule 600(b)(47) of Regulation
NMS defines an ‘‘NMS stock’’ as ‘‘any
NMS security other than an option.’’ 103
Rule 600(b)(46) of Regulation NMS
defines an ‘‘NMS security’’ as ‘‘any
security or class of securities for which
transaction reports are collected,
processed, and made available pursuant
to an effective transaction reporting
plan, or an effective national market
system plan for reporting transactions in
listed options.’’ 104 Thus, the proposed
modified uptick rule would apply to
any security or class of securities,
except options, for which transaction
reports are collected, processed, and
made available pursuant to an effective
transaction reporting plan.105 As a
result, the proposed modified uptick
rule generally would cover all
securities, except options, listed on a
national securities exchange whether
traded on an exchange or in the overcomply with the locking or crossing requirements
of any Commission or SRO rule. See, e.g., 17 CFR
242.610(d).
99 Any such execution or display would also need
to be in compliance with applicable rules regarding
minimum pricing increments. See 17 CFR 242.612.
100 A trading center could display a short sale
order priced at $47.00 provided such order would
comply with the locking or crossing requirements
of any Commission or SRO rule. See, e.g., 17 CFR
242.610(d).
101 Any such execution or display would also
need to be in compliance with applicable rules
regarding minimum pricing increments. See 17 CFR
242.612.
102 See proposed Rule 201(a)(1).
103 17 CFR 242.600(b)(47).
104 17 CFR 242.600(b)(46).
105 See proposed Rule 201(a)(1) (providing that a
‘‘covered security’’ shall mean all ‘‘NMS stock’’ as
defined in § 242.600(b)(47) of Regulation NMS).

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the-counter (‘‘OTC’’) market. It would
not include non-NMS stocks quoted on
the OTC Bulletin Board or elsewhere in
the OTC market. We are not proposing
to apply the proposed modified uptick
rule to non-NMS stocks quoted on the
OTC Bulletin Board or elsewhere in the
OTC market because a national best bid
and offer currently is not required to be
collected, consolidated, and
disseminated for such securities. In
addition, former Rule 10a–1 did not
apply to non-exchange listed securities
quoted on the OTC Bulletin Board or
elsewhere in the OTC market. We
recognize, however, that issuers of
securities quoted in the OTC market
may believe that they are particularly
vulnerable to abusive short selling.
Thus, we seek specific comment
regarding whether the proposed
modified uptick rule or some other form
of price test, or any other restrictions on
short sales, should apply to these types
of securities.
The scope of securities covered by the
proposed modified uptick rule would be
similar to the scope of securities
covered by former Rule 10a–1. Former
Rule 10a–1(a) applied to securities
registered on, or admitted to unlisted
trading privileges on, a national
securities exchange, if trades of the
security were reported pursuant to an
effective transaction reporting plan and
information regarding such trades was
made available in accordance with such
plan on a real-time basis to vendors of
market transaction information. All
securities that would have been subject
to former Rule 10a–1 would also be
subject to the proposed modified uptick
rule. In addition, certain securities, i.e.,
securities traded on Nasdaq prior to its
regulation as an exchange, that were not
subject to former Rule 10a–1, would be
subject to the proposed modified uptick
rule.106
Market information for NMS stocks,
including quotes, is disseminated
pursuant to three different national
market system plans.107 The national
106 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 letter to Marc Menchel,
Executive Vice President and General Counsel,
NASD, Inc., June 26, 2006.
107 The three joint-industry plans are (1) the
Consolidated Tape Association Plan (‘‘CTA Plan’’),
which disseminates transaction information for

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securities exchanges and FINRA
participate in these joint-industry plans
(‘‘Plans’’).108 The Plans establish three
separate networks to disseminate market
information for NMS stocks.109 These
networks are designed to ensure that,
among other things, consolidated bids
from the various trading centers that
trade NMS stocks are continually
collected and disseminated on a realtime basis, in a single stream of
information. Thus, all trading centers
would have access to the consolidated
bids for all the securities that would be
subject to the proposed modified uptick
rule.110 As discussed in further detail
below, however, we note that the
national best bid can change rapidly and
repeatedly and potentially there might
be latencies in obtaining data regarding
the national best bid.
The proposed modified uptick rule
would apply to any trading center that
executes or displays a short sale order
in a covered security. It would define a
‘‘trading center’’ as ‘‘a national
securities exchange or national
securities association that operates an
SRO trading facility, an alternative
trading system, an exchange market
maker, an OTC market maker, or any
other broker or dealer that executes
orders internally by trading as principal
or crossing orders as agent.’’ 111 The
proposed definition encompasses all
entities that may execute short sale
orders. Thus, the proposed modified
uptick rule would apply to any entity
that executes short sale orders.
Under the proposed modified uptick
rule, a trading center would be required
to have written policies and procedures
reasonably designed to prevent the
execution or display of short sale orders
on a down-bid price. Thus, upon receipt
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.
108 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).
109 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.
110 See Securities Exchange Act Release No.
51808 (June 9, 2005), 70 FR 37496, 37503 (June 29,
2005) (‘‘Regulation NMS Adopting Release’’).
111 See 17 CFR 242.600(b)(78); see also proposed
Rule 201(a)(7) (providing that the term ‘‘trading
center’’ shall have the same meaning as in
§ 242.600(b)(78) of Regulation NMS).

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of a short sale order, a trading center’s
policies and procedures would have to
require that the trading center be able to
determine whether or not the short sale
order could be executed or displayed in
accordance with the provisions of
proposed Rule 201(b)(1). If the order is
marketable at a permissible price, the
trading center would be able to present
the order for immediate execution or, if
not immediately marketable, hold for
execution later at its specified price.
The proposed modified uptick rule
would permit a trading center to display
an order provided it is permissibly
priced at the time the trading center
displays the order. If an order is
impermissibly priced, the trading center
could, in accordance with policies and
procedures reasonably designed to
prevent the execution or display of a
short sale order at a down-bid price, reprice the order at the lowest permissible
price and hold it for later execution at
its new price or better.112 As quoted
prices change, the proposed rule would
allow a trading center to repeatedly reprice and display an order at the lowest
permissible price down to the order’s
original limit order price (or, if a market
order, until the order is filled).
In addition, paragraph (b)(1)(i) of the
proposed rule would require a trading
center’s policies and procedures to be
reasonably designed to permit a trading
center to execute a displayed short sale
order at a down-bid price provided that,
at the time the order was displayed by
the trading center it was permissibly
priced, i.e., not on a down-bid price.113
This exception for properly displayed
short sale orders would help avoid a
conflict between the proposed modified
uptick rule and the ‘‘Quote Rule’’ under
Rule 602 of Regulation NMS. The Quote
Rule requires that, subject to certain
exceptions, the broker-dealer
responsible for communicating a
quotation shall be obligated to execute
any order to buy or sell presented to
him, other than an odd lot order, at a
price at least as favorable to such buyer
or seller as the responsible brokerdealer’s published bid or published
offer in any amount up to his published
quotation size.114 Thus, pursuant to this
112 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, but the
immediately preceding national best bid was $47.01
(i.e., the current bid is below the previous bid), the
trading center could re-price the order at the
permissible offer price of $47.01, and display the
order for execution at this new limit price.
113 See proposed Rule 201(b)(1)(i).
114 See 17 CFR 242.602(b)(2). We note that to the
extent that a short sale order is undisplayed, the
proposed modified uptick rule would prevent the
trading center from executing the order unless at
the time of execution, the execution price complies

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exception, a trading center would be
able to comply with the ‘‘firm quote’’
requirement of Rule 602 of Regulation
NMS by executing a presented order to
buy against its displayed offer to sell as
long as the displayed offer to sell was
permissibly priced under the proposed
rule at the time it was first displayed,
even if the execution of the transaction
would be on a down-bid price at the
time of execution.
Because a trading center could reprice and display a previously
impermissibly priced short sale order
the proposed modified uptick rule
potentially allows for the more efficient
functioning of the markets than the
proposed uptick rule because trading
centers would not have to reject or
cancel impermissibly priced orders
unless instructed to do so by the trading
center’s customer submitting the short
sale order. We recognize that some
trading centers might not want to reprice an impermissibly priced short sale
order. Thus, re-pricing would not be a
requirement under the proposed
modified uptick rule.
In addition, the proposed modified
uptick rule would provide trading
centers and their customers with
flexibility in determining how to handle
orders that are not immediately
executable or displayable by the trading
center because the order is
impermissibly priced. For example,
trading centers could offer their
customers various order types regarding
the handling of impermissibly priced
orders such that a trading center either
could reject an impermissibly priced
order or re-price the order at the lowest
permissible price until the order is
filled.
The proposed modified uptick rule
would focus on a trading center’s
written policies and procedures as the
mechanism through which to prevent
the execution or display of short sale
orders on a down-bid price. Under this
approach, trading centers would be
required to have policies and
procedures reasonably designed to
prevent the execution or display of short
sale orders at impermissible prices and
to surveil the effectiveness of the
policies and procedures. Thus, short
sale orders executed or displayed at
impermissible prices would require the
trading center that executed or
displayed the short sales to take prompt
action to remedy any deficiencies.
We also note that the policies and
procedures requirements of the
proposed modified uptick rule are
similar to those set forth under
with the proposed modified uptick rule at the time
of execution of the order.

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Regulation NMS.115 In accordance with
Regulation NMS, trading centers must
have in place written policies and
procedures in connection with that
Regulation’s order protection rule.116
Thus, trading centers are already
familiar with establishing, maintaining,
and enforcing trading-related policies
and procedures, including programming
their trading systems in accordance with
such policies and procedures. This
familiarity should reduce the
implementation costs of the proposed
modified uptick rule on trading centers.
Similar to the requirements under
Regulation NMS in connection with the
order protection rule,117 at a minimum,
a trading center’s policies and
procedures would need to enable a
trading center to monitor, on a real-time
basis, the national best bid, and whether
the current national best bid is an upor down-bid from the last differently
priced national best bid, so as to
determine the price at which the trading
center may execute or display a short
sale order. In addition, a trading center
would need to have policies and
procedures reasonably designed to
permit the execution or display of a
short sale order of a covered security
marked ‘‘short exempt’’ without regard
to whether the order is at a down-bid
price.118 A trading center’s policies and
procedures would not, however, have to
include mechanisms to determine on
which provision a broker-dealer is
relying in marking an order ‘‘short
exempt’’ in accordance with paragraph
(c) or (d) of the proposed modified
uptick rule.119
A trading center would also need to
take such steps as would be necessary
to enable it to enforce its policies and
procedures effectively. For example,
trading centers could establish policies
and procedures that could include
regular exception reports to evaluate
their trading practices. If a trading
center’s policies and procedures include
exception reports, any such reports
would need to be examined by the
trading center to affirm that a trading
center’s policies and procedures have
been followed by its personnel and
properly coded into its automated
systems and, if not, promptly identify
the reasons and take remedial action.
To help ensure compliance with the
proposed modified uptick rule, trading
centers could also have policies and
procedures that would enable a trading
115 See Regulation NMS Adopting Release, 70 FR
37496; see also 17 CFR 242.611.
116 See id.
117 See id.
118 See Section V below discussing short sale
orders marked ‘‘short exempt.’’
119 See proposed Rules 201(c) and 201(d).

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center to have a record identifying the
current national best bid at the time of
execution or display of a short sale
order, as well as the last differently
priced national best bid. Such
‘‘snapshots’’ of the market would aid
SROs in evaluating a trading center’s
written policies and procedures and
compliance with the proposed modified
uptick rule. In addition, such snapshots
would aid trading centers in verifying
that a short sale order was priced in
accordance with the provisions of
proposed Rule 201(b)(1) if bid
‘‘flickering,’’ i.e., rapid and repeated
changes in the current national best bid
during the period between identification
of the current national best bid and the
execution or display of the short sale
order, creates confusion regarding
whether or not the short sale order was
executed or displayed at a permissible
price. Snapshots of the market at the
time of execution or display of an order
would also aid trading centers in
dealing with time lags in receiving data
regarding the national best bid from
different data sources. A trading center’s
policies and procedures would be
required to address latencies in
obtaining data regarding the national
best bid. In addition, to the extent such
latencies occur, a trading center’s
policies and procedures would need to
implement reasonable steps to monitor
such latencies on a continuing basis and
take appropriate steps to address a
problem should one develop.
Trading centers would be required to
conduct surveillance under the
proposed modified uptick rule.
Proposed Rule 201(b)(2) provides that a
trading center must regularly surveil to
ascertain the effectiveness of the
policies and procedures required under
the proposed modified uptick rule and
must take prompt action to remedy
deficiencies in such policies and
procedures.120 This provision would
reinforce the ongoing maintenance and
enforcement requirements of proposed
Rule 201(b)(1) by explicitly assigning an
affirmative responsibility to trading
centers to surveil to ascertain the
effectiveness of their policies and
procedures.121 Thus, under the
proposed modified uptick rule, trading
centers would not be able to merely
establish policies and procedures that
may be reasonable when created and
assume that such policies and
procedures would continue to satisfy
the requirements of proposed Rule
201(b). Rather, trading centers would be
120 See

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

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required to regularly assess the
continuing effectiveness of their
procedures and take prompt action
when needed to remedy deficiencies. In
particular, trading centers would need
to engage in regular and periodic
surveillance to determine whether
executions or displays of short sale
orders on impermissible bids are
occurring without an applicable
exception and whether the trading
center has failed to implement and
maintain policies and procedures that
would have reasonably prevented such
impermissible executions or displays of
short sale orders.
The proposed modified uptick rule
would differ from the tick test of former
Rule 10a–1, and the alternative
proposed uptick rule discussed below.
Similar to former Rule 10a–1, the
alternative proposed uptick rule would
be based on the last sale price, rather
than the national best bid, and it would
not include an explicit policies and
procedures requirement. The proposed
uptick rule would prevent the execution
of short sale orders below the last sale
price, unless an exception applies. The
proposed modified uptick rule would
prevent the execution or display of short
sale orders below the current national
best bid, unless, among other things, the
order is marked ‘‘short exempt.’’
Because the proposed modified uptick
rule would use the national best bid as
its reference point, short selling could
occur below the last sale price.
The two proposed alternative short
sale price tests would operate similarly,
however, in that they would be
designed to achieve a similar purpose.
In addition, to help limit the impact of
the proposed alternative short sale price
tests on legitimate short selling, both
rules would permit short selling at an
increment above the national best bid,
or the last sale price, as applicable, in
a declining market. As commenters have
noted, the higher the increment the
more restrictive such an increment
could be on short selling and could even
be tantamount to a ban on short
selling.122
In addition, the proposed modified
uptick rule, similar to the proposed
uptick rule, would not result in the type
of disparate short sale regulation that
existed under former Rule 10a–1.123 The
proposed modified uptick rule would
apply a uniform rule to trades in the
same securities that can occur in
122 See supra note 94; see also letter from Dan
Mathisson, Managing Director, Credit Suisse
Securities USA, LLC, dated March 30, 2009 (‘‘letter
from Credit Suisse’’) (stating that ‘‘requiring an
uptick of more than one cent would be tantamount
to a total ban for any stock that trades actively’’).
123 See proposed Rule 201(e).

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multiple, dispersed, and diverse
markets. One of the reasons for the
elimination of former Rule 10a–1 and
the prohibition on any SRO from having
a short sale price test in July 2007 was
because the application of short sale
price tests had become disjointed with
different price tests applying to the
same securities trading in different
markets. Under the proposed modified
uptick rule, all covered securities,
wherever traded, would be subject to
one short sale price test, the proposed
modified uptick rule. To further this
goal of having a uniform short sale price
test, subsection (e) of proposed Rule 201
would provide that no SRO shall have
any rule that is not in conformity with,
or conflicts with proposed Rule 201.124
In addition, just as market participants
would be familiar with the proposed
uptick rule because it is a modified
version of former Rule 10a–1 that was
in existence for almost 70 years, market
participants would also be familiar with
using the current national best bid as a
reference point because NASD’s bid test,
which was in existence from 1994 to
mid-2007, was based on the current
national best bid.125
We preliminarily believe that a short
sale price test based on the national best
bid would be more suitable to today’s
markets than a short sale price test
based on the last sale price. Although
we recognize that a quotation proposes
a transaction, whereas the last trade
price reflects an actual trade, we note
that pursuant to Commission and SRO
rules, quotations for all covered
securities must be firm.126 By requiring
that quotations are firm, the
Commission intended to ensure that
quotations provide reliable information
to the marketplace so that broker-dealers
are able to make best execution
decisions for their customers’ orders
and customers are able to make
informed investment decisions.127
Moreover, quotation information has
significant value to the marketplace
because it reflects the various factors
affecting the market, including current
levels of buying and selling interest.128
Both retail and institutional investors
rely on quotation information to
124 See

proposed Rule 201(e).
supra note 27 (discussing NASD Rule
3350). Similar to the proposed modified uptick rule,
NASD’s bid test referenced the national best bid
and was designed to help prevent short selling at
or below the current national best bid in a declining
market. NASD’s bid test, however, took a straight
prohibition approach, rather than a policies and
procedures approach, and, by its terms, applied
only to Nasdaq Global Market securities.
126 See e.g., 17 CFR 242.602.
127 See Securities Exchange Act Release No.
43085 (July 28, 2000), 65 FR 47918 (Aug. 4, 2000).
128 See id.

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understand the market forces at work at
a given time and to assist in the
formulation of investment strategies.129
Further, we believe that bids generally
are a more accurate reflection of current
prices for a security because changes in
the national best bid are sequenced
across trading centers. In contrast,
transactions may be reported within a
90 second window, which can easily
result in out-of-sequence reports. Even
transactions that are executed and
reported automatically may be out of
sequence if they occur in different
trading centers. For example, trade
reporting for covered securities can
involve multiple trading centers
reporting trades in the same stock from
different locations using different means
of reporting. In addition, trades are
published in reporting sequence, not
trade sequence.130 Thus, for those
covered securities for which a
significant amount of trading occurs
manually, or in multiple trading centers,
a price test based on the national best
bid may be a fairer and more effective
means of regulating short selling than a
test based on the last sale price because
the manner in which trades are reported
may create up-ticks and down-ticks that
may not accurately reflect actual price
movements in the security for the
purpose of a test based on the last sale
price.
The proposed modified uptick rule
would be designed to restrict short
selling at successively lower prices and,
thereby, might help prevent short
selling, including potentially abusive or
manipulative short selling, from being
used as a tool to drive the markets down
and from being used to accelerate a
decline in the market by exhausting all
remaining bids at one price level. By
seeking to advance these goals, the
proposed modified uptick rule might
restore investor confidence in our
securities markets.
In addition, the proposed modified
uptick rule would be designed to
preserve instant execution and liquidity
by allowing relatively unrestricted short
selling in an advancing market. As
discussed above, one of the benefits of
legitimate short selling is that it
provides market liquidity by, for
example, adding to the selling interest
of stock available to purchasers, and,
when sellers are covering their short
sales, adding to the buying interest of
stock available to sellers.
In addition, we believe the proposed
modified uptick rule would
accommodate trading systems and
strategies used in the marketplace today,
129 See
130 See

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18053

such as the automated trade matching
systems that offer price improvement
based on the national best bid and offer.
These passive pricing systems often
effect trades at an independentlyderived price, such as at the mid-point
of the bid-offer spread. Such pricing
would often not satisfy the tick test of
former Rule 10a–1 because matches
could potentially occur at a price below
the last reported sale price. Thus, we
provided a limited exception from
former Rule 10a–1 for these trading
systems.131 The proposed modified
uptick rule would accommodate
matching systems that execute trades at
an independently derived price because
such systems are designed so that
matches occur above the current
national best bid.132 Thus, even in a
declining market where a trading center
could execute or display an order only
if it is priced above the current national
best bid at the time of execution or
display, such matching system
executions would comply with the
proposed modified uptick rule.
If we were to adopt the proposed
modified uptick rule, we are proposing
that there would be a three month
implementation period such that trading
centers would have to comply with the
proposed modified uptick rule three
months following the effective date of
the proposed modified uptick rule. We
believe that a proposed three month
implementation period would provide
trading centers with sufficient time in
which to modify their systems and
procedures in order to comply with the
requirements of the proposed modified
uptick rule. Because the proposed
modified uptick rule would require the
implementation of policies and
procedures similar to those required for
trading centers under Regulation NMS,
we believe that a three month
implementation period would be
reasonable. The addition of an
implementation period should alleviate
any potential disruptive effects of the
proposal.
We realize, however, that a shorter or
longer implementation period may be
manageable or preferable. In the
Solicitation of Comment below, we seek
specific comment as to what length of
implementation period would be
necessary or appropriate, and why, such
that trading centers would be able to
131 See,

e.g., supra note 26.
id.; see e.g., letter from James A.
Brigagliano, Acting Associate Director, Division of
Market Regulation, to Alan J. Reed, Jr., First Vice
President and Director of Compliance, Instinet
Group, LLC. (June 15, 2006) (granting Instinet
modified exemptive relief from Rule 10a–1 for
certain transactions executed through Instinet’s
Intraday Crossing System); POSIT letter.
132 See

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meet the proposed short sale price test
restrictions, if adopted.
2. ‘‘Short Exempt’’ Provision of
Proposed Modified Uptick Rule
Paragraph (b)(1)(ii) of the proposed
modified uptick rule provides that a
trading center’s policies and procedures
must be reasonably designed to permit
the execution or display of a short sale
order of a covered security marked
‘‘short exempt’’ without regard to
whether the order is at a down-bid
price.133 Thus, a trading center’s
policies and procedures must be
reasonably designed to recognize when
an order is marked ‘‘short exempt’’ so
that the trading center’s policies and
procedures would not prevent the
execution or display of such orders on
a down-bid price.134
As discussed in more detail below,
proposed Rule 200(g)(2) of Regulation
SHO provides that a sale order shall be
marked ‘‘short exempt’’ only if the
provisions of paragraph (c) or (d) of
proposed Rule 201 are met.135
Paragraphs (c) and (d) of the proposed
modified uptick rule set forth when a
broker-dealer may mark a short sale
order ‘‘short exempt.’’ The provisions
contained in paragraphs (c) and (d) of
the proposed modified uptick rule are
designed to promote the workability of
the proposed modified uptick rule,
while at the same time furthering the
Commission’s stated goals.
In addition, we note that the
provisions contained in paragraph (d) of
proposed Rule 201 would parallel
exceptions to former Rule 10a–1 and
exemptive relief granted pursuant to
that rule. These exceptions and
exemptions from former Rule 10a–1, as
applicable, had been in place under
former Rule 10a–1 for several years. We
are not aware of any reason that the
rationales underlying these exceptions
and exemptions from former Rule 10a–
1 would not still hold true today.
Moreover, due to the limited scope of
these exceptions and exemptions to
former Rule 10a–1, we do not believe
that including provisions that would
parallel these exceptions and
exemptions to former Rule 10a–1 would
undermine the Commission’s stated
goals for proposing short sale price test
restrictions.
Thus, the provisions in proposed Rule
201(d) parallel exceptions to and
exemptive relief granted under former
Rule 10a–1, as applicable.136 As set
133 See

proposed Rule 201(b)(1)(ii).
proposed Rule 201(b)(1)(ii).
135 See Section V below discussing proposed Rule
200(g)(2).
136 We note that NASD Rule 3350 contained
exceptions to that rule similar to exceptions to
134 See

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forth in more detail below, however, we
seek comment regarding each of these
provisions, including whether or not
these provisions would be appropriate
or necessary under the proposed
modified uptick rule.
a. Broker-Dealer Provision
Proposed Rule 201(c) provides that a
broker-dealer may mark a short sale
order of a covered security ‘‘short
exempt’’ if a broker-dealer that submits
a short sale order to a trading center
identifies that the short sale order is not
on a down-bid price at the time of
submission of the order to the trading
center.137 The proposed rule would
require any broker-dealer relying on this
provision to establish, maintain, and
enforce written policies and procedures
that are reasonably designed to prevent
the incorrect identification of orders as
being priced in accordance with the
requirements of proposed Rule
201(c)(1).138
We are proposing this provision to
provide broker-dealers with the option
to manage their order flow, rather than
having to always rely on their trading
centers to manage their order flow on
their behalf. In addition, we note that
this provision would not undermine the
Commission’s goals for short sale
regulation because any broker-dealer
marking an order ‘‘short exempt’’ in
accordance with this provision would
have to address whether its short sale
order was not on a down-bid price at the
time of submission of the order to a
trading center.
As discussed in more detail below, we
are proposing amendments to Rule
200(g) of Regulation SHO to require, in
part, that a sale order shall be marked
‘‘short exempt’’ only if the provisions of
paragraph (c) of proposed Rule 201 of
the proposed modified uptick rule are
met.139
To mark an order ‘‘short exempt’’
pursuant to paragraph (c) of the
proposed modified uptick rule, the
broker-dealer must have mechanisms in
place to enable the broker-dealer to
identify the short sale order as priced in
accordance with the provisions of
proposed Rule 201(c)(1). In accordance
with proposed Rule 201(c)(1), these
mechanisms must include written
policies and procedures reasonably
former Rule 10a–1. In addition, we note NASD Rule
3350 included an exception related to bona fide
market making activity. See infra note 190 and
accompanying text (discussing our decision not to
propose that a broker-dealer may mark an order
‘‘short exempt’’ in connection with bona fide
market making activity). See also supra note 125.
137 See proposed Rule 201(c)(1).
138 See proposed Rule 201(c)(1).
139 See proposed Rule 200(g)(2).

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designed to prevent the incorrect
identification of orders as being
permissibly priced in accordance with
the provisions of proposed Rule
201(c)(1).140 Thus, although a brokerdealer relying on this provision in
marking an order ‘‘short exempt’’ would
not need to identify the order as
permissibly priced to the trading center,
it would need to have written policies
and procedures in place reasonably
designed to enable it to identify that an
order was permissibly priced at the time
of submission of the order to a trading
center.141
At a minimum, a broker-dealer’s
policies and procedures would need to
be reasonably designed to enable a
broker-dealer to monitor, on a real-time
basis, the national best bid, and whether
the current national best bid is an upor down-bid from the last differently
priced national best bid, so as to
determine the price at which the brokerdealer may submit a short sale order to
a trading center in compliance with the
provisions of proposed Rule 201(c)(1).
A broker-dealer would also need to
take such steps as would be necessary
to enable it to enforce its policies and
procedures effectively.142 For example,
broker-dealers could establish policies
and procedures that could include
regular exception reports to evaluate
their trading practices. If a brokerdealer’s policies and procedures include
exception reports, any such reports
would need to be examined to affirm
that a broker-dealer’s policies and
procedures have been followed by its
personnel and properly coded into its
automated systems and, if not, promptly
identify the reasons and take remedial
action.
To ensure compliance with proposed
Rule 201(c)(1), a broker-dealer could
also have policies and procedures that
would enable it to have a record
identifying the current national best bid
at the time of submission of a short sale
order, as well as the last differently
priced national best bid. Such
‘‘snapshots’’ of the market would also
aid SROs in evaluating a broker-dealer’s
written policies and procedures and
compliance with proposed Rule 201(c).
In addition, such snapshots would aid
broker-dealers in verifying that a short
sale order was priced in accordance
with the provisions of proposed Rule
201(c)(1) if bid flickering during the
period between identification of the
current national best bid and the
140 See

proposed Rule 201(c)(1).
policies and procedures would be
similar to those required for trading centers
complying with paragraph (b) of the proposed
modified uptick rule.
142 See proposed Rule 201(c)(1).
141 Such

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submission of the short sale order to a
trading center creates confusion
regarding whether or not the short sale
order was submitted at a permissible
price. Snapshots of the market at the
time of submission of an order would
also aid broker-dealers in dealing with
time lags in receiving data regarding the
national best bid from different data
sources. A broker-dealer’s policies and
procedures would be required to
address any such latencies in obtaining
data regarding the national best bid. In
addition, to the extent such latencies
occur, a broker-dealer’s policies and
procedures would need to implement
reasonable steps to monitor such
latencies on a continuing basis and take
appropriate steps to address a problem
should one develop.
Surveillance would be a required part
of a broker-dealer’s satisfaction of its
legal obligations. Proposed Rule
201(c)(1) provides that a broker-dealer
must regularly surveil to ascertain the
effectiveness of the policies and
procedures required under proposed
Rule 201(c)(2) and must take prompt
action to remedy deficiencies in such
policies and procedures.143 This
provision would reinforce the ongoing
maintenance and enforcement
requirements of proposed Rule 201(c)(2)
by explicitly assigning an affirmative
responsibility to broker-dealers to
surveil to ascertain the effectiveness of
their policies and procedures.144 Thus,
under proposed Rule 201(c)(1) and
(c)(2), broker-dealers would not be able
to merely establish policies and
procedures that may be reasonable
when created and assume that such
policies and procedures would continue
to satisfy the requirements of the
proposed rule. Rather, broker-dealers
would be required to regularly assess
the continuing effectiveness of their
procedures and take prompt action
when needed to remedy deficiencies. In
particular, each broker-dealer would
need to engage in regular and periodic
surveillance to determine whether it is
submitting short sale orders marked
‘‘short exempt’’ without complying with
the requirements of proposed Rule
201(c)(1) and whether the broker-dealer
has failed to implement and maintain
policies and procedures that would
have reasonably prevented such
impermissible submissions.
b. Seller’s Delay in Delivery
The proposed modified uptick rule
provides that a broker-dealer may mark
143 See

proposed Rule 201(c)(2).
note that Rule 611(a)(2) of Regulation NMS
contains a similar surveillance provision. See 17
CFR 242.611(a)(2).
144 We

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an order ‘‘short exempt’’ if the brokerdealer has a reasonable basis to believe
that the seller owns the security being
sold and that the seller intends to
deliver the security as soon as all
restrictions on delivery have been
removed.145 Specifically, proposed Rule
201(d)(1) provides that a broker-dealer
may mark a short sale order of a covered
security ‘‘short exempt’’ if the brokerdealer has a reasonable basis to believe
the short sale order of a covered security
is by a person that is deemed to own the
covered security pursuant to Rule 200 of
Regulation SHO,146 provided that the
person intends to deliver the security as
soon as all restrictions on delivery have
been removed.147
Rule 200(g)(1) of Regulation SHO
provides that a sale can be marked
‘‘long’’ only if the seller is deemed to
own the security being sold and either
(i) the security is in the broker-dealer’s
physical possession or control, or (ii) it
is reasonably expected that the security
will be in the broker-dealer’s physical
possession or control by settlement of
the transaction.148 Thus, even where a
seller owns a security, if delivery will be
delayed, such as in the sale of formerly
restricted securities pursuant to Rule
144 of the Securities Act of 1933, or
where a convertible security, option, or
warrant has been tendered for
conversion or exchange, but the
underlying security is not reasonably
expected to be received by settlement
date, such sales must be marked
‘‘short.’’ As a result, proposed Rule
201(d)(1) would be necessary to allow
for sales of securities that although
owned, are subject to the provisions of
Regulation SHO governing short sales
due solely to the seller being unable to
deliver the security to its broker-dealer
prior to settlement based on
circumstances outside the seller’s
control.
c. Odd Lot Transactions
Proposed Rule 201(d)(2) would
provide that a broker-dealer may mark
a short sale order ‘‘short exempt’’ if the
145 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
proposed Rule 201(d)(1) parallels the exception
contained in former Rule 10a–1(e)(1).
146 17 CFR 242.200.
147 See proposed Rule 201(d)(1). This proposed
provision is also consistent with Rule 203(b)(2)(ii)
of Regulation SHO that provides an exception from
the ‘‘locate’’ requirement of Rule 203(b)(1) of
Regulation SHO for ‘‘[a]ny sale of a security that a
person is deemed to own pursuant to § 242.200,
provided that the broker or dealer has been
reasonably informed that the person intends to
deliver such security as soon as all restrictions on
delivery have been removed * * *’’ 17 CFR
242.203(b)(2)(ii).
148 See 17 CFR 242.200(g)(1).

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broker-dealer has a reasonable basis to
believe that the short sale order is by a
market maker to off-set a customer oddlot 149 order or liquidate an odd-lot
position which changes such brokerdealer’s position by no more than a unit
of trading.150
Under former Rule 10a–1, an
exception for certain odd-lot
transactions was created in an effort to
reduce the burden and inconvenience
that short sale restrictions would place
on odd-lot transactions. In 1938, the
Commission found that odd-lot
transactions played a very minor role in
potential manipulation by short selling.
Initially, sales of odd-lots were not
subject to the restrictions of Rule 10a–
1.151 However, the Commission became
concerned over the volume of odd-lot
transactions, which possibly indicated
that the exception was being used to
circumvent the rule. As a result, the
exception was changed to include the
two odd lot exceptions described
below.152
Former Rule 10a–1(e)(3) contained a
limited exception for odd-lot dealers
registered in the security and third
market makers. The exception allowed
short sales by odd-lot dealers registered
in the security and by third market
makers of covered securities to fill
customer odd lot orders. Former Rule
10a–1(e)(4) provided an exception
under the rule for any sale to liquidate
an odd-lot position by a single round lot
sell order that changed the brokerdealer’s position by no more than a unit
of trading.
We believe that a provision that
would allow a broker-dealer to mark a
short sale order ‘‘short exempt’’ if it has
a reasonable basis to believe that the
149 Proposed 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).
150 See proposed Rule 201(d)(2). SRO rules define
a ‘‘unit of trading’’ or ‘‘normal unit of trading,’’ and
generally means 100 shares, i.e., a round lot. For
example, FINRA Rule 6320A(7) defines a ‘‘normal
unit of trading’’ to mean ‘‘100 shares of a security
unless, with respect to a particular security, FINRA
determines that a normal unit of trading shall
constitute other than 100 shares.’’ NYSE Rule 55
states that ‘‘[t]he unit of trading in stocks shall be
100 shares, except that in the case of certain stocks
designated by the Exchange the unit of trading shall
be such lesser number of shares as may be
determined by the Exchange, with respect to each
stock so designated * * *.’’
151 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 supra note 24, Former Rule
10a–1 Adopting Release 3 FR 213.
152 See Securities Exchange Act Release No.
11030 (Sept. 27, 1974), 39 FR 35570 (Oct. 2, 1974).

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short sale order is by a market maker to
off-set a customer odd-lot order or
liquidate an odd-lot position which
changes such broker-dealer’s position by
no more than a unit of trading would
continue to be of utility under the
proposed modified uptick rule because
it would not be in conflict with the
goals of the proposed rule.
Thus, the provision in proposed Rule
201(d)(2) parallels the exceptions in
subsections (e)(3) and (e)(4) of former
Rule 10a–1. In addition, however, we
propose extending the provision to
cover all market makers acting in the
capacity of an odd-lot dealer. When
former Rule 10a–1 was adopted, odd-lot
dealers dealt exclusively with odd-lot
transactions, and were so registered.
Today, market makers registered in a
security typically also act as odd-lot
dealers of the security. Thus, we
propose to broaden the provision in
proposed Rule 201(d)(2) to all brokerdealers acting as ‘‘market makers’’ in
odd lots.153
We believe that this provision would
be appropriate. Because odd-lot
transactions by market makers to
facilitate customer orders are not of a
size that could facilitate a downward
movement in the market, we do not
believe that proposed Rule 201(d)(2)
would adversely affect the goals of short
sale regulation that the proposed
modified uptick rule seeks to advance.
Thus, we believe that a broker-dealer
should be able to mark such orders
‘‘short exempt’’ so that those acting in
the capacity of a ‘‘market maker,’’ with
the commensurate negative and positive
obligations, would be able to off-set a
customer odd-lot order and liquidate an
odd-lot position without a trading
center’s policies and procedures
preventing the execution or display of
such orders at a down-bid price.

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d. Domestic Arbitrage
Proposed Rule 201(d)(3) would
provide that a broker-dealer may mark
‘‘short exempt’’ short sale orders
associated with certain bona fide
domestic arbitrage transactions.
Subsection (e)(7) of former Rule 10a–1
contained an exception related to
domestic arbitrage.154 That exception
applied to bona fide arbitrage
undertaken to profit from a current
difference in price between a
convertible security and the underlying
153 Section 3(a)(38) of the Exchange Act defines
a ‘‘market maker,’’ and includes specialists. See 15
U.S.C. 78c(a)(38).
154 See Securities Exchange Act Release No. 1645
(Apr. 8, 1938).

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common stock.155 The term ‘‘bona fide
arbitrage’’ describes an activity
undertaken by market professionals in
which essentially contemporaneous
purchases and sales are effected in order
to lock in a gross profit or spread
resulting from a current differential in
pricing of two related securities.156 For
example, a person may sell short
securities to profit from a current price
differential based upon a convertible
security that entitles him to acquire an
equivalent number of securities of the
securities sold short. We continue to
believe that bona fide arbitrage activities
are beneficial to the markets because
they tend to reduce pricing disparities
between related securities.157 Thus,
bona fide arbitrage transactions promote
market efficiency.
Proposed Rule 201(d)(3) would
parallel the exception in former Rule
10a–1(e)(7). Specifically, proposed Rule
201(d)(3) would provide that a brokerdealer may mark a short sale order of a
covered security ‘‘short exempt’’ if the
broker-dealer has a reasonable basis to
believe that the short sale order is ‘‘for
a good faith account by a person who
owns another security by virtue of
which he is, or presently will be,
entitled to acquire an equivalent
number of securities of the same class
as the securities sold, provided such
sale, or the purchase which such sale
offsets, is effected for the bona fide
purpose of profiting from the difference
between the price of the security sold
and the security owned and that such
right of acquisition was originally
attached to or represented by another
security or was issued to all the holders
of any such securities of the issuer.’’ 158
155 See

Securities Exchange Act Release No.
42037 (Oct. 20, 1999), 64 FR 57996 (Oct. 28, 1999)
(‘‘1999 Concept Release’’).
156 1999 Concept Release, 64 FR at n.54 and
accompanying text (discussing the domestic
arbitrage exception under former Rule 10a–1). See
also Section 220.6(b) of Regulation T which states
that the term ‘‘bona fide arbitrage’’ means: ‘‘(1) A
purchase or sale of a security in one market together
with an offsetting sale or purchase of the same
security in a different market at as nearly the same
time as practicable for the purpose of taking
advantage of a difference in prices in the two
markets; or (2) A purchase of a security which is,
without restriction other than the payment of
money, exchangeable or convertible within 90
calendar days of the purchase into a second security
together with an offsetting sale of the second
security at or about the same time, for the purpose
of taking advantage of a concurrent disparity in the
prices of the two securities.’’ 12 CFR 220.6(b). See
also Securities Exchange Act Release No. 15533
(Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979)
(interpretation concerning the application of
Section 11(a)(1) to bona fide arbitrage).
157 See Securities Exchange Act Release No.
15533 (Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979)
(interpretation concerning the application of
Section 11(a)(1) to bona fide arbitrage).
158 Proposed Rule 201(d)(3).

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The domestic arbitrage exception in
former Rule 10a–1 was intended to be
consistent with the arbitrage provision
of Regulation T.159 Thus, consistent
with that provision, former Rule 10a–
1(e)(7) referred to a ‘‘special arbitrage
account’’ and not a ‘‘good faith
account.’’ 160 The Federal Reserve Board
amended Regulation T in 1998 to
eliminate the ‘‘special arbitrage
account’’ and allow the functions
formerly effected in that account to be
effected in a ‘‘good faith account.’’ Thus,
proposed Rule 201(d)(3) also refers to a
‘‘good faith account.’’ We note,
however, that we request specific
comment regarding whether or not the
use of a ‘‘good faith account’’ or any
other separate account continues to be
appropriate or necessary for purposes of
this proposed Rule 201(d)(3).
Because allowing domestic arbitrage
at a down-bid price would potentially
promote market efficiency, the proposed
modified uptick rule would include a
limited provision to allow brokerdealers to mark short sale orders ‘‘short
exempt’’ provided the broker-dealer has
a reasonable basis to believe that the
conditions in proposed Rule 201(d)(3)
have been met. Thus, the proposed rule
is designed to permit the execution or
display on a down-bid price of such
orders in connection with bona fide
arbitrage transactions involving
convertible, exchangeable, and other
rights to acquire the securities sold
short, where such rights of acquisition
were originally attached to, or
represented by, another security, or
were issued to all the holders of any
such class of securities of the issuer.
e. International Arbitrage
Proposed Rule 201(d)(4) would
provide that a broker-dealer may mark
‘‘short exempt’’ short sale orders
associated with certain international
arbitrage transactions. Former Rule 10a–
1(e)(8) included an international
arbitrage exception that was adopted in
1939.161 In adopting the exception, the
Commission stated that it was necessary
159 See

12 CFR 220.6.
220.3(b) of Regulation T, titled
‘‘Separation of accounts,’’ generally provides that
requirements for an account may not be met by
considering items in any other account. Further,
Regulation T identifies three types of customer
accounts—cash accounts, margin accounts and
good faith accounts—in which customer
transactions may be booked. A broker-dealer can
extend credit to customers through a margin
account or a good faith account. Generally,
positions held in a good faith account are subject
to good faith margin, whereas positions held in a
margin account are subject to the margin
requirements otherwise set forth in Regulation T
and SRO margin requirements.
161 See Securities Exchange Act Release No. 2039
(Mar. 10, 1939), 4 FR 1209 (Mar. 14, 1939).
160 Section

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to facilitate ‘‘transactions which are of a
true arbitrage nature, namely,
transactions in which a position is taken
on one exchange which is to be
immediately covered on a foreign
market.’’ 162 We believe likewise that
such transactions would have utility
under the proposed modified uptick
rule. As discussed above in connection
with domestic arbitrage, bona fide
arbitrage transactions promote market
efficiency because they equalize prices
at an instant in time in different markets
or between relatively equivalent
securities. Thus, we do not believe that
permitting broker-dealers to mark these
orders ‘‘short exempt’’ would
undermine the goals of short sale price
test regulation.
Proposed Rule 201(d)(4) would
parallel the exception contained in
former Rule 10a–1(e)(8). Specifically,
proposed Rule 201(d)(4) would provide
that a broker-dealer may mark a short
sale order of a covered security ‘‘short
exempt’’ if the broker-dealer has a
reasonable basis to believe that the short
sale order is ‘‘for a good faith account
submitted to profit from a current price
difference between a security on a
foreign securities market and a security
on a securities market subject to the
jurisdiction of the United States,
provided that the short seller has an
offer to buy on a foreign market that
allows the seller to immediately cover
the short sale at the time it was
made.’’ 163
In proposed Rule 201(d)(4), we have
simplified the language of former Rule
10a–1(e)(8) to make it more
understandable.164 In addition, we have
changed the reference in former Rule
10a–1(e)(8) from a ‘‘special international
arbitrage account’’ to a ‘‘good faith
account.’’ As discussed above in
connection with the domestic arbitrage
provision of proposed Rule 201(d)(3),
this revision is necessary to make the
proposed provision consistent with the
arbitrage provision in Regulation T. We
note, however, that we request specific
162 See

id.

163 Proposed

Rule 201(d)(4).
Rule 10a–1(e)(8) provided that the
short sale price test restrictions of that rule shall not
apply to: ‘‘Any sale of a security registered on, or
admitted to unlisted trading privileges on, a
national securities exchange effected for a special
international arbitrage account for the bona fide
purpose of profiting [sic] from a current difference
between the price of such security on a securities
market not within or subject to the jurisdiction of
the United States and on a securities market subject
to the jurisdiction of the United States; provided the
seller at the time of such sale knows or, by virtue
of information currently received, has reasonable
grounds to believe that an offer enabling him to
cover such sale is then available to him such foreign
securities market and intends to accept such offer
immediately.’’

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comment regarding whether or not the
use of a ‘‘good faith account’’ or any
other separate account continues to be
appropriate or necessary for purposes of
proposed Rule 201(d)(4).
In addition, we have incorporated
language from the exception in former
Rule 10a–1(e)(12) that provided that, for
purposes of the international arbitrage
exception, a depository receipt for a
security shall be deemed to be the same
security represented by the receipt. This
language was originally included in the
Commission’s 1939 release adopting the
international arbitrage exception, but
was incorporated separately in former
Rule 10a–1(e)(12).165 We likewise
believe this language is appropriate and
should be incorporated into proposed
Rule 201(d)(4). We seek comment,
however, regarding whether for
purposes of the international arbitrage
provision, a depository receipt for a
security should be deemed to be the
same security represented by the
receipt.
As with the exception in former Rule
10a–1(e)(8), proposed Rule 201(d)(4)
would apply only to bona fide arbitrage
transactions. Thus, this provision would
only be applicable if at the time of the
short sale there is a corresponding offer
in a foreign securities market, so that the
immediate covering purchase would
have the effect of neutralizing the short
sale. We believe proposed Rule
201(d)(4) would be necessary to
facilitate arbitrage transactions in which
a position is taken in a security in the
U.S. market, and which is to be
immediately covered in a foreign
market.166
f. Over-Allotments and Lay-Off Sales
Proposed Rule 201(d)(5) would
provide that a broker-dealer may mark
‘‘short exempt’’ short sale orders by
underwriters or syndicate members
participating in a distribution in
connection with an over-allotment, and
any short sale orders with respect to layoff sales by such persons in connection
with a distribution of securities through
a rights or standby underwriting
commitment.
Former Rule 10a–1(e)(10) contained
an exception for over-allotment and layoff sales.167 Although the exception was
not adopted until 1974, the
Commission’s approval of the concept
of excepting over-allotments and lay-off
165 See

supra note 161.
note that the requirement that the
transaction be ‘‘immediately’’ covered on a foreign
market requires the foreign market to be open for
trading at the time of the transaction. See 2003
Regulation SHO Proposing Release, 68 FR at 62986.
167 See Securities Exchange Act Release No.
11030 (Sept. 7, 1974), 39 FR 35570 (Oct. 2, 1974).
166 We

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18057

sales from short sale rules is longstanding.168 In addition, we note that
recently we excepted these sales from
the July Emergency Order, which among
other things required that short sellers
borrow or arrange to borrow securities
prior to effecting a short sale, stating
that it was not necessary for the Order
to cover such sales because such activity
is covered by Regulation M under the
Exchange Act,169 an anti-manipulation
rule.170 In accordance with the longstanding Commission position regarding
these sales, we are including through
proposed Rule 201(d)(5) a provision for
short sale orders in connection with
over-allotment and lay-off sales that
would parallel the exception in former
Rule 10a–1(e)(10).
g. Riskless Principal Transactions
Proposed Rule 201(d)(6) would
provide that a broker-dealer may mark
‘‘short exempt’’ short sale orders where
broker-dealers are facilitating customer
buy orders or sell orders where the
customer is net long, and the brokerdealer is net short but is effecting the
sale as riskless principal.171
In 2005, the Commission granted
exemptive relief under former Rule
10a–1 for any broker-dealer that
facilitates a customer buy or long sell
order on a riskless principal basis.172 In
granting the relief, the Commission
noted representations made in the letter
requesting relief that in the situation
where the amount of securities that the
broker-dealer purchases for the
customer may not be sufficient to give
the broker-dealer an overall net ‘‘long’’
position, former Rule 10a–1 would
constrain the ability of the broker-dealer
to fill the customer buy order. Further,
the Commission noted representations
in the letter requesting relief that
because such short sales would be
effected only in response to a customer
buy order, this should vitiate any
concerns about such sales having a
depressing impact on the security’s
price.173
In addition, the Commission noted
representations made in the letter
168 See, e.g., Securities Exchange Act Release No.
3454 (July 6, 1946), in which the Commission
approved the NYSE’s special offering plan, which
permitted short sales in the form of over-allotments
to facilitate market stabilization.
169 17 CFR 242.100 et seq.
170 See Securities Exchange Act Release No.
58190 (July 18, 2008), 73 FR 42837 (July 23, 2008)
(amending the July Emergency Order to include
exceptions for certain short sales).
171 See proposed Rule 201(d)(6).
172 See letter from James A. Brigagliano to Ira
Hammerman, Senior Vice President and General
Counsel, Securities Industry Association, dated July
18, 2005 (‘‘Riskless Principal Letter’’).
173 See id.

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requesting relief that where a brokerdealer is facilitating a customer long
sale order in a riskless principal
transaction, because the ultimate seller
is long the shares being sold, these
transactions present none of the
potential abuses that former Rule
10a–1 was designed to address.174 The
Commission also noted representations
that the application of former Rule
10a–1 to riskless principal transactions
involving a customer long sale can
inhibit the broker-dealer’s ability to
provide timely (or any) execution to
such customer long sale. Specifically, if
the broker-dealer has a net short
position, the broker-dealer will be
restricted from executing its own
principal trade to complete the first leg
of the riskless principal transaction.175
Thus, compliance with former Rule
10a–1 would adversely affect a brokerdealer’s ability to provide best execution
to a customer order.176
Consistent with the relief granted in
the Riskless Principal Letter, we believe
that including a provision to permit a
broker-dealer to mark ‘‘short exempt’’
short sale orders in connection with
riskless principal transactions would be
appropriate and would not undermine
our goals in proposing short sale price
test regulation. In particular, we note
that such a provision would facilitate a
broker-dealer’s ability to provide best
execution to customer orders.
Accordingly, taken together proposed
Rules 201(a)(6) and (d)(6) would parallel
the conditions for relief in the Riskless
Principal Letter.177
Specifically, proposed Rule 201(a)(6)
would define the term ‘‘riskless
principal’’ to mean ‘‘a transaction in
which a broker or dealer, after having
received an order to buy a security,
purchases the security as principal at
the same price to satisfy the order to buy
or, after having received an order to sell,
sells the security as principal at the
same price to satisfy the order to
sell.’’ 178 Proposed Rule 201(d)(6) would
provide that a broker-dealer may mark
a short sale order ‘‘short exempt’’ if the
broker-dealer has a reasonable basis to
believe that the short sale order is to
effect the execution of a customer
purchase or the execution of a customer
‘‘long’’ sale on a riskless principal basis
174 See

id.
id.
176 See id.
177 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).
178 In addition to being consistent with the
conditions in the Riskless Principal Letter and Rule
10b–18 of the Exchange Act, this definition is
consistent with the definition of ‘‘riskless
principal’’ in FINRA Rule 6642.

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and provided the sell order is given the
same per-share price at which the
broker-dealer bought shares to satisfy
the facilitated order, exclusive of any
explicitly disclosed markup or
markdown, commission equivalent or
other fee.179 In addition, proposed Rule
201(d)(6) would require the brokerdealer, if it marks an order ‘‘short
exempt’’ under this provision, to have
policies and procedures in place to
assure that, at a minimum: the customer
order was received prior to the offsetting
transaction; the offsetting transaction is
allocated to a riskless principal or
customer account within 60 seconds of
execution; and that it has supervisory
systems in place to produce records that
enable the broker-dealer to accurately
and readily reconstruct, in a timesequenced manner, all orders on which
the broker-dealer relies pursuant to this
provision.180
We believe that proposed Rule
201(d)(6) would provide broker-dealers
with additional flexibility to facilitate
customer orders and provide best
execution. In addition, we believe that
the conditions set forth in proposed
Rule 201(d)(6) would provide a
mechanism for the surveillance of the
provision’s use by linking it to specific
incoming orders and executions, and by
requiring broker-dealers to establish
procedures for handling such
transactions. These requirements would
help ensure that broker-dealers are
complying with proposed Rule
201(d)(6).
h. Transactions on a Volume-Weighted
Average Price Basis
Proposed Rule 201(d)(7) would
provide that a broker-dealer may mark
‘‘short exempt’’ certain sale orders
executed on a volume-weighted average
price (‘‘VWAP’’) basis. Under former
Rule 10a–1, the Commission granted
limited relief from that rule in
connection with short sales executed on
a VWAP basis.181 The relief was limited
179 This requirement is also consistent with
FINRA’s trade reporting rules which require a
riskless principal transaction in which both legs are
executed at the same price to be reported once, in
the same manner as an agency transaction,
exclusive of any markup, markdown, commission
equivalent, or other fee. See FINRA Rule
6380A(d)(3)(B).
180 See proposed Rule 201(d)(6).
181 See e.g. letter from Larry E. Bergmann, Senior
Associate Director, Division of Market Regulation,
SEC, to Edith Hallahan, Counsel, Phlx, dated March
24, 1999; letter from Larry E. Bergmann, Senior
Associate Director, Division of Market Regulation,
SEC, to Soo J. Yim, Wilmer, Cutler & Pickering,
dated December 7, 2000; letter from James
Brigagliano, Assistant Director, Division of Market
Regulation, SEC, to Andre E. Owens, Schiff Hardin
& Waite, dated March 30, 2001; letter from James
Brigagliano, Assistant Director, Division of Market

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to VWAP transactions that are arranged
or ‘‘matched’’ before the market opens at
9:30 a.m., but are not assigned a price
until after the close of trading when the
VWAP value is calculated. The
Commission granted the exemptions
based, in part, on the fact that these
VWAP short sale transactions appeared
to pose little risk of facilitating the type
of market effects that former Rule
10a–1 was designed to prevent.182 In
particular, the Commission noted that
the pre-opening VWAP short sale
transactions do not participate in or
affect the determination of the VWAP
for a particular security.183 Moreover,
the Commission stated that all trades
used to calculate the day’s VWAP
would continue to be subject to former
Rule 10a–1.184
Consistent with the relief granted
under former Rule 10a–1, we propose
providing that a broker-dealer may mark
‘‘short exempt’’ certain short sale orders
executed at the VWAP. Proposed Rule
201(d)(7) would differ from the relief
granted under former Rule 10a–1,
however, in that it would not be limited
to VWAP transactions that are arranged
or ‘‘matched’’ before the market opens at
9:30 a.m., or that are not assigned a
price until after the close of trading
when the VWAP value is calculated. We
believe this restriction would not be
necessary because VWAP short sale
transactions appear to pose little risk of
facilitating the type of market effects
that a short sale price test restriction
would be designed to prevent. In
addition, in accordance with proposed
Rule 201(d)(7), no short sale orders used
to calculate the VWAP may be marked
‘‘short exempt.’’ 185 This would help
limit any potential for manipulation.
Thus, pursuant to proposed Rule
201(d)(7), a broker-dealer may mark a
short sale order of a covered security
‘‘short exempt’’ if the broker-dealer has
a reasonable basis to believe that the
short sale order is for the sale of a
covered security at the VWAP that
meets the following conditions: 186 (1)
The VWAP for the covered security is
calculated by: Calculating the values for
every regular way trade reported in the
consolidated system for the security
during the regular trading session, by
multiplying each such price by the total
Regulation, SEC, to Sam Scott Miller, Esq., Orrick,
Herrington & Sutcliffe LLP, dated May 12, 2001;
letter from James Brigagliano, Assistant Director,
Division of Market Regulation, SEC, to William W.
Uchimoto, Esq., Vie Institutional Services, dated
February 12, 2003.
182 See id.
183 See id.
184 See id.
185 See proposed Rule 201(b)(7).
186 See proposed Rule 201(d)(7).

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number of shares traded at that price;
compiling an aggregate sum of all
values; and dividing the aggregate sum
by the total number of reported shares
for that day in the security; (2) the
transactions are reported using a special
VWAP trade modifier; (3) no short sales
used to calculate the VWAP are marked
‘‘short exempt’’; (4) the VWAP matched
security qualifies as an ‘‘actively traded
security’’ (as defined under Rules
101(c)(1) and 102(d)(1) of Regulation
M), or where the subject listed security
is not an ‘‘actively traded security,’’ the
proposed short sale transaction will be
permitted only if it is conducted as part
of a basket transaction of twenty or more
securities in which the subject security
does not comprise more than 5% of the
value of the basket traded; (5) the
transaction is not effected for the
purpose of creating actual, or apparent,
active trading in or otherwise affecting
the price of any security; and (6) a
broker or dealer will act as principal on
the contra-side to fill customer short
sale orders only if the broker-dealer’s
position in the subject security, as
committed by the broker-dealer during
the pre-opening period of a trading day
and aggregated across all of its
customers who propose to sell short the
same security on a VWAP basis, does
not exceed 10% of the covered
security’s relevant average daily trading
volume, as defined in Regulation M.187
Except as discussed above, the
conditions set forth in proposed Rule
201(d)(7) parallel the conditions
contained in the exemptive relief from
former Rule 10a–1 granted for VWAP
short sale transactions. We believe that
these conditions worked well in
restricting the exemptive relief to
situations that generally would not raise
the harms that short sale price tests are
designed to prevent. We believe they
would be similarly effective in serving
that function today and, therefore,
should be incorporated into proposed
Rule 201(d)(7).
i. Decision Not To Propose That a
Broker-Dealer May Mark an Order
‘‘Short Exempt’’ in Connection With
Bona Fide Market Making Activity
Former Rule 10a–1(e)(5) provided a
limited exception from the restrictions
of that rule for ‘‘[a]ny sale * * * by a
registered specialist or registered
exchange market maker for its own
account on any exchange with which it
is registered for such security, or by a
third market maker for its own account
over-the-counter, (i) Effected at a price
equal to or above the last sale, regular
way, reported for such security pursuant
187 17

CFR 242.100(b).

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to an effective transaction reporting
plan. * * * Provided, however, That
any exchange, by rule, may prohibit its
registered specialist and registered
exchange market makers from availing
themselves of the exemption afforded by
this paragraph (e)(5) if that exchange
determines that such action is necessary
or appropriate in its market in the
public interest or for the protection of
investors.’’ Unless prohibited by
exchange rule, this exception was
intended to permit registered specialists
or market makers to protect customer
orders against transactions in other
markets in the consolidated system by
allowing them to sell short at a price
equal to the last trade price reported to
the consolidated system, even if that
sale was on a minus or zero-minus
tick.188 Although former Rule 10a–1
included this exception for market
makers, exchanges adopted rules that
prohibited their registered specialists
and market makers from availing
themselves of this exception.189 In
addition, former Rule 10a–1 did not
contain a general exception for short
selling in connection with bona fide
market making activities.190
Consistent with former Rule 10a–1,
the proposed modified uptick rule
would not permit a broker-dealer to
mark a short sale order ‘‘short exempt’’
if the broker-dealer is engaging in bona
fide market making activity. By
requiring trading centers to have
policies and procedures reasonably
designed to prevent the execution or
display of a short sale order at a downbid price, the proposed modified uptick
rule might help prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool to drive down a market
and from being used to accelerate a
declining market by exhausting all
remaining bids at one price level, and
causing successively lower prices to be
established by long sellers. By seeking
188 See Securities Exchange Act Release No.
11030 (Sept. 27, 1974), 39 FR 35570 (Oct. 2, 1974).
Former Rule 10a–1(a)(1)(i) referenced the last sale
price reported to an effective transaction reporting
plan, but former Rule 10a–1(a)(2) also permitted an
exchange to make an election to use the last sale
price reported in that exchange market. Certain
exchanges, such as the NYSE, implemented short
sale price test rules consistent with former Rule
10a–1(a)(2). See, e.g., former NYSE Rule 440B.
189 See id.
190 We note, however, that NASD’s bid test
contained an exception for short sales executed by
qualified market makers in connection with bona
fide market making. When, however, the
Commission approved NASD’s bid test and the
market maker exception to the bid test it noted
concerns that the market maker exception could
create opportunities for abusive short selling. See
1994 NASD Bid Test Approval, 59 FR 34885. See
also supra notes 125 and 136 (discussing NASD
Rule 3350).

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to advance these goals, the proposed
modified uptick rule might help restore
investor confidence.
As set forth above, paragraphs (c) and
(d) of proposed Rule 201 would permit
a broker-dealer to mark a short sale
order ‘‘short exempt’’ under certain
circumstances.191 Further, if an order is
marked ‘‘short exempt,’’ proposed Rule
201(b)(1)(ii) provides that a trading
center’s policies and procedures must
be reasonably designed to permit the
execution or display of such order
without regard to whether the order is
at a down-bid price.192 We have
proposed these provisions to facilitate
the proposed modified uptick rule’s
workability, while at the same time, not
undermine our goals in proposing short
sale price test restrictions.
We believe that permitting brokerdealers to mark ‘‘short exempt’’ short
sale orders in connection with bona fide
market making activity may undermine
the goals of our proposed short sale
price test restrictions at this time. In
particular, we believe that for the
proposed modified uptick rule to have
the effect of helping to prevent declines
in securities prices and restore investor
confidence, provisions relating to when
a broker-dealer may mark an order
‘‘short exempt’’ should be limited in
scope.
In addition, we note that the proposed
provision that would allow brokerdealers to mark short sale orders as
‘‘short exempt’’ in connection with
riskless principal transactions would
provide broker-dealers with flexibility
to facilitate customer orders. A trading
center’s policies and procedures would
also be designed to permit the execution
or display of short sale orders at the
offer. Additionally, in an advancing
market, in accordance with proposed
Rule 201(b)(1), a trading center’s
policies and procedures would be
reasonably designed to permit the
execution or display of short sale orders
at the current national best bid and,
therefore, in an advancing market,
market makers could provide liquidity
to the markets and meet purchasing
demand.193 For all these reasons, we do
not believe it would be appropriate to
provide that a broker-dealer may mark
an order ‘‘short exempt’’ where the short
191 See

proposed Rule 201(c) and 201(d).
proposed Rule 201(b)(1)(ii).
193 See also McCormick, D. Timothy and Zeigler,
Bram, 1997, The Nasdaq short sale rule: Analysis
of market quality effects and the market maker
exemption. Working paper, NASD Economic
Research, p. 28 (finding that market makers’ short
sales at the bid or below on down-bids amounted
to only 1.17% of their trading).
192 See

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Regular trading hours in the U.S. are
from 9:30 a.m. to 4 p.m. Eastern Time
(‘‘ET’’).194 A high volume of trading
occurs, however, outside of these
regular trading hours. Accordingly, the
Commission interpreted former Rule
10a–1 to apply to all trades in covered
securities, whenever they occurred.195
By its terms, former Rule 10a–1 used as
a reference point the last sale price
reported to the consolidated tape. Thus,
after the consolidated tape ceased to
operate, the rule prevented any person
from effecting a short sale in a listed
security at a price lower than the last
sale reported to the consolidated
tape.196 Although former Rule 10a–1
applied in the after-hours market, we do
not believe that the proposed modified
uptick rule should apply to covered
securities during periods that the

national best bid is not collected,
calculated and disseminated.
As discussed above, market
information for quotes in NMS stocks is
disseminated pursuant to two different
national market system plans, the CQ
Plan, and Nasdaq UTP Plan.197
Quotation information is made available
pursuant to the CQ Plan between 9 a.m.
and 6:30 p.m. ET, while one or more
participants is open for trading. In
addition, quotation information is made
available pursuant to the CQ Plan
during any other period in which any
one or more participants wish to furnish
quotation information to the Plan.198
Quotation information is made available
by the Nasdaq UTP Plan between 9:30
a.m. and 4 p.m. ET. The Nasdaq UTP
Plan also collects, processes, and
disseminates quotation information
between 4 a.m. and 9:30 a.m. (ET), and
after 4 p.m. when any participant is
open for trading, until 8 p.m. ET.199
During the time periods in which
these Plans do not operate, real-time
quote information is not collected,
calculated and disseminated. We do not
believe that it would further the goals of
short sale price test regulation to apply
the proposed modified uptick rule when
the national best bid is not being
collected, calculated and disseminated
on a real-time basis. Thus, the proposed
modified uptick rule would only apply
at times when quotation information
and, therefore, the national best bid, is
collected, processed, and disseminated
pursuant to a national market system
plan. Thus, proposed Rule 201(f) limits
application of the proposed modified
uptick rule to times when ‘‘a national
best bid for [an] NMS stock is calculated
and disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.’’ 200 However, we seek
comment on these issues.

194 See, e.g., Rule 600(64) of Regulation NMS,
defining the term ‘‘regular trading hours.’’
195 See 2003 Regulation SHO Proposing Release,
68 FR at 62997 (stating that the Commission
interprets former Rule 10a–1 to apply to all trades
in listed securities whenever they occur).
196 We note, however, that NASD did not extend
its short sale price test rule to the after-hours
market. See NASD Head Trader Alert #2000–55.
197 See supra note 107. See also 17 CFR
242.603(b). Rule 603 of Regulation NMS requires

that every national securities exchange on which an
NMS stock is traded and national securities
association shall act jointly pursuant to one or more
effective national market system plans to
disseminate consolidated information, including a
national best bid and national best offer, on
quotations for and transactions in NMS stocks.
198 See http://www.nyxdata.com/cta.
199 See http://www.utpdata.com/docs/
UTP_PlanAmendment.pdf.
200 See proposed Rule 201(e).

sale order is in connection with bona
fide market making activity.
We seek comment, however, on the
importance of a market maker provision
in the context of a market maker’s role
in providing liquidity, including the
extent to which market makers would
need to sell short at or below the current
national best bid in their market making
capacity. We also seek comment on the
extent to which the proposed riskless
principal provision, as well as any other
proposed provisions, would address
concerns regarding the need for a more
general market maker provision. In
addition, we seek comment regarding
what conditions should apply if a
general market maker provision were
added to when a broker-dealer may
mark an order ‘‘short exempt’’ under the
proposed modified uptick rule. We also
seek comment on whether a general
market maker exception should be
limited to registered market makers.

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3. Proposed Modified Uptick Rule and
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B. Proposed Uptick Rule
1. Operation of the Proposed Uptick
Rule
As an alternative to proposing a short
sale price test based on the national best
bid, we are proposing a modified
version of former Rule 10a–1 to provide
the public with an opportunity to
comment on the utility of such a price
test, especially in light of the recent
changes in market conditions.201 The
proposed uptick rule would use the last
sale price as the reference point for
short sale orders.
Specifically, the proposed uptick rule
would provide that ‘‘[n]o person shall,
for his own account or for the account
of any other person, effect a short sale
of any covered security, if trades in such
security are reported pursuant to an
effective transaction reporting plan 202
and information as to such trades is
made available in accordance with such
plan on a real-time basis to vendors of
market transaction information: (i)
Below the price at which the last sale
thereof, regular way, was reported
pursuant to an effective transaction
reporting plan; or (ii) At such price
unless such price is above the next
preceding different price at which a sale
of such security, regular way, was
reported pursuant to an effective
transaction reporting plan.’’ 203 Thus,
under the proposed uptick rule, no short
sale order may be effected below the last
sale price. Short sale orders may be
effected at the last sale price only if the
last sale price is above the last different
price. Otherwise, all short sale orders
must be effected above the last sale
price.
The following transactions illustrate
the operation of the proposed uptick
rule:

201 See supra Section II, discussing the history of
short sale price test regulation in the United States
and changes in market conditions and resulting
erosion of investor confidence.
202 Proposed Rule 201(a)(3) provides that the term
‘‘transaction reporting plan’’ shall have the same
meaning as in § 242.600(22) of Regulation NMS.
203 Proposed Rule 201(b).

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The first execution at 47.04 is a plus
tick since it is higher than the previous
last trade price of 47.00. The next
transaction at 47.04 is a zero-plus tick
since there is no change in trade price
but the last change was a plus tick.
Short sales could be executed at 47.04
or above in both of these cases. The final
two transactions at 47.00 are minus and
zero-minus transactions, respectively.
Short sales in these two circumstances
would have to be effected at a price
above 47.00 in order to comply with
proposed uptick rule.
Similar to the proposed modified
uptick rule, the proposed uptick rule
would apply to any ‘‘covered security,’’
which is defined as an ‘‘NMS stock’’
under Rule 600(a)(47) of Regulation
NMS. Rule 600(a)(47) of Regulation
NMS defines an ‘‘NMS stock’’ as ‘‘any
NMS security other than an option.’’ 204
Rule 600(a)(46) of Regulation NMS
defines an ‘‘NMS security’’ as ‘‘any
security or class of securities for which
transaction reports are collected,
processed, and made available pursuant
to an effective transaction reporting
plan, or an effective national market
system plan for reporting transactions in
listed options.’’ 205 As a result, the
proposed uptick rule would effectively
cover all securities, other than options,
listed on a national securities exchange
whether traded on an exchange or in the
OTC market. It would not include nonNMS stocks quoted on the OTC Bulletin
Board or elsewhere in the OTC market.
We are not proposing to apply the
proposed uptick rule to non-NMS stocks
quoted on the OTC Bulletin Board or
elsewhere in the OTC market because
these securities were not subject to
former Rule 10a–1. We recognize,
however, that issuers of non-NMS
stocks, which often are less actively
traded securities than NMS stocks, may
believe that they are particularly
vulnerable to abusive short selling.
Thus, we seek specific comment
regarding whether the proposed uptick
rule or some other form of price test
should apply to these types of
securities.
As discussed above in connection
with the proposed modified uptick rule,
the scope of securities covered by the
proposed uptick rule would be similar
to the scope of securities covered by
former Rule 10a–1. Former Rule 10a–
1(a) applied to securities registered on,
or admitted to unlisted trading
privileges on, a national securities
exchange, if trades of the security were
reported pursuant to an effective
transaction reporting plan and
204 17
205 17

CFR 242.600(a)(47).

CFR 242.600(a)(46).

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information regarding such trades was
made available in accordance with such
plan on a real-time basis to vendors of
market transaction information. All
securities that would have been subject
to former Rule 10a–1 would also be
subject to the proposed uptick rule. In
addition, certain securities, such as
securities traded on Nasdaq, that were
not subject to former Rule 10a–1, would
be subject to the proposed uptick
rule.206
As discussed in more detail above, the
Commission eliminated former Rule
10a–1 and prohibited any SRO from
having a price test in an effort in part
to modernize and simplify short sale
regulation in light of current trading
systems and strategies used in the
marketplace. In supporting its
elimination of former Rule 10a–1, the
Commission noted that the increased
demand for exemptions from the Rule,
and the disjointed application of short
sale price tests had limited the reach of
short sale price test restrictions, created
confusion and compliance difficulties as
well as an un-level playing field among
market participants. In addition, the
Commission noted that decimal
increments had resulted in a rule that
was no longer suited to the wide variety
of trading strategies and systems used in
the marketplace. The Commission also
discussed that following its study of the
effects of removing short sale price tests,
OEA had found little empirical
justification for maintaining former Rule
10a–1 and that, on balance, elimination
of short sale price test restrictions for
pilot stocks had not had a deleterious
effect on market quality based on the
examination of transactions during the
period covered by the Pilot.207
206 See supra note 106. We note that former Rule
10a–1(b) applied the restrictions of former Rule
10a–1 to short sales on a national securities
exchange in securities for which trades were not
reported pursuant to an ‘‘effective transaction
reporting plan,’’ as defined in Rule 600 of
Regulation NMS, and for which information as to
such trades was not made available in accordance
with such plan on a real-time basis to vendors of
market transaction information. Former Rule 10a–
1(b) provided, in part: ‘‘No person shall, for his own
account or for the account of any other person,
effect on a national securities exchange a short sale
of any security not covered by paragraph (a) of this
rule, 1. below the price at which the last sale
thereof, regular way, was effected on such
exchange, or 2. at such price unless such price is
above the next preceding different price at which
a sale of such security, regular way, was effected on
such exchange.’’ A similar provision would not be
applicable to the proposed uptick rule because the
proposed uptick rule applies to all NMS stocks,
which, by definition, include only those stocks for
which trades are collected, processed, and made
available pursuant to an effective transaction
reporting plan. See 17 CFR 242.600(b)(47) and
(b)(46).
207 See 2006 Price Test Elimination Proposing
Release, 71 FR at 75073.

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Similar to the proposed modified
uptick rule, the proposed uptick rule is
designed to allow relatively unrestricted
short selling in an advancing market. In
addition, it is designed to restrict short
selling at successively lower prices and,
thereby, might help prevent short
selling, including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market by exhausting all
remaining bids at one price level,
causing successively lower prices to be
established by long sellers. In addition,
the proposed uptick rule, similar to the
proposed modified uptick rule, would
not result in the type of disparate short
sale regulation that existed under former
Rule 10a–1 because proposed Rule
201(d) would include a requirement that
no SRO shall have any rule that is not
in conformity with, or conflicts with,
the short sale price test requirements of
the proposed uptick rule. Another
potential advantage to the proposed
uptick rule is that market participants
would be familiar with the test because
it would be based on former Rule 10a–
1 which was in existence for almost 70
years, and was only recently eliminated.
At the same time, some of the reasons
cited by the Commission for eliminating
former Rule 10a–1, which are unique to
the proposed uptick rule as a price test
based on the last sale price, remain
today. For example, as discussed in
more detail below, as a short sale price
test that is based on the last sale price,
the proposed uptick rule includes a
number of exceptions necessary to
accommodate the various trading
strategies and systems used in today’s
marketplace. For example, the proposed
uptick rule includes an exception for
automated trading systems that utilize
passive pricing and trading systems that
offer price improvement based on the
national best bid. The proposed uptick
rule also includes an exception to allow
market makers or specialists publishing
two-sided quotes to sell short at the
offer to facilitate customer market or
marketable limit buy orders regardless
of the last sale price.
In addition, as noted above in
connection with our discussion of the
proposed modified uptick rule, we
believe the spread of more fully
automated markets may make a test
based on the last sale price less effective
at regulating short selling than a test
based on the national best bid due to
delays in reporting of last sale price
information and because last sale price
information is published in reporting
sequence and not trade sequence. Such
trade reporting may create up-ticks and
down-ticks that may not accurately

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reflect price movements in the security
for purposes of the proposed uptick
rule. Because last trade prices can be
reported out of sequence, for various
reasons, we believe bids may be a more
accurate reflection of current prices for
a security.
Although former Rule 10a–1 was only
recently eliminated, we recognize that
due to the extensive systems changes
that have occurred in the last couple of
years in response to Regulation NMS,
programming systems for the proposed
uptick rule may be burdensome. For
example, we note that at the same time
that we proposed and subsequently
adopted amendments to eliminate
former Rule 10a–1, market participants
were programming their systems to
comply with Regulation NMS. It is our
understanding that some market
participants may not have included in
their programming coding that would
have allowed for the application of short
sale price test restrictions at that
time.208
Although the proposed uptick rule
does not take a policies and procedures
approach, it is likely that market
participants would use a policies and
procedures approach as part of their
efforts to comply with the proposed
prohibition. As such, for either
proposed approach (prohibition or
policies and procedures), market
participants could consider whether to
build off the policies and procedures
they already have in place under
Regulation NMS. As discussed above in
connection with the proposed modified
uptick rule, trading centers have been
required to develop policies and
procedures in accordance with
Regulation NMS that would be similar
208 In connection with the elimination of former
Rule 10a–1 and all short sale price test restrictions,
we noted that commenters to the proposed
amendments to eliminate all short sale price test
restrictions discussed potential reprogramming
costs that market participants may incur if the
proposed amendments were not effective prior to
the date for which all automated trading centers
were required to have fully operational Regulation
NMS-compliant trading systems, i.e., July 9, 2007
(the ‘‘Regulation NMS Compliance Date’’). For
example, we noted that the Securities Industry
Financial Markets Assn. (‘‘SIFMA’’) urged the
Commission to take steps to eliminate price test
restrictions prior to the Regulation NMS
Compliance Date to alleviate the need for firms to,
in the course of instituting programming changes to
meet the new requirements of Regulation NMS,
program systems to comply with price test
restrictions, only to be required to reverse such
programming costs shortly thereafter. After
considering these comments, we made the
elimination of short sale price test restrictions
immediately effective to provide market
participants with sufficient notice and time prior to
the Regulation NMS Compliance Date to reprogram
their systems without regard to the then-current
short sale price test restrictions. See 2007 Price Test
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to the types of policies and procedures
that would be required under the
proposed modified uptick rule.
The proposed uptick rule may be
more burdensome to apply than the
proposed modified uptick rule,
however, because the prohibition
approach of the proposed uptick rule
would not allow any short sale at an
impermissible price, even if in error or
inadvertent, unless an exception
applies. If the Commission were to
decide to provide an exception for
inadvertent errors, that could reduce the
differences between the two proposed
approaches. In addition, the proposed
uptick rule could follow a policies and
procedures approach similar to the
approach discussed in connection with
the proposed modified uptick rule. Such
a policies and procedures approach
would require that market participants
continuously surveil for compliance and
take prompt remedial steps to limit the
execution or display of short sales at
impermissible prices.
As discussed above, we are proposing
a short sale price test based on the last
sale price, and, in particular, we are
proposing a modernized version of
former Rule 10a–1 to provide the public
with the opportunity to comment on
this test in light of changes that have
occurred in market conditions and
investor confidence since the
elimination of former Rule 10a–1 in
mid-2007. Because we want to provide
the public with the opportunity to
comment on a short sale price test
similar to former Rule 10a–1, we are not
proposing a policies and procedures
type of approach in connection with the
proposed uptick rule because this
would be a substantial change from how
former Rule 10a–1 was applied. We
note, however, that some commenters
may believe that a policies and
procedures approach similar to the
approach discussed under the proposed
modified uptick rule that references the
last sale price, rather than the national
best bid, might be preferable to either
the proposed modified uptick rule or
the proposed uptick rule. Thus, we seek
specific comment regarding such an
approach.
If we were to adopt the proposed
uptick rule, we are proposing that there
would be a three month implementation
period such that market participants
would have to comply with the
proposed uptick rule three months
following the effective date of the
proposed uptick rule. We believe that a
proposed implementation period of
three months after the effective date
would provide market participants with
sufficient time in which to modify their
systems and procedures in order to

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comply with the requirements of the
proposed uptick rule. Among other
things, we believe this period would be
a reasonable period because market
participants would be familiar with the
changes to their trading systems
necessary to implement the proposed
uptick rule as the proposed uptick rule
would be similar to former Rule 10a–1.
The addition of an implementation
period should help alleviate potential
disruptive effects of the proposal.
We realize, however, that a shorter or
longer implementation period may be
manageable or preferable. Thus, we seek
specific comment as to what length of
implementation period would be
necessary or appropriate, and why, such
that market participants would be able
to meet the proposed short sale price
test restrictions, if adopted.
2. Exceptions to Proposed Uptick Rule
Paragraph (c) of Rule 201 of the
proposed uptick rule sets forth
exceptions to the proposed rule to
promote its workability. Rule 201(c) of
the proposed uptick rule would include
exceptions that parallel provision set
forth in proposed Rule 201(d) of the
proposed modified uptick rule pursuant
to which a broker-dealer may mark an
order ‘‘short exempt’’ for purposes of
that proposed rule. Thus, proposed Rule
201(c) of the proposed uptick rule
would also include exceptions for: (i) A
seller’s delay in delivery as set forth in
Section III.A.2.b above; (ii) odd lots, as
set forth in Section III.A.2.c. above; (iii)
domestic arbitrage, as set forth in
Section III.A.2.d. above; (iv)
international arbitrage, as set forth in
Section III.A.2.e. above; (v) overallotments and lay-off sales, as set forth
in Section III.A.2.f. above; (vi)
transactions on a VWAP basis, as set
forth in Section III.A.2.h above; and (vii)
riskless principal transactions as set
forth in Section III.A.2.g. above. We
believe that the rationale for these
provisions under the proposed modified
uptick rule would be equally applicable
to the proposed uptick rule. Thus, we
do not repeat the discussions of these
provisions in connection with our
discussion regarding the proposed
uptick rule.
The following discussion sets forth
the rationale regarding exceptions that
would be unique to the proposed uptick
rule. The exceptions contained in
paragraph (c) of proposed Rule 201 are
based upon exceptions contained in
former Rule 10a–1 and exemptive relief
granted pursuant to that rule. These
exceptions and exemptions, as
applicable, had been in place under
former Rule 10a–1 for several years. We
are not aware of any reason that the

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rationales underlying these exceptions
and exemptions would not still hold
true today. Moreover, due to the limited
scope of the proposed exceptions and
exemptions, we do not believe that they
would undermine the Commission’s
stated goals for proposing short sale
price test restrictions.
Thus, the exceptions in proposed
Rule 201(c) parallel exceptions to and
exemptive relief granted under former
Rule 10a–1. As set forth in more detail
below, however, we seek comment
regarding each of these exceptions,
including whether or not these
exceptions would be appropriate or
necessary under the proposed modified
uptick rule particularly in light of
trading systems and strategies used in
today’s marketplace.
a. Error in Marking a Short Sale
Proposed Rule 201(c)(2) would
provide an exception from the proposed
uptick rule where a broker-dealer effects
a sale order marked ‘‘long’’ by another
broker-dealer, but the order was mismarked such that it should have been
marked as a ‘‘short’’ sale order.
Specifically, proposed Rule 201(c)(2)
provides that the proposed uptick rule
shall not apply to ‘‘[a]ny sale by a broker
or dealer of a covered security for an
account in which it has no interest,
pursuant to an order marked long.’’ 209
The broker-dealer that marks the
order ‘‘long’’ must comply with the
order marking requirements of Rule
200(g) of Regulation SHO.210 Subsection
(e)(2) of former Rule 10a–1 contained an
exception for mis-marked short sales.
The exception was included in former
Rule 10a–1 when the rule was adopted
in 1938 and was provided to ‘‘avoid
implicating in any violation of the rules
a member whose participation in the
violation [was] unwitting and
unintentional.’’ 211 The exception in
proposed Rule 201(c)(2) would avoid
implicating the broker-dealer effecting
the sale where the broker-dealer’s
participation in the violation was
neither knowing nor reckless.212
209 Proposed

Rule 201(c)(2).
17 CFR 242.200(g).
211 See Former Rule 10a–1 Adopting Release, 3
FR 213.
212 Knowledge may be inferred where a brokerdealer has previously accepted orders marked
‘‘long’’ from the same counterparty that required
borrowed shares for delivery or that resulted in a
‘‘fail to deliver.’’ See 2004 Regulation SHO
Adopting Release, 69 FR at 48019, n.111 (stating
that ‘‘[i]t may be unreasonable for a broker-dealer
to treat a sale as long where orders marked ‘long’
from the same customer repeatedly require
borrowed shares for delivery or result in ‘fails to
deliver.’ A broker-dealer also may not treat a sale
as long if the broker-dealer knows or has reason to
know that the customer borrowed shares being
sold.’’).

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210 See

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b. Electronic Trading Systems
Proposed Rule 201(c)(8) would
provide an exception from the proposed
uptick rule for sales of securities in
certain electronic trading systems that
match and execute trades at various
times and at independently-derived
prices, such as at the mid-point of the
NBBO. The Commission granted limited
exemptive relief in connection with
these systems under former Rule 10a–1
because matches could potentially occur
at a price below the last sale price.213
Similarly, under the proposed uptick
rule, matches could potentially occur at
a price below the last sale price and,
therefore, violate the provisions of
proposed Rule 201(b) prohibiting short
sales on a minus or zero-minus tick,
absent an exception.
This exception provides that the
proposed uptick rule shall not apply to
any sale of a covered security in an
electronic trading system that matches
buying and selling interest at various
times throughout the day if: (1) Matches
occur at an externally derived price
within the existing market and above
the current national best bid; (2) sellers
and purchasers are not assured of
receiving a matching order; (3) sellers
and purchasers do not know when a
match will occur; (4) persons relying on
the exception are not represented in the
primary market offer or otherwise
influence the primary market bid or
offer at the time of the transaction; (5)
transactions in the electronic trading
system are not made for the purpose of
creating actual, or apparent, active
trading in, or depressing or otherwise
manipulating the price of, any security;
(6) the covered security qualifies as an
‘‘actively-traded security’’ (as defined in
Rules 101(c)(1) and 102(d)(1) of
Regulation M), or where the subject
listed security is not an ‘‘actively-traded
security,’’ the proposed short sale
transaction will be permitted only if it
is conducted as part of a basket
transaction of twenty or more securities
in which the subject security does not
comprise more than 5% of the value of
the basket traded; and (7) during the
period of time in which the electronic
trading system may match buying and
selling interest, there is no solicitation
of customer orders, or any
communication with customers that the
match has not yet occurred.214
The conditions set forth in the
exception in proposed Rule 201(c)(8)
parallel the conditions provided in the
exemptive relief granted under former
Rule 10a–1. Consistent with the relief
213 See
214 See

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Proposed Rule 201(c)(8).

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granted under former Rule 10a–1 and
the rationales provided in granting such
relief, we believe it is appropriate to
propose an exception to the proposed
uptick rule for short sales submitted to
these electronic trading systems because
such rationales still hold true today. In
particular, we note that due to the
passive nature of pricing and the lack of
price discovery, trades executed through
these systems generally would not
involve the types of abuses that the
proposed uptick rule would be designed
to prevent.
c. Trade-Throughs
Proposed Rules 201(c)(10) and (11)
would provide exceptions from the
requirements of the proposed uptick
rule that would help address any
potential conflict between the proposed
uptick rule and the Quote Rule under
the Exchange Act.215 These exceptions
parallel the exceptions contained in
former Rule 10a–1(e)(5)(ii) and (e)(11),
respectively.
Former Rule 10a–1(e)(5)(ii) was added
to former Rule 10a–1 to address a
potential conflict between the operation
of former Rule 10a–1 and the ‘‘firm
quote requirement’’ of the Quote
Rule 216 in situations where execution of
an offer quotation by a broker-dealer
would be rendered unlawful because of
a trade-through,217 even though the offer
had been at a price permitted under
former Rule 10a–1 at the time that the
broker-dealer had communicated it to
its exchange or association for inclusion
in the consolidated quotation system.218
215 See

17 CFR 242.602.
the time the Commission adopted former
Rule 10a–1(e)(5)(ii), the Quote Rule was included
in Rule 11Ac1–1 under the Exchange Act. The
Quote Rule is now in Rule 602 of Regulation NMS.
See 17 CFR 242.602.
217 A ‘‘trade-through’’ generally means the
purchase or sale of a security at a price that is lower
than a protected bid or higher than a protected
offer. See 17 CFR 242.600(a)(77) (defining the term
‘‘trade-through’’ for purposes of Regulation NMS).
218 The following example from the release
adopting the exception illustrates the potential
conflict: A market maker who currently has a short
position in XYZ stock communicates an offer
which, if executed against at that time, would be
in compliance with Rule 10a–1, e.g., at a price of
201⁄8 when the last trade price reported in the
consolidated system is also 201⁄8. There is a ‘‘trade
through’’ of the market maker’s offer on another
trading venue that causes an up-tick to be reported
in the consolidated system at 201⁄4. Finally, a buy
order is sent to the market maker after the trade
through at 201⁄4 has been reported. In order to
ensure compliance with 10a–1, the market maker
must refuse to execute the order at his offer of 201⁄8
because doing so would result in a short sale being
effected on an impermissible minus tick, however,
in refusing to effect the trade, he would arguably
violate the ‘‘firm quote requirement’’ of the Quote
Rule. In addition, when a market maker ‘‘backs
away’’ from an order, he may, in effect be revealing
that he had a short position in the security, thus
216 At

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To resolve this potential conflict, the
Commission adopted the exception in
subsection (e)(5)(ii) of former Rule 10a–
1 to permit market makers to execute
transactions at their offer following a
trade-through, and (e)(11) to permit nonmarket makers to effect a short sale at
a price equal to the price associated
with their most recently communicated
offer up to the size of that offer 219
provided the offer was at a price, when
communicated, that was permissible
under former Rule 10a–1. The (e)(11)
exception was added in response to
several comments that, in addition to
orders for their own account, specialists
and other floor members also often
represent as part of their displayed
quotation orders of other market
participants (e.g., public agency orders
or proprietary orders of non-market
makers) that also might be ineligible for
execution under former Rule 10a–1
following a trade-through in another
market.220
We believe that the rationale for
adopting the exceptions in former Rule
10a–1(e)(5)(ii) and (e)(11) and proposed
in subsections (c)(10) and (c)(11) of the
proposed uptick rule, namely resolving
a conflict between a short sale price test
based on the last sale price and the
Quote Rule would exist under the
proposed uptick rule. Thus, the
proposed exceptions would parallel the
exceptions in former Rule 10a–1(e)(5)(ii)
and (e)(11).221
Specifically, proposed Rule 201(c)(10)
would provide that the restrictions of
making it more difficult to liquidate that position
at favorable prices. See Securities Exchange Act
Release No. 17314 (Nov. 20, 1980), 45 FR 79018
(Nov. 28, 1980).
219 The Commission explained in the release that
the scope of the exception in former Rule 10a–
1(e)(11) was limited to the size of the brokerdealer’s displayed offer because the need for the
exception only arises to the extent that the brokerdealer’s obligations under the Quote Rule may
conflict with former Rule 10a–1. Because the firm
quote requirement of the Quote Rule only applies
to a broker-dealer’s displayed offer, it was deemed
appropriate to limit the exception to the size of the
displayed offer. See supra note 218 at n.20.
220 This concern was illustrated in the release
adopting the amendments with the following
example: A specialist who is short XYZ stock
quotes an offer for 1,000 shares at 201⁄8 at a time
when the last sale reported in the consolidated
system was such that the offer, if executed at that
time, would be in compliance with Rule 10a–1.
This offer for 1,000 shares consists of 300 shares
offered by the specialist, a 400-share limit order in
the specialist’s book, and an offer from the crowd
at the specialist’s post for 300 shares, all at 201⁄8.
A trade through of this offer occurs on another
exchange and an up-tick is reported in the
consolidated system at 201⁄4. A buy order for 1,000
shares at 201⁄8 is then sent to the exchange—after
the trade through at 201⁄4 is reported. Without
(e)(11), filling the complete order for 1,000 shares
would not be permissible, since (e)(5)(ii), by its
terms, applied only to a sale by a market maker for
its own account. See supra note 218 at n.18.
221 See Proposed Rule 201(c)(10) and (c)(11).

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the proposed uptick rule shall not apply
to: ‘‘[A]ny sale of a covered security
(except a sale to a stabilizing bid
complying with § 242.104 of Regulation
M) by a registered specialist or
registered exchange market maker for its
own account on any exchange with
which it is registered for such security,
or by a third market maker for its own
account over-the-counter, (i) Effected at
a price equal to the most recent offer
communicated for the security by such
registered specialist, registered
exchange market maker or third market
maker to an exchange or a national
securities association (‘‘association’’)
pursuant to § 242.602 of this chapter, if
such offer, when communicated, was
equal to or above the last sale, regular
way, reported for such security pursuant
to an effective transaction reporting
plan. Provided, however, (ii) That any
self-regulatory organization, by rule,
may prohibit its registered specialist
and registered exchange market makers
from availing themselves of the
exemption afforded by this paragraph
(c)(10) if that self-regulatory
organization determines that such
action is necessary or appropriate in its
market in the public interest or for the
protection of investors.’’ 222
We believe that the rationale for
adopting former Rule 10a–1(e)(5)(ii) still
holds true today and, therefore, we have
incorporated the language of that
exception into proposed Rule
201(c)(10). Consistent with former Rule
10a–1(e)(5)(ii), the proposed exception
would include language that would
permit SROs to prohibit registered
specialists and registered exchange
market makers from availing themselves
of this exception. We note that under
former Rule 10a–1, SROs such as the
NYSE prohibited registered specialists
and registered exchange market makers
from availing themselves of this
exception.223 We believe it would be
appropriate to continue to provide this
option to SROs.
Proposed Rule 201(c)(11) would
provide that the restrictions of the
proposed uptick rule shall not apply to:
‘‘[A]ny sale of a covered security (except
a sale to a stabilizing bid complying
with § 242.104 of this chapter) by any
broker or dealer, for his own account or
for the account of any other person,
effected at a price equal to the most
recent offer communicated by such
broker or dealer to an exchange or
association pursuant to § 242.602 of this
chapter in an amount less than or equal
to the quotation size associated with
such offer, if such offer, when
222 See

Proposed Rule 201(c)(10).

223 See former NYSE Rule 440B.

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communicated, was: (i) Above the price
at which the last sale, regular way, for
such security was reported pursuant to
an effective transaction reporting plan;
or (ii) At such last sale price, if such last
sale price is above the next preceding
different price at which a sale of such
security, regular way, was reported
pursuant to an effective transaction
reporting plan.’’ We believe that the
rationale for adopting former Rule 10a–
1(e)(11) still holds true today and,
therefore, we have incorporated the
language of that exception into
proposed Rule 201(c)(10).
d. Facilitation of Customer Buy Orders
Proposed Rule 201(c)(12) would
provide for an exception from the
proposed uptick rule for short sales by
registered market makers or specialists
publishing two-sided quotes to sell
short at the offer to facilitate customer
market and marketable buy limit orders
regardless of the last sale price.224 We
believe that this exception would be
necessary because some third market
makers in exchange-listed securities
offer trade execution for eligible
customer orders at a price equal to or
better than the national best offer. Under
the proposed uptick rule, if the national
best offer were below the previous last
reported sale in a security and the third
market maker or specialist has a short
position, sales at the national best offer
would violate the proposed uptick rule.
The proposed exception would provide
limited relief in a decimals environment
to registered market makers and
specialists so that they could provide
liquidity in response to customer buy
limit orders. Because this relief is
limited to short selling only at the
national best offer and only in response
to customer buy limit orders we believe
that it would not undermine the goals
of short sale price test regulation,
including helping to prevent short
selling from being used as a tool to drive
the market down.
3. Proposed Uptick Rule and AfterHours Trading
As discussed above in connection
with the proposed modified uptick rule,
the Commission interpreted former Rule
10a–1 to apply to all trades in covered
securities, whenever they occurred. By
its terms, former Rule 10a–1 used as a
reference point the last sale price
reported to the consolidated tape. Thus,
after the consolidated tape ceased to
operate, the rule prevented any person
from effecting a short sale in a listed
224 See proposed Rule 201(c)(12). This exception
parallels exemptive relief provided by the
Commission under former Rule 10a–1.

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security at a price lower than the last
sale reported to the consolidated
tape.225 Although former Rule 10a–1
applied in the after-hours market,
similar to the proposed modified uptick
rule, we do not believe that the
proposed uptick rule should apply to
covered securities while last sale price
information is not collected, processed,
and disseminated.226
As discussed above, last sale price
information for NMS stocks is
disseminated pursuant to a national
market system plan, the CTA Plan.227
The CTA Plan disseminates last sale
price information during the hours in
which any of its participants that
regularly reports to the Plan is open for
trading. In addition, the Plan
disseminates last sale price information
at other times during which any of its
exchange participants is open for
trading.228 During times in which the
CTA Plan does not collect, process, and
disseminate last sale price information,
real-time last sale price information is
not available. For the same reasons
discussed in connection with the
proposed modified uptick rule, we do
not believe that it would further the
goals of short sale price test regulation
to apply the proposed uptick rule when
last sale price information is not being
collected and disseminated on a realtime basis. Thus, proposed Rule 201(e)
limits application of the proposed
uptick rule to times when ‘‘a last sale
price for [an] NMS stock is collected
and disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.’’ 229

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C. The Proposed Circuit Breaker Rules
We also are proposing for comment,
as an alternative to the proposed price
test restrictions, circuit breaker rules.
The proposed circuit breaker halt rule
would, when triggered by a specified
decline in the price of a particular
security, temporarily prohibit any
person from selling short a particular
225 We note, however, that NASD did not extend
its short sale price test rule to the after-hours
market. See NASD Head Trader Alert #2000–55.
226 See supra Section III.A.2. (discussing our
belief that the proposed modified uptick rule
should not apply when the national best bid is not
collected, processed, and disseminated on a realtime basis).
227 See 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.
228 See http://www.nyxdata.com/cta.
229 See proposed Rule 201(e).

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NMS stock during severe market
declines in that security, subject to
certain exceptions. The proposed circuit
breaker modified uptick rule would,
when triggered by a specified decline in
the price of a particular security,
temporarily impose the proposed
modified uptick rule for that security.
As discussed above, questions persist
about the reasons for the rapid speed of
steep declines in the prices of securities.
A short selling circuit breaker rule
would be designed to target only those
securities that experience rapid severe
intraday declines and, therefore, might
help to prevent short selling from being
used to drive the price of a security
down or to accelerate the decline in the
price of those securities.
In line with the Commission’s
position that market impediments
should be minimized, a short selling
circuit breaker when applied might
benefit the market as a narrowly tailored
response to extraordinary
circumstances.230 Unlike the market
wide circuit breakers that halt all
trading, a short selling circuit breaker
would apply only to those individual
securities that are facing a severe
intraday decline in share price. A short
selling circuit breaker could be
structured in a number of ways. We set
forth below three forms of circuit
breakers.
1. Background on Circuit Breakers
To protect investors and the markets,
the Commission has approved proposals
to restrict or halt trading if key market
indexes fall by specified amounts. For
example, the Commission approved
such proposals from various exchanges
(‘‘SRO Circuit Breakers’’) in response to
the October 1987 market break. These
measures were designed to permit brief,
coordinated cross-market halts to
provide opportunities during a severe
market decline to re-establish
equilibrium between buying and selling
interests in an orderly fashion, and help
to ensure that market participants have
a reasonable opportunity to become
aware of, and respond to, significant
price movements.231
Currently, all stock exchanges and
FINRA have rules or policies to
implement coordinated circuit breaker
halts.232 The options markets also have
230 See Securities Exchange Act Release No.
39846 (Apr. 9, 1998), 63 FR 18477 (Apr. 15, 1998)
(order approving proposals by Amex, BSE, CHX,
NASD, NYSE, and Phlx) (‘‘1998 Release’’).
231 See Securities Exchange Act Release No.
26198 (Oct. 19, 1988), 53 FR 41637 (Oct. 24, 1988)
(approving rules of the Amex, CBOE, NASD,
NYSE).
232 See 1998 Release supra note 230. See also
NYSE Rule 80B. The circuit breaker procedures call

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18065

rules applying circuit breakers.233 The
futures exchanges that trade index
futures contracts have adopted circuit
breaker halt procedures in conjunction
with their price limit rules for index
products.234 Finally, security futures
products are required to have crossmarket circuit breaker regulatory halt
procedures in place.235 In addition, the
Commission has authority under
Section 12(k)(1) of the Exchange Act to
suspend trading in the securities of
individual issuers.236 Moreover, SROs
have rules or policies in place to
coordinate individual security trading
halts corresponding to significant news
events.237 Information on the securities
subject to SRO regulatory trading halts
is disseminated to market participants
through the Common Messaging System
(‘‘CMS’’) and other electronic media.238
The current SRO Circuit Breakers
impose percentage based triggers that
result in trading halts of varying lengths,
dependent on the DJIA’s rate of
decline.239 Unlike the original SRO
for cross-market trading halts when the Dow Jones
Industrial Average (DJIA) declines by 10 percent, 20
percent, and 30 percent from the previous day’s
closing value. See e.g., BATS Exchange Rule 11.18.
233 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.
234 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.
235 See Securities Exchange Act Release No.
45956 (May 17, 2002), 67 FR 36740 (May 24, 2002).
236 See 15 U.S.C. 78l(k)(1).
237 See, e.g., FINRA Rule 6120.
238 For example, in addition to disseminating
news of trading halts through the CMS, Nasdaq
publishes a daily list of securities subject to trading
halts indicating the name of the issuer, the time the
halt was initiated, and where applicable, the times
at which quoting and trading may resume.
239 See 1998 Release 63 FR 18477 supra note 230
and accompanying text (The SRO Circuit Breakers,
as adopted in 1988, called for a one-hour trading
halt if the DJIA declined by 250 points from the
previous day’s close, and a two-hour halt in the
event of a 400 point decline.). See Securities
Exchange Act Release No. 26198 (Oct. 19, 1988), 53
FR 41637 (Oct.24, 1988) (approving rules of the
Amex, CBOE, NASD, NYSE). The original circuit
breaker parameters were amended in 1996 to limit
the duration of trading halts, and again in 1997 after
it was determined that the 250 and 400 point
thresholds were too low given the substantial
increase in the value of the DJIA in the years
following implementation of 1988 policies. The
1997 amendments increased the SRO Circuit
Breakers’ ‘‘trigger values’’ to 350 and 500 points
respectively for the one-hour and two-hour trading
halt scenarios. See Securities Exchange Act Release
No. 38221 (Jan. 31, 1997) 62 FR 5871 (Feb. 7, 1997).
The Commission approved the various Exchanges’
circuit breaker revisions on a one year pilot basis.
The SRO Circuit Breakers were revised again in
1998 to put into place circuit breakers triggered by
certain percentage declines. See Securities

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Circuit Breakers, which used set point
values to determine when a trading halt
should be imposed, the current SRO
Circuit Breakers are governed by
percentage based declines tied to
specific point values that are calculated
at the beginning of each calendar
quarter using the average daily DJIA
closing for the previous month.240
Under the current SRO Circuit
Breakers, a 10% decline prior to 2 p.m.
will result in a one hour trading halt.
Should the 10% decline occur after 2
p.m. but prior to 2:30 p.m., exchanges
must halt trading for 30 minutes. If the
10% threshold is crossed after 2:30
p.m., trading will not be halted. A 20%
decline in the DJIA will result in a twohour trading halt, if the decline occurs
prior to 1 p.m. and a one-hour trading
halt if the threshold is reached between
1 p.m., and 2 p.m. If the DJIA declines
by 20% after 2 p.m., under the current
circuit breaker rules, trading will halt
for the remainder of the day. Should the
market decline by 30% at any point,
trading will halt for the remainder of the
day.241 The coordinated cross-market
trading halts provided by the SRO
Circuit Breakers operate only during
significant market declines and are
intended to substitute orderly, preplanned halts for the ad hoc and
destabilizing halts which can occur
when market liquidity is exhausted.242
The SRO Circuit Breakers focus on
market indexes rather than on the
market for an individual security. The
SRO Circuit Breakers apply a marketwide trading halt, rather than a halt in
an individual security, or a short selling
halt. The proposed circuit breaker rules,
in contrast, would temporarily restrict
only short selling (and only) in an
individual NMS security that suffers a
severe price decline.
We believe that either a short sale
price test restriction or a circuit breaker
rule may be appropriate to address the
recent change in market conditions and
erosion of investor confidence. As
discussed above, investors have become
increasingly concerned about sudden
and excessive declines in prices that
appear to be unrelated to issuer
fundamentals.243 Circuit breakers that
are triggered by severe declines in the
price of individual securities may be a
Exchange Act Release No. 39846 (Apr. 9, 1998) 63
FR 18477 (Apr. 15, 1998).
240 See id.
241 See 1998 Release, 63 FR 18477 supra note 230.
242 See Circuit Breaker Report by the Staff of the
President’s Working Group on Financial Markets
(Aug. 18, 1998) (Circuit Breaker Report), n. 33.
243 See supra Section II.C. (discussing investor
confidence).

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targeted response to address these
concerns.
2. Proposed Circuit Breaker Halt Rule
We are proposing a short selling
circuit breaker that, when triggered by a
severe price decline in a particular
security, would prohibit any person
from selling short that security,
wherever it is traded, while the circuit
breaker is in effect, subject to certain
exceptions.
While the Commission does not favor
market closings as a general matter, the
proposed circuit breaker halt rule would
not be as broad as a market-wide trading
halt. Furthermore, the Commission has
recognized that circumstances may
infrequently call for a trading pause that
allows participants to reassess
conditions.244 We believe that a pause
in short selling resulting from a
significant decline in the price of an
individual equity security might
provide a similar measure of stability.
We seek comment on whether it
would be appropriate for the
Commission to impose a circuit breaker
that when triggered would halt all short
selling in an individual equity security,
wherever it is traded, for the remainder
of the trading day if the price of the
security has declined by at least 10%
from the prior day’s closing price for
that security, as measured by the closing
price of the security on the consolidated
system. Like the proposed modified
uptick rule and the proposed uptick
rule, we propose that it would apply to
all NMS stocks as that term is defined
under Rule 600(a)(47) of Regulation
NMS.245 We seek comment regarding
the scope of a potential circuit breaker’s
application and to which securities it
might most appropriately apply.
We preliminarily believe that a 10%
decline in a security’s price as measured
from the prior day’s closing price, as
reported in the consolidated system,
would be an appropriate level at which
to trigger a circuit breaker that results in
a short selling halt. As discussed above,
such a percentage decline would be
consistent with the current SRO Circuit
Breakers.246 The 10% threshold for a
circuit breaker that, when triggered,
results in a short selling halt in an
individual security would reflect the
format of current SRO Circuit Breakers
and use a trigger based on a fluctuating
value, the share price, to strike a balance
between the need to halt short selling in
moments of severe decline in a
security’s price and the market
244 See

1998 Release, 63 FR 18477 supra note 230.
proposed Rule 201(a)(1).
246 See 1998 Release, 63 FR 18477 supra note 230
and accompanying text.
245 See

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participant’s expectation that its short
selling strategy will be available in an
efficient and open marketplace. We note
that a group of national securities
exchanges recommended a 10% decline
threshold in connection with a short
selling circuit breaker combined with a
short sale price test restriction.247
Another commenter supported a 10%
minimum threshold, but also
recommended a ‘‘rolling’’ circuit
breaker that when triggered would
impose short selling halts of varying
lengths, depending on the level of
decline in the price of an individual
equity security.248 We recognize that a
lesser or greater percentage decline or
some other measure of decline may be
appropriate, and seek comment on that
question.
As described in more detail below,
the price decline would be based on the
security’s price during the trading day
as reported in the consolidated system
as compared to the prior day’s closing
price as reported in the consolidated
system. The prior day’s closing price
would be the last price reported during
regular trading hours 249 the prior day.
The proposed circuit breaker halt rule
would, once triggered by a 10% decline
in the price of a security from the prior
day’s closing price on any trading day,
impose a short selling halt in the
individual security at times when the
last sale price is calculated and
disseminated in the consolidated
system. We based the time period on the
calculation and dissemination of last
sale price because the circuit breaker is
triggered by a percentage decline in the
security’s intra-day last sale price
relative to the prior day’s last sale price
at the end of regular trading hours on
the prior day.
In addition, to avoid market
disruption that may occur if a circuit
breaker is triggered late in the trading
day, the proposed circuit breaker rules
would not be triggered if the specified
market decline threshold is reached in
an NMS security within thirty minutes
of the end of regular trading hours.
Former NYSE Rules 80A(a) and 80A(b)
provided that a circuit breaker would
not trigger program trading restrictions
after 3:25 p.m., or approximately thirtyfive minutes before the close. We seek
comment as to whether thirty minutes is
an appropriate balance to ensure that
247 See

National Exchanges letter, supra note 63.
letter from Credit Suisse, supra note 122.
249 ‘‘Regular trading hours’’ has the same meaning
as in Rule 600(b)(64) of Regulation NMS. Rule
600(b)(64) provides that ‘‘Regular trading hours
means the time between 9:30 a.m. and 4 p.m.
Eastern Time, or such other time as is set forth in
the procedures established pursuant to
§ 242.605(a)(2).’’
248 See

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the goals of the proposed rule would be
met while also reducing the potential
for market disruption toward the close
of regular trading hours.
We believe that a short selling halt
that persists at times when the last sale
price is calculated and disseminated
following a 10% decline in a security’s
price might be appropriate. We are
concerned that a short selling halt for a
lesser time might not provide sufficient
time to re-establish equilibrium between
buying and selling interest in the
individual security in an orderly
fashion. We also believe that a short
selling halt for this length of time might
be necessary to help ensure that market
participants have a reasonable
opportunity to become aware of, and
respond to, a significant decline in a
security’s price. We seek comment
below, however, regarding whether a
longer or shorter short selling halt
would be appropriate, or whether it
would be appropriate to impose a short
selling halt on a rolling basis as
suggested by an industry commenter.250
We are also seeking comment on the
potential costs and benefits of a short
selling circuit breaker that when
triggered results in a temporary halt on
short selling. The Commission has
previously noted that circuit breakers
may benefit the market by allowing
participants an opportunity to
reevaluate circumstances and respond
to volatility.251 Unlike the proposed
modified uptick rule and the proposed
uptick rule, this proposed circuit
breaker halt rule would halt all short
selling for an individual security for the
specified period of time. In discussing a
short selling circuit breaker, one
commenter noted that such a measure
could address the issue of ‘‘bear raids’’
while limiting the market impact that
may arise from other forms of short sale
price test restrictions.252 The
Commission has long held the view that
coordinated circuit breakers might
restore investor confidence during times
of substantial uncertainty.253 We believe
the proposed circuit breaker halt rule
might produce similar benefits.
We recognize, however, that there are
potential costs associated with
implementation of a short selling circuit
breaker that when triggered results in a
temporary short selling halt. As
discussed below, we anticipate that
market participants charged with
implementation of such a short selling
circuit breaker would have to invest
human and financial resources to

update systems as necessary for
compliance. Furthermore, as discussed
above, short selling is an important tool
in price discovery and the provision of
liquidity to the market, and we
recognize that imposition of a short
selling circuit breaker that when
triggered imposes short selling halts
could restrict otherwise legitimate short
selling activity during periods of
extreme volatility.
We also understand there are
concerns about a potential ‘‘magnet
effect’’ that could arise as an unintended
consequence of a circuit breaker that
halts short selling and results in short
sellers driving down the price of an
equity security in a rush to execute
short sales before the circuit breaker is
triggered. One commenter noted that a
short sale circuit breaker could
exacerbate downward pressure on
stocks as their value reached the
threshold level.254 Another commenter,
however, in discussing the issue of a
‘‘magnet effect’’ cited empirical studies
that question whether a circuit breaker
would result in artificial pressure on the
price of individual securities.255 We are
also concerned about another type of
‘‘magnet effect’’ in which short selling
demand is built up until the circuit
breaker is lifted.
Similar to the short sale price test
restrictions, the proposed circuit breaker
halt rule would apply to NMS securities
other than options. However, we seek
comment below on whether such a rule
should also apply to non-NMS
securities.
The proposed circuit breaker halt rule
would include exceptions substantially
identical to exceptions that were
included in the Short Sale Ban
Emergency Order,256 as amended by the
Commission on September 21, 2008
(‘‘September 21, 2008 Amended Order’’)
(collectively, the ‘‘Short Sale Ban’’).257
We believe the proposed circuit breaker
halt rule should include exceptions that
mirror certain of the exceptions in the
Short Sale Ban because the proposed
rule shares the same goal of prohibiting
short selling that might exacerbate a
price decline during a period of sudden
and excessive price declines, while
being designed to maintain functions
that, for example, would be necessary to
help provide adequate liquidity. Short
sales effected under these exceptions
would be marked ‘‘short exempt.’’

letter to Mary Schapiro, Chairman, from
Direct Edge, dated March 30, 2009.
255 See letter from Credit Suisse supra note 122.
250 See letter from Credit Suisse supra note 122.

256 See Short Sale Ban Emergency Order, 73 FR
251 See 1998 Release, 63 FR 18477.

55169–02 (Sept. 24, 2008).
252 See Brown Letter supra note 55.

257 See September 21, 2008 Amendment, 73 FR
253 See 1998 Release, 63 FR 18477 supra note 230.
55556–01 (Sept. 25, 2008).

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The proposed circuit breaker halt rule
could operate in place of, or in addition
to, a short sale price test restriction. For
instance, in addition to the imposition
of a permanent, market-wide price test
restriction, a circuit breaker halt rule
could also prohibit any person from
selling short any security that suffers a
severe price decline.
a. Market Makers and Options Market
Makers Engaged in Bona Fide Market
Making Activities
The Short Sale Ban excepted
registered market makers, block
positioners, or other market makers
obligated to quote in the over-thecounter market, if they were selling
short a publicly traded security covered
by the Short Sale Ban as part of bona
fide market making in such security.258
The purpose of the exception was to
permit market makers to continue to
provide liquidity to the markets,
facilitate orders including customer buy
orders, and otherwise comply with their
obligations as market makers.
The term ‘‘market maker’’ includes
any specialist permitted to act as a
dealer, any dealer acting in the capacity
of a block positioner, and any dealer
who, with respect to a security, holds
itself out (by entering quotations in an
inter-dealer quotation system or
otherwise) as being willing to buy and
sell such security for its own account on
a regular or continuous basis.259 As the
Commission has stated previously, a
market maker engaged in bona fide
market making is a ‘‘broker-dealer that
deals on a regular basis with other
broker-dealers, actively buying and
selling the subject security as well as
regularly and continuously placing
quotations in a quotation medium on
both the bid and ask side of the
market.’’ 260 We recently provided
guidance on bona fide market making
for purposes of Regulation SHO Rule
203(b), and believe that such guidance
would also be appropriate with regard
to a market maker exception for the
proposed circuit breaker halt rule.261
We believe it is appropriate to include
a market maker exception for this
proposed alternative because a halt in
short selling in a security would, during
the period of the halt, have far greater
effects on liquidity and legitimate price
discovery activity than the proposed
modified uptick rule or proposed uptick
258 See

254 See

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id.
2004 Regulation SHO Adopting Release,
69 FR at 48015, n. 66 (citing to Section 3(a)(38) of
the Exchange Act).
260 See Exchange Act Release No. 32632 (July 14,
1993), 58 FR 39072, 39074 (July 21, 1993).
261 See Exchange Act Release No. 58775 (Oct. 14,
2008); 73 FR 61690 (Oct. 17, 2008).
259 See

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rule, which, as discussed above, are
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sroberts on PROD1PC70 with PROPOSALS

b. Bona Fide Market Making in
Derivatives

c. Options and Futures Contract
Expiration
The Short Sale Ban included an
exception to allow short sales that
occurred as a result of automatic
exercise or assignment of an equity
option held prior to effectiveness of the
Short Sale Ban due to expiration of the
option.265 It also allowed short sales
that occurred as a result of the
expiration of futures contracts held
prior to effectiveness of the Short Sale
Ban.266
We propose including a similar
exception for the proposed circuit
breaker halt rule for short sales that
occur as a result of automatic exercise
or assignment of an equity option held
before a circuit breaker on a particular
security is triggered and a short selling
halt is imposed in that security due to
expiration of the option. We are also
proposing an exception to the proposed
circuit breaker halt rule to allow short
sales that occur as a result of the
expiration of futures contracts held
before a circuit breaker is triggered in a
particular security.
Persons that purchased or sold
options prior to the effectiveness of a
circuit breaker halt entered into such
transactions with the expectation that
they would be able to fulfill their
contractual obligations and receive the
benefits of their bargain in return.
Generally, options contracts are
purchased or sold prior to the day in
which a circuit breaker might be
triggered. Therefore, providing an
exception to the proposed circuit
breaker halt rule to allow such persons
to continue to rely on their pre-existing
transactions until completion does not
raise the concerns that the proposed
circuit breaker halt rule is intended to
address. As with the Short Sale Ban, we
propose to limit this exception to
automatic exercises and assignments to
prevent it from being abused by more
discretionary options exercises.

The Short Sale Ban also included an
exception for any person that is a
market maker that effects a short sale as
part of bona fide market making and
hedging activity related directly to bona
fide market making in derivatives on the
publicly traded securities of any
security covered by the Short Sale
Ban.262 Under the Short Sale Ban, this
exception applied to all market makers,
including over-the-counter market
makers, and to bona fide market making
and hedging activity related directly to
bona fide market making in exchange
traded funds and exchange traded notes
of which securities included in the
Short Sale Ban were a component. We
stated that the purpose of the exception
was to permit market makers to
continue to provide liquidity to the
markets.263 Similarly, we believe such
an exception would be appropriate for
the proposed circuit breaker halt rule.
During the period that the Short Sale
Ban was effective, to help ensure that
the exception would not result in
increased short exposure in securities
covered by the Short Sale Ban, we
limited the exception so that if a
customer or counterparty position in a
derivative security based on the security
was established after the effectiveness of
the September 21 Amended Order, a
market maker could not effect the short
sale if the market maker knew that the
customer’s or counterparty’s transaction
would result in the customer or
counterparty establishing or increasing
an economic net short position (i.e.,
through actual positions, derivatives, or
otherwise) in the issued share capital of
a firm covered by the Short Sale Ban.
This provision was included to address
potential circumvention of the Short
Sale Ban during the several weeks that
it was in effect.264 However, we do not
believe such a provision is necessary for
the proposed circuit breaker halt rule
because the rule as proposed only
contemplates a one-day (or less than one
day depending on when during the day
the circuit breaker is triggered)
prohibition on short selling of any NMS
security that becomes subject to the
circuit breaker.

d. Exception for Assignment To Call
Writers Upon Exercise of an Option
To allow for creation of long call
options, the Short Sale Ban included an
exception to permit short sales that
occur as a result of assignment to call
writers upon exercise.267 When options
are exercised, call writers may be
required to sell short in order to satisfy
their obligations. Because call writers do
not have discretion, and because the
short sales are effected in order to fill

262 See Short Sale Ban Emergency Order, 73 FR
55169–02.
263 See id.
264 See September 21, 2008 Amendment, 73 FR
55556–01.

265 See Short Sale Ban Emergency Order, 73 FR
55169–02.
266 See id.
267 See September 21, 2008 Amendment, 73 FR
55556–01.

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buying demand, we believe that
including this exception in the
proposed circuit breaker halt rule would
benefit the markets while not opening
the door to the abuses that the proposed
rule is intended to address.
e. Owned Securities
The Short Sale Ban provided that
sales of Rule 144 securities were
excepted from its requirements because
Rule 144 securities are owned securities
and do not raise the concerns that the
Short Sale Ban was designed to
address.268 We believe a similar
exception for securities that a seller is
deemed to own under Rule 200(b)
should be included in the proposal.
Rule 200(g)(1) of Regulation SHO
provides that a sale can be marked
‘‘long’’ only if the seller is deemed to
own the security being sold and either
(i) the security is in the broker-dealer’s
physical possession or control, or (ii) it
is reasonably expected that the security
will be in the broker-dealer’s physical
possession or control by settlement of
the transaction.269 Thus, even where a
seller owns a security, if delivery will be
delayed, such as in the sale of formerly
restricted securities pursuant to Rule
144 of the Securities Act of 1933, or
where a convertible security, option, or
warrant has been tendered for
conversion or exchange, but the
underlying security is not reasonably
expected to be received by settlement
date, such sales must be marked
‘‘short.’’ 270 As a result, during a halt
triggered by a circuit breaker, sellers
would be permitted to sell securities
that although owned, are subject to the
provisions of Regulation SHO governing
short sales due solely to the seller being
unable to deliver the security to its
broker-dealer prior to settlement based
on circumstances outside the seller’s
control.
Although the Short Sale Ban only
excepted Rule 144 securities, we believe
that other securities considered
‘‘deemed to own’’ for purposes of Rule
200(b) should also be excepted from the
proposed circuit breaker halt rule
because these are owned securities that
do not raise the same concerns that the
proposed rule is designed to address.
3. Proposed Circuit Breaker Price Test
Rules
We are also proposing a short selling
circuit breaker that, when triggered by a
severe decline in the price of a
particular security, would impose short
sale price restrictions for that security
268 See

id.

17 CFR 242.200(g)(1).

270 See id.

269 See

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wherever it is traded for the remainder
of the trading day. Such a circuit
breaker would be imposed in place of a
permanent, market-wide short sale price
test restriction.
Similar to the reasons stated in the
discussion above regarding the
proposed circuit breaker halt rule, a
circuit breaker price test rule would be
triggered by a 10% intraday decline in
the price of an individual equity
security from the prior day’s closing
price as reported in the consolidated
system. We preliminarily believe that a
10% decline in a security’s price as
measured from the prior day’s closing
price, as reported in the consolidated
system, would be an appropriate level at
which to trigger a circuit breaker that
results in a short sale price test
restriction. As discussed above, such a
percentage decline would be consistent
with the current SRO Circuit
Breakers.271 We recognize that a lesser
or greater percentage decline or some
other measure of decline may be
appropriate.
We also seek comment regarding the
form of the short sale price test
restrictions that could be imposed when
the proposed circuit breaker is triggered.
Such a circuit breaker when triggered
could impose a short sale price test
restriction in the form of the proposed
modified uptick rule based on the
national best bid, or in the form of the
proposed uptick rule based on the last
sale price of the individual security.
This would include the same proposed
short sale price test and provisions that
would be used in the proposed modified
uptick and proposed uptick rules,
permitting certain sales to occur
notwithstanding the price limitations
otherwise applicable under the two
proposed rules.272 We believe these
provisions would be justified for the
same reasons described regarding the
proposed modified uptick rule and the
proposed uptick rule, respectively.273
As described in more detail below,
the price decline would be based on the
security’s price during the trading day
as reported in the consolidated system
as compared to the prior day’s closing
price as reported in the consolidated
system. The prior day’s closing price
would be the last price reported during
regular trading hours 274 the prior day.
271 See 1998 Release, 63 FR 18477 supra note 230
and accompanying text.
272 See Section III.A. and III.B. (discussing the
operation of the proposed modified uptick rule and
the proposed uptick rule respectively).
273 See Sections III.A.2. and III.B.2. (discussing
the short exempt provisions of the proposed
modified uptick rule and proposed uptick rule,
respectively).
274 ‘‘Regular trading hours’’ has the same meaning
as in Rule 600(b)(64) of Regulation NMS. Rule

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The proposed circuit breaker
modified uptick rule would, once
triggered by a 10% decline in the price
of a security from the prior day’s closing
price, impose the modified uptick rule
in the individual security at times when
the national best bid is calculated and
disseminated in the consolidated
system, for the remainder of the trading
day. We based the time period on the
calculation and dissemination of the
national best bid in the consolidated
system because the proposed modified
uptick rule is based on the national best
bid as calculated and disseminated in
the consolidated system.
Similarly, the proposed circuit
breaker uptick rule would, once
triggered by a 10% decline in the price
of a security from the prior day’s closing
price on any trading day, impose the
uptick rule in the individual security at
times when the last sale price is
calculated and disseminated in the
consolidated system. We based the time
period on the calculation and
dissemination of the last sale price
because the proposed uptick rule is
based on the last sale price as calculated
and disseminated in the consolidated
system.
To avoid market disruption that may
occur if a circuit breaker is triggered late
in the trading day, the proposed circuit
breaker rules would not be triggered if
the specified market decline threshold
is reached in an NMS security within
thirty minutes of the end of regular
trading hours. Former NYSE Rules
80A(a) and 80A(b) provided that a
circuit breaker would not trigger
program trading restrictions after 3:25
p.m., or approximately thirty-five
minutes before the close of regular
trading hours. As with the proposed
circuit breaker halt rule, we seek
comment as to whether thirty minutes is
an appropriate balance to ensure that
the goals of the proposed rule would be
met while also reducing the potential
for market disruption toward the close
of regular trading hours.
We believe that the temporary
imposition of the proposed modified
uptick rule, after a circuit breaker is
triggered, that operates at times when
the national best bid is disseminated
following a 10% decline in a security’s
price might be appropriate. Similarly,
we believe that the temporary
imposition of the proposed uptick rule,
after a circuit breaker is triggered, that
operates at times when the last sale
price is calculated and disseminated
600(b)(64) provides that ‘‘Regular trading hours
means the time between 9:30 a.m. and 4 p.m.
Eastern Time, or such other time as is set forth in
the procedures established pursuant to
§ 242.605(a)(2).’’

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following a 10% decline in a security’s
price might be appropriate. We seek
comment below, however, regarding
whether longer or shorter time periods
would be appropriate.
We are seeking comment on the
potential benefits and costs of the
proposed circuit breaker price test rule.
We believe that such a rule might be a
narrowly tailored means to help restore
investor confidence and stabilize the
market for individual securities. Such a
rule might also help prevent short
selling, including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market by exhausting all
remaining bids at one price level,
causing successively lower prices to be
established by long sellers. Further, we
note that allowing short selling to
continue with price test restrictions
once the circuit breaker is triggered
might have a lesser impact on legitimate
short selling and normal market activity
including price discovery and the
provision of liquidity than a circuit
breaker that triggers a short selling halt.
We also believe that a circuit breaker
rule that triggers a price test restriction,
because it is based on a trading
increment of a penny as opposed to a
short sale halt, may also alleviate some
concerns over the possibility of artificial
downward pressure that might arise
from a ‘‘magnet effect’’ prior to reaching
the trigger threshold.
We recognize that a short selling
circuit breaker that, when triggered,
imposes short sale price test restrictions
for the remainder of the trading day,
would result in costs on market
participants responsible for
implementing and assuring compliance
with the requirements of such
restrictions. There might be significant
operational costs associated with
reprogramming systems to comply with
short sale price test restrictions, and we
anticipate that these costs might be
greater than those required to comply
with a short selling circuit breaker that,
when triggered, imposes halts on short
selling in individual securities. There
might also be requirements for
additional staff and costs associated
with personnel hiring and training
related to maintaining and ensuring
compliance with any short sale price
test restrictions.275
Further, we recognize that short sale
price test restrictions imposed as a
result of a circuit breaker might result in
many of the same costs discussed in
detail in Section IX pertaining to the
implementation of market-wide short
275 See,

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sale price test restrictions.276 Those
costs might include a reduction of the
benefit of legitimate short selling and a
subsequent reduction in the quantity of
short selling, which we have noted
might lead to a decrease in market
quality and price discovery, less
protection against upward stock price
manipulations, a less efficient allocation
of capital, an increase in trading costs,
and a decrease in liquidity.277 We are
seeking comment on the extent of these
and other costs associated with a circuit
breaker that when triggered imposes
short sale price test restrictions.
The proposed circuit breaker price
test rule would result in either the
proposed modified uptick rule or the
proposed uptick rule, for the remainder
of the trading day, as each proposed rule
is described above. For instance, a
circuit breaker resulting in the proposed
modified uptick rule would require that
trading centers establish, maintain, and
enforce policies and procedures
reasonably designed to prevent short
selling on a downbid in a security
where the circuit breaker has been
triggered by a severe decline in the price
of that NMS security. Broker-dealers
could mark certain short sale orders
‘‘short-exempt’’ under the conditions set
forth above. A circuit breaker that
resulted in the proposed uptick rule
would, when triggered by a decline in
the price of a particular security,
prohibit any person from selling short
that security on a downtick. This would
be a more limited approach than a short
sale price test rule that is in place at all
times and thus might result in fewer of
the potential disadvantages that would
result from a short sale price test that
was in place at all times.
Under the proposed circuit breaker
price test rule, a price test would not be
in place on a permanent and marketwide basis for all securities. Under the
proposed circuit breaker that results in
the proposed modified uptick rule,
trading centers would need to establish
and maintain reasonable policies and
procedures in advance so that they are
able to comply with the proposed
circuit breaker rule whenever triggered.
It would not be reasonable for a trading
center to wait until the circuit breaker
is triggered to begin establishing
policies and procedures to prevent the
execution or display of the particular
security on a downbid. Thus, a circuit
breaker that triggers the proposed
modified uptick rule would result in
276 See Section IX (discussing costs and benefits
of the proposed modified uptick rule and the
proposed uptick rule).
277 See Section IX.B.

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some immediate upfront costs to trading
centers.
In the Solicitation of Comments, we
seek comment on whether the short sale
price test restrictions should remain in
place for a longer or shorter period of
time, whether a 10% decline would be
an appropriate trigger for the circuit
breaker proposals, or if for example, a
5% or 20% threshold might be more
appropriate, and what additional costs
may be associated with a proposed
circuit breaker price test rule.
IV. Request for Comment
In addition to the specific requests for
comment found throughout this
proposing release, we seek comment
generally from all members of the public
on all aspects of the proposed
amendments to Rules 200(g) and 201 of
Regulation SHO. We request that
commenters provide empirical data to
support their views and arguments
related to these proposals. In addition to
the questions set forth above,
commenters are welcome to offer their
views on any other matter raised by the
proposed amendments to Regulation
SHO. Specifically, are there any other
possible restrictions on short selling that
the Commission should consider,
particularly ones that might be helpful
in a severe market decline?
Questions Regarding Proposed Short
Sale Price Tests Generally
1. Should short sales be subject to a
short sale price test restriction, or
should we continue to rely on current
short sale regulations and anti-fraud and
anti-manipulation provisions of the
securities laws to address potentially
abusive short selling?
2. We note that our decision to
propose a short sale price test was
based, in part, on the recent changes in
market conditions and investor
confidence.278 To what extent, if any,
would a short sale price test, such as the
proposed modified uptick rule or the
proposed uptick rule, be necessary or
appropriate in light of recent changes in
market conditions? Please explain and
provide empirical data in support of any
arguments and/or analyses. How would
the proposed modified uptick rule or
the proposed uptick rule affect market
conditions today? Please explain and
provide empirical data in support of any
arguments and/or analyses.
3. How effective would the proposed
modified uptick rule or the proposed
uptick rule be in allowing relatively
unrestricted short selling in an
advancing market? Please explain and
provide empirical data in support of any

arguments and/or analyses. How
effective would the proposed modified
uptick rule or proposed uptick rule be
at helping to prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market by exhausting all
remaining bids at one price level,
causing successively lower prices to be
established by long sellers? Please
explain and provide empirical data in
support of any arguments and/or
analyses. Could the proposed modified
uptick rule or proposed uptick rule be
modified to better meet these goals? If
so, how? Please explain and provide
empirical data in support of any
arguments and/or analyses.
4. We also note our concern regarding
investor confidence based on the
numerous requests for reinstatement of
short sale price test restrictions.279
Would reinstating a short sale price test
restriction such as the proposed
modified uptick rule or proposed uptick
rule help restore investor confidence? If
so, why? If not, why not? Please explain
and provide empirical data or other
specific information in support of any
arguments and/or analyses.
5. In addition to investor confidence
and market volatility, we have stated
that we are concerned about potentially
abusive short selling. Would the
proposed modified uptick rule or
proposed uptick rule help address
potentially abusive short selling? If so,
how? If not, why not? Please explain
and provide empirical data in support of
any arguments and/or analyses.
6. We note that short selling provides
the market with important benefits,
including market liquidity and pricing
efficiency.280 What effect, if any, would
the proposed modified uptick rule or
proposed uptick rule have on market
liquidity? Please explain and provide
empirical data in support of any
arguments and/or analyses. What effect,
if any, would the proposed modified
uptick rule or proposed uptick rule have
on pricing efficiency? Please provide
empirical data in support of any
arguments and/or analyses.
7. We also note that short selling may
be used to illegally manipulate stock
prices.281 What impact, if any, would
the proposed modified uptick rule or
proposed uptick rule have on ‘‘bear
raids’’? Please explain and provide
empirical data in support of any
arguments and/or analyses. To what
extent, if any, does unrestricted short
279 See

id.

Section II.A.

281 See id.

280 See

278 See

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selling exacerbate a declining market?
Please explain and provide empirical
data in support of any arguments and/
or analyses.
8. Is there a need for short sale price
test restrictions? If there is a need for a
short sale price test, would the proposed
modified uptick rule be the best test? If
so, why? If not, why not? Would the
proposed uptick rule be the best test? If
so, why? If not, why not? What are the
costs and benefits of the proposed
modified uptick rule versus the
proposed uptick rule? What would be
the general costs and benefits of short
sales being subject to the proposed
modified uptick rule? What would be
the general costs and benefits of short
sales being subject to the proposed
uptick rule? Should we consider other
forms of short sale price tests? If so,
what forms? What would be the costs
and benefits of any alternative forms of
short sale price tests? Please explain and
provide empirical data in support of any
arguments and/or analyses.
9. Would the proposed modified
uptick rule or proposed uptick rule be
an appropriate short sale price test in
the current decimals environment?
Would the proposed modified uptick
rule or proposed uptick rule be more
suitable in a decimals environment with
multiple trading centers? Please explain
and provide empirical data in support of
any arguments and/or analyses.
10. Should the proposed modified
uptick rule or proposed uptick rule be
limited to specific sectors or industries,
such as financials, due to the unique
harms or susceptibility to harms to
those industries or sectors from the
potential adverse effect of short selling
in a declining market? If so, please
describe the types of industries or
sectors that should be covered and the
unique harms or susceptibility to harm
to which they are subject. Please also
describe the mechanisms or criteria that
should be used to determine which
entities fall within these industries or
sectors.
11. One of the reasons for the
elimination of former Rule 10a–1 and
the prohibition on any SRO from having
a short sale price test in July 2007 was
because the application of short sale
price tests had become disjointed with
different price tests applying to the
same securities trading in different
markets. Under both proposed rules, all
covered securities, wherever traded,
would be subject to one short sale price
test. What are the advantages or
disadvantages of having a uniform short
sale price test in the covered securities
across all markets? Please explain.
12. How would trading systems and
strategies used in today’s marketplace

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be impacted by the proposed modified
uptick rule or proposed uptick rule?
How might market participants alter
their trading systems and strategies in
response to either proposed rule, if
adopted? To further the goal of having
a uniform short sale price test, both the
proposed modified uptick rule and
proposed uptick rule would provide
that no SRO shall have any rule that is
not in conformity with, or conflicts with
either proposed rule. Is this prohibition
necessary or appropriate? Would there
ever be a need for an SRO to institute
its own short sale price test? If so, why?
13. One of the reasons for the
elimination of former Rule 10a–1 was
that the disjointed application of the
rule resulted in an un-level playing field
among market participants. Could
implementation of a short sale price test
through a policies and procedures
approach applicable to a ‘‘trading
center’’ lead to disproportionate burden
among market participants? In what
way? Would a straight prohibition
implementation approach be preferable
in this regard? To what extent could the
proposed exceptions to either
alternative rule contribute to a
disproportionate burden on certain
market participants? What effect might
there be on relative competitive
advantages of different market
participants if the short sale price test
were based on an increment larger than
a penny?
14. What impact, if any, would the
trading requirements of Regulation NMS
have on implementing the proposed
modified uptick rule or proposed uptick
rule?
15. To what extent does the ability to
obtain a short position through the use
of derivative products such as options,
futures, contracts for difference,
warrants, credit default swaps or other
swaps (so-called ‘‘synthetic short sales’’)
or other instruments (such as inverse
leveraged exchange traded funds)
undermine the goals of short sale price
test restrictions, such as the proposed
modified uptick rule and the proposed
uptick rule? Will synthetic short sales
increase if the Commission adopts
either alternative short sale price test?
What effects might such an increase
have on market liquidity and pricing
efficiency? Please explain.
16. Before determining whether to
adopt a short sale price test restriction
on a permanent basis, should we adopt
a rule that would apply, on a pilot basis,
the operation of a short sale price test
restriction for specified securities? Such
an approach would allow us to study
the effects on, among other things,
market volatility, price efficiency, and
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market conditions. What would be other
benefits of taking this approach? What
would be the costs of taking this
approach? Would the costs associated
with programming systems to apply a
short sale price test restriction on
specified securities outweigh any
benefits of having a pilot? If we were to
take this approach, how long would it
take to program systems to apply a short
sale price test restriction to specified
securities? Similar to the Pilot
conducted immediately prior to the
elimination of former Rule 10a–1, the
securities that could be subject to the
pilot could be comprised of a subset of
the Russell 3000 index, or such other
securities as necessary or appropriate in
the public interest and consistent with
the protection of investors after giving
due consideration to the security’s
liquidity, volatility, market depth and
trading market. Would it be appropriate
for such a pilot to be comprised of a
subset of the Russell 3000 index? How
should the securities that would
comprise a pilot be selected? Please
explain the reasons for any suggested
selection method. Such a pilot could
remain in effect for one or two years.
Would a one or two year pilot be an
appropriate period of time? If so, why?
If not, why not? Please provide specific
reasons to support any views in favor of
establishing another time period. Please
provide any additional details regarding
how a pilot could be structured in terms
of the securities to be selected, the timeframe of the pilot, and the types of
restrictions that could be placed on
short selling of such securities.
17. In connection with the Pilot
conducted immediately prior to our
elimination of former Rule 10a–1, SROs
publicly released transactional short
selling data so that data would be
available to the public to encourage
independent researchers to study the
Pilot. If we were to adopt a rule that
would apply, on a pilot basis, a short
sale price test restriction on specified
securities, we would expect to make
information obtained during any such
pilot publicly available. In addition, we
would expect SROs to again make data
available to the public during any such
pilot. Would there be any costs
associated with making short selling
data available to the public during the
period of a pilot? What would be the
benefits of making such data available to
the public?
18. Commenters have stated that the
Pilot conducted prior to the elimination
of former Rule 10a–1 was insufficient,
in part, because it only covered a period

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of relative market stability 282 and that
the Pilot should have lasted longer to
‘‘ensure at least one bear market was
involved in the study.’’ 283 Did the Pilot
cover a sufficient period of time?
19. The proposed implementation
period for both of the proposed rules
would be three months from the
effective date of the proposed rule, if
adopted. Would a three month
implementation period be appropriate
for the proposed modified uptick rule?
Would a three month implementation
period be appropriate for the proposed
uptick rule? Should there be a shorter or
longer implementation period for either
proposed rule? Please explain.
Questions Regarding Proposed Modified
Uptick Rule
1. The proposed modified uptick rule
would define the term ‘‘down-bid price’’
to mean a price that is less than the
current national best bid or, if the last
differently priced national best bid was
greater than the current national best
bid, a price that is less than or equal to
the current national best bid. Should
this definition be altered? If the last
differently priced national best bid was
greater than the current national best
bid, should short selling be restricted to
a cent above the current national best
bid, or a higher or lower increment? If
so, why? If a specific increment is
suggested, please describe what impact
such increment would have on short
selling. What increment, if any, would
be tantamount to a ban on short selling?
Please provide empirical data in support
of any arguments and/or analyses.
2. The proposed modified uptick rule
would allow short selling at the current
national best bid in an advancing
market. Should the proposed modified
uptick rule instead require a trading
center to have policies and procedures
reasonably designed to permit short
selling only at a price above the current
national best bid such that short selling
would occur only at a higher price than
the current national best bid, and only
on a passive basis? Would such an
approach be more effective at
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to drive down the market or from being
used to accelerate a declining market
than the approach set forth in the
proposed modified uptick rule or
proposed uptick rule? If so, how? If not,
why not? What effect would an
approach that allows short selling only
at a price above the current national best
bid have on the benefits of short selling,
282 See
283 See

Brown Letter supra note 55.

id.

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such as providing price efficiency and
liquidity? Would this approach be easier
to program into trading and surveillance
systems than the approach in the
proposed modified uptick rule or
proposed uptick rule? If so, why? If not,
why not? Should an approach that
allows short selling only at a price
above the current national best bid be
combined with a policies and
procedures approach similar to that
discussed under the proposed modified
uptick rule or a prohibition approach
similar to that discussed under the
proposed uptick rule? What would be
the advantages and disadvantages,
including costs and benefits of each of
these approaches as combined with a
short sale price test that permits short
selling only at a price above the current
national best bid?
3. The proposed modified uptick rule
would apply to a ‘‘covered security’’
which is defined to mean an NMS stock
as that term is defined in Regulation
NMS. Is it appropriate for the proposed
modified uptick rule to apply only to
NMS stocks? Should the definition of a
‘‘covered security’’ instead be a security
that is registered on, or admitted to
unlisted trading privileges on, a national
securities exchange? If so, why? If not,
why not? Should the definition of
‘‘covered security’’ be expanded to
include all NMS securities, including
options? If so, why? If not, why not?
4. Should the proposed modified
uptick rule be extended to Non-NMS
stocks, such as stocks quoted on the
OTC Bulletin Board and Pink Sheets?
How would a national best bid be
determined for sales of such securities?
5. The proposed modified uptick rule
has as its reference point for a
permissible short sale the current
national best bid in relation to the last
differently priced national best bid. To
what extent would the sequence of bids
play a role in determining when short
sales can be executed or displayed by
trading centers, or submitted by brokerdealers relying on the exception to the
proposed modified uptick rule in
proposed Rule 201(c)? Are there any
regulatory or operational reasons to
allow markets to use their own bid
information in regulating short sales
under the proposed modified uptick
rule? Would allowing markets to use
their own bid information affect the
operation or effectiveness of the
proposed modified uptick rule? If so,
how? If trading centers and brokerdealers marking orders ‘‘short exempt’’
pursuant to proposed Rule 201(c) take
snapshots of the market at the time of
execution, display, or submission of the
short sale order, as applicable, would
such snapshots address any concerns

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regarding the sequence of bids? If not,
what other policies and procedures
could trading centers and broker-dealers
put in place to address these concerns?
6. The proposed modified uptick rule
would require trading centers to
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the execution or
display by the trading center of
impermissibly priced short sale orders.
Are the proposed modified uptick rule’s
requirements for what trading centers’
policies and procedures would be
required to include appropriate? Please
explain. Pursuant to proposed Rule
201(b)(1)(ii) a trading center’s policies
and procedures must be reasonably
designed to permit the execution or
display of a short sale order of a covered
security marked ‘‘short exempt’’ without
regard to whether the order is at a
down-bid price. Thus, a trading center’s
policies and procedures must be able to
recognize an order marked ‘‘short
exempt.’’ Is the inclusion of this
requirement in a trading center’s
policies and procedures appropriate?
Please explain.
7. Proposed Rule 201(b)(2) would
require that trading centers regularly
surveil to ascertain the effectiveness of
the policies and procedures required by
proposed Rule 201(b)(1) and promptly
take action to remedy deficiencies in
such policies and procedures. Would all
trading centers readily be able to
monitor on a real-time basis the national
best bid and the last differently priced
national best bid? Are there other ways
to surveil that would not be on a realtime basis that would be equally or
more effective? Please explain. What
systems and surveillance changes by
trading centers would be necessary to
meet the requirements of the proposed
modified uptick rule? Should additional
requirements be placed on trading
centers that execute or display short sale
orders in covered securities? If so, what
should such requirements be? Is a
policies and procedures approach
preferable to a prohibition (as was the
case under former Rule 10a–1) on any
person executing a short sale on a
down-bid price? What would be the
costs and benefits of a policies and
procedures approach as compared to
such a prohibition? Should the
Commission consider instead a
prohibition with regard to some or all of
the entities regulated by the
Commission, rather than one on ‘‘any
person,’’ as was the case under former
Rule 10a–1? What about an approach
that imposed a policies and procedures
requirement on some or all of the
entities regulated by the Commission
and a prohibition on ‘‘any person’’?

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What would be the costs and benefits of
an approach that used both a
prohibition and a policies and
procedures requirement on some or all
of the entities regulated by the
Commission? What would be the costs
and benefits of each of these
approaches?
8. Under the proposed modified
uptick rule, a trading center or brokerdealer, as applicable, would need to
take such steps as would be necessary
to enable it to enforce its policies and
procedures effectively. For example,
trading centers and broker-dealers, as
applicable, could establish policies and
procedures that could include regular
exception reports to evaluate their
trading practices. Should the proposed
modified uptick rule require trading
centers and broker-dealers subject to the
policies and procedures requirements of
the rule to have exception reports?
Please explain. What would be the costs
and benefits of such a requirement?
Would such costs and benefits differ
depending on the size of the trading
center or broker-dealer?
9. Under the proposed modified
uptick rule, if an order is impermissibly
priced, the trading center could re-price
the order at the lowest permissible price
and hold it for later execution at its new
price or better. As quoted prices change,
the proposed modified uptick rule
would allow a trading center to
repeatedly re-price and display an order
at the lowest permissible price down to
the order’s original limit order price (or,
if a market order, until the order is
filled). In effect, what would be the
consequences of the proposed modified
uptick rule? What would be the impact
of the proposed modified uptick rule on
speed of executions, transaction costs,
and order flow? In addition, if a trading
center were not to re-price an order,
what would be the impact on speed of
executions, transaction costs, and order
flow?
10. Proposed Rule 201(b)(1)(i)
provides that a trading center’s policies
and procedures must be reasonably
designed to permit the execution of a
displayed short sale order of a covered
security if, at the time of display of the
short sale order, the order was not at a
down-bid price. Is it appropriate that
the proposed modified uptick rule
would not preclude execution of a short
sale order that was not priced in
accordance with proposed Rule
201(b)(1) provided that the short sale
order complied with the requirements of
proposed Rule 201(b)(1) at the time it
was displayed? If so, why? If not, why
not? Please explain.
11. Proposed Rule 201(c) provides
that a broker-dealer may mark an order

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‘‘short exempt’’ provided the brokerdealer complies with the requirements
of that paragraph of the proposed rule.
Would it be appropriate to permit a
broker-dealer to mark a short sale order
‘‘short exempt’’ if it complies with the
requirements of paragraph (c) of the
proposed rule? Should this provision
apply to entities other than, or in
addition to, broker-dealers? Would the
determination of the down-bid price for
certain orders at the time of submission
and others at the time of execution or
display cause unnecessary confusion in
the market? What systems and
surveillance changes by broker-dealers
would be necessary to meet the
requirements of this provision?
12. The proposed modified uptick
rule would not apply at times the
national best bid is not collected,
processed, and disseminated. Is this
appropriate? Would this result in a
substantial portion of short selling
moving to times when the national best
bid is not collected, processed, and
disseminated? Would this undermine
the effectiveness of the proposed
modified uptick rule at helping to
prevent short selling, including
potentially abusive or manipulative
short selling, from being used as a tool
to drive down markets or to accelerate
a price decline? Should the proposed
modified uptick rule apply even at
times the national best bid is not
collected, processed, and disseminated?
If so, why? If not, why not? If it were
to apply during trading sessions when
the national best bid is not collected,
processed, and disseminated, how
should it apply (e.g., using the national
best bid at the end of the trading
session)? What would be the costs and
benefits of applying the proposed
modified uptick rule at times the
national best bid is not collected,
processed, and disseminated, including
the impact on liquidity and price
efficiency? What would be the costs and
benefits of applying the proposed
modified uptick rule at times the
national best bid is collected, processed,
and disseminated, including the impact
on liquidity and price efficiency?
13. The proposed modified uptick
rule includes a number of provisions
that would permit a broker-dealer to
mark a short sale order ‘‘short exempt.’’
Pursuant to proposed Rule 201(b)(1)(ii)
a trading center’s policies and
procedures must be reasonably designed
to permit the execution or display of a
short sale order marked ‘‘short exempt’’
without regard to whether the order is
at a down-bid price. In addition to the
provisions under paragraphs (c) and (d)
of the proposed modified uptick rule
regarding when a broker-dealer may

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mark an order ‘‘short exempt,’’ are there
other provisions that the proposed
modified uptick rule should include?
Should the proposed modified uptick
rule permit a broker-dealer to make a
short sale order ‘‘short exempt’’ in
connection with short selling activity
and electronic trading systems that
match and execute customer orders at
random times within specific time
intervals, and at independently derived
prices? If so, please explain. If such a
provision would be appropriate or
necessary, what conditions should
apply? Should such a provision include
conditions similar to the conditions set
forth in Rule 201(c)(8) of the proposed
uptick rule? Should the proposed
modified uptick rule permit a brokerdealer to mark a short sale order ‘‘short
exempt’’ in connection with locked or
crossed markets? If so, please explain
how a conflict could arise in connection
with the proposed modified uptick rule
and locked or crossed markets and what
should be the conditions of any such
provision. Should the proposed
modified uptick rule permit a brokerdealer to make a short sale order ‘‘short
exempt’’ when the broker-dealer is
fulfilling specific obligations? If so,
please explain.
14. Would any of the provisions
under paragraph (c) or (d) under the
proposed modified uptick rule be
susceptible to abuse? If so, how? Are
there conditions that would address this
concern?
15. Proposed Rule 201(d)(1) would
permit a broker-dealer to mark a short
sale order of a covered security ‘‘short
exempt’’ if the seller owns the security
sold and intends to deliver the security
as soon as all restrictions on delivery
have been removed. Would this
provision be necessary or appropriate?
Should any conditions or limitations
apply? If so, why? If not, why not?
16. Proposed Rule 201(d)(2) would
permit a broker-dealer to mark a short
sale order of a covered security ‘‘short
exempt’’ in connection with certain odd
lot transactions. Is this provision
necessary or appropriate? Should
proposed Rule 201(d)(2) apply to all
market makers in odd-lots or should it
be more limited? If so, why and how?
17. Proposed Rule 201(d)(3) would
permit a broker-dealer to mark a short
sale order of a covered security ‘‘short
exempt’’ in connection with certain
bona fide domestic arbitrage
transactions. Would this provision be
necessary or appropriate? Should the
provision be narrowed or broadened? If
so, state specifically why, and how it
should be restructured in relation to the
purposes of the proposed modified
uptick rule. Proposed Rule 201(d)(3)

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parallels the exception in former Rule
10a–1(e)(7) which, consistent with
Regulation T at the time, referred to a
‘‘special arbitrage account.’’ Because
Regulation T no longer refers to a
‘‘special arbitrage account’’ but instead
refers to a ‘‘good faith account’’,
proposed Rule 201(d)(3) would also
refer to a ‘‘good faith account.’’ Should
proposed Rule 201(d)(3) refer to a
‘‘special arbitrage account’’ or a ‘‘good
faith account’’? Please explain. Is a
separate account, whether a ‘‘special
arbitrage account’’ or ‘‘good faith
account,’’ necessary or appropriate for
this provision? If so, why? If not, why
not?
18. Proposed Rule 201(d)(4) would
permit a broker-dealer to mark a short
sale order of a covered security ‘‘short
exempt’’ in connection with certain
international arbitrage transactions.
Would this provision be necessary or
appropriate? Should the provision be
narrowed or broadened? If so, state
specifically why, and how it should be
restructured in relation to the purposes
of the proposed modified uptick rule.
Proposed Rule 201(d)(4) parallels the
exception in former Rule 10a–1(e)(8)
which, consistent with Regulation T at
the time, referred to a ‘‘special
international arbitrage account.’’
Because Regulation T no longer refers to
a ‘‘special international arbitrage
account’’ but instead refers to a ‘‘good
faith account,’’ proposed Rule 201(d)(4)
would also refer to a ‘‘good faith
account.’’ Should proposed Rule
201(d)(4) refer to a ‘‘special
international arbitrage account’’ or a
‘‘good faith account’’? Please explain. Is
a separate account, whether a ‘‘special
arbitrage account’’ or ‘‘good faith
account,’’ necessary or appropriate for
this provision? If so, why? If not, why
not? Should proposed Rule 201(d)(4) be
combined with proposed Rule
201(d)(3)? If so, why? If not, why not?
Should depository receipts of a security
be deemed the same security as the
security represented by such depository
receipt? Why or why not?
19. Proposed Rule 201(d)(5) would
permit a broker-dealer to mark a short
sale order of a covered security ‘‘short
exempt’’ in connection with sales by
underwriters or syndicate members
participating in a distribution in
connection with over-allotments, and
lay-off sales by such persons in
connection with a distribution of
securities. Would this provision be
necessary or appropriate for both and/or
either over-allotments and lay-off sales?
Under what circumstances would an
underwriter or syndicate member price
an offering below the national best bid?
What market impact, if any, would there

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be if the provision were extended to
short sales below the national best bid?
20. Proposed Rule 201(d)(6) would
permit a broker-dealer to mark a short
sale order of a covered security ‘‘short
exempt’’ where a broker-dealer is
facilitating customer buy or long sale
orders on a riskless principal basis.
Would this provision be appropriate or
necessary? Are the conditions set forth
in proposed Rule 201(d)(6) appropriate?
Should the conditions be narrowed or
broadened in any way? Please explain.
21. Proposed Rule 201(d)(7) would
permit a broker-dealer to mark a short
sale order of a covered security ‘‘short
exempt’’ in connection with certain
VWAP transactions. Would this
provision be necessary or appropriate?
Should the proposed provision be
modified in any way? If so, please
explain. Are all of the proposed
conditions appropriate, or should any
be eliminated or modified? Should any
other conditions be added? In place of
a provision limited to VWAP
transactions, would it be more
appropriate to permit a broker-dealer to
mark a short sale order of a covered
security ‘‘short exempt’’ in connection
with ‘‘any short sale at a price that is not
based, directly or indirectly, on the
quoted price of the covered security at
the time of execution and for which the
material terms were not reasonably
determinable at the time the
commitment to execute the order was
made’’? 284 If this provision would be
more appropriate, please explain why.
What types of benchmark orders would
such a provision capture? If we were to
use this alternative language, how
should we determine the ‘‘material
terms’’ of the short sale? Should there be
any conditions on the use of this
alternative proposed provision?
22. Should the proposed modified
uptick rule include a ‘‘short exempt’’
marking provision specific to the daily
opening of trading at each trading
center, particularly given that there are
multiple trading centers with nonsynchronous opening auctions? Please
explain. Should there be a ‘‘short
exempt’’ marking provision specific to
the opening of trading after a trading
halt? Please explain. Should there be a
‘‘short exempt’’ marking provision
specific to short selling at the closing of
trading at each trading center? Please
explain.
23. Should the proposed modified
uptick rule include a ‘‘short exempt’’
marking provision for transactions in
exchange traded funds and similar
products? If so, what should be the
qualifications and/or conditions related
284 See

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to such provision? We note the
Commission previously exempted ETFs
from Rule 10a–1, subject to various
conditions.285
24. Should the proposed modified
uptick rule include a ‘‘short exempt’’
marking provision for short sale orders
that are not pursuant to a ‘‘regular way’’
contract?
25. The proposed modified uptick
rule does not contain a ‘‘short exempt’’
marking provision in connection with
market makers engaged in bona fide
market making activity. Should there be
such a provision to facilitate market
making activity by broker-dealers? If so,
why? What consequences would there
be, if any, to the markets if brokerdealers are not permitted to mark such
orders ‘‘short exempt’’? Please describe.
If the proposed modified uptick rule
were to permit broker-dealers to mark
short sale orders pursuant to bona fide
market making activity as ‘‘short
exempt’’ what qualifications and/or
conditions should apply?
26. When the Commission repealed
short sale price tests in 2007, it also
provided that no SRO could have or
adopt its own short sale price test. One
reason for removing short sale price
tests was the existence of different types
of prices tests (e.g., the tick test of Rule
10a–1 and the NASD bid test). Should
the proposed modified uptick rule be an
SRO rule?
27. Under a straight prohibition, any
person is liable for an impermissible
short sale, even if the sale is the product
of an error. Should we include an
exception for inadvertent errors, if the
person can demonstrate that the error
was inadvertent? When would an
inadvertent error occur? How could a
person demonstrate that the noncompliant short sale was an inadvertent
error?
28. The short sales that qualify for the
‘‘broker-dealer’’ provision in proposed
Rule 201(c) are still subject to the
provisions of the proposed modified
uptick rule and would be required to be
marked as ‘‘short exempt.’’ Should these
short sales be marked as ‘‘short exempt’’
or is another mark more appropriate?
What effect, if any, would marking these
short sales as ‘‘short exempt’’ have on
compliance or surveillance relative to
another mark? What would be the costs
associated with implementing a mark
especially for these short sales?
Questions Regarding Proposed Uptick
Rule
1. Should the proposed uptick rule
have a policies and procedures
approach for some or all of the entities
285 See,

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regulated by the Commission similar to
the approach under the proposed
modified uptick rule? If so, why? If not,
why not? Or, should the Commission
also adopt a prohibition on ‘‘any
person’’ for the proposed uptick rule, in
addition to a policies and procedures
requirement on some or all of the
entities regulated by the Commission?
What would be the costs and benefits of
a policies and procedures requirement,
as compared to the proposed
prohibition? What would be the costs
and benefits of an approach that used
both a prohibition and a policies and
procedures requirement on some or all
of the entities regulated by the
Commission?
2. The proposed uptick rule would
apply to a ‘‘covered security’’ which is
defined as an NMS security, other than
an option, in which trades in such
securities are reported pursuant to an
effective transaction reporting plan and
for which information as to such trades
is made available in accordance with
such plan on a real-time basis to
vendors of market transaction
information. Should the definition of a
‘‘covered security’’ be changed to apply
to a security registered on, or admitted
to unlisted trading privileges on, a
national securities exchange, if trades in
such securities are reported pursuant to
an effective transaction reporting plan
and information as to such trades is
made available in accordance with such
plan on a real-time basis to vendors of
market transaction information? If so,
why? Would such a definition result in
securities other than NMS stocks being
subject to the proposed uptick rule? If
so, please describe those types of
securities and the costs and benefits of
applying the proposed uptick rule to
such securities. Should the definition of
‘‘covered security’’ be expanded to
include all NMS securities, including
options? If so, why? If not, why not?
3. The proposed uptick rule would
apply to NMS stocks quoted in the OTC
market, but not to non-NMS stocks
quoted in the OTC market. What form
of price test, if any, should apply to
non-NMS stocks quoted in the OTC
market, and why? If a price test should
apply to non-NMS stocks, to what types
of non-NMS stocks should it apply?
Please explain. How should such a price
test be implemented? In addition, we
seek comment regarding whether the
market is structured in a manner that
would make regulation of non-NMS
stocks practical.
4. Could any operational concerns
regarding implementation of the
proposed uptick rule be remedied by
market participants taking snapshots of
the market at the time of effecting a

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short sale? Such snapshots could
provide a record of the last sale price
and the direction of the market for a
particular security at the time of
effecting the short sale. Would any
additional exceptions be necessary to
address time lags in the receipt of last
sale price information from data feeds?
If so, please explain, including
providing any suggested language for
such an exception.
5. The proposed uptick rule would
not apply to short sales in covered
securities while last sale price
information is not collected, calculated
and disseminated on a real-time basis.
Would this result in a substantial
portion of short selling moving to times
when last price information is not
collected, calculated, and disseminated
on a real-time basis? Would this
undermine the effectiveness of the
proposed modified uptick rule at
helping to prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool to drive down markets or
to accelerate a price decline? Would it
be appropriate to apply the proposed
uptick rule while last sale price
information is not collected, calculated
and disseminated on a real-time basis?
Please explain. What would be the costs
and benefits of applying the proposed
uptick rule during after-hours trading
sessions, including the impact on
liquidity and price efficiency? Please
explain. What would be the costs and
benefits of not applying the proposed
uptick rule during after-hours trading
sessions, including the impact on
liquidity and price efficiency? Please
explain.
6. Former Rule 10a–1 included a
provision that permitted markets to use
the last sale prices on their own markets
as the reference point for measuring the
permissibility of short sales.
Specifically, former Rule 10a–1(a)(2)
provided: ‘‘* * * any exchange, by rule,
may require that no person shall, for his
own account or the account of any other
person, effect a short sale of any such
security on that exchange (i) below the
price at which the last sale thereof,
regular way, was effected on such
exchange, or (ii) at such price unless
such price is above the next preceding
different price at which a sale of such
securities, regular way, was effected on
such exchange, if that exchange
determines that such action is necessary
or appropriate in its market in the
public interest or for the protection of
investors; and, if an exchange adopts
such a rule, no person shall, for his own
account or for the account of any other
person, effect a short sale of any such
security on such exchange otherwise

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18075

than in accordance with such rule
* * *.’’ This provision was added to
former Rule 10a–1 in response to certain
SROs asserting that the last trade price
on the consolidated system should not
be the reference point for the tick test of
former Rule 10a–1 because last trade
price data was not available in a timely
manner and because the principal
exchanges did not have adequate
information retrieval systems on their
floors to ensure adherence with former
Rule 10a–1.286 Should the proposed
uptick rule include a similar provision?
With the spread of fully automated
markets and the advances in the
dissemination of market information, is
such a provision necessary or desirable
in today’s markets? Please explain the
costs and benefits of permitting each
market to use the last sale price in its
market as the reference point under the
proposed uptick rule.
7. Former Rule 10a–1(a)(3) included a
provision that allowed for an
adjustment to the sale price of a security
after the security went ex-dividend, exright, or ex any other distribution when
determining the price at which a short
sale may be effected. Specifically,
former Rule 10a–1(a)(3) provided: ‘‘In
determining the price at which a short
sale may be effected after a security goes
ex-dividend, ex-right, or ex-any other
distribution, all sale prices prior to the
‘‘ex’’ date may be reduced by the value
of such distribution.’’ Would this
provision be necessary under the
proposed uptick rule? Please explain.
8. Former Rule 10a–1(e)(6) contained
an ‘‘equalizing exception’’ that applied
to securities registered on, or admitted
to unlisted trading privileges on, a
national securities exchange, for which
trades in such securities were not
reported to an effective transaction
reporting plan and for which
information as to such trades was not
made available in accordance with such
plan on a real-time basis to vendors of
market transaction information. For
such securities, it allowed short sales to
be effected on a national securities
exchange (provided the exchange
approved the sale), if such sale was
necessary to equal the price of the
security on that exchange with the price
of the security on the principal
exchange for the security. The
Commission stated that this exception
286 See Securities Exchange Act Release No.
11276 (Mar. 5, 1975), 54 FR 12522 (Mar. 19, 1975)
(release proposing subparagraph (a)(2) in response
to stated operational and other difficulties
associated with complying with Rule 10a–1); see
also Securities Exchange Act Release No. 11468
(June 12, 1975), 40 FR 25442 (June 16, 1975)
(adoption of proposed changes adding
subparagraph (a)(2)).

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was afforded to persons on regional
exchanges to enhance the liquidity on
those exchanges with respect to orders
naturally flowing to those exchanges.287
The Commission also noted, however,
that the exception may have resulted in
providing an incentive to divert orders
from the principal exchange market to
avoid the impact of former Rule 10a–1,
because it allowed short sales to be
effected on regional exchanges at prices
below the last sale price on the
principal exchange.288 We have
determined not to include this
exception in the proposed uptick rule
because we believe it would not make
sense in light of the proposed reference
point (the last sale reference point in the
consolidated system). The exception in
former Rule 10a–1(e)(6) was originally
adopted in 1938 when the permissibility
of short sales under former Rule 10a–1
was determined for each particular
exchange by comparing the price of the
proposed short sale to the immediately
preceding price of the security to be
sold short on that exchange. The
exception was modified, but retained,
following amendments to former Rule
10a–1 to reference the last trade price
reported to the consolidated system or
in a particular exchange market. The
proposed uptick rule uses as the
reference price the last sale price
reported pursuant to an effective
transaction reporting plan only. Thus,
we believe a similar exception to the
exception contained in former Rule
10a–1(e)(6) would not be necessary. Are
there any reasons to include in the
proposed uptick rule a similar exception
to that contained in former Rule 10a–
1(e)(6)? Please explain.
9. As discussed in detail above under
Section III.B.2.c. we have incorporated
into proposed Rule 201(c)(10) and
(c)(11), proposed exceptions to address
any potential conflict between the
proposed uptick rule and the Quote
Rule arising from a trade-through. These
exceptions are substantially in the form
in which they were included in
subsections (e)(5)(ii) and (e)(11) of
former Rule 10a–1. Are these exceptions
appropriate or necessary? Should these
exceptions be revised in any way? If so,
please provide suggested language.
Proposed Rule 201(c)(10) would allow
an SRO, by rule, to prohibit its
registered specialists and registered
exchange market makers from availing
themselves of the exemption afforded by
paragraph (c)(10) if that SRO determines
287 See Securities Exchange Act Release No.
11468 (June 12, 1975), 40 FR 25442 (June 16, 1975)
(adopting amendments to Rule 10a–1 and
discussing the operation of Rule 10a–1(e)(6) as in
effect prior to and after amendment).
288 See id.

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that such action is necessary or
appropriate in its market in the public
interest or for the protection of
investors. Is this provision appropriate
or necessary? Would any SRO avail
itself of this provision? If not, why not?
If so, why and how?
10. Former Rule 10a–1 contained an
exception in paragraph (e)(5)(i) that
permitted market makers to effect short
sales at the same price as the last sale
price even if the last sale price was on
a zero-minus tick. Specifically, former
Rule 10a–1(e)(5)(i) provided an
exception for: ‘‘Any sale of a security
* * * (except a sale to a stabilizing bid
complying within Rule 104 of
Regulation M) by a registered specialist
or registered exchange market maker for
its own account on any exchange with
which it is registered for such security,
or by a third market maker for its own
account over-the-counter, i. Effected at a
price equal to or above the last sale,
regular way, reported for such security
pursuant to an effective transaction
reporting plan * * * Provided, however,
That any exchange, by rule, may
prohibit its registered specialist and
registered exchange market makers from
availing themselves of the exemption
afforded by this paragraph (e)(5) if that
exchange determines that such action is
necessary or appropriate in its market in
the public interest or for the protection
of investors.’’ Unless prohibited by
exchange rule, this exception was
intended to permit registered specialists
or market makers to protect customer
orders against transactions in other
markets in the consolidated system by
allowing them to sell short at a price
equal to the last trade price reported to
the consolidated system, even if that
sale was on a minus or zero-minus
tick.289 Although former Rule 10a–1
included this exception for market
makers, exchanges adopted rules that
prohibited their registered specialists
and market makers from availing
themselves of this exception.290 Thus,
we have determined not to include a
similar exception in the proposed
uptick rule.291 Would a similar
exception under the proposed uptick
rule for registered market makers be
289 See supra note 188. Former Rule 10a–1(a)(1)(i)
referenced the last sale price reported to an effective
transaction reporting plan, but former Rule 10a–
1(a)(2) also permitted an exchange to make an
election to use the last sale price reported in that
exchange market. Certain exchanges, such as the
NYSE, implemented short sale price test rules
consistent with former Rule 10a–1(a)(2). See, e.g.,
former NYSE Rule 440B.
290 See former NYSE Rule 440B.
291 See supra Section III.A.2.i. (discussing our
decision not to propose that a broker dealer may
mark an order ‘‘short exempt’’ in connection with
bona fide market making activity).

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appropriate or necessary? If the
proposed uptick rule were to include a
similar exception, should the exception
be substantially in the form in which it
was included in former Rule
10a–1(e)(5)(i)? If so, why? If not, why
not? Please explain any recommended
changes.
11. The proposed uptick rule would
include a number of exceptions. In
addition to the exceptions contained in
the proposed uptick rule, are there other
exceptions that should be included? For
example, should the Commission
provide an exception from the proposed
uptick rule for transactions in exchange
traded funds? If so, what should be the
qualifications and/or conditions for
relief? If not, please explain why not. In
addition, we note that under former
Rule 10a–1 the Commission granted
conditional relief to allow requesting
exchanges 292 and broker-dealers 293 to
execute short sales in after-hours
crossing sessions at a price equal to the
closing price of the security.294 Absent
relief, such short sales could have
violated former Rule 10a–1 in that the
matching price (the closing price) of a
security could have been on a minus or
zero-minus tick with respect to the last
sale in the consolidated transaction
reporting system. In granting this
conditional relief, the Commission
noted that short sale transactions
executed at the closing price generally
do not represent the type of abusive
practices that former Rule 10a–1 was
designed to prevent. In particular, the
Commission stated that short sale orders
entered in the after-hours crossing
sessions cannot influence the matching
price, but rather are priced by unrelated
order flow and transactions occurring
during the primary trading session,
which are subject to former Rule
10a–1. Should we codify the exemptive
292 See, e.g., letter re: Off-Hours Trading by the
Amex, [1991] Fed. Sec. L. Rep. (CCH) ¶ 79,802
(Aug. 5, 1991); letter re: Operation of Off-Hours
Trading by the NYSE, [1991] Fed. Sec. L. Rep.
(CCH) ¶ 79,736 (June 13, 1991).
293 See, e.g., letter re: Burlington Capital Markets
(July 1, 2003); letter re: Bear, Stearns & Co., Inc.
(Jan. 19, 1996); Letter re: AZX, Inc. (Nov. 15, 1995);
letter re: Instinet Corporation Crossing Network,
[1992] Fed. Sec. L. Rep. (CCH) ¶ 76,290 (July 1,
1992); letter re: Portfolio System for Institutional
Trading, [1991–1992] Fed. Sec. L. Rep. (CCH)
¶ 76,097 (Dec. 31, 1991).
294 The relief was generally subject to the
conditions that: (1) Short sales of a security in the
after-hours matching session shall not be effected at
prices lower than the closing price of the security
on its primary exchange; (2) persons relying on
these exemptions shall not directly or indirectly
effect any transactions designed to affect the closing
price on the primary exchange for any security
traded in the after-hours matching session; and (3)
transactions effected in the after-hours matching
session shall not be made for the purpose of
creating actual, or apparent, active trading in or
otherwise affecting the price of any security.

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relief granted under former Rule 10a–1
as an exception from the proposed
uptick rule? Under current market
conditions, do closing price transactions
create potentially manipulative
incentives for broker-dealers, such that
they should not be granted an
exception?
12. Proposed Rule 201(c)(1) would
provide an exception to allow short
sales to be submitted without regard to
the proposed uptick rule if the seller
owns the security sold and the seller
intends to deliver the security as soon
as all restrictions on delivery have been
removed. Would this exception be
necessary or appropriate? Should any
conditions or limitations apply to the
exception? If so, why? If not, why not?
13. Proposed Rule 201(c)(2) would
provide an exception for any sale by a
broker-dealer of a covered security for
an account in which it has no interest
pursuant to an order marked ‘‘long.’’
Would this exception be appropriate or
necessary? Should any conditions or
limitations apply to the exception? If so,
why? If not, why not?
14. Proposed Rule 201(c)(3) would
provide a limited exception for odd lot
transactions. Would this exception be
appropriate or necessary? Should the
proposed exception apply to all market
makers in odd-lots or should the
exception be more limited? Would this
exception be susceptible to abuse? If so,
how? Should all odd-lot transactions
have an exception from the proposed
uptick rule? Would providing an
exception for all odd-lot transactions
result in a risk of increased short sale
manipulation, e.g., would traders break
up trades into 99 share odd-lots in order
to avoid the proposed uptick rule?
15. Proposed Rule 201(c)(4) would
provide an exception from the proposed
uptick rule for certain bona fide
domestic arbitrage transactions. Should
the exception be narrowed or
broadened? If so, state specifically why,
and how it should be restructured in
relation to the purposes of the proposed
uptick rule. Proposed Rule 201(c)(4)
parallels the exception in former Rule
10a–1(e)(7) which, consistent with
Regulation T at the time, referred to a
‘‘special arbitrage account.’’ Because
Regulation T no longer refers to a
‘‘special arbitrage account’’ but instead
refers to a ‘‘good faith account’’,
proposed Rule 201(c)(4) would also
refer to a ‘‘good faith account.’’ Should
proposed Rule 201(c)(4) refer to a
‘‘special arbitrage account’’ or a ‘‘good
faith account’’? Please explain.
16. Proposed Rule 201(c)(5) would
provide an exception from the proposed
uptick rule for certain international
arbitrage transactions. Should the

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proposed exception be narrowed or
broadened? If so, state specifically why,
and how it should be restructured in
relation to the purposes of the proposed
uptick rule. Proposed Rule 201(c)(5)
parallels the exception in former Rule
10a–1(e)(8) which, consistent with
Regulation T at the time, referred to a
‘‘special international arbitrage
account.’’ Because Regulation T no
longer refers to a ‘‘special international
arbitrage account’’ but instead refers to
a ‘‘good faith account’’, proposed Rule
201(c)(5) would also refer to a ‘‘good
faith account.’’ Should proposed Rule
201(c)(5) refer to a ‘‘special international
arbitrage account’’ or a ‘‘good faith
account’’? Please explain. Should
proposed Rule 201(c)(4) be combined
with proposed Rule 201(c)(5)? If so,
why? If not, why not? Should
depository receipts of a security be
deemed the same security as the
security represented by such depository
receipt? Why or why not?
17. Proposed Rule 201(c)(6) would
provide an exception from the proposed
uptick rule for sales by underwriters or
syndicate members participating in a
distribution in connection with overallotments and lay-off sales by such
persons in connection with a
distribution of securities. Under what
circumstances would an underwriter or
syndicate member price an offering
below the last sale? What market
impact, if any, would there be if the
exception were extended to short sales
below the last sale?
18. Would the exception for VWAP
transactions contained in proposed Rule
201(c)(7) be appropriate or necessary?
Are all of the proposed conditions
appropriate, or should any be
eliminated or modified? Should any
other conditions be added? Should the
proposed exception be modified in any
way? If so, please explain. Would the
following exception be more
appropriate for excepting transactions
such as short sale orders on a VWAP
basis: The provisions of the proposed
uptick rule shall not apply to ‘‘any short
sale at a price that was not based,
directly or indirectly, on the quoted
price of the covered security at the time
of execution and for which the material
terms were not reasonably determinable
at the time the commitment to execute
the order was made’’? 295 If this
exception would be more appropriate,
please explain why. What types of
benchmark orders would such an
exception capture? If we were to use
this alternative language, how should
we determine the ‘‘material terms’’ of
the short sale? Should there be any
295 See

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conditions on the use of this alternative
proposed exception?
19. Would the exception for
transactions pursuant to certain
electronic trading systems that match
buying and selling interest in proposed
Rule 201(c)(8) be appropriate? Should
the proposed exception be modified in
any way? If so, please explain.
20. Proposed Rule 201(c)(9) would
provide an exception from the proposed
uptick rule for broker-dealers facilitating
customer buy or long sale orders on a
riskless principal basis. Are the
conditions set forth in proposed Rule
201(c)(9) in connection with the
‘‘riskless principal’’ exception
appropriate? Should the conditions be
narrowed or broadened in any way?
Please explain.
21. Proposed Rule 201(c)(12) would
provide for an exception from the
proposed uptick rule for short sales by
registered market makers or specialists
publishing two-sided quotes to sell
short to facilitate customer market and
marketable limit orders regardless of the
last sale price. Would this proposed
exception be appropriate? Should
additional qualifications and/or
conditions be placed on such a
proposed exception? If so, please
describe any such qualifications and/or
conditions including the purpose of
such qualifications and/or conditions. Is
this proposed exception necessary in
highly liquid securities where there is
likely to be sufficient selling interest
without the specialist’s or market
maker’s quote? Should this proposed
exception be limited in some way?
Please explain.
22. Should there be an exception
specific to the daily opening of trading
at each trading center, particularly given
that there are multiple trading centers
with non-synchronous opening
auctions? Please explain. Should there
be an exception specific to the opening
of trading after a trading halt? Please
explain. Should there be an exception
specific to short selling at the closing of
trading at each trading center? Please
explain.
23. Under the proposed uptick rule,
short sales could not be executed at a
price below the last sale price of a
security. In addition, short sale orders
could be executed at the last sale price
only if it is higher than the last different
price for the security. Is a one-cent
trading increment appropriate for the
proposed uptick rule? Why or why not?
If a higher increment is suggested,
please describe what impact such
increment would have on short selling.
What increment, if any, would be
tantamount to a ban on short selling?

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Please provide empirical data in support
of any arguments and/or analyses.
24. When the Commission repealed
short sale price tests in 2007, it also
provided that no SRO could have or
adopt its own short sale price test. One
reason for removing short sale price
tests was the existence of different types
of prices tests (e.g., the tick test of Rule
10a–1 and the NASD bid test). Should
the proposed uptick rule be an SRO
rule?
Questions Regarding Circuit Breakers
Generally
1. The Commission believes that the
erosion of investor confidence and
questions concerning the volatility in
the securities markets necessitate review
of various alternatives with respect to
short selling restrictions. Would a short
selling circuit breaker be more
appropriate than a market-wide short
sale price test restriction in current
market conditions? If so, why? If not,
why not? Would a short selling circuit
breaker provide more potential benefit
to the market than a market-wide short
sale price test restriction? Please
explain. For example, would a short
selling circuit breaker be a more
appropriate means for the Commission
to achieve the objective of helping to
prevent short selling from being used as
a tool to drive down the market? Please
explain. Would a short selling circuit
breaker rule help to address the
Commission’s concerns regarding
investor confidence? If so, why and
how? If not, why not?
2. Would implementation of a circuit
breaker be less or more costly than the
implementation of a market-wide short
sale price test restriction? The proposed
circuit breaker rules would, when
triggered, impose short selling
restrictions for the trading day on which
the circuit breaker is triggered. Should
the circuit breaker rules instead impose
short sale price tests for multiple days?
How many days? Would there be any
additional costs associated with a
circuit breaker that persisted for
multiple trading days? Would a circuit
breaker that when triggered imposed a
temporary halt on short selling be more
or less costly than one that resulted in
a short sale price test restriction? Please
explain. Would a short selling circuit
breaker be generally easier to implement
in a Regulation NMS environment than
a market-wide short sale price test
restriction such as the proposed
modified uptick rule, or the proposed
uptick rule.
3. To which securities should a short
selling circuit breaker apply? Should a
short selling circuit breaker apply to all
NMS stocks? If so, why? If not, why not

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and to which securities should a short
selling circuit breaker apply? Should a
short selling circuit breaker also apply
to securities traded over-the-counter?
4. The Commission is seeking
comment on the potential impacts of a
short selling circuit breaker on market
function and efficiency. What would be
the impact of a short selling circuit
breaker when triggered on the liquidity
of individual securities? What would be
the impact of a short selling circuit
breaker on capital formation? What
would be the impact of a short selling
circuit breaker on price discovery?
Would different circuit breaker
alternatives have different impacts on
liquidity, capital formation and price
discovery? Would a multiple day circuit
breaker pose any unique costs? Please
explain.
5. Would circuit breakers pose any
unique issues related to the daily
opening of trading, the opening of
trading after a trading halt, or the
closing of trading? Please explain.
6. Should a short selling circuit
breaker be limited in its application to
specific industry sectors that are
historically susceptible to extreme
volatility or disproportionately high
levels of short selling? If so, why? If not,
why not? If a circuit breaker should be
limited to apply only to certain sectors,
what sectors should be included? Please
explain. For example, should a circuit
breaker apply only to the financial
sector? If so, how should the financial
sector be defined for purposes of
determining which issuers’ securities
are subject to the circuit breaker
thresholds? Please explain.
7. Currently, the marketwide circuit
breaker rules are SRO rules. Should a
short selling circuit breaker be a SRO
rule or a Commission rule? Who should
be responsible for implementing a short
selling circuit breaker? Should trading
centers be responsible for implementing
a short selling circuit breaker when
triggered? Should any person effecting a
short sale be responsible for
implementing a short selling circuit
breaker? Should market participants be
responsible for programming their own
systems to prevent submission of a short
sale order in violation of the circuit
breaker? Please explain.
8. Who should be responsible for
monitoring the price declines of
individual securities that may trigger
the short selling circuit breaker (e.g.,
broker-dealers, SROs)? Please explain.
How should information about the
triggering of a circuit breaker in an
individual security be disseminated to
the market? Who should be responsible
for disseminating that information? For
example, the CMS is the primary means

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of dissemination for the current SRO
Circuit Breakers and regulatory halts.
Should the CMS be the primary means
by which participants are made aware
that a short selling circuit breaker has
been triggered with respect to an
individual security? Please explain.
Should the exchanges be responsible for
publishing daily lists of the individual
securities subject to the restrictions of a
short selling circuit breaker? What cost
would be associated with dissemination
of circuit breaker notifications and what
entities would bear expense in
upgrading systems to ensure compliance
with a short selling circuit breaker?
Please explain.
9. What would be the advantages and
disadvantages of a short selling circuit
breaker combined with a short selling
halt versus those of a short selling
circuit breaker combined with short sale
price test restrictions? Please explain.
10. What would be the advantages
and disadvantages of short selling
circuit breakers in general? Please
explain.
11. To what extent would market
participants’ ability to create short
positions through the use of derivatives
or other instruments undermine the
effectiveness of a short selling circuit
breaker? If this would occur, would it be
more or less significant in the context of
a short selling circuit breaker as
compared to a short sale price test
restriction? What effects would any
increase in ‘‘synthetic short sales’’ after
a circuit breaker is reached during a
rapid market decline have on market
volatility, liquidity, and price
efficiency? Would a short selling circuit
breaker create an unlinking of equity
markets from derivatives market prices?
12. Would a short selling circuit
breaker result in exacerbated downward
pressure as the trigger was approached,
creating a ‘‘magnet effect’’? Would any
such ‘‘magnet effect’’ differ between a
circuit breaker that when triggered
imposed a short selling halt, and a
circuit breaker that when triggered
imposed a short sale price test
restriction? Please explain and provide
empirical data and analysis where
appropriate to support the explanation.
13. Before determining whether to
adopt a short selling circuit breaker on
a permanent basis, should we adopt a
rule that would apply, on a pilot basis,
the operation of a short selling circuit
breaker on individual securities? If so,
what variation of a short selling circuit
breaker should be applied on a pilot
basis? Should the pilot circuit breaker
when triggered result in short selling
halts in individual securities, or rather
should such a pilot circuit breaker
impose short sale price test restrictions

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on individual securities? Please explain.
Such an approach would allow us to
study the effects on, among other things,
market volatility, price efficiency, and
liquidity during the recent changes in
market conditions. What would be other
benefits of taking this approach? What
would be the costs of taking this
approach? Would the costs associated
with programming systems to apply a
short selling circuit breaker on specified
individual securities outweigh any
benefits of having a pilot? If we were to
take this approach, how long would it
take to program systems to apply a short
selling circuit breaker in specified
individual securities? Would it take
longer or be more difficult to implement
a short selling circuit breaker that when
triggered imposed short selling halts?
Would it take longer or be more difficult
to implement a short selling circuit
breaker that when triggered imposed
short sale price test restrictions? Please
explain. Similar to the Pilot conducted
immediately prior to the elimination of
former Rule 10a–1, the securities that
could be subject to the pilot could be
comprised of a subset of the Russell
3000 index, or such other securities as
necessary or appropriate in the public
interest and consistent with the
protection of investors after giving due
consideration to the security’s liquidity,
volatility, market depth and trading
market. Would it be appropriate for
such a pilot to be comprised of a subset
of the Russell 3000 index? How should
the securities that would comprise a
pilot be selected? Please explain the
reasons for any suggested selection
method. Such a pilot could remain in
effect for one or two years. Would a one
or two year pilot be an appropriate
period of time? If so, why? If not, why
not? Please provide specific reasons to
support any views in favor of
establishing another time period.
14. In connection with the Pilot
conducted immediately prior to our
elimination of former Rule 10a–1, SROs
publicly released transactional short
selling data so that data would be
available to the public to encourage
independent researchers to study the
Pilot. If we were to adopt a rule that
would apply, on a pilot basis, a short
selling circuit breaker on individual
securities, we would expect to make
information obtained during any such
pilot publicly available. In addition, we
would expect SROs to again make data
available to the public during any such
pilot. Would there be any costs
associated with making short selling
data available to the public during the
period of a pilot? What would be the

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benefits of making such data available to
the public?
15. The proposed circuit breaker rules
would not be triggered if there is a
severe decline in the price of any NMS
security within 30 minutes of the end of
regular trading hours on any trading
day. As noted above, former NYSE Rule
80A provided that a circuit breaker
would not trigger program trading
restrictions after 3:25 p.m., or
approximately 35 minutes before the
close. Is 30 minutes an appropriate time
to limit the proposed circuit breaker
rules? Is 35 minutes more appropriate?
At what point during the trading day
would it be too disruptive to implement
a circuit breaker rule? Is a 30 minute
period sufficient to avoid major
disruptions to the markets? Do thinly
traded NMS securities raise additional
concerns? If a circuit breaker would
otherwise be triggered toward the end of
the trading day, what alternative short
sale restriction would be helpful in
addressing a severe market decline in
the price of a particular NMS security?
Please provide any data if available.
16. Should a circuit breaker be based
on an intra-day decline from that day’s
opening price? For instance, should the
circuit breaker be triggered by a 10%
decline from the opening price during
regular trading hours?
17. As proposed, the proposed circuit
breaker rules, once triggered, would
impose a short selling halt or a short
sale price test restriction in the
individual security until the close of the
consolidated system.296 Should the
short selling halt or short sale price test
restriction conclude at the end of
regular trading hours (which are from
9:30 a.m. until 4 p.m. EST)? 297 Should
we consider extending the short selling
halt or short sale price test, when
triggered, for a longer period of time?
Should the halt be extended until the
opening of regular trading hours on the
next trading day? Please explain.
Questions Regarding Proposed Circuit
Breaker Halt Rule
1. If a short selling circuit breaker was
to be imposed, should short selling in
individual securities be halted entirely
during a period of severe decline in the
price of the security? If so, why? If not,
why not? Please explain.
2. If short selling should be halted
during periods of severe decline in the
price of an individual security, how
should the decline be measured? Should
the decline be tied to a market index or
296 See Sections III.A.3 and III.B.3. discussing the
after-hours trading with regard to the proposed
modified uptick rule and the proposed uptick rule,
respectively.
297 See supra note 274.

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the price of an individual security?
Should illiquidity in the market for an
individual security be a factor in
measuring a decline in the price of a
security for purposes of determining
whether to halt short selling in a
particular security? Please explain.
3. If short selling should be halted
during periods of severe decline in the
price of an individual security, on what
price should the decline be based?
Should the decline be based on the
previous day’s closing price? If the
decline is measured by the prior day’s
closing price at the end of regular
trading hours, should it be based on the
closing price reported in the
consolidated system, or some other
widely disseminated price? Please
explain.
4. The proposed circuit breaker rules
would impose a short sale halt on any
security that declines in price 10% or
more relative to the prior day’s closing
price for that security. We note that a
low trigger level may result in more
securities becoming subject to a halt or
some securities becoming subject to a
halt more frequently, resulting in
potential increases in costs, decreases in
liquidity, and decreases in market
quality for the affected security. Also,
the impact of a lower trigger level may
be greater for thinly traded securities
and higher volatility securities than for
other securities. However, if a high level
is established, more securities may face
severe price declines for longer periods
before a halt is imposed. This also may
affect thinly traded securities more than
other securities. Is 10% an appropriate
trigger for a circuit breaker rule that
results in short sale halt? If not, at what
level should a halt take place? Should
the trigger be different for thinly traded
or higher volatility securities? Should
the halt take place after a 10% decline,
or a higher/lower level? Should the
initial halt take place after a 5% decline,
or a 15% decline, or a 20% decline, or
some other decline? Please explain.
Should the decline be measured as a
percentage of the individual security’s
price or should another value be used?
Please explain. For example, should the
decline measurement for the circuit
breaker threshold be based on the dollar
amount of the decline, i.e., $5? If so,
how should the thresholds be
determined in relation to the price level
of the individual stock? Should the
percentage decline be linked to the
stock’s price level such that stocks with
lower prices must experience a greater
percentage decline before the circuit
breaker is triggered? If so, what
thresholds are appropriate? Please
explain. If the percentage decline is
linked to price level, what additional

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operational burdens would be
experienced if stock values were
required to be continuously monitored
due to frequent fluctuation? Please
explain. What costs and benefits may
accrue from having the decline based on
a dollar amount rather than a value
derived from a percentage of the share
value? What potential problems or
benefits may arise from pegging a short
selling circuit breaker threshold to a
decline in a stock’s dollar amount?
Please explain.
5. The proposed circuit breaker halt
rule would impose a short selling halt
for the trading day following the
triggering of the circuit breaker. Is this
an appropriate length of time? If so,
why? If not, why not, and how long
should the halt persist? Should the
length of the halt vary depending on the
time during the day that the circuit
breaker is triggered? 298 We note that
increasing the length of a halt to an
additional day or multiple additional
days may increase costs, reduce market
quality, and reduce liquidity in that
security. This may affect thinly traded
securities and higher volatility
securities more than other securities.
However, decreasing the period of time
to less than a trading day, such as
limiting the halt to an hour or a few
hours following the trigger, may reduce
the effectiveness of the halt. Would it be
more beneficial for a 10% intraday
decline to trigger a periodic halt in short
selling rather than a halt for the trading
day? Should it result in a multiple day
halt in short selling? Please explain.
How disruptive to normal trading would
a multiple day halt be compared to a
halt for one trading day? If short selling
is halted after the circuit breaker is
triggered in the wake of a 10% intraday
decline, and the value of the stock
continues to decline throughout the day
to the point where it is down 20% at
closing, should short selling be allowed
to resume the following trading day? If
so, why? If not, why not? Please explain.
Should a 20% or greater intraday
decline result in a halt on short selling
for multiple trading days? For example,
would it be appropriate for a 20%
intraday decline on the day the circuit
breaker is triggered to result in a 3-day
halt in short selling, a 5-day halt in
short selling, or a 10-day halt in short
selling? Specifically, what length of a
short selling halt would be appropriate
for the various levels of decline in
excess of 10%? Should volatility of the
298 See 1998 Release supra note 230 and
accompanying text (discussing that SRO Circuit
Breaker rules vary the length of the trading halt
depending on the time of day the halt is triggered
and the amount of the decline triggering the halt).

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individual security be considered?
Please explain.
6. Should different stocks be subject
to different levels of decline before the
circuit breaker is triggered? For
example, should a higher trigger level
apply to more liquid stocks than to less
liquid stocks? Should different trigger
levels be based on market capitalization
or volatility of individual securities? If
so, what parameters should apply and
what criteria should be used to
determine those parameters? Please
explain.
7. Would a circuit breaker that when
triggered halts short selling in a
particular security result in increased
selling pressure by short sellers in
anticipation of the halt for securities
experiencing large price declines?
Please explain and provide data and
analysis to support the explanation.
What provisions, if any, would facilitate
an orderly re-entry of a security after a
halt on short selling? Please explain.
8. What benefits would be associated
with a short selling circuit breaker that
when triggered imposes short selling
halts? Could such a short selling halt
help stabilize the market for the
individual security? If so, why? If not,
why not? Could the short selling halt
benefit investors by allowing the market
to ‘‘cool off’’ with respect to that
individual security? Please explain.
Could a temporary short selling halt
imposed by a circuit breaker result in an
increase in investor confidence? Please
explain.
9. What costs would be associated
with implementing a short selling
circuit breaker for individual securities
that when triggered imposed a halt on
short selling? Please explain. What
would it cost to update systems in a
manner necessary to ensure compliance
with such a circuit breaker? Would the
expenditure necessary to ensure
compliance be primarily an ‘‘up-front’’
cost? Would the expenditure necessary
to ensure compliance require long-term
investment? Please explain. What
technological challenges would be
encountered in updating systems to
ensure compliance with a short selling
circuit breaker that applied to
individual securities and when triggered
imposed halts on short selling? Please
explain. How long would it take to
update systems in a manner that
ensured compliance with such a short
selling circuit breaker? Please explain.
10. Should a short selling circuit
breaker that when triggered imposed a
halt on short selling contain exceptions?
If so, why? If not, why not? Please
explain. Should the circuit breaker
contain an exception for bona fide
market making? If so, why? If not, why

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not? Should such an exception apply to:
Registered market makers, block
positioners, other market makers
obligated to quote in the over-thecounter market, in each case that are
selling short the individual securities
subject to the short selling halt? If so,
why? If not, why not, and what entities
should be excepted under a bona fide
market making exception? Should the
circuit breaker provide an exception
that would allow short sales that occur
as a result of automatic exercise or
assignment of an equity option held
prior to the effectiveness of the short
selling halt due to expiration of the
option? If so, why? If not, why not?
Please explain. Should the circuit
breaker contain an exception for options
market makers selling short as part of
bona fide market making and hedging
activities related directly to bona fide
market making in derivatives on the
individual security subject to the halt?
If so, why? If not, why not? Please
explain. The circuit breaker halt rule as
proposed includes an exception for
hedging activity by market makers
engaged in bona fide market making, but
it does not provide an exception for
hedging of convertible securities or for
convertible arbitrage activities by
persons who are not market makers
engaged in bona fide market making
activities at the time of the short sale.
Should we consider exceptions for
convertible arbitrage and/or the hedging
of convertible securities by persons who
are not market makers engaged in bona
fide market making? Would such
exceptions reduce the effectiveness of
the rule? How often would this
exception be used? Please explain and
provide empirical data to support
explanations/analyses.
11. What other exceptions should be
considered or included in such a circuit
breaker? Please explain.
12. What would be an appropriate
implementation period for the circuit
breaker? Would a three-month
implementation period be appropriate
for a circuit breaker that when triggered
imposed short selling halts on
individual securities? Is more or less
time necessary? Please explain.
13. Should the exception for owned
securities be limited to Rule 144
securities, similar to the Short Sale Ban,
or expanded to include other securities
that a seller is deemed to own but are
not included under Rule 200(b) of
Regulation SHO?
14. We are proposing to include an
exception for marker makers, including
over-the-counter market makers, that
sell short as part of bona fide market
making and hedging activity directly
related to bona fide market making in

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derivative securities based on covered
securities or exchange traded funds and
exchange traded notes of which covered
securities are a component. Similar to
the Short Sale Ban, should we also
provide that this exception would not
apply to any market maker that knows
that the customer’s or counterparty’s
transaction would result in the customer
or counterparty establishing or
increasing an economic net short
position (i.e., through actual positions,
derivatives, or otherwise) in a covered
security? Do the same concerns apply
for a short sale halt that would only be
in place for one trading day? What if the
proposed circuit breaker halt rule
prohibits short selling in a particular
security for longer than one trading day
when triggered? How long of a period
would necessitate including such a
provision?
15. Should the proposed circuit
breaker halt rule be adopted in addition
to a permanent, marketwide short sale
price test restriction rule? Thus, while a
short sale price test restriction rule
would be in place as a permanent,
marketwide rule, a circuit breaker
would also trigger a short selling halt in
any security that suffers a severe price
decline.
16. Should the proposed circuit
breaker halt rule apply to non-NMS
securities? Would a 10% trigger level
cause some non-NMS securities to be
halted too frequently? Should we
consider a different trigger for non-NMS
securities?
17. As an alternative to a circuit
breaker rule that prohibits short selling
at any price after the trigger price is
reached, should we consider instead a
price limit rule that would prohibit
short selling in a particular NMS
security at a price lower than 10%
below the prior day’s close? Unlike a
circuit breaker rule, a price limit rule
would continue to allow short selling at
prices above the limit price after the
limit has been reached. Would 10% be
the appropriate limit? Should it be
higher or lower? Please explain.
18. We propose including an
exception for sales of securities that the
seller is deemed to own pursuant to
Rule 200(b) of Regulation SHO because
these are sales of owned securities. Are
broker-dealers able to identify short
sales as sales of Rule 200(b) owned
securities on an intra-day basis so that
the exception would be useful when a
circuit breaker is triggered?
Questions Regarding Circuit Breaker
Price Test Rule
1. Should a short selling circuit
breaker impose a short sale price test
restriction on individual equity

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securities, rather than halt short selling
for individual securities when triggered?
For example, following a 10% decline
in a security’s price, as measured from
the prior day’s closing price, should a
circuit breaker result in a temporary
short sale price test restriction in the
form of the proposed modified uptick
rule or the proposed uptick rule? Please
explain.
2. Should we consider a circuit
breaker rule that, when triggered, would
prohibit short selling in a particular
NMS security on a downbid unless the
short sale is effected at a price that is
more than 10% greater than the prior
day’s closing price? Would 10% be an
appropriate requirement? Should it be
higher or lower? Should we have
different percentages for different types
of securities (e.g., based on volatility,
market capitalization, volume traded)?
Please explain.
3. The proposed circuit breaker rules
would impose a short sale price test on
any security that suffers a decline in
price of 10% or more relative to the
prior day’s closing price for that
security. We note that a low trigger level
may result in more securities becoming
subject to a short sale price test or some
securities becoming subject to a short
sale price test more frequently, resulting
in potential increases in costs, decreases
in liquidity, and decreases in market
quality for the affected security. Also,
the impact of a lower trigger level may
be greater for thinly traded securities or
higher volatility securities than for other
securities. However, if a high level is
established, more securities may face
severe price declines for longer periods
before the short sale price test is
imposed. This also may affect thinly
traded securities more than other
securities. Unlike a circuit breaker that
results in a halt, however, a circuit
breaker that results in a short sale price
test would not prohibit short selling but
would restrict short selling to a rising
market. Also, the short sale price test
would be limited to a trading unit
increment, which may result in fewer
costs and reduced loss of liquidity than
a short sale halt. Is 10% an appropriate
trigger for a circuit breaker rule that
results in short sale price test? If not, at
what percentage trigger level should
short sale price test restrictions be
imposed? Would a 10% trigger level be
appropriate? Would a higher or lower
trigger level be appropriate? Should the
trigger be different for thinly traded or
higher volatility stocks? Should we
consider market capitalization in
determining different trigger levels?
4. What short sale price test
restrictions would be most appropriate
in combination with a short selling

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circuit breaker? Should the circuit
breaker when triggered result in a short
sale price test based on the national best
bid, similar to the proposed modified
uptick rule? Please explain. Should the
circuit breaker when triggered result in
a short sale price test based on the last
sale price, similar to the proposed
uptick rule? Please explain. Should the
circuit breaker when triggered result in
a short sale price test that requires short
sale orders to be initiated only at a price
above the highest prevailing national
best bid by posting a quote for a short
sale order above the national bid? If so,
why? If not, why not? If the circuit
breaker when triggered results in a short
sale price test restriction based on the
national best bid (the proposed
modified uptick rule), should short
selling be restricted to a specific
increment above the current national
best bid, such as one cent above the
national best bid? Or should a higher or
lower increment apply? Please explain.
If a specific increment is suggested,
what impact would such an increment
have on short selling in the individual
security? Please explain. What
increment, if any, would be tantamount
to a halt on short selling during the
period in which the circuit breaker is in
effect? Please explain and provide
empirical data and analysis in support
of any arguments and/or analyses.
5. The proposed circuit breaker halt
rule would impose a short sale price test
for the trading day following the
triggering of the circuit breaker. Is this
an appropriate length of time? If so,
why? If not, why not, and how long
should the short sale price test persist?
We note that increasing the length of a
halt to an additional days or multiple
additional days may increase costs,
reduce market quality, and reduce
liquidity in that security. This may
affect thinly traded securities or higher
volatility securities more than other
securities. However, decreasing the
period of time to less than the trading
day, such as limiting the short sale price
test to an hour or a few hours following
the trigger, may reduce the effectiveness
of the short sale price test. Would it be
more beneficial for a 10% intraday
decline to trigger a short sale price test
in short selling for a few hours rather
than for the trading day? Should it
result in a multiple day short sale price
test? Please explain. How disruptive to
normal trading would a multiple day
short sale price test be compared to a
halt for one trading day? If short selling
is restricted by a price test after the
circuit breaker is triggered in the wake
of a 10% intraday decline, and the value
of the stock continues to decline

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throughout the day to the point where
it is down 20% at closing, should short
selling be allowed to resume the
following trading day? If so, why? If not,
why not? Please explain. Should a 20%
or greater intraday decline result in a
short sale price test for multiple trading
days? For example, would it be
appropriate for a 20% intraday decline
on the day the circuit breaker is
triggered to result in a 3-day price test
restriction in short selling, a 5-day
restriction on short selling, or a 10-day
restriction on short selling? Specifically,
what length of a restriction would be
appropriate for the various levels of
decline in excess of 10%? Should we
consider a different period for higher
volatility stocks? Should we consider
market capitalization in determining
different trigger levels? Please explain.
6. What benefits would be associated
with a short selling circuit breaker that
when triggered imposed short sale price
test restrictions? Could the short sale
price test restrictions help stabilize the
market for the individual security? If so,
why? If not, why not? Could the short
sale price test restrictions benefit
investors by allowing the market to
‘‘cool off’’ with respect to that
individual security? Please explain.
Could a circuit breaker that when
triggered imposes short sale price test
restrictions result in an increase in
investor confidence? Please explain.
7. What are the benefits, if any, of a
circuit breaker that when triggered
imposes short sale price test restrictions,
versus a permanent, market-wide short
sale price test such as the modified
uptick rule or the proposed uptick rule?
Please explain and support explanations
with data and analysis where
appropriate.
8. What costs would be associated
with implementing a short selling
circuit breaker that when triggered
imposed short sale price test
restrictions? Please explain. What
would be the degree of financial
expenditure involved in updating
systems in a manner necessary to ensure
compliance with such a circuit breaker?
Would the expenditure necessary to
ensure compliance be primarily an ‘‘upfront’’ cost? Would the expenditure
necessary to ensure compliance require
long-term investment? Please explain.
How would the costs of a circuit breaker
that when triggered imposes short sale
price test restrictions compare with the
costs of a permanent short sale price test
such as the proposed modified uptick
rule or the proposed uptick rule? Please
explain.
9. What technological challenges
would be encountered in updating
systems to ensure compliance with a

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short selling circuit breaker that when
triggered imposed short sale price test
restrictions on individual securities?
Please explain. How long would it take
to update systems in a manner that
ensured compliance? Please explain.
Would a short selling circuit breaker
that when triggered imposed short sale
price test restrictions impede the
efficient functioning of the equity
markets? If so, why? If not, why not?
Please explain. Are there any other
operational challenges that may arise
from implementing a short selling
circuit breaker that when triggered
imposed short sale price test
restrictions? Please explain. Would the
operational challenges presented
impede the effectiveness of such a short
selling circuit breaker? Please explain.
10. Are there other short sale price
test restrictions that should be
considered in combination with a short
selling circuit breaker? Please explain.
11. Should a circuit breaker that when
triggered imposed short sale price test
restrictions include exceptions? Please
explain. If such a circuit breaker is
based on the proposed modified uptick
rule, should it contain the same
exceptions as those contemplated in the
proposed modified uptick rule? If so,
why? If not, why not? If other or
different exceptions are warranted for
such a circuit breaker, what should they
be? Please explain. If a circuit breaker is
based on the proposed uptick rule,
should it contain the same exceptions as
those contemplated in the proposed
uptick rule? If so, why? If not, why not?
If other or different exceptions are
warranted for such a circuit breaker,
what should they be? Please explain.
12. Should a circuit breaker that when
triggered imposed short sale price test
restrictions contain a general market
maker exception? If so, why? If not, why
not? If so, should the market maker
exemption be limited to registered
market makers, exchange-based market
makers, or apply to over-the-counter
market makers as well? Should upstairs
customer facilitation be exempted from
a short selling circuit breaker? Should
parties involved in delta neutral
hedging be excepted from a short selling
circuit breaker? Should parties involved
with index arbitrage be excepted from a
short selling circuit breaker that when
triggered imposed short sale price test
restrictions? What other exceptions may
be appropriate? Please explain.
13. What implementation period
would be necessary for the circuit
breaker? Would a three month
implementation period be appropriate
for a circuit breaker that when triggered
imposed short sale price test restrictions

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on individual securities? Is more or less
time necessary? Please explain.
14. One commenter suggested a
circuit breaker that, when triggered,
would prohibit any person from selling
short except at an upbid.299 Should a
circuit breaker that triggers a bid-based
price restriction for a particular security
be expanded to prohibit short sales both
on a downbid and at the bid? Thus,
once triggered, short sales in the
particular security could only be
executed or displayed, or effected, at an
upbid. We note that such a rule would
be stricter than the proposed circuit
breaker modified uptick rule, which
would permit short sales at the bid
unless the bid is on a downbid. As a
result, this proposal may result in
additional costs, reduce liquidity, and
reduce market quality. However, this
proposed rule may also establish a
longer ‘‘break’’ before short selling
resumes. Would it be appropriate to
change the proposed circuit breaker
modified uptick rule to require that,
following the trigger of the circuit
breaker, short sales could only be
effected at an upbid? Please explain
why this may be more appropriate.
15. Would it be more appropriate for
the resulting price test to be based on a
policies and procedures rule or a
straight prohibition? For instance, a
circuit breaker that triggers a policies
and procedures rule would require
trading centers to incur immediate
upfront costs to establish policies and
procedures that would be implemented
and enforced once a circuit breaker is
triggered for a particular security.
Would a circuit breaker that triggers a
straight prohibition incur fewer costs?
Please explain.
V. Marking
Rule 200(g) of Regulation SHO
provides that a broker-dealer must mark
all sell orders of any security as ‘‘long’’
or ‘‘short.’’ 300 As initially adopted,
Regulation SHO included an additional
marking requirement of ‘‘short exempt’’
applicable to short sale orders if the
seller was ‘‘relying on an exception from
the tick test of 17 CFR 240.10a–1, or any
short sale price test of any exchange or
national securities association.’’ 301 We
adopted amendments to Rule 200(g) of
Regulation SHO to remove the ‘‘short
exempt’’ marking requirement in
conjunction with our elimination of
former Rule 10a–1.302
299 See

National Exchanges Letter, supra note 63.
17 CFR 242.200(g).
301 See 2004 Regulation SHO Adopting Release,
69 FR 48008.
302 See 2007 Price Test Adopting Release, 72 FR
36348.
300 See

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sroberts on PROD1PC70 with PROPOSALS

In conjunction with the proposed
amendments to Rule 201 of Regulation
SHO to add a short sale price test or a
circuit breaker rule, we are proposing to
amend Rule 200(g) of Regulation SHO to
again impose a ‘‘short exempt’’ marking
requirement. Specifically, proposed
Rule 200(g) would provide that ‘‘[a]
broker or dealer must mark all sell
orders of any equity security as ‘‘long,’’
‘‘short,’’ or ‘‘short exempt.’’ 303
In addition, proposed Rule 200(g)(2)
of the proposed modified uptick rule
would provide that a sale order shall be
marked ‘‘short exempt’’ only if the
provisions of paragraph (c) or (d) of
proposed Rule 201 are met.304 This
‘‘short exempt’’ marking requirement
would provide a record that a brokerdealer is availing itself of the provisions
of paragraph (c) or (d) of the proposed
modified uptick rule.
Proposed Rule 200(g)(2) of the
proposed uptick rule or the proposed
circuit breaker rules would provide that
a sale order shall be marked ‘‘short
exempt’’ only if the seller is relying on
an exception from the price test of
§ 242.201.305 This ‘‘short exempt’’
marking requirement would provide a
record that short sellers are availing
themselves of the various exceptions to
the application of the restrictions of the
proposed uptick rule.306
The records provided pursuant to the
‘‘short exempt’’ marking requirements of
proposed Rule 200(g) of the proposed
short sale price test rules and the
proposed circuit breaker rules would
aid surveillance by SROs and the
Commission for compliance with the
provisions of either of those short sale
price test restrictions. In addition, if the
Commission were to adopt a policies
and procedures approach, such as is
proposed in conjunction with the
proposed modified uptick rule, the
proposed ‘‘short exempt’’ marking
requirement would provide an
indication to a trading center regarding
whether it must execute or display a
short sale order with regard to whether
303 See proposed Rule 200(g) of the proposed
modified uptick rule and of the proposed uptick
rule.
304 See proposed Rule 200(g)(2) of the proposed
modified uptick rule.
305 See Proposed Rule 200(g)(2).
306 The improper marking of a short sale order as
‘‘short exempt’’ by the broker-dealer would be a
violation of proposed Rule 200(g)(2) and Exchange
Act Section 10(a). In addition, the improper
marking of a short sale order as ‘‘short exempt’’
could, in some circumstances, result in liability
under the antifraud provisions of the federal
securities laws; the liability of the broker-dealer that
marked the order, and of the trading center that
displayed or executed the order, would turn on
whether those entities acted with the mental state
required under the applicable antifraud provisions.

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the short sale order is at a down-bid
price.
If we were to adopt the proposed
‘‘short exempt’’ marking requirement of
proposed Rule 200(g) of the proposed
short sale price test rules or the
proposed circuit breaker rules, we are
proposing an implementation period
under which market participants would
have to comply with this requirement
three months following the effective
date of the proposed marking
requirement. We believe that this
proposed implementation period would
provide market participants with
sufficient time in which to modify their
systems and procedures in order to
comply with the proposed marking
requirements. We realize, however, that
a shorter or longer implementation
period may be manageable or preferable.
Thus, we seek specific comment as to
what length of implementation period
would be necessary or appropriate, and
why, such that market participants
would be able to meet the proposed
marking requirements, if adopted.
Request for Comment
We seek comment generally on all
aspects of the proposed amendment to
Rule 200(g) of Regulation SHO. In
addition, we seek comment on the
following:
1. What type of costs, if any, would
be associated with requiring sell orders
to be marked ‘‘short exempt’’ when
relying on an exception under proposed
Rule 201? What types of costs, if any,
would be associated with not requiring
sell orders to be marked ‘‘short exempt’’
when relying on an exception under
proposed Rule 201?
2. Should the proposed rule require a
broker-dealer marking a sell order
‘‘short exempt’’ to identify the specific
provision on which the broker-dealer is
relying in marking the order ‘‘short
exempt’’? If not, why not?
3. What would be a sufficient
implementation period for making any
systems changes necessary to allow sell
orders to be marked ‘‘short exempt’’?
4. Please describe any anticipated
difficulties in complying with a ‘‘short
exempt’’ marking requirement.
5. The ‘‘short exempt’’ marking has
historically been used only for short
sales that are excepted from a short sale
price test. For instance, the ‘‘short
exempt’’ marking was not available for
short sales that were excepted from the
Regulation SHO locate requirement of
Rule 203(b). We are, however, proposing
to require short sales that are excepted
from the proposed circuit breaker halt
rule, when triggered, to be marked
‘‘short exempt.’’ Would a ‘‘short
exempt’’ marking be needed for the

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proposed circuit break rules if circuit
breakers operate in place of short sale
price test restrictions?
VI. Overseas Transactions
In connection with former Rule 10a–
1, the Commission consistently took the
position that the rule applied to trades
in securities subject to that rule where
the trade was ‘‘agreed to’’ in the U.S.,
but booked overseas.307 In addition, in
the 2004 Regulation SHO Adopting
Release we stated that any broker-dealer
using the United States jurisdictional
means to effect short sales in securities
traded in the United States would be
subject to Regulation SHO, regardless of
whether the broker-dealer is registered
with the Commission or relying on an
exemption from registration.308 For
example, a U.S. money manager decides
to sell a block of 500,000 shares in an
NMS stock. The money manager
negotiates a price with a U.S. brokerdealer, who sends the order ticket to its
foreign trading desk for execution. In
our view, this trade occurred in the
United States as much as if the trade
had been executed by the broker-dealer
307 See Securities Exchange Act Release No.
27938 (Apr. 23, 1990), 55 FR 17949 (Apr. 30, 1990)
(stating that the no-action position exempting
certain index arbitrage sales from former Rule 10a–
1 would not apply to an index arbitrage position
that was established in an offshore transaction
unless the holder acquired the securities from a
seller that acted in compliance with former Rule
10a–1 or other comparable provision of foreign
law). See also Securities Exchange Act Release No.
21958 (Apr. 18, 1985), 50 FR 16302 (Apr. 25, 1985)
at n. 48 (stating that, ‘‘Rule 10a–1 does not contain
any exemption for short sales effected in
international markets.’’). The question of whether a
particular transaction negotiated in the U.S. but
nominally executed abroad by a foreign affiliate is
a domestic trade for U.S. regulatory purposes was
also addressed in the Commission’s Order
concerning Wunsch Auction Systems, Inc. (WASI).
The Commission stated its belief that ‘‘trades
negotiated in the U.S. on a U.S. exchange are
domestic, not foreign trades. The fact that the trade
may be time-stamped in London for purposes of
avoiding an SRO rule does not in our view affect
the obligation of WASI and BT Brokerage to
maintain a complete record of such trades and
report them as U.S. trades to U.S. regulatory and
self-regulatory authorities and, where applicable, to
U.S. reporting systems.’’ See Securities Exchange
Act Release No. 28899 (Feb. 20, 1991), 56 FR 8377
(Feb. 28, 1991). In what is commonly referred to as
the ‘‘fax market,’’ a U.S. broker-dealer acting as
principal for its customer negotiates and agrees to
the terms of a trade in the U.S., but transmits or
faxes the terms overseas to be ‘‘printed’’ on the
books of a foreign office. This practice of ‘‘booking’’
trades overseas was analyzed in depth in the
Division of Market Regulation’s Market 2000
Report. In the Report, the Division estimated that
at that time approximately 7 million shares a day
in NYSE stocks were faxed overseas, and many of
these trades were nominally ‘‘executed’’ in the
London over-the-counter market. See Division of
Market Regulation, SEC, Market 2000: An
Examination of Current Equity Market
Developments (Jan. 1994), Study VII, p. 2.
308 See 2004 Regulation SHO Adopting Release,
69 FR at 48104, n. 54.

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at a U.S. trading desk. Under either the
proposed short sale price test rules or
the proposed circuit breaker rules, if the
short sale is agreed to in the U.S., it
must be effected in accordance with the
requirements of those proposed rules,
unless otherwise excepted.
Request for Comment
1. Would the proposed modified
uptick rule, proposed uptick rule, or
circuit breaker rules, if adopted, result
in sellers transacting short sales in
foreign markets where they would not
be subject to a short sale price test rather
than in U.S. markets? If so, please
explain.
2. For short sales agreed to in the
United States and executed overseas,
would the time the short sale is agreed
to in the U.S. be the appropriate time to
be used to establish the price against
which the proposed uptick rule,
proposed modified uptick rule, or
circuit breaker rule, would be
determined?
3. Please identify any challenges or
difficulties that could arise in applying
the proposed modified uptick rule or
proposed uptick rule to short sales
agreed to in the United States and
executed overseas?
4. Would the proposed modified
uptick rule, proposed uptick rule,
circuit breaker proposals, or any other
restriction on short sales, be easier to
implement and enforce for short sales
agreed to in the United States but
executed overseas? Please explain.
5. What would be the costs and
benefits of applying the proposed
modified uptick rule, proposed uptick
rule, the alternative circuit breaker
rules, or any other restriction on short
sales to short sales agreed to in the
United States and executed overseas?

sroberts on PROD1PC70 with PROPOSALS

VII. Exemptive Procedures
The proposed alternative short sale
price test rules and the alternative
circuit breaker rules would establish
procedures for the Commission, upon
written request or its own motion, to
grant an exemption from the rules’
provisions, either unconditionally or on
specified terms and conditions, if the
Commission determines that such
exemption is necessary or appropriate
in the public interest and is consistent
with the protection of investors.309
Pursuant to this provision, we would
consider and act upon appropriate
309 See proposed Rule 201(e) of the proposed
uptick rule; proposed Rule 201(f) of the proposed
modified uptick rule; proposed Rule 201(g) of the
proposed circuit breaker halt rule and proposed
circuit breaker uptick rule; and proposed Rule
201(h) of the proposed circuit breaker modified
uptick rule.

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requests for relief from the proposed
short sale price tests’ provisions and the
proposed short sale circuit breakers’
provisions, if adopted, and would
consider the particular facts and
circumstances relevant to each such
request and any appropriate conditions
to be imposed as part of the exemption.
We solicit comment regarding including
a provision for exemptive procedures in
the proposed short sale price test rules
and the proposed circuit breaker rules.
VIII. Paperwork Reduction Act
A. Background
Certain provisions of the proposed
amendments to Regulation SHO would
impose new ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’).310 We have submitted the
collection of information to OMB for
review and approval in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless it
displays a currently valid OMB control
number. OMB has not yet assigned a
control number to the new collection of
information.
We are proposing amendments to
Rules 201 and 200(g) of Regulation SHO
under the Exchange Act. The proposed
amendments to Rule 201 include two
alternative price tests that would
impose restrictions on the prices at
which certain securities would be able
to be sold short.311 The first alternative
short sale price test would be a
proposed modified uptick rule. The
second alternative short sale price test
would be a proposed uptick rule. We are
also proposing alternative circuit
breaker rules that would establish
limitations on short selling in a
particular security during severe market
declines in the price of that security.312
The first alternative circuit breaker rule
would be the proposed circuit breaker
halt rule. The second alternative circuit
breaker rule would be the proposed
circuit breaker modified uptick rule.
The third alternative circuit breaker rule
would be the proposed circuit breaker
uptick rule. In addition, we are
proposing to amend Rule 200(g) of
Regulation SHO to impose a ‘‘short
exempt’’ marking requirement and to
also require that a broker-dealer mark a
sell order ‘‘short exempt’’ only if the
provisions in proposed Rule 201(c) or
(d) of the proposed modified uptick rule
(or the proposed circuit breaker
310 44

U.S.C. 3501 et seq.

proposed Rule 201.

312 See proposed Rule 201.

311 See

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modified uptick rule) are met, or if a
seller is relying on an exception in
proposed Rule 201(c) of the proposed
uptick rule (or the proposed circuit
breaker uptick rule), or if a seller is
relying on an exception in proposed
Rule 201(c) of the proposed circuit
breaker halt rule.313
B. Summary
As detailed below, several provisions
under the proposed amendments to
Regulation SHO would impose a new
‘‘collection of information’’ within the
meaning of the PRA.
1. Policies and Procedures Requirement
Under Proposed Modified Uptick Rule
The proposed modified uptick rule
would impose a new ‘‘collection of
information’’ within the meaning of the
PRA.314 Under the proposed modified
uptick rule, a trading center would be
required to have written policies and
procedures reasonably designed to
prevent the execution or display of a
short sale order of a covered security at
a down-bid price.315 In addition, a
trading center would be required to
have policies and procedures reasonably
designed to permit the execution or
display of a short sale order of a covered
security marked ‘‘short exempt’’ without
regard to whether the order is at a
down-bid price.316 Thus, upon
acceptance of a short sale order, a
trading center’s policies and procedures
would have to be reasonably designed to
permit the trading center to be able to
determine whether or not the short sale
order is priced in accordance with the
provisions of proposed Rule 201(b)(1)
and to recognize when an order is
marked ‘‘short exempt’’ such that the
trading center’s policies and procedures
do not prevent the execution or display
of such orders on a down-bid price.317
At a minimum, a trading center’s
policies and procedures would need to
enable a trading center to monitor, on a
real-time basis, the national best bid,
313 See

proposed Rules 200(g) and 200(g)(2).
discussion of the PRA as it applies to the
proposed modified uptick rule applies equally to
the proposed circuit breaker modified uptick rule.
315 Proposed Rule 201(b)(1). A ‘‘down bid’’ is
defined as ‘‘a price that is less than the current
national best bid or, if the last differently priced
national best bid was greater than the current
national best bid, a price that is less than or equal
to the current national best bid.’’ Proposed Rule
201(a)(2).
316 See proposed Rule 201(b)(1)(ii). See also
Section V, above, regarding the proposed ‘‘short
exempt’’ marking requirement.
317 See proposed Rule 200(g)(2). The brokerdealer marking the order ‘‘short exempt’’ would
have responsibility for being able to identify on
which provision to the proposed modified uptick
rule it was relying in marking the order ‘‘short
exempt.’’
314 The

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and whether the current national best
bid is an up- or down-bid from the last
differently priced national best bid, so
as to determine the price at which the
trading center may execute or display a
short sale order. As mentioned above, a
trading center would need to have
policies and procedures governing how
to recognize and handle orders that a
trading center receives as marked ‘‘short
exempt’’ pursuant to proposed Rule
200(g)(2).318 A trading center’s policies
and procedures also would be required
to address latencies in obtaining data
regarding the national best bid. In
addition, to the extent such latencies
occur, a trading center would be
required to implement reasonable steps
in its policies and procedures to
monitor such latencies on a continuing
basis and take appropriate steps to
address a problem should one develop.
A trading center would also need to
take such steps as would be necessary
to enable it to enforce its policies and
procedures effectively. As part of its
written policies and procedures, a
trading center also would be required to
regularly surveil to ascertain the
effectiveness of its policies and
procedures and take prompt remedial
steps.319 The nature and extent of the
policies and procedures that a trading
center would be required to establish to
comply with these requirements would
depend upon the type, size, and nature
of the trading center.
2. Identification of Short Sale Orders
and Policies and Procedures
Requirement Under the Proposed
‘‘Broker-Dealer’’ and ‘‘Riskless
Principal’’ Provisions
The proposed modified uptick rule
contains a ‘‘broker-dealer’’ provision
that would require a new ‘‘collection of
information’’ under the PRA. Proposed
Rule 201(c)(1) provides that a broker
dealer may mark a short sale order of a
covered security ‘‘short exempt’’ if a
broker-dealer that submits a short sale
order to a trading center has identified
that the short sale order is not on a
down-bid price at the time of
submission of the order to the trading
center.320 This provision would require
a new ‘‘collection of information’’ in
that a broker-dealer marking an order
‘‘short exempt’’ under proposed Rule

sroberts on PROD1PC70 with PROPOSALS

318 Id.
319 This provision would reinforce the ongoing
maintenance and enforcement requirements of
proposed Rule 201(b)(1) by explicitly assigning an
affirmative responsibility to trading centers to
surveil to ascertain the effectiveness of their
policies and procedures. See proposed Rule
201(b)(2). We note that Rule 611(a)(2) of Regulation
NMS contains a similar provision for trading
centers. See 17 CFR 242.611(a)(2).
320 See proposed Rule 201(c)(1).

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201(c)(1) must identify both a short sale
order as priced in accordance with the
requirements of proposed Rule 201(c)(1)
and establish, maintain, and enforce
written policies and procedures
reasonably designed to prevent the
incorrect identification of orders as
being priced in accordance with the
requirements of proposed Rule
201(c)(1).321
While the proposed uptick rule itself
does not contain a ‘‘collection of
information’’ requirement within the
meaning of the PRA, the proposed
uptick rule does contain a ‘‘riskless
principal’’ exception that would require
a new ‘‘collection of information’’ under
the PRA.322 The proposed modified
uptick rule also contains a ‘‘riskless
principal’’ provision that would require
a new ‘‘collection of information’’ under
the PRA. Specifically, proposed Rule
201(d)(6) of the proposed modified
uptick rule and Rule 201(c)(9) of the
proposed uptick rule would allow a
broker-dealer to mark short sale orders
of a covered security ‘‘short exempt’’
where a broker-dealer is facilitating
customer buy orders or sell orders
where the customer is net long, and the
broker-dealer is net short but is effecting
the sale as riskless principal, provided
certain conditions are satisfied.323
Proposed Rules 201(d)(6) of the
proposed modified uptick rule and
201(c)(9) of the proposed uptick rule
would require a new ‘‘collection of
information’’ in that each would require
a broker-dealer marking an order ‘‘short
exempt’’ under these provisions to have
written policies and procedures in place
to assure that, at a minimum, the
customer order was received prior to the
offsetting transaction; the offsetting
transaction is allocated to a riskless
principal account within 60 seconds of
execution; and that it has supervisory
systems in place to produce records that
enable the broker-dealer to accurately
and readily reconstruct, in a timesequenced manner, all orders on which
321 See proposed Rule 201(c)(1). As part of its
written policies and procedures, a broker-dealer
also would be required to regularly surveil to
ascertain the effectiveness of its policies and
procedures and take prompt remedial steps. See
proposed Rule 201(c)(2). This provision is intended
to reinforce the ongoing maintenance and
enforcement requirements of the provision
contained in proposed Rule 201(c)(1) by explicitly
assigning an affirmative responsibility to brokerdealers to surveil to ascertain the effectiveness of
their policies and procedures. See id.
322 The discussion of the PRA as it applies to the
proposed uptick rule applies equally to the
proposed circuit breaker uptick rule.
323 See proposed Rule 201(d)(6). As a result, a
trading center’s policies and procedures would
need to be reasonably designed to permit the
execution or display of such orders without regard
to whether the order is at a down-bid price. See
proposed Rule 201(b)(1)(ii).

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the broker-dealer relies pursuant to this
provision.324
3. Proposed Marking Requirements
While the current marking
requirements in Rule 200(g) of
Regulation SHO, which require brokerdealers to mark all sell orders of any
equity security as either ‘‘long’’ or
‘‘short,’’ 325 would remain in effect,
proposed Rule 200(g) would add a new
marking requirement of ‘‘short
exempt.’’ 326 In addition, the proposed
amendments to Rule 200(g)(2) would
require that a broker-dealer mark a sell
order ‘‘short exempt’’ only if the
provisions in paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraph (c) or (d) of the proposed
circuit breaker modified uptick rule) are
met, or if the seller is relying on an
exception in paragraph (c) of the
proposed uptick rule (or paragraph (c) of
the proposed circuit breaker uptick
rule), or if the seller is relying on an
exception in paragraph (c) of the
proposed circuit breaker halt rule.327
The proposed ‘‘short exempt’’ marking
requirements would impose a new
‘‘collection of information.’’
C. Proposed Use of Information
1. Policies and Procedures Requirement
Under Proposed Modified Uptick Rule
The information that would be
collected under the proposed modified
uptick rule’s written policies and
procedures requirement would help
ensure that the trading center does not
execute or display any impermissibly
priced short sale orders, unless an order
is marked ‘‘short exempt’’ in accordance
with the rule’s requirements. This
written policies and procedures
requirement would also provide trading
centers with flexibility in determining
how to comply with the requirements of
the proposed modified uptick rule. The
information collected also would aid the
Commission and SROs that regulate
trading centers in monitoring
compliance with the price test’s
requirements. It also would aid trading
centers and broker-dealers in complying
with the rule’s requirements.

324 See proposed Rule 201(c)(9) of the proposed
uptick rule and Rule 201(d)(6) of the proposed
modified uptick rule.
325 17 CFR 242.200(g).
326 See proposed Rule 200(g). See also Section V
above discussing proposed Rule 200(g).
327 See proposed Rule 200(g)(2).

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2. Identification of Short Sale Orders
and Policies and Procedures
Requirement Under the Proposed
‘‘Broker-Dealer’’ and ‘‘Riskless
Principal’’ Provisions
Proposed Rule 201(c)(1) of the
proposed modified uptick rule would
include a ‘‘broker-dealer’’ provision that
would permit a broker-dealer to mark a
short sale order in a covered security
‘‘short exempt’’ if the broker-dealer has
identified the order as not being at a
down-bid price at the time of
submission of the order to the trading
center. This provision would include a
policies and procedures requirement
that would be designed to help prevent
incorrect identification of orders for
purposes of the proposed modified
uptick rule’s broker-dealer provision.
Moreover, the information collection
under the written policies and
procedures requirement in the ‘‘riskless
principal’’ exception in proposed Rule
201(c)(9) of the proposed uptick rule
and the ‘‘riskless principal’’ provision in
proposed Rule 201(d)(6) of the proposed
modified uptick rule would help assure
that broker-dealers comply with the
requirements of these proposed
provisions. The information collected
would also enable the Commission and
SROs to examine for compliance with
the requirements of these proposed
provisions.
3. Proposed Marking Requirements
Proposed Rule 200(g) would impose a
‘‘short exempt’’ marking requirement.328
In addition, proposed Rule 200(g)(2)
would require that a sale order be
marked ‘‘short exempt’’ only if the
provisions in paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraph (c) or (d) of the proposed
circuit breaker modified uptick rule) are
met,329 or if the seller is relying on an
exception in paragraph (c) of the
proposed uptick rule (or paragraph (c) of
the proposed circuit breaker uptick
rule),330 or if the seller is relying on an
exception in paragraph (c) of the
328 See

proposed Rule 200(g).
proposed Rule 200(g)(2) of the proposed
modified uptick rule (and the proposed circuit
breaker modified uptick rule). Paragraphs (c) and
(d) of the proposed modified uptick rule (and the
proposed circuit breaker modified uptick rule) set
forth when a broker-dealer may mark a short sale
order ‘‘short exempt.’’ See proposed Rules 201(c)
and (d).
330 See proposed Rule 200(g)(2) of the proposed
uptick rule (and the proposed circuit breaker uptick
rule). Paragraph (c) of the proposed uptick rule (and
paragraph (c) of the proposed circuit breaker uptick
rule) sets forth when a broker-dealer may mark a
short sale order ‘‘short exempt’’ in accordance with
the proposed uptick rule (or the proposed circuit
breaker uptick rule). See proposed Rule 201(c).

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329 See

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proposed circuit breaker halt rule.331
The purpose of the information
collected would be to enable the
Commission and SROs to monitor
whether a person entering a sell order
covered by the proposed amendments to
Rule 201 is acting in accordance with
one of the provisions contained in
paragraph (c) or (d) of the proposed
modified uptick rule (or paragraph (c) or
(d) of the proposed circuit breaker
modified uptick rule), or if the seller is
relying on an exception in paragraph (c)
of the proposed uptick rule (or
paragraph (c) of the proposed circuit
breaker uptick rule), or if the seller is
relying on an exception in paragraph (c)
of the proposed circuit breaker halt rule.
In particular, the ‘‘short exempt’’
marking requirement would provide a
record that would aid in surveillance for
compliance with the provisions of
proposed Rule 201. It also would
provide an indication to a trading center
regarding whether or not it must execute
or display a short sale order in
accordance with the price test
restrictions of the proposed modified
uptick rule (or the proposed circuit
breaker modified uptick rule). It also
would help a trading center determine
whether its policies and procedures
were reasonable and whether its
surveillance was effective.
D. Respondents
As discussed below, the Commission
has considered each of the following
respondents for the purposes of
calculating the reporting burdens under
the proposed amendments to Rules
200(g) and 201 of Regulation SHO. The
Commission requests comment on the
accuracy of these figures.
1. Policies and Procedures Requirement
Under Proposed Modified Uptick Rule
The proposed modified uptick rule
would require each trading center to
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the execution or
display of a short sale order at a downbid price.332 A ‘‘trading center’’ is
defined as ‘‘a national securities
exchange or national securities
association that operates an SRO trading
facility, an alternative trading system,
an exchange market maker, an OTC
market maker, or any other brokerdealer that executes orders internally by
trading as principal or crossing orders as
331 See proposed Rule 200(g)(2) of the proposed
circuit breaker halt rule. Paragraph (c) of the
proposed circuit breaker halt rule sets forth when
a broker-dealer may mark a short sale order ‘‘short
exempt’’ in accordance with the proposed circuit
breaker halt rule. See proposed Rule 201(c).
332 See proposed Rule 201(b)(1).

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agent.’’ 333 Because the proposed
modified uptick rule would apply to
any trading center that executes or
displays a short sale order in a covered
security, the proposed modified uptick
rule would apply to 10 registered
national securities exchanges that trade
NMS stocks and one national securities
association (or ‘‘SRO trading
centers’’),334 and approximately 372
broker-dealers (including ATSs)
registered with the Commission (or
‘‘non-SRO trading centers’’).335
2. Identification of Short Sale Orders
and Policies and Procedures
Requirements Under the Proposed
‘‘Broker-Dealer’’ and ‘‘Riskless
Principal’’ Provisions
The collection of information that
would be required in the proposed
‘‘broker-dealer’’ provision in proposed
Rule 201(c)(1) of the proposed modified
uptick rule, the ‘‘riskless principal’’
provision in proposed Rule 201(d)(6) of
the proposed modified uptick rule, and
the ‘‘riskless principal’’ exception in
proposed Rule 201(c)(9) of the proposed
uptick rule would apply to all the
5,561 336 registered brokers-dealers
submitting short sale orders in reliance
on these proposed provisions.
3. Proposed Marking Requirements
The collection of information that
would be required pursuant to the
proposed ‘‘short exempt’’ marking
requirements would apply to all the
5,561 337 registered brokers-dealers
submitting short sale orders marked
‘‘short exempt’’ in accordance with the
provisions contained in paragraph (c) or
(d) of the proposed modified uptick rule
(or paragraph (c) or (d) of the proposed
333 See

17 CFR 242.600(b)(78).
are 10 national securities exchanges
(BX, BATS, CBOE, CHX, ISE, NASDAQ, NSX,
NYSE, NYSE Amex, and NYSE Arca) and one
national securities association (FINRA) that operate
an SRO trading facility for NMS stocks and thus
would be subject to the Rule.
335 This number includes the approximately 325
firms that were registered equity market makers or
specialists at year-end 2007 (this number was
derived from annual FOCUS reports and discussion
with SRO staff), as well as the 47 ATSs that operate
trading systems that trade NMS stocks. The
Commission believes it is reasonable to estimate
that in general, firms that are block positioners—
i.e., firms that are in the business of executing
orders internally—are the same firms that are
registered market makers (for instance, they may be
registered as a market maker in one or more Nasdaq
stocks and carry on a block positioner business in
exchange-listed stocks), especially given the
amount of capital necessary to carry on such a
business.
336 This number is based on OEA’s review of 2007
FOCUS Report filings reflecting registered brokerdealers, including introducing broker-dealers. This
number does not include broker-dealers that are
delinquent on FOCUS Report filings.
337 See id.
334 There

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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules
circuit breaker modified uptick rule), or
in reliance on an exception contained in
paragraph (c) of the proposed uptick
rule (or paragraph (c) of the proposed
circuit breaker uptick rule), or in
reliance on an exception contained in
paragraph (c) of the proposed circuit
breaker halt rule.
E. Total Annual Reporting and
Recordkeeping Burdens
1. Policies and Procedures Requirement
under Proposed Modified Uptick Rule

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The proposed modified uptick rule
would require each trading center to
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the execution or
display of a short sale order of a covered
security at a down-bid price.338 In
addition, a trading center would need to
have policies and procedures reasonably
designed to permit the execution or
display of a short sale order of a covered
security marked ‘‘short exempt’’ without
regard to whether the order is at a
down-bid price.339 Thus, trading centers
would be required to develop written
policies and procedures reasonably
designed to permit the trading center to
be able to determine whether or not the
short sale order is priced in accordance
with the provisions of proposed Rule
201(b)(1) and to recognize when an
order is marked ‘‘short exempt’’ such
that the trading center’s policies and
procedures do not prevent the execution
or display of such orders on a down-bid
price in accordance with proposed Rule
201(b)(1)(ii).340 A trading center’s
policies and procedures would not,
however, have to include mechanisms
to determine on which provision a
broker-dealer is relying in marking an
order ‘‘short exempt’’ in accordance
with paragraph (c) or (d) of the proposed
modified uptick rule.
Although the exact nature and extent
of the policies and procedures that a
trading center would be required to
establish likely would vary depending
upon the nature of the trading center
(e.g., SRO vs. non-SRO, full service
broker-dealer vs. market maker), we
preliminarily estimate that it initially
would take an SRO trading center
338 See proposed Rule 201(b)(1). This would
include a trading center taking such steps as would
be necessary to enable it to enforce its policies and
procedures effectively, including the proposed
requirement to regularly surveil to ascertain the
effectiveness of its policies and procedures and
taking prompt remedial steps. See proposed Rule
201(b)(2).
339 See proposed Rule 201(b)(1)(ii). See also
Sections III.A. and V, above, discussing short sale
orders marked ‘‘short exempt.’’
340 See proposed Rule 201(b)(1)(ii).

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approximately 220 hours 341 of legal,
compliance, information technology and
business operations personnel time,342
and a non-SRO trading center
approximately 160 hours of legal,
compliance, information technology and
business operations personnel time,343
to develop the required policies and
procedures.
In addition to this estimate (of 220
hours for SRO respondents and 160
hours for non-SRO respondents), we
expect that SRO and non-SRO
respondents may incur one-time
external costs for outsourced legal
services. While we recognize that the
amount of legal outsourcing utilized to
help establish written policies and
procedures may vary widely from entity
to entity, we preliminarily estimate that
on average, each trading center would
outsource 50 hours of legal time in order
to establish policies and procedures in
accordance with the proposed
amendments.344
We estimate that there would be an
initial one-time burden of 220 (not
including the outsourced 50 hours of
legal time) burden hours per SRO
trading center or 2,420 hours,345 and
341 For purposes of this Release, we are basing our
estimates on the burden hour estimates provided in
connection with the adoption of Regulation NMS
because the policies and procedures developed in
connection with that Regulation’s order protection
rule are in many ways similar to what a trading
center would need to do to comply with the
proposed modified uptick rule. See Securities
Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496 (June 29, 2005). We note, however, that
these estimates may be on the high end because
trading centers have already had to establish similar
policies and procedures to comply with Regulation
NMS.
342 Based on experience and estimates provided
in connection with Regulation NMS, we anticipate
that of the 220 hours we preliminarily estimate
would be spent to establish the required policies
and procedures, 70 hours would be spent by legal
personnel, 105 hours would be spent by compliance
personnel, 20 hours would be spent by information
technology personnel and 25 hours would be spent
by business operations personnel of the SRO
trading center.
343 Based on experience and the estimates
provided in connection with Regulation NMS, we
anticipate that of the 160 hours we preliminarily
estimate would be spent to establish policies and
procedures, 37 hours would be spent by legal
personnel, 77 hours would be spent by compliance
personnel, 23 hours would be spent by information
technology personnel and 23 hours would be spent
by business operations personnel of the non-SRO
trading center.
344 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 would need to do to comply with the
proposed modified uptick rule.
345 The estimated 2,420 burden hours necessary
for SRO trading centers to establish policies and
procedures are calculated by multiplying 11 times
220 hours (11 × 220 hours = 2,420 hours).

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18087

160 (not including the outsourced 50
hours of legal time) burden hours per
non-SRO trading center 346 or 59,520
hours, for a total of 61,940 burden hours
to establish the required written policies
and procedures.347 We estimate a cost of
approximately $7,660,000 for both SRO
and non-SRO trading centers resulting
from outsourced legal work.348
Once a trading center has established
the required written policies and
procedures, we preliminarily estimate
that it would take the average SRO and
non-SRO trading center each
approximately two hours per month of
ongoing internal legal time and three
hours of ongoing internal compliance
time to ensure that its written policies
and procedures are up-to-date and
remain in compliance with the
proposed amendments to Rule 201, or a
total of 60 hours annually per
respondent.349 In addition, we
preliminarily estimate that it would take
the average SRO and non-SRO trading
center each approximately 16 hours per
month of ongoing compliance time, 8
hours per month of ongoing information
technology time, and 4 hours per month
of ongoing legal time associated with
ongoing monitoring and surveillance for
and enforcement of trading in
compliance with the proposed modified
uptick rule, or a total of 336 hours
annually per respondent.350
As mentioned above, we realize that
the exact nature and extent of the
policies and procedures that a trading
346 The estimated 59,520 burden hours necessary
for non-SRO trading centers to establish policies
and procedures are calculated by multiplying 372
times 160 hours (372 × 160 hours = 59,520 hours).
347 Proposed Rule 201(b)(1). Proposed Rule
201(b)(1) requires that ‘‘A trading center shall
establish, maintain, and enforce written policies
and procedures reasonably designed to prevent the
execution or display of a short sale order at a downbid price.’’
348 This figure was calculated as follows: (50 legal
hours × $400 × 11 SRO trading centers) + (50 legal
hours × $400 × 372 non-SRO trading centers) =
$7,660,000. Based on industry sources, OEA
estimates that the average hourly rate for
outsourced legal services in the securities industry
is $400.
349 This figure was calculated as follows: (2 legal
hours × 12 months) + (3 compliance hours × 12
months) = 60 hours annually per respondent. As
discussed above, this burden estimate of 60 hours
is based on experience and what was estimated for
Regulation NMS to ensure that written policies and
procedures were up-to-date and remained in
compliance.
350 This figure was calculated as follows: (16
compliance hours × 12 months) + (8 information
technology hours × 12 months) + (4 legal hours ×
12 months) = 336 hours annually per respondent.
As discussed above, this preliminary burden
estimate of 336 hours is based on experience and
what was estimated for Regulation NMS regarding
similarly required ongoing monitoring and
surveillance for and enforcement of trading in
compliance with that regulation’s policies and
procedures requirement.

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center would be required to establish
likely would vary depending upon the
type, size, and nature of the trading
center. Thus, while we have based our
burden estimates, in part, on the burden
estimates provided in connection with
the adoption of Regulation NMS, we
note that these estimates may be on the
high end because trading centers have
already had to establish policies and
procedures in connection with that
Regulation’s order protection rule,
which could help form the basis for the
policies and procedures for the
proposed modified uptick rule. We
realize, however, that these estimates
may be on the low end for smaller
trading centers with less familiarity
with having had to establish policies
and procedures in connection with
Regulation NMS’s order protection rule.
Thus, we seek specific comment as to
whether the proposed burden estimates
are appropriate or whether such
estimates should be increased or
reduced, and for which entities. If they
should be increased or decreased, please
address by how much, in order to be
able to comply with the proposed
modified uptick rule’s required policies
and procedures, if adopted.

sroberts on PROD1PC70 with PROPOSALS

2. Identification of Short Sale Orders
and Policies and Procedures
Requirements Under the Proposed
‘‘Broker-Dealer’’ and ‘‘Riskless
Principal’’ Provisions
To rely on the proposed modified
uptick rule’s Rule 201(c)(1) ‘‘brokerdealer’’ provision, a broker-dealer
marking a short sale order in a covered
security ‘‘short exempt’’ under proposed
Rule 201(c)(1) must identify the order as
not being a down-bid price at the time
the order is submitted to the trading
center and must establish, maintain, and
enforce written policies and procedures
that are reasonably designed to prevent
the incorrect identification of orders as
not being submitted to the trading
center at a down-bid price.351 At a
minimum, the broker-dealer’s policies
and procedures would need to be
reasonably designed to enable a brokerdealer to monitor, on a real-time basis,
the national best bid, and whether the
current national best bid is an up- or
down-bid from the last differently
priced national best bid, so as to
determine the price at which the brokerdealer may submit a short sale order to
a trading center in compliance with the
requirements of proposed Rule
201(c)(1). In addition, a broker-dealer
would also need to take such steps as
would be necessary to enable it to
351 See

proposed Rule 201(c)(1).

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enforce its policies and procedures
effectively.352
To rely on proposed Rule 201(d)(6)’s
‘‘riskless principal’’ provision under the
proposed modified uptick rule or Rule
201(c)(9)’s ‘‘riskless principal’’
exception to the proposed uptick rule, a
broker-dealer would be required to have
written policies and procedures in place
to assure that, at a minimum, the
customer order was received prior to the
offsetting transaction and that it has
supervisory systems in place to produce
records that enable the broker-dealer to
accurately and readily reconstruct, in a
time-sequenced manner, all orders on
which a broker-dealer relies pursuant to
these provisions.
Although the exact nature and extent
of the required policies and procedures
that a broker-dealer would be required
to establish under the ‘‘broker-dealer’’ or
the ‘‘riskless principal’’ provisions
likely would vary depending upon the
nature of the broker-dealer (e.g., full
service broker-dealer vs. market maker),
we preliminarily estimate that it
initially would take a broker-dealer
approximately 160 hours 353 of legal,
compliance, information technology and
business operations personnel time,354
to develop the required policies and
procedures. In addition to this estimate
of 160 hours, we expect that brokerdealers may incur one-time external
costs for outsourced legal services.
While we recognize that the amount of
legal outsourcing utilized to help
establish written policies and
procedures may vary widely from entity
to entity, we preliminarily estimate that
on average, each broker-dealer would
outsource 50 hours 355 of legal time in
352 This would include the proposed requirement
that broker-dealer regularly surveil to ascertain the
effectiveness of its policies and procedures and
taking prompt remedial steps. See proposed Rule
201(c)(2).
353 We base this estimate of 160 hours on the
estimated burden hours we preliminarily believe it
would take a non-SRO trading center (which would
include broker-dealers) to develop similarly
required policies and procedures, since the policies
and procedures required under the proposed
broker-dealer provisions would be similar to those
required for non-SRO trading centers in complying
with paragraph (b) of the proposed modified uptick
rule.
354 Based on experience and the estimates
provided in connection with Regulation NMS, we
anticipate that of the 160 hours we estimate would
be spent to establish policies and procedures; 37
hours would be spent by legal personnel, 77 hours
would be spent by compliance personnel, 23 hours
would be spent by information technology
personnel and 23 hours would be spent by business
operations personnel of the broker-dealer.
355 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-

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order to establish policies and
procedures in accordance with the
‘‘broker-dealer’’ provision in proposed
Rule 201(c)(1) of the proposed modified
uptick rule, the ‘‘riskless principal’’
exception in 201(c)(9) of the proposed
uptick rule, and the ‘‘riskless principal’’
provision in 201(d)(6) of the proposed
modified uptick rule.
We preliminarily estimate that there
would be an initial one-time burden of
160 burden hours per broker-dealer or
889,760 hours 356 to establish policies
and procedures that would be required
to rely on the proposed modified uptick
rule’s ‘‘broker-dealer’’ provision in
proposed Rule 201(c)(1), the ‘‘riskless
principal’’ exception in Rule 201(c)(9) of
the proposed uptick rule, or the
‘‘riskless principal’’ provision in
201(d)(6) of the proposed modified
uptick rule. We preliminarily estimate a
cost of approximately $111,220,000 for
broker-dealers resulting from
outsourced legal work.357
Once a broker-dealer has established
written policies and procedures that
would be required so that it could rely
on proposed 201(c)(1) of the proposed
modified uptick rule, 201(c)(9) of the
proposed uptick rule, or 201(d)(6) of the
proposed modified uptick rule, we
preliminarily estimate that it would take
the average broker-dealer approximately
two hours per month of internal legal
time and three hours of internal
compliance time to ensure that its
written policies and procedures are upto-date and remain in compliance with
proposed 201(c)(1) of the proposed
modified uptick rule, 201(c)(9) of the
proposed uptick rule, or 201(d)(6) of the
proposed modified uptick rule, or a total
of 60 hours annually per respondent.358
dealer would need to do to comply with the
policies and procedures required under the
proposed broker-dealer provision of the proposed
modified uptick rule.
356 As discussed above, we base this estimate of
160 hours on the estimated burden hours we
preliminarily believe it would take a non-SRO
trading center (which would include brokerdealers) to develop similarly required policies and
procedures since the policies and procedures
required under the proposed broker-dealer
provisions would be similar to those required for
non-SRO trading centers in complying with
paragraph (b) of the proposed modified uptick rule.
The estimated 889,760 burden hours necessary
for a broker-dealer to establish policies and
procedures are calculated by multiplying 5,561
times 160 hours (5,561 × 160 hours = 889,760
hours).
357 This figure was calculated as follows: (50 legal
hours × $400 × 5,561 broker-dealers) =
$111,220,000. Based on industry sources, OEA
estimates that the average hourly rate for
outsourced legal services in the securities industry
is $400.
358 This figure was calculated as follows: (2 legal
hours × 12 months) + (3 compliance hours × 12
months). As discussed above, this burden estimate
of 60 hours is based on experience and what was

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In addition, we preliminarily estimate
that it would take the average brokerdealer each approximately 16 hours per
month of ongoing compliance time, 8
hours per month of ongoing information
technology time, and 4 hours per month
of ongoing legal time associated with
ongoing monitoring and surveillance for
and enforcement of trading in
compliance with the proposed modified
uptick rule, or a total of 336 hours
annually per respondent.359
As mentioned above, we realize that
the exact nature and extent of the
policies and procedures that a brokerdealer would be required to establish
likely would vary depending upon the
type, size, and nature of the brokerdealer. Thus, while we have based our
burden estimates on the burden
estimates provided in connection with
the adoption of Regulation NMS with
respect to non-SRO trading centers
(which includes broker-dealers), we
note that these estimates may be on the
high end for those broker-dealers that
have already had to establish policies
and procedures in connection with that
Regulation’s order protection rule,
which could help form the basis for the
policies and procedures for the
proposed broker-dealer provision of the
modified uptick rule, or the riskless
principal provisions under the proposed
modified uptick rule and the proposed
uptick rule. We realize, however, that
these estimates may be on the low end
for some broker-dealers with less
familiarity with having had to establish
policies and procedures in connection
with Regulation NMS’s order protection
rule. Thus, we seek specific comment as
to whether the proposed burden
estimates are appropriate or whether
such estimates should be increased or
reduced, and for which broker-dealers.
If they should be increased or
decreased, please address by how much,
in order to be able to comply with the
proposed provisions’ required policies
and procedures, if adopted.

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3. Proposed Marking Requirements
Proposed Rule 200(g) would impose a
‘‘short exempt’’ marking requirement.360
In addition, proposed Rule 200(g)(2)
estimated for a Regulation NMS respondent to
ensure that its written policies and procedures were
up-to-date and remained in compliance.
359 This figure was calculated as follows: (16
compliance hours × 12 months) + (8 information
technology hours × 12 months) + (4 legal hours ×
12 months) = 336 hours annually per respondent.
As discussed above, this preliminary burden
estimate of 336 hours is based on experience and
what was estimated for Regulation NMS for
similarly required ongoing monitoring and
surveillance for and enforcement of trading in
compliance with that regulation’s policies and
procedures requirement.
360 See proposed Rule 200(g).

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would require a broker-dealer to mark
all sell orders of a covered security
‘‘short exempt’’ only if the provisions
contained in paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraph (c) or (d) of the proposed
circuit breaker modified uptick rule) are
met, or if the seller is relying on one of
the exceptions contained in paragraph
(c) of the proposed uptick rule (or
paragraph (c) of the proposed circuit
breaker uptick rule), or if the seller is
relying on one of the exceptions
contained in paragraph (c) of the
proposed circuit breaker halt rule.361
While not all broker-dealers likely
would enter sell orders in securities
covered by the proposed amendments to
Rules 200(g) and 201 in a manner that
would subject them to this collection of
information, we estimate, for purposes
of the PRA, that all of the approximately
5,561 registered broker-dealers would
do so.362 For purposes of the PRA, the
Commission staff has estimated that a
total of approximately 12.9 billion
‘‘short exempt’’ orders would be entered
annually.363
This would be an average of
approximately 2,319,727 annual
responses by each respondent.364 Each
response of marking sell orders ‘‘short
exempt’’ would take approximately
.000139 hours (.5 seconds) to
complete.365 We base this estimate on
the fact that, in accordance with the
current marking requirements of Rule
200(g) of Regulation SHO, broker361 See

proposed Rule 200(g)(2).
also note that, because the proposed
circuit breaker halt rule, if adopted, would not be
in place at all times or for all securities and because
there would be fewer exceptions that would be
available and they would apply only when the
restrictions of the proposed circuit breaker halt rule
are triggered, the frequency and, therefore, the
estimate burden of marking ‘‘short exempt’’ would
be expected to be lower under the proposed circuit
breaker halt rule.
363 There are approximately 45.4 billion short sale
orders entered annually. OEA calculates that there
were about 263 million short sale trades during
August 2008 for Amex, FINRA, Nasdaq, NYSEArca,
and NYSE market centers. We gross up 263 million
by 14.4 which is the ratio of orders to trades. The
ratio is derived from Rule 605 reports from the three
largest market centers during August 2008. This
yields 3.8 billion short sale orders during August
2008 or an annualized figure of 45.4 billion. OEA
believes that August 2008 data is representative of
a normal month of trading. We estimate that
approximately 28.5% of short sale orders are short
exempt using Nasdaq short sale data from January
to April 2005. We multiply 45.4 billion times 0.285
to obtain our estimate of 12.9 billion short exempt
orders.
364 This figure was calculated as follows: 12.9
billion ‘‘short exempt’’ orders divided by 5,561
broker-dealers.
365 This estimate is based on the same time
estimate for marking sell orders ‘‘long’’ or ‘‘short’’
under current Rule 200(g) under Regulation SHO.
See 2004 Regulation SHO Adopting Release, 69 FR
at 48023; see also 2003 Regulation SHO Proposing
Release, 68 FR at 63000 n. 232.
362 We

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18089

dealers are already required to mark a
sell order either ‘‘long’’ or short’’; the
fact that most broker-dealers already
have the necessary mechanisms and
procedures in place and are already
familiar with processes and procedures
to comply with the marking
requirements of Rule 200(g) of
Regulation SHO; and the fact that
broker-dealers would be able to
continue to use the same mechanisms,
processes and procedures to comply
with proposed Rules 200(g) and
200(g)(2).
Thus, the total approximate estimated
annual hour burden per year would be
1,793,100 burden hours (12,900,000,000
orders marked ‘‘short exempt’’ @
0.000139 hours/order marked ‘‘short
exempt’’). Our estimate for the
paperwork compliance for the proposed
amendments order marking requirement
for each broker-dealer would be
approximately 322 burden hours
(2,319,727 responses @ 0.000139 hours/
responses) or (a total of 1,793,100
burden hours/5,561 respondents).
F. Collection of Information Is
Mandatory
1. Proposed Policies and Procedures
Requirements
The collection of information that
would be required under the proposed
modified uptick rule’s (and proposed
circuit breaker modified uptick rule’s)
policies and procedures requirement in
proposed Rule 201(b)(1) would be
mandatory for trading centers executing
and displaying short sale orders in
covered securities. The collection of
information that would be required
under the proposed modified uptick
rule’s (and proposed circuit breaker
modified uptick rule’s) policies and
procedures requirements in connection
with the proposed broker-dealer
provision in proposed Rule 201(c)(1)
and the ‘‘riskless principal’’ provision in
proposed Rule 201(d)(6), and the
collection of information that would be
required under the proposed uptick
rule’s (and proposed circuit breaker
uptick rule’s) policies and procedure
requirement in connection with the
proposed ‘‘riskless principal’’ exception
in proposed Rule 201(c)(9) would be
mandatory for broker-dealers relying on
these provisions.
2. Proposed Marking Requirements
The collection of information would
be mandatory for all broker-dealers
submitting sell orders marked ‘‘short
exempt’’ in reliance on one of the
proposed provisions contained in
paragraph (c) or (d) of the proposed
modified uptick rule (or paragraph (c) or

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(d) of the proposed circuit breaker
modified uptick rule), or in reliance on
an exception in paragraph (c) of the
proposed uptick rule (or paragraph (c) of
the proposed circuit breaker uptick
rule), or in reliance on an exception in
paragraph (c) of the proposed circuit
breaker halt rule.
G. Confidentiality
1. Proposed Policies and Procedures
Requirements
We expect that the information
collected pursuant to the proposed
modified uptick rule’s (and the
proposed circuit breaker modified
uptick rule’s) required policies and
procedures would be communicated to
the members, subscribers, and
employees (as applicable) of all trading
centers. To the extent this information
is made available to the Commission, it
would not be kept confidential. The
information collected pursuant to the
proposed modified uptick rule’s (or
proposed circuit breaker modified
uptick rule’s) ‘‘broker-dealer’’ provision
and the ‘‘riskless principal’’ provisions
under the proposed short sale price tests
(or under the proposed circuit breaker
price tests) would be retained and
would be available to the Commission
and SRO examiners upon request, but
not subject to public availability.
2. Proposed Marking Requirements
The information collected pursuant to
the ‘‘short exempt’’ marking
requirements in proposed Rules 200(g)
and 200(g)(2) would be submitted to
trading centers and would be available
to the Commission and SRO examiners
upon request.
H. Record Retention Period
1. Proposed Policies and Procedures
Requirements
Any records generated in connection
with the proposed short sale price tests’
requirements to establish written
policies and procedures and the
proposed circuit breaker rules would be
required to be preserved in accordance
with, and for the periods specified in,
Exchange Act Rules 17a–1 for SRO
trading centers and 17a–4(e)(7) for nonSRO trading centers.
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2. Proposed Marking Requirements
The proposed amendments to Rule
200(g) and 200(g)(2) do not contain any
new record retention requirements. All
registered broker-dealers that would be
subject to the proposed amendments are
currently required to retain records in

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accordance with Rule 17a–4(e)(7) of the
Exchange Act.366
I. Request for Comment
We invite comment on these
estimates. Pursuant to 44 U.S.C.
3506(c)(2)(B), we request comment in
order to: (a) Evaluate whether the
collection of information is necessary
for the proper performance of our
functions, including whether the
information will have practical utility;
(b) evaluate the accuracy of our estimate
of the burden of the collection of
information; (c) determine whether
there are ways to enhance the quality,
utility and clarity of the information to
be collected; and (d) evaluate whether
there are ways to minimize the burden
of the collection of information on those
who respond, including through the use
of automated collection techniques or
other forms of information technology.
Persons submitting comments on the
collection of information requirements
should direct them to the Office of
Management and Budget, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
send a copy of their comments to
Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090, with reference to File No.
[S7–08–09]. Requests for materials
submitted to OMB by the Commission
with regard to this collection of
information should be in writing, with
reference to File No. [S7–08–09], and be
submitted to the Securities and
Exchange Commission, Records
Management, 100 F Street, NE.,
Washington, DC 20549. As OMB is
required to make a decision concerning
the collections of information between
30 and 60 days after publication, a
comment to OMB is best assured of
having its full effect if OMB receives it
within 30 days of publication.
IX. Cost-Benefit Analysis
We are sensitive to the costs and
benefits of our rules. We request
comment on the costs and benefits
associated with the proposed
amendments. In particular, we request
comment on the potential costs for any
modification to both computer systems
and surveillance mechanisms and for
information gathering, management, and
recordkeeping systems or procedures, as
well as any potential benefits resulting
from the proposed amendments for
registrants, issuers, investors, brokers or
dealers, other securities industry
366 17

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professionals, regulators, and others. We
also request comment as to the extent to
which placing price restrictions on short
selling could impact or lessen some of
the benefits of legitimate short selling or
could lead to a decrease in market
efficiency, price discovery, or liquidity.
Commenters should provide analysis
and data to support their views on the
costs and benefits associated with the
proposed amendments to Rules 200(g)
and 201.
A. Benefits
As discussed above, we believe it is
appropriate at this time to examine and
seek comment on whether to restore
short sale price test restrictions or adopt
circuit breaker rules in light of the
extreme market conditions that we are
currently facing and the resulting
deterioration in investor confidence.
The proposed amendments to Rule
201 include two alternative price tests
that would place restrictions on the
prices at which certain securities would
be able to be sold short.367 The first test
would be the proposed modified uptick
rule that would be based on the national
best bid and would require trading
centers to have policies and procedures
reasonably designed to prevent the
execution or display of short sales at
impermissible prices. The second test
would be the proposed uptick rule that
would be based on the last sale price,
similar to the tick test under former
Rule 10a–1, and would prohibit any
person from effecting short sales at
impermissible prices.
We are also proposing circuit breaker
rules that would establish limitations on
short selling in a particular security
during severe market declines in the
price of that security.368 The proposed
circuit breaker halt rule, when triggered
by a severe price decline in a particular
security, would temporarily prohibit
any person from selling short that
security during the effectiveness of the
circuit breaker.369 The proposed circuit
breaker modified uptick rule, when
triggered by a severe market decline in
a particular security, would temporarily
impose the proposed modified uptick
rule, as described in detail above, for
that security. The proposed circuit
breaker uptick rule, when triggered by a
severe market decline in a particular
security, would temporarily impose the
367 See

proposed Rule 201.
proposed Rule 201.
369 The proposed circuit breaker halt rule could
be imposed in place of, or in addition to, a short
sale price rule.
368 See

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proposed uptick rule, as described in
detail above, for that security.370
In addition, we are proposing
amendments to Rule 200(g) of
Regulation SHO to impose a ‘‘short
exempt’’ marking requirement and to
Rule 200(g)(2) of Regulation SHO to
require broker-dealers to mark a sell
order ‘‘short exempt’’ only if the
provisions in paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraph (c) or (d) of the proposed
circuit breaker modified uptick rule) are
met, or if the seller is relying on an
exception in paragraph (c) of the
proposed uptick rule (or paragraph (c) of
the proposed circuit breaker uptick
rule), or if the seller is relying on an
exception in paragraph (c) of the
proposed circuit breaker halt rule.

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1. Proposed Short Sale Price Tests
The two alternative short sale price
tests proposed would be designed to
allow relatively unrestricted short
selling in an advancing market. In
addition, the proposed short sale price
tests would be designed to restrict short
selling at successively lower prices and,
thereby, help prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market by exhausting all
remaining bids at one price level,
causing successively lower prices to be
established by long sellers. Further, the
two alternative short sale price tests
would be designed to help restore
investor confidence in the securities
markets.371
In particular, by requiring trading
centers to have policies and procedures
reasonably designed to prevent the
execution or display of short sale orders
at a down-bid price, unless the order is
marked ‘‘short exempt,’’ and by
requiring them to regularly surveil to
ascertain the effectiveness of the
policies and procedures and to take
prompt remedial action to remedy
deficiencies in such policies and
procedures, the proposed modified
uptick rule might help to prevent short
selling, including potentially abusive or
manipulative short selling, from driving
the market down and from being used
as a tool to accelerate a declining
market. Similarly, for the proposed
uptick rule, by prohibiting the execution
of short sale orders below the last sale
370 A circuit breaker that triggers a short sale price
test rule would be adopted in place of a short sale
price test rule.
371 See, e.g., supra note 56 (citing comment letters
suggesting that reinstatement of short price test
restrictions in some format would help restore
investor confidence in the market).

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price, unless an exception applies, the
alternative proposed uptick rule might
also help to prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool to drive the market down
and accelerate a declining market.
At the same time, the proposed short
sale price tests might help to preserve
instant execution and liquidity, by
allowing relatively unrestricted short
selling in an advancing market. As
discussed above, one of the benefits of
legitimate short selling is that it may
provide market liquidity by, for
example, adding to the selling interest
of stock available to purchasers, and,
when sellers are covering their short
sales, adding to the buying interest of
stock available to sellers.
In seeking to advance these goals, the
proposed short sale price tests might
help address the erosion of investor
confidence in our markets. Bolstering
investor confidence in the markets
should help to encourage investors to be
more willing to invest in the market,
thus adding depth and liquidity to the
markets. Moreover, as discussed above,
prior research on the uptick rule
indicates that price test restrictions
might help improve market depth,
especially at the offer, and could also
dampen intraday volatility.372 For
example, as discussed above, OEA
found that price test restrictions
resulted in an increase in the quote
depths.373
2. Proposed Circuit Breaker Halt Rule
The proposed circuit breaker halt
rule, when triggered by a severe price
decline in a particular security, would
temporarily prohibit any person from
selling short a particular NMS stock
during a severe decline in the price of
that security.374 By targeting only those
securities that experience severe
intraday declines, the proposed circuit
breaker halt rule would be designed to
help prevent short selling, including
potentially abusive or manipulative
short selling, from being used to drive
the price of a security down, or to
accelerate the decline in the price of
those securities when needed most. By
applying only to those individual
securities that are facing a severe
intraday decline in share price, the
proposed circuit breaker halt rule might
benefit the market as a narrowly tailored
response to extraordinary
372 See supra note 35 (referencing OEA Staff’s
Summary Pilot Report, at 55 n. 61–63 and
supporting text).
373 See supra note 37 (referencing OEA Staff’s
Summary Pilot Report, at 55 n. 61–63 and
supporting text).
374 See proposed Rule 201.

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18091

circumstances.375 It also might benefit
the market by allowing participants an
opportunity to reevaluate circumstances
and respond to volatility.376
We believe that the proposed circuit
breaker halt rule also would be narrowly
tailored to help restore investor
confidence and stabilize the market for
individual securities during times of
substantial uncertainty.377 By halting
short selling for the remainder of the
trading day following a significant
decline in a security’s price, we believe
the proposed circuit breaker halt rule
might provide sufficient time to reestablish equilibrium between buying
and selling interests in the individual
security in an orderly fashion. It might
also help to ensure that market
participants have a reasonable
opportunity to become aware of, and
respond to, a significant decline in a
security’s price. By providing a pause in
short selling resulting from a significant
decline in the price of an individual
equity security, we believe the proposed
circuit breaker halt rule might provide
a measure of stability to the markets. We
believe that the proposed circuit breaker
halt rule might help to restore investor
confidence during times of substantial
uncertainty.
Moreover, unlike the proposed short
sale price test restrictions, the proposed
circuit breaker halt rule would halt all
short selling for an individual security
only for a specified period of time.
Thus, the proposed circuit breaker halt
rule would also be narrowly tailored to
help address the issue of ‘‘bear raids’’
while limiting the potential negative
market quality impact that may arise
from the proposed short sale price test
restrictions.378
3. Proposed Circuit Breaker Price Test
Rules
The alternative proposed circuit
breaker price test rules, when triggered
by a severe market decline in a
particular security, would temporarily
impose either the proposed circuit
breaker modified uptick rule or the
proposed circuit breaker uptick rule, as
each rule is described above, for a
particular NMS stock during a severe
market decline in that security, and
would remain in place for the remainder
of the trading day.379
375 See 1998 Release, 63 FR 18477 (April 15,
1998) supra note 230.
376 See id.
377 See id.
378 See 1998 Release, 63 FR 18477.
379 For instance, a circuit breaker resulting in the
proposed modified uptick rule would require that
trading centers implement and enforce policies and
procedures reasonably designed to prevent short

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We believe that the proposed circuit
breaker price test rules would be
narrowly tailored to help restore
investor confidence and stabilize the
market for individual securities. The
proposed circuit breaker price test rules
might also help prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market by exhausting all
remaining bids at one price level,
causing successively lower prices to be
established by long sellers. Further, we
also believe that allowing short selling
to continue with price test restrictions
once a circuit breaker is triggered might
also have less impact on legitimate short
selling and normal market activity
including price discovery and the
provision of liquidity than a circuit
breaker that halts short selling. To that
end, we believe that the proposed
circuit breaker price test rules might
also alleviate some concerns over the
possibility of artificial downward
pressure that might arise from a
‘‘magnet effect’’ prior to reaching the
trigger threshold.380
4. Proposed Marking Requirements

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In addition, the ‘‘short exempt’’
marking requirements under Rule
200(g)(2) would provide a record that a
broker-dealer is availing itself of the
provisions of paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraphs (c) or (d) of the proposed
circuit breaker modified uptick rule), or
that short sellers are availing themselves
of the various exceptions to the
application of the restrictions of the
proposed uptick rule (or the proposed
circuit breaker uptick rule), or that short
sellers are availing themselves of the
various exceptions to the application of
the proposed circuit breaker halt rule.
Thus, the records created pursuant to
the ‘‘short exempt’’ marking
requirements of proposed Rule 200(g) of
the proposed short sale price test rules
or the proposed circuit breaker rules
would aid surveillance by SROs and the
Commission for compliance with the
provisions of those short sale price tests
or circuit breaker rules. In addition, if
the Commission were to adopt a policies
and procedures approach, such as is
selling at a down-bid price in a particular security,
when triggered by a decline in the price of that
security. Broker-dealer could mark certain short
sale orders ‘‘short-exempt’’ under the conditions set
forth above. A circuit breaker resulting in the
proposed uptick rule would, once triggered by a
decline in the price of a particular security, prohibit
any person from selling short on a downtick.
380 See, e.g., letter from Credit Suisse (discussing
‘‘magnet effect’’).

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proposed in conjunction with the
proposed modified uptick rule (or
proposed circuit breaker modified
uptick rule), the proposed ‘‘short
exempt’’ marking requirement would
provide an indication to a trading center
regarding whether it must execute or
display a short sale order with regard to
whether the short sale order is at a
down-bid price.
B. Costs
1. Proposed Short Sale Price Test
Restrictions
We recognize that the proposed
amendments, if adopted, would impose
costs on market participants to
implement and assure compliance with
the proposed short sale price test
requirements. These costs could, in
sum, increase the costs of legitimate
short selling. We believe, however, that
such costs might be justified by the
design of the proposed short sale price
tests to restrict short selling at
successively lower prices and, thereby,
help prevent short selling, including
potentially abusive or manipulative
short selling, from being used as a tool
for driving the market down or from
being used to accelerate a declining
market by exhausting all remaining bids
at one price level, causing successively
lower prices to be established by long
sellers. Further, by seeking to advance
these goals, the proposed price test
restrictions might help restore investor
confidence in the securities markets.
We recognize that, to the extent that
the proposed short sale price test
restrictions could result in increased
costs of short selling in NMS stocks, it
might lessen some of the benefits of
legitimate short selling and, thereby,
could result in a reduction in short
selling generally. Such a reduction
might lead to a decrease in market
efficiency and price discovery, less
protection against upward stock price
manipulations, a less efficient allocation
of capital, an increase in trading costs,
and a decrease in liquidity. Restricting
short selling may also reduce ‘‘long’’
activity where it is part of the same
strategy, thus adversely affecting
liquidity. Thus, we believe there might
be potential costs associated with the
proposed short sale price tests in terms
of potential impact of such price tests
on quote depths, spread widths, and
market liquidity.
We also believe costs might be
incurred in terms of execution and
pricing inefficiencies. For example,
allowing all short sales to be executed
or displayed at or above the best bid (or
last sale price) in an advancing market,
and above the best bid (or last sale

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price) in a declining market might slow
the speed of executions and impose
additional costs on market participants,
including buyers.381
In addition, we recognize that
imposing short sale price restrictions
when, currently, there is an absence of
any short sale price test restrictions may
result in costs in terms of modifications
to systems and surveillance
mechanisms, as well as changes to
processes and procedures. We anticipate
that these changes would likely result in
immediate implementation costs for
trading centers and SROs and other
market participants associated with
reprogramming trading and surveillance
systems to now account for price test
restrictions based on either last sale or
best bid information, as discussed in
more detail below. We also believe the
proposed amendments may impose
costs to trading centers and SROs and
other market participants related to
systems changes to computer hardware
and software, reprogramming costs, and
surveillance and compliance costs, as
well as staff time and technology
resources, associated with monitoring
compliance with the proposed short sale
price test restrictions, as discussed
below.
Moreover, imposing price test
restrictions when there are currently no
short sale price restrictions in place also
could mean that staff (compliance
personnel, associated persons, etc.)
might need to be trained or re-trained
regarding rules related to price test
restrictions. Also, trading centers and
SROs and other market participants
could be required to hire additional staff
(and train or re-train them) to comply
with the proposed rules related to short
sale price test restrictions. As such, we
believe the proposed amendments, if
adopted, might impose training and
compliance costs for trading centers,
SROs, and other market participants.
a. Proposed Modified Uptick Rule
The proposed modified uptick rule, in
particular, would require each trading
center to establish, maintain, and
enforce written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order at a down-bid price.382 In
addition, a trading center would be
required to have policies and
procedures reasonably designed to
381 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 36 (referencing
OEA Staff’s Summary Pilot Report at 8).
382 See proposed Rule 201(b)(1).

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permit the execution or display of a
short sale order of a covered security
marked ‘‘short exempt’’ without regard
to whether the order is at a down-bid
price.383 A trading center’s policies and
procedures would not, however, have to
include mechanisms to determine on
which provision a broker-dealer is
relying in marking an order ‘‘short
exempt’’ in accordance with paragraph
(c) or (d) of the proposed modified
uptick rule. In addition, trading centers
also would be required to surveil the
effectiveness of their written policies
and procedures and take prompt action
to remedy any deficiencies in their
policies and procedures.
As detailed in the PRA section, VIII,
above, although the exact nature and
extent of the required policies and
procedures that a trading center would
be required to establish likely would
vary depending upon the nature of the
trading center (e.g., SRO vs. non-SRO,
full service broker-dealer vs. market
maker), we preliminarily estimate a total
one-time initial cost of $26,393,412 384
for all trading centers subject to the
proposed modified uptick rule to
establish the written policies and
procedures reasonably designed to help
prevent the execution or display of short
sale orders not priced in accordance
383 See proposed Rule 201(b)(1)(ii). See also
Sections III.A.2. and V, above, discussing short sale
orders marked ‘‘short exempt.’’
384 This figure was calculated by adding
$18,733,412 and $7,660,000 (for outsourced legal
work). The $18,733,412 figure was calculated as
follows: (70 legal hours × $305) + (105 compliance
hours × $313) + (20 information technology hours
× $292) + (25 business operation hours × $273) =
$66,880 per SRO × 11 SROs = $735,680 total cost
for SROs; (37 legal hours × $305) + (77 compliance
hours × $313) + (23 information technology hours
× $292) + (23 business operation hours × $273) =
$48,381 per broker-dealer × 372 broker-dealers =
$17,997,732 total cost for broker-dealers; $735,680
+ $17,997,732 = $18,733,412. The $7,660,000 figure
for outsourced legal work was calculated as follows:
(50 legal hours × $400 × 11 SROs) + (50 legal hours
× $400 × 372 broker-dealers) = $7,660,000.
Based on industry sources, OEA estimates that
the average hourly rate for outsourced legal services
in the securities industry is $400. For in-house legal
services, we estimate that the average hourly rate
for an attorney in the securities industry is
approximately $305 per hour. The $305/hour figure
for an attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2008, modified by Commission staff to account for
an 1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits
and overhead. In addition, OEA estimates that the
average hourly rate for an assistant compliance
director, a senior computer programmer, a senior
operations manager, in the securities industry is
approximately $313, $292, and $273 per hour,
respectively. These figures are from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, modified by Commission
staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.

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with the provisions of proposed Rule
201(b)(1).
Once a trading center has established
written policies and procedures
reasonably designed to help prevent the
execution or display of a short sale
order at a down-bid price, we
preliminarily estimate a total annual
ongoing cost of $7,119,204 385 for all
trading centers subject to the proposed
modified uptick rule to ensure that their
written policies and procedures are upto-date and remain in compliance with
the proposed amendments to Rule 201.
In addition, with regard to ongoing
monitoring for and enforcement of
trading in compliance with the
proposed modified uptick rule, as
detailed in the PRA section, VIII, above,
we preliminary believe that, once the
tools necessary to carry out on-going
monitoring have been put in place, a
trading center would be able to
incorporate ongoing monitoring and
enforcement within the scope of its
existing surveillance and enforcement
policies and procedures without a
substantial additional burden. We
recognize, however, that this ongoing
compliance would not be cost-free, and
that trading centers would incur some
additional annual costs associated with
ongoing compliance, including
compliance costs of reviewing
transactions. We preliminarily estimate
that each trading center would incur an
average annual ongoing compliance cost
of $102,768, for a total annual cost of
$39,360,144 for all trading centers.386
385 This figure was calculated as follows: (2 legal
hours × 12 months × $305) × (11 + 372) + (3
compliance hours × 12 months × $313) × (11 + 372)
= $7,119,204.
386 We preliminarily estimate that each trading
center would incur an average annual ongoing
compliance cost of $102,768 for a total annual cost
of $39,360,144 for all trading centers. This figure
was calculated as follows: (16 compliance hours ×
$313) + (8 information technology hours × $292) +
(4 legal hours × $305) × 12 months = $102,768 per
trading center × 383 trading centers = $39,360,144.
As discussed above, we base our burden hour
estimates on the estimates used for Regulation NMS
because it requires similar ongoing monitoring and
surveillance for and enforcement of trading in
compliance with that regulation’s policies and
procedures requirement.
For in-house legal services, we estimate that the
average hourly rate for an attorney in the securities
industry is approximately $305 per hour. The $305/
hour figure for an attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, modified by Commission
staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. In addition, OEA
estimates that the average hourly rate for an
assistant compliance director, a senior computer
programmer, a senior operations manager, in the
securities industry is approximately $313, $292,
$273 per hour, respectively. These figures are from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour work-

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As detailed in the PRA section, VIII,
above, we realize that the exact nature
and extent of the policies and
procedures that a trading center would
be required to establish would likely
vary depending upon the type, size, and
nature of the trading center. Thus, while
we have based our estimates on the
burden estimates provided in
connection with the adoption of
Regulation NMS, we note that these
estimates may be on the high end
because trading centers have already
had to establish policies and procedures
in connection with that Regulation’s
order protection rule, which could help
form the basis for the policies and
procedures for the proposed modified
uptick rule. We realize, however, that
these estimates may be on the low end
for some trading centers. Thus, we seek
specific comment as to whether these
estimates are appropriate or whether
such estimates should be increased or
reduced and for which entities. If they
should be increased or decreased, please
address by how much, in order to be
able to comply with the proposed
modified uptick rule’s required policies
and procedures, if adopted.
As detailed in the PRA section, VIII,
above, although the exact nature and
extent of the required policies and
procedures that a broker-dealer would
be required to establish under the
‘‘broker-dealer’’ provision in proposed
Rule 201(c)(1) of the proposed modified
uptick rule, as well as under the
‘‘riskless principal’’ provision in
proposed Rule 201(d)(6) of the proposed
modified uptick rule and the ‘‘riskless
principal’’ exception in proposed Rule
201(c)(9) of the proposed uptick rule,
likely would vary depending upon the
nature of the broker-dealer (e.g., full
service broker-dealer vs. market maker),
we preliminarily estimate a total onetime initial cost of $380,266,741 for all
broker-dealers relying on the brokerdealer provision in proposed Rule
201(c)(1) of the proposed modified
uptick rule; the ‘‘riskless principal’’
provisions in proposed Rules 201(d)(6)
of the proposed modified uptick rule; or
201(c)(9) of the proposed uptick rule, to
establish the written policies and
procedures reasonably designed to
prevent the incorrect identification of
orders as being priced in accordance
with the broker-dealer provision or, in
the case of the ‘‘riskless principal’’
provisions, to assure that, at a
minimum, the customer order was
received prior to the offsetting
transaction and to assure the brokerdealer has supervisory systems in place
year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.

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to produce records that enable the
broker-dealer to accurately and readily
reconstruct, in a time-sequenced
manner, all orders on which a brokerdealer relies pursuant to these
provisions of the proposed price
tests.387
Once a broker-dealer has established
written policies and procedures that
would be required so that it could rely
on the proposed modified uptick rule’s
‘‘broker-dealer provision’’ in proposed
Rule 201(c)(1); the ‘‘riskless principal’’
exception in proposed Rule 201(c)(9) of
the proposed uptick rule; or the
‘‘riskless principal’’ provision in
proposed Rule 201(d)(6) of the proposed
uptick rule, we estimate a total annual
on-going cost of $103,367,868 for all
broker-dealers relying on any of these
three provisions to ensure that its
written policies and procedures are upto-date and remain in compliance with
the proposed amendments to Rule
201.388 In addition, with regard to
ongoing monitoring for and enforcement
of trading in compliance with the
proposed modified uptick rule’s
‘‘broker-dealer’’ provision in proposed
Rule 201(c)(1), as detailed in the PRA
section, VIII, above, we preliminary
believe that, once the tools necessary to
carry out on-going monitoring would
have been put in place, a broker-dealer
would be able to incorporate ongoing
monitoring and enforcement within the
scope of its existing surveillance and
enforcement policies and procedures
without a substantial additional burden.
387 This figure was calculated by adding
$269,046,741 and $111,220,000 (for outsourced
legal work). The $269,046,741 figure was calculated
as follows: (37 legal hours × $305) + (77 compliance
hours × $313) + (23 information technology hours
× $292) + (23 business operation hours × $273) =
$48,381 per broker-dealer × 5,561 broker-dealers =
$ 269,046,741 total cost for broker-dealers. The
$111,220,000 figure was calculated as follows: (50
legal hours × $400 × 5,561) = $111,220,000.
Based on industry sources, OEA estimates that
the average hourly rate for outsourced legal services
in the securities industry is $400. For in-house legal
services, we estimate that the average hourly rate
for an attorney in the securities industry is
approximately $305 per hour.
The $305/hour figure for an attorney is from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead. In
addition, OEA estimates that the average hourly rate
for an assistant compliance director, a senior
computer programmer, a senior operations manager,
in the securities industry is approximately $313,
$292, $273 per hour, respectively. These figures are
from SIFMA’s Management & Professional Earnings
in the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
388 This figure was calculated as follows: (2 legal
hours × 12 months × $305) × 5,561 + (3 compliance
hours × 12 months × $313) × 5,561 = $103,367,868.

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We recognize, however, that this
ongoing compliance would not be costfree, and that broker-dealers would
incur some additional annual costs
associated with ongoing compliance,
including compliance costs of reviewing
transactions. We estimate that each
broker-dealer would incur an average
annual ongoing compliance cost of
$102,768, for a total annual cost of
$571,492,848 for all broker-dealers.389
As discussed above in connection
with the PRA, we realize that the exact
nature and extent of the policies and
procedures that a broker-dealer would
be required to establish likely would
vary depending upon the type, size, and
nature of the broker-dealer. Thus, while
we have based our estimates on the
burden estimates provided in
connection with the adoption of
Regulation NMS, we note that these
estimates may be on the high end
because broker-dealers have already had
to establish policies and procedures in
connection with that Regulation’s order
protection rule, which could help form
the basis for the policies and procedures
for the proposed modified uptick rule’s
‘‘broker-dealer’’ provision’s policies and
procedures requirement in proposed
Rule 201(c)(1). We realize, however, that
these estimates may be on the low end
for some broker-dealers that may have
less familiarity with a policies and
procedures approach. Thus, we seek
specific comment as to whether these
estimates are appropriate or whether
such estimates should be increased or
reduced. If they should be increased or
decreased, please address by how much,
389 We estimate that each broker-dealer would
incur an average annual ongoing compliance cost of
$102,768 for a total annual cost of $571,492,848 for
all broker-dealers. This figure was calculated as
follows: (16 compliance hours × $313) + (8
information technology hours × $292) + (4 legal
hours × $305) × 12 months = $102,768 per brokerdealer × 5,561 broker-dealers = $571,492,848. As
discussed above, we base our estimate of burden
hours on the estimates used for Regulation NMS
because it requires similar ongoing monitoring and
surveillance for and enforcement of trading in
compliance with that regulation’s policies and
procedures requirement.
For in-house legal services, we estimate that the
average hourly rate for an attorney in the securities
industry is approximately $305 per hour. The $305/
hour figure for an attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, modified by Commission
staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. In addition, OEA
estimates that the average hourly rate for an
assistant compliance director, a senior computer
programmer, a senior operations manager, in the
securities industry is approximately $313, $292,
$273 per hour, respectively. These figures are from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.

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in order to be able to comply with the
proposed modified uptick rule’s
required policies and procedures, if
adopted.
In addition, we anticipate that each
trading center would incur initial upfront costs associated with taking action
necessary to implement the written
policies and procedures it has
developed, which would include
surveillance and reprogramming costs
for enforcing, monitoring, and updating
their trading, execution management,
and surveillance systems under the
proposed modified uptick rule, systems
changes to computer hardware and
software, as well as staff time and
technology resources.390 However, we
note that the policies and procedures
that would be required to be
implemented are similar to those that
are required under Regulation NMS.391
In accordance with Regulation NMS,
trading centers must have in place
written policies and procedures in
connection with that Regulation’s order
protection rule, which could help form
the basis for the policies and procedures
390 For instance, to implement the proposed
modified uptick rule would require that each ATS
reprogram their trading engine, as would any
broker-dealer who executes trades as an OTC
market maker. Moreover, one commenter indicated
that programming costs across sell-side firms could
range from $200,000 to $2 million. See, e.g., 2007
Price Test Adopting Release, 72 FR at 36350 n. 113
(citing comment letter from SIFMA stating that cost
estimates for firms to program for the changes that
were necessary to meet the policies and procedures
requirements of Regulation NMS varied, from as
low as approximately $200,000 for some firms to as
high as $2 million for others. See also supra note
46 (citing to 2007 SIFMA letter) and text
accompanying note 208. Additionally, because they
might require trading centers and other market
participants a significant amount of time in which
to reprogram and test their systems to comply with
the proposed amendments, these systems and
programming costs might be higher without a
sufficient implementation period. For example, this
same commenter indicated that it would take six to
nine months to implement a new version of the bid
test. See id.
See letter from Credit Suisse (discussing need for
a longer implementation period, particularly for
smaller broker-dealers, in terms of having to build
systems to be able to track upticks or upbids in their
smart order routers in accordance with any new
rules and then preserve this history so that
regulators can audit it). According to this
commenter, ‘‘[b]uilding such systems would likely
be as expensive and challenging as Reg NMS
implementation was from 2005–2007, and would
likely take more than a year to implement * * * It
is also likely that the compliance costs would
disproportionately burden smaller BDs, who would
likely be forced to route their order flow through
a handful of larger brokers, impeding competition
and adding to systemic risk as flow is consolidated
among fewer players’’. Id.
We also recognize that the proposed
amendments, if adopted, would require the
commitment of resources associated with
compliance oversight, market surveillance, and
enforcement, with attendant opportunity costs.
391 See Regulation NMS Adopting Release, 70 FR
37496. See also 17 CFR 242.611.

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for the proposed modified uptick
rule.392 Thus, we believe trading centers
may already be familiar with
establishing, maintaining, and enforcing
trading-related policies and procedures,
including programming their trading
systems in accordance with such
policies and procedures.
We believe this familiarity may
reduce the implementation costs of the
proposed modified uptick rule on
trading centers and may make the
proposed modified uptick rule less
burdensome to implement. Moreover,
because trading centers have already
developed or modified their
surveillance mechanisms in order to
comply with Regulation NMS’s policies
and procedures requirement, trading
centers may already have retained and
trained the necessary personnel to
ensure compliance with that
Regulation’s policies and procedures
requirements and, therefore, may
already have in place most of the
infrastructure and potential policies and
procedures necessary to comply with
the proposed modified uptick rule.393
Thus, while we believe there would
be costs associated with systems
modifications and training staff that
would be affected by these systems
modifications, because most trading
centers would already have in place
systems, written policies and
procedures in order to comply with
Regulation NMS’s order protection rule,
we believe trading centers would
already be familiar with establishing,
maintaining, and enforcing tradingrelated policies and procedures,
including programming their trading
and surveillance systems in accordance
with such policies and procedures.
Moreover, the proposed modified
uptick rule’s written policies and
procedures requirement are designed to
provide trading centers with significant
flexibility in determining how to
comply with the requirements of the
proposed modified uptick rule. For
example, the proposed modified uptick
rule is designed to provide trading
centers and their customers with
flexibility in determining how to handle
orders that are not immediately
executable or displayable by the trading
center because the order is
impermissibly priced. Thus, if an order
were impermissibly priced, the trading
center could, in accordance with
policies and procedures reasonably
392 See

id.
also believe some trading centers may
have retained personnel familiar with the former
SRO bid tests, which may make the proposed
modified uptick rule less burdensome to
implement. See, e.g., supra note 125 and
accompanying text.
393 We

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designed to prevent the execution or
display of a short sale at a down-bid
price, re-price the order at the lowest
permissible price and hold it for later
execution at its new price or better.394
As quoted prices change, the proposed
modified uptick rule would allow a
trading center to repeatedly re-price and
display an order at the lowest
permissible price down to the order’s
original limit order price (or, if a market
order, until the order is filled). Because
a trading center could re-price and
display a previously impermissibly
priced short sale order, the proposed
modified uptick rule may allow for the
more efficient functioning of the
markets because trading centers would
not have to reject or cancel
impermissibly priced orders unless
instructed to do so by the trading
center’s customer submitting the short
sale order.
Moreover, while latencies in
obtaining data regarding the national
best bid from consolidated market data
feeds, as discussed in detail above,
could impact implementation costs
associated with the proposed modified
uptick rule, a trading center could have
policies and procedures that could
provide a snapshot of the market to
identify the current national best bid at
the time of execution or display of a
short sale order. Such snapshots may
cause a reduction in costs for trading
centers by helping to verify whether a
short sale order was executed or
displayed at a permissible price.
b. Proposed Uptick Rule
The alternative proposed uptick rule
would be based on the last sale price,
rather than the national best bid, as the
reference point for short sale orders,
similar to former Rule 10a–1. However,
the proposed uptick rule would not
include an explicit policies and
procedures requirement. Instead, the
proposed uptick rule would prohibit
any person from effecting a short sale
below the last sale price, unless an
exception applies. Because the proposed
uptick rule would be a modernized
version of the former Rule 10a–1, it
would also provide the public with an
opportunity to comment on the utility of
such a price test, especially in light of
recent changes in market conditions.395
394 For example, if a trading center received a
short sale order priced at $47.00 when the current
national best bid in the security is $47.00, but the
immediately preceding national best bid was $47.01
(i.e., the current bid is below the previous bid), the
trading center could re-price the order at the
permissible offer price of $47.01, and display the
order for execution at this new limit price.
395 See supra Section II discussing the history of
short sale price test regulation in the United States

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We recognize that due to the
extensive systems changes that have
occurred in the last couple of years in
response to Regulation NMS,
programming systems for the proposed
uptick rule could be burdensome.396 In
particular, because the proposed uptick
rule does not take a policies and
procedures approach, market
participants would not be able to rely to
the same extent on the policies and
procedures they already have in place
under Regulation NMS. Instead, the
proposed uptick rule would prohibit
any person from effecting a short sale in
contravention of the rule’s limitations.
However, because the proposed uptick
rule would apply to any person effecting
a short sale, rather than just to trading
centers, the proposed uptick rule might
impose costs on more market
participants than the proposed modified
uptick rule. However, the proposed
uptick rule, which is similar to the price
test of former Rule 10a–1, would be
familiar to many market participants
because it would be based on a rule
which was in existence for almost 70
years, and was only recently eliminated.
We believe this familiarity may help to
reduce the implementation costs of the
proposed uptick rule on market
participants and, therefore, should
decrease the costs of implementation of
the proposed uptick. For example, we
believe some market participants may
have retained personnel familiar with
former Rule 10a–1,397 and may also
have in place some of the systems and
surveillance mechanisms used in
connection with former Rule 10a–1 that
could be used to comply with the
proposed uptick rule. We believe,
however, that most market participants
would incur costs associated with
having to implement or modify their
trading systems and surveillance
and the changes in market conditions and resulting
erosion of investor confidence.
396 See, e.g., 2007 Price Test Adopting Release, 72
FR at 36350 n. 113 (citing to comment letter from
SIFMA stating that cost estimates for firms to
program for the changes that were necessary to meet
the policies and procedures requirements of
Regulation NMS varied, from as low as
approximately $200,000 for some firms to as high
as $2 million for others. See SIFMA Letter.
Additionally, because they might require trading
centers, SROs, and other market participants a
significant amount of time in which to reprogram
and test their systems to comply with a price test
restriction, these systems and programming costs
might be higher without a sufficient
implementation period. For example, one
commenter indicated that it would take six to nine
months to implement a new version of the price
test. See id. (discussing SIFMA comment letter) and
see also supra note 208.
397 Likewise, we believe some market participants
may have retained personnel familiar with former
SRO bid tests. See, e.g., supra note 125 and
accompanying text.

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mechanisms in order to comply with the
proposed uptick rule, including a period
of time in which to make such
changes.398 However, we believe
familiarity with a price test that would
be based on a modernized version of
former Rule 10a–1 might more readily
help address investor confidence in our
markets.
c. Additional Mitigating Price Test Costs
Features
While we recognize that either
proposed price test alternatives would
create costs for trading centers that
execute or display short sale orders in
covered securities, as well as other
market participants that engage in short
selling, we believe there are several
additional mitigating costs features that
might help to reduce costs associated
with a proposed price test if adopted.
First, we believe that the fact that
either proposed price test alternative, if
adopted, would apply a uniform price
test 399 might help to reduce compliance
costs for market participants. For
example, by applying a uniform price
test, the proposed short sale price test
restrictions would be designed so as to
not result in the type of disparate short
sale regulation that existed under former
Rule 10a–1, in which different price
tests were applied in different markets,
resulting in confusion, compliance
difficulties, regulatory arbitrage, and an
un-level playing field among market
participants.400 Moreover, subsection (e)
of proposed Rule 201 of the proposed
modified uptick rule and subsection (d)
of proposed Rule 201 of the proposed
uptick rule, if adopted, would include a
requirement that no SRO may have any
rule that is not in conformity with, or
conflicts with, the proposed short sale
price test requirements.401 Thus, we
believe a uniform rule might reduce
compliance costs, and also could reduce
regulatory arbitrage. Also, there might
be a reduction in costs associated with
systems and surveillance mechanisms
that would have to be programmed to
consider only a single test based on the
national best bid (or on the last sale
price if the proposed uptick rule is
398 See,

e.g., supra note 346.
discussed above, unlike the former Rule
10a–1, the proposed short sale price test
restrictions, if adopted, would apply a uniform rule
to trades in the same securities that occur in
multiple, dispersed, and diverse markets. Under the
proposed short sale price test restrictions, all
covered securities, wherever traded, would be
subject to the same short sale price test.
400 See supra note 27 (discussing the different
tests under former Rule 10a–1).
401 See proposed Rule 201(e) of the proposed
modified uptick rule, and proposed Rule 201(d) of
the proposed uptick rule.

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adopted) instead of different tests for
different markets.
Second, the proposed three month
implementation period would be
designed to provide trading centers and
market participants with a sufficient
amount of time in which to modify their
systems and procedures in order to
comply with the requirements of a
proposed short sale price test if adopted
and, thus, might help reduce some of
the costs and help to alleviate some of
the potential disruptions that might be
associated with implementing either
proposed price test. We recognize,
however, that a longer implementation
period may be more manageable or
preferable, particularly to smaller
broker-dealers that might be
disproportionately burdened by any
implementation and compliance costs
associated with the proposed short sale
price test restrictions, as well as
competitively disadvantaged in terms of
reduced order flow as a result.402 Thus,
we seek comment as to what length of
implementation period would be
necessary or appropriate, and why, such
that trading centers would be able to
meet the proposed short sale price test
restrictions, if adopted.
Third, as described below, we believe
the ‘‘broker-dealer’’ provision in
proposed Rule 201(c)(1) of the proposed
modified uptick rule and the provisions
contained in paragraph (d) of the
proposed modified uptick rule, as well
as the exceptions contained in
paragraph (c) of the proposed uptick
rule might also help to minimize any
potential price distortions or costs
associated with the proposed short sale
price restrictions. These provisions also
would be designed to help promote the
workability of the proposed price tests,
while at the same time furthering the
Commission’s stated goals of short sale
price test regulation.
For example, as discussed above,
proposed Rule 201(c)(1) of the proposed
modified uptick rule would provide that
a broker-dealer may mark a short sale
order in a covered security ‘‘short
exempt’’ and send it to a trading center
if the broker-dealer has identified the
order as not being at a down-bid price
at the time of submission of the order to
the trading center. This provision would
provide broker-dealers with the option
to manage their order flow, rather than
having to always rely on their trading
centers to manage their order flow on
their behalf. In addition, we note that
this provision would not undermine the
402 See supra note 390 and accompanying text
(discussing letters from SIFMA and Credit Suisse,
respectively, regarding cost estimates and the need
for a longer implementation period, particularly for
smaller broker-dealers).

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Commission’s goals for short sale
regulation because any broker-dealer
marking an order ‘‘short exempt’’ in
accordance with this provision would
have to ensure that its short sale order
was not on a down-bid price at the time
of submission of the order to a trading
center. We believe that this provision
also might help to preserve instant
execution and liquidity by allowing
relatively unrestricted short selling in
an advancing market.
Proposed Rule 201(d)(1) of the
proposed modified uptick rule would
provide an exception if the seller owns
a security and would provide that a
short sale order of a covered security
may be marked ‘‘short exempt,’’ thereby
allowing it to be displayed or executed
at a down-bid price, if the broker-dealer
has a reasonable basis to believe that the
seller owned the security being sold and
that the seller intended to deliver the
security as soon as all the restrictions on
delivery have been removed. Similarly,
proposed Rule 201(c)(1) of the proposed
uptick rule would provide an exception
for sales of owned securities. As a
result, these provisions would allow for
sales of securities that although owned,
were subject to the provisions of
Regulation SHO governing short sales
due solely to the seller being unable to
deliver the security to its broker-dealer
prior to settlement due to circumstances
outside the seller’s control.
Proposed Rule 201(d)(2) of the
proposed modified uptick rule would
allow a broker-dealer to mark a short
sale order ‘‘short exempt’’ if the brokerdealer has a reasonable basis to believe
that the short sale order is by a market
maker to off-set a customer odd-lot
order or to liquidate an odd-lot position
by a single round lot sell order that
changed such broker-dealer’s position
by no more than a unit of trading and,
thereby, may be permitted to be
executed or displayed at a down-bid
price. Similarly, in proposed Rule
201(c)(3) of the proposed uptick rule we
would provide an exception for sales
related to odd-lot orders. These
provisions would allow market makers
to facilitate customer orders that are not
of a size that could facilitate a
downward price movement in the
market.
Proposed Rule 201(d)(3) of the
proposed modified uptick would permit
qualifying short sale orders associated
with certain bona fide domestic
arbitrage transactions to be marked
‘‘short exempt,’’ and thereby permit
them to be executed or displayed at a
down-bid price. This provision would
allow broker-dealers to engage in
transactions that tend to reduce pricing
disparities between securities.

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Moreover, to facilitate arbitrage
transactions in which a short position
was taken in a security on the U.S.
market, and which was to be
immediately covered on a foreign
market, Rule 201(d)(4) of the proposed
modified uptick rule would permit short
sale orders associated with certain
international arbitrage transactions to be
marked ‘‘short exempt,’’ and thereby
permit such orders to be executed or
displayed at a down-bid price.
Similarly, proposed Rules 201(c)(4) and
201(c)(5) of the proposed uptick rule
would provide exceptions related to
domestic and international arbitrage
transactions.
In addition, proposed Rule 201(d)(5)
of the proposed modified uptick rule is
intended to facilitate distributions of
securities by providing an exception for
any sales of covered securities by
underwriters or members of a syndicate
or group participating in the
distribution of a security in connection
with an over-allotment of securities, and
any lay-off sales by such persons in
connection with a distribution of
securities through a rights or standby
underwriting commitment. By
permitting short sales in connection
with an over-allotment or lay-off sales at
or below the national best bid to be
marked ‘‘short exempt,’’ and thereby
permit them to be executed or displayed
at a down-bid price, this provision
would enable an underwriter to reduce
its risk by pricing an offering at or below
the current national best bid or last sale
price, as applicable. Similarly, proposed
Rule 201(c)(6) of the proposed uptick
rule would provide an exception for
sales in connection with over-allotments
and lay-off sales.
As discussed above, proposed Rule
201(d)(6) of the proposed modified
uptick rule would allow a broker-dealer
to mark short sale orders of a covered
security ‘‘short exempt,’’ and thereby
allow for their execution or display at a
down-bid price where a broker-dealer is
facilitating customer buy orders or sell
orders where the customer is net long
and the broker-dealer is net short but is
effecting the sale as riskless principal,
provided certain conditions are met.
Similarly, proposed Rule 201(c)(9) of
the proposed uptick rule would provide
an exception for certain transactions on
a riskless principal basis. These
provisions would provide brokerdealers with additional flexibility to
facilitate customer orders.
Proposed Rule 201(d)(7) of the
proposed modified uptick rule would
permit certain short sale orders
executed on a VWAP basis to be marked
‘‘short exempt,’’ and, as a result, to be
executed or displayed at a down-bid

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price.403 Similarly, proposed Rule
201(c)(7) of the proposed uptick rule
would provide an exception for certain
transactions on a VWAP basis. These
provisions might help provide an
additional source of liquidity for
investors’ VWAP orders and might help
enable investors to achieve their
objective of obtaining an execution at
the VWAP.
In addition, the proposed uptick rule
would include cost-mitigating
provisions that would be unique to the
proposed uptick rule, designed to allow
its proper functioning in today’s
markets, while at the same time being
designed to further the purposes of our
proposing short sale price test
restrictions at this time. For example,
proposed Rule 201(c)(2) of the proposed
uptick rule would provide an exception
for errors in marking a short sale order,
such as when a broker-dealer effected a
sale marked ‘‘long’’ by another brokerdealer, but the sale was mis-marked
such that it should have been marked as
a ‘‘short’’ sale.404 This exception might
help promote liquidity by avoiding
implicating the broker-dealer effecting
the sale where the broker-dealer’s
participation in the violation was
neither knowing nor reckless.405
Proposed Rule 201(c)(8) of the
proposed uptick rule would provide an
exception from the proposed uptick rule
for any sale of a covered security in an
electronic trading system that matches
buying and selling interest at various
times throughout the day as long as
such sales meet certain criteria. This
exception might help promote market
efficiency and liquidity by
accommodating the increased use of
automated trading systems and
alternative strategies used in today’s
marketplace. It might also help provide
an additional source of liquidity for
investors’ passively priced orders and
better enable investors to engage in
alternative trading strategies to achieve
their investment objectives.
Proposed Rule 201(c)(10) and (c)(11)
of the proposed uptick rule might also
help promote market efficiency and
liquidity by providing exceptions to the
requirements of the proposed uptick
rule to help address conflicts between
the proposed uptick rule and the Quote
Rule under Rule 602 of Regulation
NMS.406
Proposed Rule 201(c)(12) of the
proposed uptick rule would provide an
exception from the proposed uptick rule
403 See supra note 181 (citing to VWAP relief
letters under former Rule 10a–1).
404 See proposed Rule 201(d)(2).
405 Id.
406 See 17 CFR 242.602.

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for any sale of a security at the offer by
a registered market maker or specialist
publishing two-sided quotes to sell
short to facilitate customer market and
marketable limit orders to buy
regardless of the last sale price. This
exception is intended to help provide
relief in a decimals environment to
registered market makers and specialists
so that they could provide liquidity in
response to customer buy orders.
2. Proposed Circuit Breaker Halt Rule
We recognize that the proposed
circuit breaker halt rule, if adopted,
would impose costs on market
participants to implement and assure
compliance with the proposed circuit
breaker halt rule’s requirements. These
costs could, in sum, increase the costs
of legitimate short selling. For example,
the proposed circuit breaker halt rule,
when triggered, would impose a short
selling halt that might restrict otherwise
legitimate short selling activity during
periods of extreme volatility. As such,
we recognize that the proposed circuit
breaker halt rule might result in a
reduction of the benefits of legitimate
short selling and, thereby, could result
in a subsequent reduction in short
selling generally. Such a reduction
might lead to a decrease in market
efficiency and price discovery, less
protection against upward stock price
manipulations, a less efficient allocation
of capital, an increase in trading costs,
and a decrease in liquidity.407 Thus, we
believe there might be potential costs
associated with the proposed circuit
breaker halt rule in terms of potential
impact of such a halt on quote depths,
spread widths, and market liquidity.
In addition, we recognize that
imposing a circuit breaker halt rule
when, currently, there is an absence of
a short selling halt may result in costs
in terms of modifications to systems and
surveillance mechanisms, as well as
changes to processes and procedures.
We anticipate that these changes would
likely result in immediate
implementation costs for market
participants associated with
reprogramming trading and surveillance
systems to now account for the
requirements of the proposed circuit
breaker halt, if adopted. We also believe
the proposed circuit breaker halt rule
may impose costs to market participants
related to systems changes to computer
hardware and software, reprogramming
costs, and surveillance and compliance
costs, as well as staff time and
technology resources, associated with
407 See Section IX.B. (discussing costs of the
proposed modified uptick rule and proposed uptick
rule).

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monitoring compliance with the
proposed circuit breaker halt rule.408
Moreover, imposing a circuit breaker
halt rule when there are currently no
short sale halts in place also could mean
that staff (compliance personnel,
associated persons, etc.) might need to
be trained or re-trained regarding rules
related to the circuit breaker
requirements. Also, market participants
could be required to hire additional staff
(and train or re-train them) to comply
with the proposed circuit breaker halt
rule. As such, we believe the proposed
circuit breaker halt rule, if adopted,
might impose training and compliance
costs for market participants.
While we recognize that market
participants would incur initial up-front
costs associated with having to update
their systems, including systems
changes to computer hardware and
software, as well as staff time and
technology resources to update their
systems and surveillance mechanisms
in order to ensure compliance with the
requirements of the proposed circuit
breaker halt rule,409 we believe that
many of the systems changes that would
be required to be implemented are
similar to what was already required for
implementation under Regulation
NMS.410 Thus, we believe market
participants may already have
developed or programmed their trading
and surveillance systems in accordance
with the requirements of Regulation
NMS which may help to reduce any
implementation costs associated with
the proposed circuit breaker halt rule
and, therefore, may make the proposed
circuit breaker halt rule less
burdensome to implement.
Thus, while we believe there would
be costs associated with systems
modifications and training staff that
would be affected by these systems
modifications, because most market
participants would already have in
place systems in order to comply with
Regulation NMS, market participants
may already have in place most of the
infrastructure and processes necessary
to comply with the proposed circuit
breaker halt rule. Moreover, because the
proposed circuit breaker halt rule might
require less substantial modifications to
existing systems, the implementation
and compliance costs may not be
408 See

id.
e.g., 2007 Price Test Adopting Release, 72
FR at 36350 n. 113 (citing comment letter from
SIFMA stating that cost estimates for firms to
program for the changes that were necessary to meet
the requirements of Regulation NMS varied, from as
low as approximately $200,000 for some firms to as
high as $2 million for others. See also letter from
Credit Suisse.
410 See Regulation NMS Adopting Release, 70 FR
37496. See also 17 CFR 242.611.

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409 See,

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significant.411 As discussed above,
currently, all stock exchanges and
FINRA have rules or policies to
implement coordinated circuit breaker
halts.412 Moreover, SROs have rules or
policies in place to coordinate
individual security trading halts
corresponding to significant news
events.413 Information on the securities
subject to SRO regulatory trading halts
is disseminated to market participants
through the CMS and other electronic
media.414 We, however, seek comment
as to whether the time and
implementation costs associated with
the proposed circuit breaker halt rule
may be lower than other alternatives
proposed.
We, however, recognize that there
may be concerns about a potential
‘‘magnet effect’’ that could arise as an
unintended consequence of the
proposed circuit breaker halt rule that
could halt short selling and result in
short sellers driving down the price of
an equity security in a rush to execute
short sales before the circuit breaker
would be triggered. As discussed above,
one commenter noted that a short sale
circuit breaker could exacerbate
downward pressure on stocks as their
value reached the threshold level.415
Another commenter, however, in
discussing the issue of a ‘‘magnet effect’’
cited empirical studies that question
whether a circuit breaker would result
in artificial pressure on the price of
individual securities.416
In addition, we note that the proposed
circuit breaker halt rule would include
exceptions substantially identical to
exceptions in the Short Sale Ban that
would be designed to allow its proper
411 See letter from Credit Suisse (stating that
‘‘[i]mplementation could be fast and costs would be
modest’’ and that ‘‘listing exchanges already
disseminate real-time status conditions as part of
existing price feeds. By generalizing the existing
‘‘Regulatory Halt’’ flag to include a ‘‘Do Not Short’’
condition, both away trading venues and brokerdealers could react to the circuit breaker condition
in real-time with very little coding and testing’’).
412 See Securities Exchange Act Release No.
39846 (Apr. 9, 1998), 63 FR 18477 (Apr. 15, 1998)
(order approving proposals by Amex, BSE, CHX,
NASD, NYSE, and Phlx) (‘‘1998 Release’’). See also
NYSE Rule 80B. The circuit breaker procedures call
for cross-market trading halts when the DJIA
declines by 10 percent, 20 percent, and 30 percent
from the previous day’s closing value. See e.g.,
BATS Exchange Rule 11.18.
413 See, e.g., FINRA Rule 6120.
414 For example, in addition to disseminating
news of trading halts through the CMS, Nasdaq
publishes a daily list of securities subject to trading
halts indicating the name of the issuer, the time the
halt was initiated, and where applicable, the times
at which quoting and trading may resume.
415 See letter to Mary Schapiro, Chairman, from
Direct Edge, dated March 30, 2009.
416 See letter from Credit Suisse (discussing
potential costs associated with short sale price test
restrictions and circuit breaker rules).

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functioning in today’s markets and
allow broker-dealer to provide liquidity
to the market, while at the same time
being designed to further the purposes
of our proposing the alternative circuit
breaker halt rule at this time.417
We believe the proposed circuit
breaker halt rule should include
exceptions that mirror certain of the
exceptions in the Short Sale Ban
because the proposed rule shares the
same goal of prohibiting short selling
that might exacerbate a price decline
during a period of sudden and excessive
price declines. For example, the
proposed circuit breaker halt would
include a bona fide market maker
exception, which would allow market
makers to effect a short sale as part of
bona fide market making and hedging
activity related directly to bona fide
market making in derivatives on the
publicly traded securities of a covered
security. This proposed exception
would permit market makers to
continue to provide liquidity to the
markets, facilitate orders, and otherwise
comply with their obligations as market
makers. This proposed exception would
also apply to options market makers that
sell short equity securities to hedge
options positions.
The proposed exception for short
sales that occur as a result of automatic
exercise or assignment of an equity
option held before a circuit breaker on
a particular security is triggered and a
short selling halt is imposed in that
security due to expiration of the option
would allow short sales that occur as a
result of the expiration of options
contracts held before a circuit breaker is
triggered in a particular security. This
would allow persons that purchased or
sold options prior to the effectiveness of
a circuit breaker halt entered into such
transactions with the expectation that
they would be able to fulfill their
contractual obligations and receive the
benefits of their bargain in return.
Providing this proposed exception to
the circuit breaker halt rule would not
raise the concerns that a circuit breaker
rule is intended to address.
To allow for creation of long call
options, the proposed exception would
permit short sales that occur as a result
of assignment to call writers upon
exercise. When options are exercised,
call writers may be required to sell short
in order to satisfy their obligations.
Because call writers do not have
discretion, and because the short sales
are effected in order to fill buying
417 See Section III, above (discussing exceptions
to proposed circuit breaker halt rule). See also
Securities Exchange Act Release No. 58592 (Sept.
18, 2008), 73 FR 55169–02 (Sept. 24, 2008)
(regarding exceptions to the Short Sale Ban).

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demand, we believe that including this
exception in the proposed circuit
breaker halt rule would benefit the
markets while not opening the door to
the abuses that the proposed rule is
intended to address.
The proposed exception for securities
that a seller is deemed to own under
Rule 200(b) (because Rule 144 securities
are owned securities and do not raise
the concerns that a short sale circuit
breaker halt would be designed to
address) would, during a halt triggered
by a circuit breaker, allow sellers to sell
securities that although owned, are
subject to the provisions of Regulation
SHO governing short sales due solely to
the seller being unable to deliver the
security to its broker-dealer prior to
settlement based on circumstances
outside the seller’s control.
We seek comment regarding any
benefits or costs associated with the
above described exceptions to the
proposed circuit breaker halt rule.
3. Proposed Circuit Breaker Price Test
Rules

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We also recognize that the proposed
circuit breaker price test restrictions
would result in costs on market
participants responsible for
implementing and assuring compliance
with such requirements. We anticipate
that there might be significant
operational costs associated with
reprogramming systems to comply with
the proposed circuit breaker price test
rules. We also anticipate that these costs
might be greater than those required to
comply with the proposed circuit
breaker halt rule described above, which
would, when triggered, impose a halt on
short selling in individual NMS stocks
rather than impose specific price test
restrictions.418 In addition, we believe
there might also be costs incurred for
additional staff and costs associated
with personnel hiring and training
related to maintaining and ensuring
compliance with the proposed circuit
breaker price test rules.419
Further, we recognize that short sale
price test restrictions that would be
imposed as a result of the proposed
circuit breaker price test rules being
triggered might result in many of the
same costs discussed in detail in
Section IX.B.1 pertaining to the
implementation of market-wide short
418 See also Sections IX.B.1. (discussing costs of
the proposed modified uptick rule and proposed
uptick rule).
419 See, e.g., letter from Credit Suisse (discussing
potential costs associated with short sale price
restrictions and circuit breaker rules). See also
Section IX.B. (discussing costs associated with
proposed modified uptick rule and proposed uptick
rule).

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sale price test restrictions.420 Those
costs might include a reduction of the
benefit of legitimate short selling and a
subsequent reduction in the quantity of
short selling, which we recognize might
lead to a decrease in market efficiency
and price discovery, less protection
against upward stock price
manipulations, a less efficient allocation
of capital, an increase in trading costs,
and a decrease in liquidity.421
Although under the proposed circuit
breaker price test rules, a price test
would not be in place full-time or for all
securities, if the proposed circuit
breaker modified uptick rule is adopted,
trading centers would need to establish
reasonable policies and procedures in
advance to ensure compliance whenever
a circuit breaker, and thus the proposed
circuit breaker modified uptick rule, is
triggered. We note that it would not be
reasonable for a trading center to wait
until the circuit breaker is triggered to
begin establishing reasonable policies
and procedures to prevent the execution
or display of the particular NMS stock
on a down-bid. Thus, we recognize that
both of the proposed circuit breaker
price tests would result in immediate
upfront costs to trading centers.422
However, while we recognize that
either proposed circuit breaker price test
would create costs for trading centers
that execute or display short sale orders
in covered securities, as well as other
market participants that engage in short
selling, we note that the proposed
circuit breaker price tests would include
the same cost-mitigating provisions
discussed in Section IX(B)(1)(c)
pertaining to the market-wide short sale
price test restrictions that might help to
reduce costs associated with the
proposed circuit breaker price tests,
while at the same time being designed
to further the purposes of our proposing
the alternative circuit breaker price test
restrictions at this time.423 For example,
we believe that the fact that either
proposed circuit breaker price test, if
adopted, would apply a uniform price
test 424 might help to reduce compliance
420 See Section IX.B.1. (discussing costs and
benefits of the proposed modified uptick rule and
the proposed uptick rule). See also Section IX.B.1.a.
(discussing burden hour estimates, for purposes of
the PRA, in connection with the proposed policies
and procedure requirements under the modified
uptick rule, the riskless principal exception to the
proposed uptick rule, and the proposed marking
requirements).
421 See Section IX.B.1. (discussing costs of the
proposed modified uptick rule and proposed uptick
rule).
422 See id.
423 See id.
424 As discussed above, unlike the former Rule
10a–1, the proposed short sale price test
restrictions, if adopted, would apply a uniform rule
to trades in the same securities that occur in

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costs for market participants associated
with systems and surveillance
mechanisms that would have to be
programmed to consider only a single
circuit breaker price test instead of
different tests for different markets.
Second, the proposed three month
implementation period would be
designed to provide trading centers and
market participants with a sufficient
amount of time in which to modify their
systems and procedures in order to
comply with the requirements of either
proposed circuit breaker price test, if
adopted, and, thus, might help reduce
some of the costs and help to alleviate
some of the potential disruptions that
might be associated with implementing
either proposed circuit breaker price
test. We recognize, however, that a
longer implementation period may be
more manageable or preferable,
particularly to smaller broker-dealers
that might be disproportionately
burdened by any implementation and
compliance costs associated with the
proposed circuit breaker price test
restrictions, as well as competitively
disadvantaged in terms of reduced order
flow as a result.425 Thus, we seek
comment as to what length of
implementation period would be
necessary or appropriate, and why, such
that trading centers would be able to
meet the proposed circuit breaker price
test restrictions, if adopted.
Third, as described below, we believe
the ‘‘broker-dealer’’ provision in
proposed Rule 201(c)(1) of the proposed
circuit breaker modified uptick rule and
the provisions contained in paragraph
(d) of the proposed circuit breaker
modified uptick rule, as well as the
exceptions contained in paragraph (c) of
the proposed circuit breaker uptick rule
might also help to minimize any
potential price distortions or costs
associated with the proposed circuit
breaker price restrictions. These
provisions also would be designed to
help promote the workability of the
proposed circuit breaker price tests,
while at the same time furthering the
multiple, dispersed, and diverse markets. Under the
proposed short sale price test restrictions, all
covered securities, wherever traded, would be
subject to the same short sale price test.
425 See letter from Credit Suisse supra note 122
(discussing need for a much longer implementation
period, particularly for smaller broker-dealers).
According to this commenter, compliance costs
associated with a bid or tick test would
disproportionately burden smaller broker-dealers,
who would likely be forced to route their flow
through a handful of larger broker-dealers,
impeding competition and adding to systemic risk
as flow is consolidated among fewer players).

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Commission’s stated goals of short sale
price test regulation.426
4. Proposed Marking Requirements
We do not anticipate that the ‘‘short
exempt’’ marking requirements would
impose significant costs on brokerdealers. For example, such brokerdealers might incur a one-time cost
associated with implementation and
reprogramming. In connection with the
order marking requirements of Rule
200(g) of Regulation SHO, which had
originally included the category of
‘‘short exempt,’’ industry sources at that
time estimated initial implementation
costs for the former ‘‘short exempt’’
marking requirement to be
approximately $100,000 to $125,000.427
In addition, we do not believe the
proposed order marking requirements
would impose significant ongoing
monitoring and surveillance costs for
broker-dealers. Broker-dealers already
have established systems, processes,
and procedures in place to comply with
the current marking requirements of
Rule 200(g) of Regulation SHO with
respect to marking a sell order either
‘‘long’’ or ‘‘short’’ and, thus, would
likely continue to use such systems,
processes and procedures to comply
with the proposed ‘‘short exempt’’
marking requirements in proposed
Rules 200(g) and 200(g)(2).
We recognize that there would be an
ongoing paperwork burden cost
associated with adding the ‘‘short
exempt’’ marking requirements. For
example, as discussed in detail in
Section VIII, above, for purposes of the
PRA, we estimate that it would take
each broker-dealer no more than
approximately .000139 hours (.5
seconds) to mark a sell order ‘‘short
exempt.’’ In addition, we estimate that
the total annual hour burden per year
for each broker-dealer subject to the
proposed ‘‘short exempt’’ marking
requirements would be 322 hours.
If we were to adopt the proposed
‘‘short exempt’’ marking requirements of
proposed Rules 200(g) of the proposed
modified uptick rule (or the proposed
circuit breaker modified uptick rule) or
the proposed uptick rule (or the
proposed circuit breaker uptick rule), or
the proposed circuit breaker halt rule,
we are proposing an implementation
period under which market participants
would have to comply with these
requirements three months following
the effective date of the proposed
marking requirements. We believe that
426 See Section IX.B.1.c. (discussing costmitigating features of proposed modified uptick
rule and proposed uptick rule in detail).
427 See 2004 Regulation SHO Adopting Release,
69 FR at 48023.

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this proposed implementation period
would provide market participants with
sufficient time in which to modify their
systems and procedures in order to
comply with the proposed ‘‘short
exempt’’ marking requirements. We
realize, however, that a shorter or longer
implementation period may be
manageable or preferable. Thus, we seek
specific comment as to what length of
implementation period would be
necessary or appropriate, and why, such
that market participants would be able
to meet the proposed marking
requirements, if adopted.
C. Request for Comment
We are sensitive to the costs and
benefits of the proposed amendments,
and encourage commenters to discuss
any additional costs or benefits beyond
those discussed herein, as well as any
reduction in costs. Commenters should
provide analysis and data to support
their views of the costs and benefits
associated with the proposed
amendments.
Questions Regarding Proposed Short
Sale Price Test Restrictions
1. The Commission believes that the
erosion of investor confidence and
questions concerning the volatility in
the securities markets necessitate review
of various alternatives with respect to
short selling restrictions. Would the
proposed market-wide short sale price
test restrictions be more appropriate
than the proposed circuit breaker rules
in current market conditions? If so,
why? If not, why not? Would the
proposed market-wide short sale price
test restrictions provide more potential
benefit to the market than the proposed
circuit breaker rules? Please explain. For
example, would the proposed marketwide short sale price test restrictions be
a more appropriate means for the
Commission to achieve the objective
helping to prevent short selling from
being used as a tool to drive down the
market? Please explain. Would the
proposed market-wide short sale price
test restrictions help to address the
Commission’s concerns regarding
investor confidence? If so, why and
how? If not, why not?
2. What would be the costs and
benefits of the proposed modified
uptick rule versus the proposed uptick
rule? Is a policies and procedures
approach preferable to a prohibition on
executing a short sale on a down-bid
price? Why or why not? What would be
the costs and benefits of a policies and
procedures approach as compared to
such a prohibition? Should we consider
other forms of short sale price tests?
What would be the costs and benefits of

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any alternative forms of short sale price
tests?
3. What would be the costs and
benefits of short sales being subject to
the proposed modified uptick rule?
What would be the costs and benefits of
short sales being subject to the proposed
uptick rule? What would be the costs
and benefits of having a uniform short
sale price test in the covered securities
across all markets? Please explain.
4. What, if any, additional benefits,
beyond those discussed herein, would
result from the proposed modified
uptick rule? What, if any, additional
benefits, beyond those discussed herein,
would result from the proposed uptick
rule? Should either proposed price test
be modified in any way to increase the
benefits of a short sale price test? If so,
how?
5. What, if any, additional costs,
beyond those discussed herein, would
result from the proposed modified
uptick rule? What, if any, additional
costs, beyond those discussed herein,
would result from the proposed uptick
rule? What would be the types of costs,
and what would be the amounts?
Should the proposed short sale price
tests be modified in any way to mitigate
costs? If so, how?
6. How would trading systems and
strategies used in today’s marketplace
be impacted by the proposed modified
uptick rule? How might market
participants alter their trading systems
and strategies in response to the
proposed modified uptick rule, if
adopted?
7. Would the proposed modified
uptick rule create any additional
implementation or operational costs
associated with systems (including
computer hardware and software),
surveillance, procedural, recordkeeping,
or personnel modifications, beyond
those discussed herein? Would the
proposed uptick rule create any
additional implementation or
operational costs associated with
systems (including computer hardware
and software), surveillance, procedural,
recordkeeping, or personnel
modifications, beyond those discussed
herein?
8. Would smaller trading centers and
other market participants be
disproportionately impacted by any
additional implementation or
operational costs associated with
systems (including computer hardware
and software), surveillance, procedural,
recordkeeping, or personnel
modification as a result of the proposed
short sale price test restrictions? If so, in
what way. Please explain.
9. To comply with the proposed
modified uptick rule, broker-dealers

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might be required to purchase new
systems or implement changes to
existing systems. Would changes to
existing systems be significant? What
would be the costs and benefits
associated with acquiring new systems
or making changes to existing systems?
What, if any, changes would need to be
made to existing recordkeeping
systems? What would be the costs and
benefits associated with any changes?
How might smaller broker-dealers be
impacted by having to purchase new
systems or implement changes to
existing systems in order to comply
with the proposed modified uptick rule,
if adopted?
10. To comply with the proposed
uptick rule, broker-dealers might be
required to purchase new systems or
implement changes to existing systems.
Would changes to existing systems be
significant? What would be the costs
and benefits associated with acquiring
new systems or making changes to
existing systems? What, if any, changes
would need to be made to existing
records? What would be the costs and
benefits associated with any changes?
11. What would be the costs and
benefits of requiring trading centers to
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the execution or
display by the trading center of
impermissibly priced short sale orders?
What would be the costs and benefits of
requiring trading centers to have
policies and procedures reasonably
designed to permit the execution or
display of a short sale order of a covered
security marked ‘‘short exempt’’ without
regard to whether the order is at a
down-bid price?
12. What would be the costs and
benefits of requiring that trading centers
regularly surveil to ascertain the
effectiveness of the policies and
procedures required by proposed Rule
201(b)(1) and promptly take action to
remedy deficiencies in such policies
and procedures? What systems and
surveillance changes by trading centers
would be necessary to meet the
requirements of the proposed modified
uptick rule?
13. Would the proposed modified
uptick rule’s compliance and
surveillance requirements
disproportionately burden smaller
broker-dealers? If so, in what way?
Please explain.
14. How much, if any, would the
proposed price test restrictions affect
compliance costs (e.g., personnel or
system changes) for each category of
broker-dealers: small, medium, and
large?

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15. Would the proposed modified
uptick rule affect different trading
centers differently? If so, how? If not,
why?
16. Would there be any increases in
staffing and associated overhead costs
for trading centers and broker-dealers?
Would other resources need to be rededicated to comply with the proposed
modified uptick rule or proposed uptick
rule?
17. What, if any, impact on
competition would the proposed price
test restrictions have on smaller brokerdealers, e.g., due to systems
modifications and implementation
costs. Please explain.
18. We solicit comment on whether
any costs associated with the proposed
modified uptick rule and proposed
uptick rule would be incurred on a onetime or ongoing basis, as well as cost
estimates. In addition, we seek comment
as to whether the exceptions to the
proposed modified uptick rule or
proposed uptick rule would decrease or
increase any costs for any market
participants. We seek comment about
any other costs and cost reductions
associated with the proposed
amendments.
19. Would the proposed short sale
price tests increase the costs of
legitimate short selling and lessen some
of the benefits of legitimate short
selling, which, in turn, could result in
a reduction of short selling? To what
extent, if any, would the proposed short
sale price tests impact legitimate short
selling and market efficiency?
20. We seek comment regarding types
of entities that would be affected, and
the manner in which they would be
affected, by the proposed amendments.
21. We seek specific comments on the
costs associated with systems changes
for trading centers and broker-dealers,
including the type of systems changes
necessary and quantification of costs
associated with changing the systems,
including both start-up costs and
maintenance. We request comments on
the types of jobs and staff that would be
affected by systems modifications and
training with respect to the proposed
modified uptick rule or proposed uptick
rule, the number of labor hours that
would be required to accomplish these
matters, and the compensation rates of
these staff members.
22. Would reinstating a short sale
price test restriction such as the
proposed modified uptick rule or
proposed uptick rule help restore
investor confidence? If so, why? If not,
why not? We note that short selling
provides the market with important
benefits, including market liquidity and

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pricing efficiency.428 What effect, if any,
would the proposed modified uptick
rule have on market liquidity? What
effect, if any, would the proposed
modified uptick rule have on pricing
efficiency? Please provide empirical
data in support of any arguments and/
or analyses.
23. Should short sales be subject to a
short sale price test restriction, or
should we continue to rely on current
short sale regulations, as well as antifraud and anti-manipulation provisions
of the securities laws to address issues
raised by potentially abusive short
selling? What would be the costs and
benefits of subjecting short sales to a
short sale price test restriction versus
the current short sale regulations, as
well as anti-fraud and anti-manipulation
provisions of the securities laws?
24. We request comments on whether
the pricing of securities affected by any
short sale price test would be more or
less efficient.
25. We request comments on whether
the pricing of securities affected by the
proposed modified uptick rule would be
more or less efficient.
26. We request comments on whether
the pricing of securities affected by the
proposed uptick rule would be more or
less efficient.
27. If a short sale price test restriction
were introduced, the rule would require
some commitment of resources
associated with compliance oversight,
market surveillance, and enforcement.
What would be the associated
opportunity costs? What level of
additional resources would be needed
for that oversight, surveillance, and
enforcement?
Questions Regarding Proposed Circuit
Breaker Halt Rule
1. The Commission believes that the
erosion of investor confidence and
questions concerning the volatility in
the securities markets necessitate review
of various alternatives with respect to
short selling restrictions. Would the
proposed circuit breaker halt rule be
more appropriate than a market-wide
short sale price test restriction in
current market conditions? If so, why?
If not, why not? Would the proposed
circuit breaker halt rule provide more
potential benefit to the market than a
market-wide short sale price test
restriction? Please explain. For example,
would the proposed circuit breaker halt
rule be a more appropriate means for the
Commission to achieve the objective,
helping to prevent short selling from
being used as a tool to drive down the
market? Please explain. Would the
428 See

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proposed circuit breaker halt rule help
to address the Commission’s concerns
regarding investor confidence? If so,
why and how? If not, why not?
2. Would implementation of the
proposed circuit breaker halt rule be
less or more costly than the
implementation of a market-wide short
sale price test restriction? Would the
proposed circuit breaker halt rule that,
when triggered, would impose a
temporary halt on short selling be more
or less costly than one that resulted in
a short sale price test restriction? Please
explain. Would the proposed circuit
breaker halt rule be generally easier to
implement in a post-Regulation NMS
environment than a market-wide short
sale price test restriction such as the
proposed modified uptick rule, or the
proposed uptick rule? Are there any
additional costs associated with
multiple day circuit breakers when
compared to same day circuit breakers?
3. Should the proposed circuit breaker
halt rule be adopted in addition to a
permanent, market-wide short sale price
test restriction rule? Thus, while a short
sale price test restriction rule would be
in place as a permanent, market-wide
rule, a circuit breaker would also trigger
a short selling halt in any security that
suffers a severe price decline. Please
describe the advantages and
disadvantages of such an approach.
4. What would be the relative
advantages and disadvantages of a short
sale price test combined with a circuit
breaker halt rule versus those of a short
selling circuit breaker with short sale
price test restrictions? Please explain.
5. The Commission is seeking
comment on the potential impact of the
proposed circuit breaker halt rule on
market function and efficiency. What
would be the impact of the proposed
circuit breaker halt rule, when triggered,
on the liquidity of individual securities?
What would be the impact of the
proposed circuit breaker halt rule on
capital formation? What would be the
impact of the proposed circuit breaker
halt rule on price discovery? Would
different circuit breaker alternatives
have different impacts on liquidity,
capital formation and price discovery?
Would a multiple circuit breaker impose
any unique costs? Please explain.
6. Should the percentage decline be
linked to the stock’s price level such
that stocks with lower prices must
experience a greater percentage decline
before the circuit breaker is triggered? If
so, what thresholds are appropriate?
Please explain. If the percentage decline
is linked to price level, what additional
operational burdens would be
experienced if stock values were
required to be continuously monitored

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due to frequent fluctuation? Please
explain. What costs and benefits may
accrue from having the decline based on
a dollar amount rather than a value
derived from a percentage of the share
value? What potential problems or
benefits may arise from pegging a short
selling circuit breaker threshold to a
decline in a stock’s dollar amount?
Please explain.
7. What other benefits, beyond those
discussed herein, would be associated
with the proposed circuit breaker halt
rule? Would the proposed circuit
breaker halt rule help stabilize the
market for the individual security? If so,
why? If not, why not? Would the
proposed circuit breaker halt rule
benefit investors by allowing the market
to ‘‘cool off’’ with respect to that
individual security? Please explain.
Would the proposed circuit breaker halt
rule result in an increase in investor
confidence? Please explain.
8. What costs, beyond those discussed
herein, would be incurred in terms of
implementing the proposed circuit
breaker halt rule? Please explain. What
would it cost to update systems in a
manner necessary to ensure compliance
with the proposed circuit breaker halt
rule? Would the expenditure necessary
to ensure compliance be primarily an
‘‘up-front’’ cost? Would the expenditure
necessary to ensure compliance require
long-term investment? Please explain.
What technological challenges would be
encountered in updating systems to
ensure compliance with the proposed
circuit breaker halt rule? Please explain.
How long would it take to update
systems in a manner that ensured
compliance with the proposed circuit
breaker halt rule? Please explain.
9. What would be the costs and
benefits associated with the proposed
bona fide market making exception to
the proposed circuit breaker halt rule?
Please explain. What would be the costs
and benefits associated with the
proposed exception that would allow
short sales that occur as a result of
automatic exercise or assignment of an
equity option held prior to the
effectiveness of the short selling halt
due to expiration of the option? Please
explain. What would be the costs and
benefits associated with the proposed
exception for options market makers
selling short as part of bona fide market
making and hedging activities related
directly to bona fide market making in
derivatives on the individual security
subject to the halt? Please explain.
Questions Regarding Proposed Circuit
Breaker Price Test Rules
1. What benefits, beyond those
discussed herein, would be associated

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with the proposed circuit breaker price
test rules? Would the proposed circuit
breaker price test rules help stabilize the
market for the individual security? If so,
why? If not, why not? Would the
proposed circuit breaker price test rules
benefit investors by allowing the market
to ‘‘cool off’’ with respect to that
individual security? Please explain.
Would the proposed circuit breaker
price test rules result in an increase in
investor confidence? Please explain.
2. What would be the benefits of the
proposed circuit breaker price test rules
versus a permanent, market-wide short
sale price test such as the modified
uptick rule or the proposed uptick rule?
Please explain and support explanations
with data and analysis where
appropriate.
3. What costs would be associated
with implementing the proposed circuit
breaker modified uptick rule? Please
explain. What costs would be associated
with implementing the proposed circuit
breaker uptick rule? What would be the
degree of financial expenditure involved
in updating systems in a manner
necessary to ensure compliance with
each proposed circuit breaker price test
rule? Would the expenditure necessary
to ensure compliance be primarily an
‘‘up-front’’ cost? Would the expenditure
necessary to ensure compliance require
long-term investment? Please explain.
How would the costs of each of the
proposed circuit breaker price test rules
compare with the costs of permanent
short sale price tests such as the
proposed modified uptick rule or the
proposed uptick rule? Please explain.
4. What technological challenges
would be encountered in updating
systems to ensure compliance with each
of the proposed circuit breaker price test
rules on individual securities? Please
explain. How long would it take to
update systems in a manner that
ensured compliance? Please explain.
Would either of the proposed circuit
breaker price test rules impede the
efficient functioning of the equity
markets? If so, why? If not, why not?
Please explain. Are there any other
operational challenges that may arise
from implementing either of the
proposed circuit breaker price test
rules? Please explain. Would the
operational challenges presented
impede the effectiveness of the
proposed circuit breaker modified
uptick rule? Please explain. Would the
operational challenges presented
impede the effectiveness of the
proposed circuit breaker uptick rule?
Please explain.
5. Are there other short sale price test
restrictions, beyond those discussed
herein, that should be considered in

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combination with proposed circuit
breaker price test rules? Please explain.
6. What would be the benefits and
costs associated with the proposed
exceptions to the proposed circuit
breaker modified uptick rule? Please
explain. What would be the benefits and
costs associated with the proposed
exceptions to the proposed circuit
breaker uptick rule? Please explain.
7. What would be the benefits and
costs associated with a circuit breaker
rule that, when triggered, would
prohibit short selling in a particular
NMS security on a down-bid unless the
short sale is effected at a price that is
more than 10% greater than the prior
day’s closing price? Please explain.
Questions Regarding Proposed Marking
Requirements
1. What, if any, additional benefits or
costs, beyond those discussed herein,
would result from complying with the
‘‘short exempt’’ marking requirements
under the proposed amendments to
Rules 200(g) and 200(g)(2)? What would
be the types of additional benefits, and
what would be the amounts? What
would be the types of additional costs,
and what would be the amounts? Who
would bear these costs? Should the
proposed ‘‘short exempt’’ marking
requirements be modified in any way to
mitigate costs? If so, how?
2. Would there be any operational or
compliance concerns associated with
the proposed ‘‘short exempt’’ marking
requirements?
3. What types of costs, if any, would
be associated with requiring sell orders
be marked ‘‘short exempt’’ only if the
provisions of paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraph (c) or (d) of the proposed
circuit breaker modified uptick rule) are
met? What type of costs, if any, would
be associated with requiring sell orders
to be marked ‘‘short exempt’’ when
relying on an exception to the proposed
uptick rule (or the proposed circuit
breaker uptick rule)? What type of costs,
if any, would be associated with
requiring sell orders to be marked ‘‘short
exempt’’ when relying on an exception
to the proposed circuit breaker halt
rule?
4. What would be a sufficient
implementation period for making any
systems changes necessary to allow sell
orders to be marked ‘‘short exempt’’?
5. Please describe any anticipated
difficulties in complying with ‘‘short
exempt’’ marking requirements.
6. The short sales that qualify for the
‘‘broker-dealer’’ provision in proposed
Rule 201(c) are still subject to the
provisions of the proposed modified
uptick rule and would be required to be

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marked as ‘‘short exempt.’’ Should these
short sales be marked as ‘‘short exempt’’
or is another mark more appropriate?
What effect, if any, would marking these
short sales as ‘‘short exempt’’ have on
compliance or surveillance relative to
another mark? What would be the costs
associated with implementing a mark
especially for these short sales?
X. Consideration of Burden on
Competition and Promotion of
Efficiency, Competition, and Capital
Formation
Section 3(f) of the Exchange Act
requires the Commission, whenever it
engages in rulemaking and is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider whether the action
would promote efficiency, competition,
and capital formation.429 In addition,
Section 23(a)(2) of the Exchange Act
requires the Commission, when making
rules under the Exchange Act, to
consider the impact such rules would
have on competition.430 Exchange Act
Section 23(a)(2) prohibits the
Commission from adopting any rule that
would impose a burden on competition
not necessary or appropriate in
furtherance of the purposes of the
Exchange Act.
We believe the proposed amendments
might have minimal impact on the
promotion of price efficiency and
capital formation. The two alternative
short sale price tests proposed are
designed to allow relatively unrestricted
short selling in an advancing market. In
addition, the short sale price tests
would restrict short selling at
successively lower prices and, thereby,
might help prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market by exhausting all
remaining bids at one price level,
causing successively lower prices to be
established by long sellers. Further, by
seeking to advance these goals, the two
alternative short sale price tests might
help restore investor confidence in the
securities markets.431
If the proposed short sale price test
restrictions help address the erosion of
investor confidence in our markets, the
proposed amendments might help to
facilitate and maintain stability in the
markets and help ensure that they
function efficiently. Bolstering investor
confidence in the markets could help to
429 15

U.S.C. 78c(f).
U.S.C. 78w(a)(2).
431 See supra Section II.C., above (discussing
restoring investor confidence).
430 15

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18103

encourage investors to be more willing
to invest in the market, thus adding
depth and liquidity to the markets and
promoting the ability of listed
companies to raise capital.
In particular, by proposing to require
trading centers to establish, maintain,
and enforce written policies and
procedures reasonably designed to help
prevent the execution or display of a
short sale order at a down-bid price, in
the case of the proposed modified
uptick rule, or prohibiting persons from
effecting short sales below the last sale
price, in the case of the proposed uptick
rule, the proposed short sale price test
restrictions might help prevent short
selling, including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market by exhausting all
remaining bids at one price level,
causing successively lower prices to be
established by long sellers. By doing so,
the proposed amendments might help to
facilitate and maintain stability to the
markets and help ensure that they
function efficiently.
In addition, the proposed short sale
price tests might help preserve instant
execution and liquidity, by allowing
relatively unrestricted short selling in
an advancing market. As discussed
above, one of the benefits of legitimate
short selling is that it provides market
liquidity by, for example, adding to the
selling interest of stock available to
purchasers, and, when sellers are
covering their short sales, adding to the
buying interest of stock available to
sellers. Thus, the proposed short sale
price tests are designed to help reduce
the potential harm toward the useful
market purposes served by short selling
by allowing relatively unrestricted short
selling in an advancing market.
Moreover, unlike the former short sale
price tests (including former Rule 10a–
1), the proposed short sale price test
restrictions would apply a uniform rule
to trades in the same securities that
occur in multiple, dispersed, and
diverse markets. Under the proposed
short sale price test restrictions, all
covered securities, wherever traded,
would be subject to the same short sale
price test. As such, the proposed short
sale price test restrictions would not
result in the type of disparate short sale
regulation that existed under former
Rule 10a–1 (in which different price
tests were applied in different markets,
potentially resulting in confusion,
compliance difficulties, regulatory
arbitrage, and an un-level playing field

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among market participants).432 This
might help to avoid undermining
competition and efficiency in the
market.
In addition, the proposed short sale
price tests include a number of
provisions that are designed to help
promote market efficiency and liquidity,
while at the same time helping to
promote the goals of our proposing at
this time short sale price test restrictions
and alternative circuit breaker rules.
Moreover, the proposed modified uptick
rule (and proposed circuit breaker
modified uptick rule) is designed to
provide trading centers and their
customers with flexibility in
determining how to handle orders that
are not immediately executable or
displayable by the trading center
because the order is impermissibly
priced. For example, if an order is
impermissibly priced, a trading center
could re-price the order at the lowest
permissible price, execute the order
immediately if the order is marketable at
its new price, or hold it for later
execution at its new price or better.433
As quoted prices change, the proposed
rule would allow a trading center to
repeatedly re-price and display an order
at the lowest permissible price down to
the order’s original limit order price (or,
if a market order, until the order is
filled). Permitting a trading center to reprice an impermissibly priced short sale
order might help to allow for the more
efficient functioning of the markets
because trading centers would not have
to reject or cancel impermissibly priced
orders unless instructed to do so by the
trading center’s customer submitting the
short sale order.
In addition, the proposed circuit
breaker rules would be designed to
target only those securities that
experience severe intraday declines and,
therefore, might also help prevent short
selling, including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market where needed most.
By doing so, the proposed circuit
breaker rules might help restore
confidence in the securities markets 434
and, in turn, might help stabilize the
market for individual securities during
432 See supra note 27 (discussing disparate short
sale regulation under former Rule 10a–1).
433 For example, if a trading center received a
short sale order priced at $47.00 when the current
national best bid in the security was $47.00, but the
immediately preceding national best bid was $47.01
(i.e., the current bid was below the previous bid),
the trading center could re-price the order at the
permissible offer price of $47.01, and display the
order for execution at this new limit price.
434 See supra Section II.C. above (discussing
restoring investor confidence).

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times of substantial uncertainty and
help ensure that the markets function
efficiently. Bolstering investor
confidence in the markets might help to
encourage investors to be more willing
to invest in the market during times of
substantial uncertainty, thus adding
depth and liquidity to the markets and
promoting capital formation.
For example, by halting short selling
for the remainder of the trading day
following a significant decline in a
security’s price, we believe the
proposed circuit breaker halt rule, in
particular, would be designed to
provide sufficient time to re-establish
equilibrium between buying and selling
interests in the individual security in an
orderly fashion. It would also be
designed to help ensure that market
participants have a reasonable
opportunity to become aware of, and
respond to, a significant decline in a
security’s price. By providing a pause in
short selling resulting from a significant
decline in the price of an individual
equity security, we believe the proposed
circuit breaker halt rule might provide
a measure of stability to the markets.
However, by allowing short selling to
continue with price test restrictions
once a circuit breaker was triggered, the
proposed circuit breaker price test rules
might have less impact on legitimate
short selling and normal market activity
including price discovery and the
provision of liquidity than a circuit
breaker with halt on short selling.
By targeting only those securities that
experience severe intraday declines, all
three proposed circuit breaker rules
would be narrowly tailored so that most
stocks would not fall under any new
short sale restrictions. As such, the
proposed circuit breaker rules might
help preserve instant execution and
liquidity. As discussed above, one of the
benefits of legitimate short selling is that
it provides market liquidity by, for
example, adding to the selling interest
of stock available to purchasers, and,
when sellers are covering their short
sales, adding to the buying interest of
stock available to sellers. Thus, the
proposed circuit breaker rules are
designed to help reduce the potential
harm toward the useful market purposes
served by short selling by targeting only
those securities that experience severe
intraday declines.
In addition, the proposed amendment
to Rule 200(g)(2) of Regulation SHO to
require broker-dealers to mark a sale
order as ‘‘short exempt’’ if the
provisions of paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraph (c) or (d) of the proposed
circuit breaker modified uptick rule) are
met, or if the seller is relying on an

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exception in paragraph (c) of the
proposed uptick rule (or paragraph (c) of
the proposed circuit breaker uptick
rule), or if the seller is relying on an
exception in paragraph (c) of the
proposed circuit breaker halt rule, could
help to promote price efficiency by
helping to preserve instant execution
and liquidity of such orders.
In addition, we believe that the
proposed amendments would not
impose any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Exchange Act. We
believe the proposed short sale price
test restrictions and the proposed circuit
breaker rules might help to avoid
undermining competition by imposing a
uniform price test on all similarly
situated entities or individuals subject
to the proposed amendments. We
recognize, however, that the proposed
three-month implementation period for
the proposed short sale price test
restrictions may not be sufficient for
certain smaller broker-dealers and that
any potential compliance costs
associated with the short sale price test
restrictions could likely
disproportionately burden these smaller
broker-dealers in terms of reduced order
flow, thereby impeding competition.435
However, we believe the proposed
circuit breaker halt rule, in particular,
might help to avoid undermining
competition in that it may require less
time and significantly less costs for
implementation and compliance with
its requirements.436 In addition, the
proposed ‘‘short exempt’’ marking
requirements would apply to all NMS
stocks wherever traded, thereby
providing a uniform practice designed
to ensure consistency within the equity
markets. Moreover, the proposed
amendments could help to address any
possibility that abusive or manipulative
short selling might be contributing to
the disruption in the markets and,
therefore, could help to address the
erosion of investor confidence in the
markets.
We request comment on whether the
proposed amendments would likely
promote efficiency, capital formation,
and competition.
435 See letter from Credit Suisse (discussing need
for a much longer implementation period,
particularly for smaller broker-dealers, and how
compliance costs of a bid or tick test would likely
disproportionately burden smaller broker-dealers
and impede competition by forcing these smaller
broker-dealers to route their flow through a handful
of larger broker-dealers).
436 See id.

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XI. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ 437 we must advise
the Office of Management and Budget as
to whether the proposed regulation
constitutes a ‘‘major’’ rule. Under
SBREFA, a rule is considered ‘‘major’’
where, if adopted, it results or is likely
to result in:
• An annual effect on the economy of
$100 million or more (either in the form
of an increase or a decrease);
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effect on
competition, investment or innovation.
If a rule is ‘‘major,’’ its effectiveness will
generally be delayed for 60 days
pending Congressional review. We
request comment on the potential
impact of the proposed amendments on
the economy on an annual basis.
Commenters are requested to provide
empirical data and other factual support
for their view to the extent possible.

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XII. Initial Regulatory Flexibility
Analysis
The Commission has prepared an
Initial Regulatory Flexibility Analysis
(‘‘IRFA’’), in accordance with the
provisions of the Regulatory Flexibility
Act,438 regarding the proposed
amendments to Rules 200(g) and 201 of
Regulation SHO under the Exchange
Act.
A. Reasons for the Proposed Action
We are proposing to amend
Regulation SHO to impose a short sale
price test that would restrict the prices
at which certain securities may be sold
short. We are also proposing as
alternatives to a full-time price short
sale price test two alternative circuit
breaker rules. As discussed above, we
believe it is appropriate at this time to
examine and seek comment on whether
to restore short sale price tests in light
of the extreme market conditions that
we are currently facing and the resulting
deterioration in investor confidence.
We are proposing two alternative
short sale price tests. The first test
would be the proposed modified uptick
rule that would be based on the national
best bid. The second test would be the
proposed uptick rule that would be a
modernized version of the tick test
under former Rule 10a–1, and would be
based on a last sale price. We are also
437 Public Law 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C. and
as a note to 5 U.S.C. 601).
438 5 U.S.C. 603.

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proposing, as alternatives to a full-time
short sale price test, circuit breaker rules
that would establish limitations on short
selling in a particular security during
severe market declines in the price of
that security. The proposed circuit
breaker halt rule, when triggered by a
severe price decline in a particular
security, would temporarily prohibit
any person from selling short that
security during the effectiveness of the
circuit breaker.439 The proposed circuit
breaker price test rules, when triggered
by a severe market decline in a
particular security, would temporarily
establish either the proposed modified
uptick rule or the proposed uptick rule,
as each are described in detail above, for
that security.440
In addition, we are proposing
amendments to Rule 200(g) of
Regulation SHO to impose a ‘‘short
exempt’’ marking requirement and to
Rule 200(g)(2) of Regulation SHO to
require broker-dealers to mark a sell
order ‘‘short exempt’’ only if the
provisions in paragraph (c) or (d) of the
proposed modified uptick rule (or
paragraph (c) or (d) of the proposed
circuit breaker modified uptick rule) are
met, or if a seller is relying on an
exception in paragraph (c) of the
proposed uptick rule (or paragraph (c) of
the proposed circuit breaker uptick
rule), or if a seller is relying on an
exception in paragraph (c) of the
proposed circuit breaker halt rule.
B. Objectives
The two alternative short sale price
tests proposed are designed to allow
relatively unrestricted short selling in
an advancing market. In addition, the
short sale price tests are designed to
restrict short selling at successively
lower prices and, thereby, might help
prevent short selling, including
potentially abusive or manipulative
short selling, from being used as a tool
for driving the market down or from
being used to accelerate a declining
market by exhausting all remaining bids
at one price level, causing successively
lower prices to be established by long
sellers. Further, by seeking to advance
these goals, the two alternative short
sale price tests would also be designed
to help restore investor confidence in
the securities markets.
Moreover, the proposed alternative
circuit breaker rules would be designed
to target only those securities that
experience severe intraday declines and,
439 The proposed circuit breaker halt rule could
be imposed in place of, or in addition to, a
permanent short sale price restriction rule.
440 A circuit breaker that triggers a short sale price
test rule would be adopted in place of a short sale
price test rule.

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18105

therefore, might also help prevent short
selling, including potentially abusive or
manipulative short selling, from being
used as a tool for driving the market
down or from being used to accelerate
a declining market when needed most.
C. Legal Basis
Pursuant to the Exchange Act and
particularly, Sections 2, 3(b), 6, 9(h), 10,
11A, 15, 15A, 17, 19, 23(a), and 36
thereof, 15 U.S.C. 78b, 78c(b), 78(f),
78i(h), 78j, 78k–1, 78o, 78o–3, 78q, 78s,
78w(a), and 78mm the Commission is
proposing amendments to §§ 242.200
and 242.201 of Regulation SHO.
D. Small Entities Subject to the
Proposed Amendments
The proposed modified uptick rule
and proposed circuit breaker modified
uptick rule would require each trading
center to establish, maintain, and
enforce written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order at a down-bid price.441 A ‘‘trading
center’’ is defined as ‘‘a national
securities exchange or national
securities association that operates an
SRO trading facility, an alternative
trading system, an exchange market
maker, an OTC market maker, or any
other broker-dealer that executes orders
internally by trading as principal or
crossing orders as agent.’’ 442
Rule 0–10(e) under the Exchange Act
provides that the term ‘‘small business’’
or ‘‘small organization,’’ when referring
to an exchange, means any exchange
that: (i) Has been exempted from the
reporting requirements of Rule 601
under the Exchange Act; 443 and (ii) is
not affiliated with any person (other
than a natural person) that is not a small
business or small organization, as
defined by Rule 0–10.444 No national
securities exchanges are small entities
because none meet these criteria. There
is one national securities association
(FINRA) that would be subject to the
proposed modified uptick rule. FINRA
is not a small entity as defined by 13
CFR 121.201. Thus, the current national
securities exchanges and one national
securities association that would be
subject to the proposed modified uptick
rule are not considered ‘‘small entities’’
for purposes of the Regulatory
Flexibility Act.
The remaining non-SRO trading
centers that would be subject to the
proposed modified uptick rule or the
proposed circuit breaker modified
441 See

proposed Rule 201(b)(1).

17 CFR 242.600(b)(78).

443 17 CFR 242.601.

444 See 17 CFR 240.0–10(e) and 13 CFR 121.201.

442 See

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uptick rule are registered broker-dealers.
The Commission has preliminarily
determined that approximately 372
broker-dealers registered with the
Commission that could meet the
proposed definition of a trading
center,445 which includes broker-dealers
operating as equity ATSs, broker-dealers
registered as market makers or
specialists in NMS stocks, and any
broker-dealer that is in the business of
executing orders internally in NMS
stocks. Pursuant to Rule 0–10(c) under
the Exchange Act, 17 CFR 240.0–10(c),
a broker-dealer is defined as a small
entity for purposes of the Exchange Act
and the Regulatory Flexibility Act if the
broker-dealer had a total capital (net
worth plus subordinated liabilities) of
less than $500,000 on the date in the
prior fiscal year as of which its audited
financial statements were prepared, and
it is not affiliated with any person (other
than a natural person) that is not a small
entity.446 Of these 372 non-SRO trading
centers, only five 447 are considered
small for purposes of the Regulatory
Flexibility Act pursuant to the standards
of Rule 0–10(c) under the Exchange Act.
The entities covered by the proposed
uptick rule, the proposed circuit breaker
uptick rule, the proposed circuit breaker
halt rule, and the proposed ‘‘short
exempt’’ marking requirements, would
include small entities that are small
broker-dealers, small businesses, and
any investor who effected a short sale
that qualifies as a small entity. Although
we are not aware of data that is available
to permit us to quantify every type of
small entity covered by the proposed
amendments, paragraph (c)(1) of Rule 0–
10 under the Exchange Act, as
mentioned above, states that the term
‘‘small business’’ or ‘‘small
organization,’’ when referring to a
broker-dealer, means a broker-dealer
that had total capital (net worth plus
subordinated liabilities) of less than
$500,000 on the date in the prior fiscal
year as of which its audited financial
statements were prepared pursuant to
§ 240.17a–5(d); and is not affiliated with
any person (other than a natural person)
that is not a small business or small
organization. We estimate that as of
2007 there were approximately 896
broker-dealers that qualified as small
entities as defined above.448
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445 See

supra note 10.
CFR 240.0–10(c)(1).
447 This number was derived from OEA’s review
of 2007 FOCUS Report filings and discussion with
SRO staff.
448 These numbers are based on OEA’s review of
2007 FOCUS Report filings reflecting registered
broker-dealers, including introducing brokerdealers. This number does not include broker446 17

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As mentioned above, paragraph (e) of
Rule 0–10 under the Exchange Act 449
states that the term ‘‘small business’’ or
‘‘small organization,’’ when referring to
an exchange, means any exchange that:
(i) Has been exempted from the
reporting requirements of Rule 11Aa3–
1 under the Exchange Act; and (ii) is not
affiliated with any person (other than a
natural person) that is not a small
business or small organization, as
defined by Rule 0–10. As mentioned
above, no U.S. registered exchange is a
small entity because none meets these
criteria. Any business, however,
regardless of industry, could be subject
to the proposed uptick rule and the
proposed provisions contained in
paragraph (c) and (d) of the proposed
modified uptick rule (or paragraph (c) or
(d) of the proposed circuit breaker
modified uptick rule), or the exceptions
contained in paragraph (c) of the
proposed uptick rule (or paragraph (c) of
the proposed circuit breaker uptick
rule), or the exceptions contained in
paragraph (c) of the proposed circuit
breaker halt rule if it effects a short sale.
The Commission believes that, except
for the broker-dealers discussed above,
it is not possible to estimate the number
of small entities that would fall under
the proposed amendments because we
are not aware of data, including the
number of investors, who do or will
engage in short selling.
E. Projected Reporting, Recordkeeping
and Other Compliance Requirements
The proposed amendment may
impose some new or additional
reporting, recordkeeping, or compliance
costs on trading centers and other
broker-dealers that are small entities.
The proposed modified uptick rule
would focus on a trading center’s
written policies and procedures as the
mechanism through which to help
prevent the execution or display of short
sale orders on a down-bid price. In
addition, the proposed modified uptick
rule’s ‘‘broker-dealer’’ provision (and
the proposed circuit breaker modified
uptick rule’s ‘‘broker-dealer’’ provision)
would include a policies and
procedures requirement to help prevent
incorrect identification of orders for
purposes of the proposed ‘‘brokerdealer’’ provision. In order to comply
with Regulation NMS when it became
effective in 2005, entities were required
to modify their systems and surveillance
mechanisms in order to comply with the
order protection rule’s policies and
procedures requirement. Thus, the five
dealers that are delinquent on FOCUS Report
filings.
449 17 CFR 240.0–10(e).

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non-SRO trading centers that would
qualify as small entities may already
have in place most of the infrastructure
necessary to comply with the proposed
modified uptick rule (or the proposed
circuit breaker modified uptick rule), if
adopted.
In addition, in order to implement
and comply with former Rule 10a–1,
entities were required to modify their
systems and surveillance mechanisms.
Thus, the small entities that would be
subject to the proposed uptick rule (or
proposed circuit breaker uptick rule or
proposed circuit breaker halt rule) may
already be familiar with, and may have
retained systems, that would aid in their
implementation and compliance with
the proposed uptick rule (or proposed
circuit breaker uptick rule or proposed
circuit breaker halt rule). Small entities,
however, may still need to make some
modifications to their systems and
surveillance mechanisms to implement
and ensure compliance with the
proposed uptick rule (or proposed
circuit breaker uptick rule or proposed
circuit breaker halt rule), if adopted.450
In addition, the proposed amendment
to Rule 200(g)(2) that would require that
a sale order be marked ‘‘short exempt’’
only if the provisions of proposed Rule
201(c) or (d) of the proposed modified
uptick rule (or proposed Rule 201(c) or
(d) of the proposed circuit breaker
modified uptick rule) are met, or if the
seller is relying on an exception from
the proposed uptick rule (or the
proposed circuit breaker uptick rule),
could impose some new or additional
reporting, recordkeeping, or compliance
costs on broker-dealers that are small
entities. We believe, however, that such
costs would not be significant. Rule
200(g) currently requires that brokerdealers mark all sell orders of any equity
security as either ‘‘long’’ or ‘‘short.’’ 451
Broker-dealers that are small entities
should already be familiar with the
current marking requirements and
should already have in place
mechanisms that could be used to
comply with the proposed ‘‘short
exempt’’ marking requirement if
adopted.
F. Duplicative, Overlapping, or
Conflicting Federal Rules
We believe that there are no rules that
duplicate, overlap, or conflict with the
proposed amendments to Rules 200(g)
and 201 of Regulation SHO.
450 See letter from Credit Suisse. See also supra
note 122 and accompanying text.
451 See 17 CFR 242.200(g).

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G. Significant Alternatives
The Regulatory Flexibility Act directs
us to consider significant alternatives
that would accomplish our stated
objective, while minimizing any
significant adverse impact on small
entities.452 In connection with the
proposed amendments, we considered
the following alternatives: (i)
Establishing different compliance or
reporting requirements or timetables
that take into account the resources
available to small entities; (ii) clarifying,
consolidating, or simplifying
compliance and reporting requirements
under the rule for small entities; (iii)
using performance rather than design
standards; and (iv) exempting small
entities from coverage of the rule, or any
part of the rule.
A primary goal of the proposed
amendments is to help restore investor
confidence by restricting short selling at
successively lower prices and, thereby,
help prevent short selling, including
potentially abusive or manipulative
short selling, from being used as a tool
for driving the market down or from
being used to accelerate a declining
market by exhausting all remaining bids
at one price level, while at the same
time allowing relatively unrestricted
short selling in an advancing market. As
such we believe that imposing different
compliance requirements, and possibly
a different timetable for implementing
compliance requirements, for small
entities would undermine the goal of
restoring investor confidence. It also
could create confusion in the market if
some sellers were not required to
comply. Further, it could undermine the
goals of the proposed short sale price
test restrictions or the proposed circuit
breaker rules because it could provide
an avenue for short sellers to evade the
proposed amendments. In addition, we
have concluded similarly that it is not
consistent with the primary goal of the
proposals to further clarify, consolidate
or simplify the proposals for small
entities. Finally, the proposals would
impose performance standards rather
than design standards.

sroberts on PROD1PC70 with PROPOSALS

H. General Request for Comments
We solicit written comments
regarding our IRFA analysis. In
particular, the Commission seeks
comment on the number of small
entities that would be affected by the
proposed amendments. We request that
commenters provide empirical data to
quantify the number of small entities
that could be affected by the proposed
amendments. We request comment on
452 See

21:34 Apr 17, 2009

XIII. Additional Request for Comment
In addition to the specific requests for
comment found throughout this
proposing release, we seek comment
generally from all members of the public
on all aspects of the proposed
amendments to Rules 200(g) and 201 of
Regulation SHO. We request that
commenters provide empirical data to
support their views and arguments
related to these proposals. In addition to
the questions set forth above,
commenters are welcome to offer their
views on any other matter raised by the
proposed amendments to Regulation
SHO. Specifically, are there any other
possible restrictions on short selling that
the Commission should consider,
particularly ones that might be helpful
in a severe market decline?
XIV. Statutory Authority
Pursuant to the Exchange Act and,
particularly, Sections 2, 3(b), 6, 9(h), 10,
11A, 15, 15A, 17, 19, 23(a), and 36
thereof, 15 U.S.C. 78b, 78c(b), 78(f),
78i(h), 78j, 78k–1, 78o, 78o–3, 78q, 78s,
78w(a), and 78mm the Commission is
proposing amendments to §§ 242.200
and 242.201 of Regulation SHO.
XV. Text of the Amendments to
Regulation SHO
List of Subjects in 17 CFR Part 242
Brokers, Fraud, Reporting and
recordkeeping requirements, Securities.
For the reasons set out in the
preamble, Title 17, Chapter II, Part 242,
of the Code of Federal Regulations is
proposed to be amended as follows.
PART 242—REGULATIONS M, SHO,
ATS, AC, AND NMS AND CUSTOMER
MARGIN REQUIREMENTS FOR
SECURITY FUTURES
1. The authority citation for part 242
continues to read as follows:
Authority: Pursuant to the Exchange Act
and, particularly, Sections 2, 3(b), 6, 9(h), 10,
11A, 15, 15A, 17, 19, 23(a), and 36 thereof,
15 U.S.C. 78b, 78c(b), 78(f), 78i(h), 78j, 78k–
1, 78o, 78o–3, 78q, 78s, 78w(a), and 78mm
the Commission is proposing amendments to
§§ 242.200 and 242.201 of Regulation SHO.

Alternative I—Price Tests
A. Modified Uptick Rule
2. Section 242.200 is amended by
revising paragraph (g) introductory text

5 U.S.C. 603(c).

VerDate Nov<24>2008

whether the proposed amendments
would have any effects that we have not
discussed. We also request that
commenters describe the nature of any
impact on small entities and provide
empirical data to support the extent of
the impact.

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18107

and adding paragraph (g)(2) to read as
follows:
§ 242.200 Definition of ‘‘short sale’’ and
marking requirements.

*

*
*
*
*
(g) A broker or dealer must mark all
sell orders of any equity security as
‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’
(1) * * *
(2) A sale order shall be marked
‘‘short exempt’’ only if the provisions of
§ 242.201(c) or (d) are met.
*
*
*
*
*
3. Section 242.201 is revised to read
as follows:
§ 242.201 Price test.

(a) Definitions. For the purposes of
this section:
(1) The term covered security shall
mean any NMS stock as defined in
§ 242.600(b)(47).
(2) The term down-bid price shall
mean a price that is less than the current
national best bid or, if the last
differently priced national best bid was
greater than the current national best
bid, a price that is less than or equal to
the current national best bid.
(3) The term national best bid shall
have the same meaning as in
§ 242.600(b)(42).
(4) The term national market system
plan shall have the same meaning as in
§ 242.600(b)(43).
(5) The term odd lot shall have the
same meaning as in § 242.600(b)(49).
(6) The term riskless principal shall
mean a transaction in which a broker or
dealer, after having received an order to
buy a security, purchases the security as
principal at the same price to satisfy the
order to buy or, after having received an
order to sell, sells the security as
principal at the same price to satisfy the
order to sell.
(7) The term trading center shall have
the same meaning as in § 242.600(b)(78).
(b)(1) A trading center shall establish,
maintain, and enforce written policies
and procedures reasonably designed to
prevent the execution or display of a
short sale order of a covered security at
a down-bid price. Provided, however,
(i) The policies and procedures must
be reasonably designed to permit the
execution of a displayed short sale order
of a covered security by a trading center
if, at the time of display of the short sale
order, the order was not at a down-bid
price.
(ii) The policies and procedures must
be reasonably designed to permit the
execution or display of a short sale
order of a covered security marked
‘‘short exempt’’ without regard to
whether the order is at a down-bid
price.

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(2) A trading center shall regularly
surveil to ascertain the effectiveness of
the policies and procedures required by
paragraph (b)(1) of this section and shall
take prompt action to remedy
deficiencies in such policies and
procedures.
(c) A broker or dealer may mark a
short sale order of a covered security
‘‘short exempt’’ if the broker or dealer
that submits the order identifies that the
order is not on a down-bid price at the
time of submission of the order to the
trading center. Provided, however,
(1) The broker or dealer that identifies
a short sale order of a covered security
in accordance with this paragraph must
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent incorrect
identification of orders for purposes of
this paragraph; and
(2) The broker or dealer shall
regularly surveil to ascertain the
effectiveness of the policies and
procedures required by paragraph (c) of
this section and shall take prompt
action to remedy deficiencies in such
policies and procedures.
(d) A broker or dealer may mark a
short sale order of a covered security
‘‘short exempt’’ if the broker or dealer
has a reasonable basis to believe:
(1) The short sale order of a covered
security is by a person that is deemed
to own the covered security pursuant to
§ 242.200, provided that the person
intends to deliver the security as soon
as all restrictions on delivery have been
removed.
(2) The short sale order of a covered
security is by a market maker to off-set
customer odd-lot orders or to liquidate
an odd-lot position that changes such
broker’s or dealer’s position by no more
than a unit of trading.
(3) The short sale order of a covered
security is for a good faith account by
a person who then owns another
security by virtue of which he is, or
presently will be, entitled to acquire an
equivalent number of securities of the
same class as the securities sold;
provided such sale, or the purchase
which such sale offsets, is effected for
the bona fide purpose of profiting from
a current difference between the price of
the security sold and the security owned
and that such right of acquisition was
originally attached to or represented by
another security or was issued to all the
holders of any such securities of the
issuer.
(4) The short sale order of a covered
security is for a good faith account
submitted to profit from a current price
difference between a security on a
foreign securities market and a security
on a securities market subject to the

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jurisdiction of the United States,
provided that the short seller has an
offer to buy on a foreign market that
allows the seller to immediately cover
the short sale at the time it was made.
For the purposes of this section, a
depository receipt of a security shall be
deemed to be the same security as the
security represented by such receipt.
(5)(i) The short sale order of a covered
security is by an underwriter or member
of a syndicate or group participating in
the distribution of a security in
connection with an over-allotment of
securities; or
(ii) Any short sale order with respect
to a lay-off sale by an underwriter or
member of a syndicate or group in
connection with a distribution of
securities through a rights or standby
underwriting commitment.
(6) The short sale order of a covered
security is by a broker or dealer effecting
the execution of a customer purchase or
the execution of a customer ‘‘long’’ sale
on a riskless principal basis; provided,
however, the purchase or sell order must
be given the same per-share price at
which the broker or dealer sold shares
to satisfy the facilitated order, exclusive
of any explicitly disclosed markup or
markdown, commission equivalent or
other fee. In addition, for purposes of
this section, a broker or dealer must
have written policies and procedures in
place to assure that, at a minimum: The
customer order was received prior to the
offsetting transaction; the offsetting
transaction is allocated to a riskless
principal or customer account within 60
seconds of execution; and the broker or
dealer has supervisory systems in place
to produce records that enable the
broker or dealer to accurately and
readily reconstruct, in a time-sequenced
manner, all orders on which a broker or
dealer relies pursuant to this exception.
(7) The short sale order is for the sale
of a covered security at the volume
weighted average price (VWAP) that
meets the following criteria:
(i) The VWAP for the covered security
is calculated by:
(A) Calculating the values for every
regular way trade reported in the
consolidated system for the security
during the regular trading session, by
multiplying each such price by the total
number of shares traded at that price;
(B) Compiling an aggregate sum of all
values; and
(C) Dividing the aggregate sum by the
total number of reported shares for that
day in the security.
(ii) The transactions are reported
using a special VWAP trade modifier.
(iii) No short sales used to calculate
the VWAP are marked ‘‘short exempt.’’
(iv) The VWAP matched security:

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(A) Qualifies as an ‘‘actively-traded
security’’; or
(B) The proposed short sale
transaction is being conducted as part of
a basket transaction of twenty or more
securities in which the subject security
does not comprise more than five
percent of the value of the basket traded.
(v) The transaction is not effected for
the purpose of creating actual, or
apparent, active trading in or otherwise
affecting the price of any security.
(vi) A broker or dealer shall be
permitted to act as principal on the
contra-side to fill customer short sale
orders only if the broker’s or dealer’s
position in the covered security, as
committed by the broker or dealer
during the pre-opening period of a
trading day and aggregated across all of
its customers who propose to sell short
the same security on a VWAP basis,
does not exceed 10% of the covered
security’s relevant average daily trading
volume.
(e) No self-regulatory organization
shall have any rule that is not in
conformity with, or conflicts with this
section.
(f) The provisions of this section shall
apply to short sale orders in a covered
security at times when a national best
bid for the covered security is calculated
and disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.
(g) Upon written application or upon
its own motion, the Commission may
grant an exemption from the provisions
of this section, either unconditionally or
on specified terms and conditions, to
any person or class of persons, to any
transaction or class of transactions, or to
any security or class of securities to the
extent that such exemption is necessary
or appropriate, in the public interest,
and is consistent with the protection of
investors.
B. Uptick Rule
2. Section 242.200 is amended by
revising paragraph (g) introductory text
and adding paragraph (g)(2) to read as
follows:
§ 242.200 Definition of ‘‘short sale’’ and
marking requirements.

*

*
*
*
*
(g) A broker or dealer must mark all
sell orders of any equity security as
‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’
(1) * * *
(2) A sale order shall be marked
‘‘short exempt’’ if the seller is relying on
an exception from the price test of
§ 242.201.
*
*
*
*
*

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3. Section 242.201 is revised to read
as follows:

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§ 242.201 Price test.

(a) Definitions. For the purposes of
this section:
(1) The term actively traded security
shall have the same meaning as in
§ 242.101(c)(1).
(2) The term average daily trading
volume shall have the same meaning as
in § 242.100(b).
(3) The term national market system
plan shall have the same meaning as in
§ 242.600(b)(43).
(4) The term covered security shall
mean any NMS stock as defined in
§ 242.600(b)(47).
(5) The term odd lot shall have the
same meaning as in § 242.600(b)(49).
(6) The term riskless principal shall
mean a transaction in which a broker or
dealer, after having received an order to
buy a security, purchases the security as
principal at the same price to satisfy the
order to buy or, after having received an
order to sell, sells the security as
principal at the same price to satisfy the
order to sell.
(b) No person shall, for his own
account or for the account of any other
person, effect a short sale of any covered
security, if trades in such security are
reported pursuant to an effective
national market system plan and
information as to such trades is made
available in accordance with such plan
on a real-time basis to vendors of market
transaction information:
(1) Below the price at which the last
sale thereof, regular way, was reported
pursuant to an effective national market
system plan; or
(2) At such price unless such price is
above the next preceding different price
at which a sale of such security, regular
way, was reported pursuant to an
effective national market system plan.
(c) The provisions of paragraph (b) of
this section shall not apply to:
(1) Any sale by any person of a
covered security that the person is
deemed to own pursuant to § 242.200,
provided that the person intends to
deliver the security as soon as all
restrictions on delivery have been
removed.
(2) Any sale by a broker or dealer of
a covered security for an account in
which it has no interest, pursuant to an
order marked long.
(3) Any sale of a covered security by
a market maker to off-set customer oddlot orders or to liquidate an odd-lot
position which changes such broker’s or
dealer’s position by no more than a unit
of trading.
(4) Any sale of a covered security for
a good faith account by a person who

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then owns another security by virtue of
which he is, or presently will be,
entitled to acquire an equivalent
number of securities of the same class
as the securities sold; provided such
sale, or the purchase which such sale
offsets, is effected for the bona fide
purpose of profiting from a current
difference between the price of the
security sold and the security owned
and that such right of acquisition was
originally attached to or represented by
another security or was issued to all the
holders of any such securities of the
issuer.
(5) Any sale of a covered security for
a good faith account submitted to profit
from a current price difference between
a security on a foreign securities market
and a security on a securities market
subject to the jurisdiction of the United
States, provided that the short seller has
an offer to buy on a foreign market that
allows the seller to immediately cover
the short sale at the time it was made.
For the purposes of this section, a
depository receipt of a security shall be
deemed to be the same security as the
security represented by such receipt.
(6)(i) Any sale of a covered security by
an underwriter or member of a
syndicate or group participating in the
distribution of a security in connection
with an over-allotment of securities; or
(ii) Any lay-off sale by an underwriter
or member of a syndicate or group in
connection with a distribution of
securities through a rights or standby
underwriting commitment.
(7) Any sale of a covered security at
the volume weighted average price
(VWAP) that meets the following
criteria:
(i) The VWAP for the covered security
is calculated by:
(A) Calculating the values for every
regular way trade reported in the
consolidated system for the security
during the regular trading session, by
multiplying each such price by the total
number of shares traded at that price;
(B) Compiling an aggregate sum of all
values; and
(C) Dividing the aggregate sum by the
total number of reported shares for that
day in the security.
(ii) The transactions are reported
using a special VWAP trade modifier.
(iii) No short sales used to calculate
the VWAP are marked ‘‘short exempt’’;
(iv) The VWAP matched security:
(A) Qualifies as an ‘‘actively-traded
security’’; or
(B) The proposed short sale
transaction is being conducted as part of
a basket transaction of twenty or more
securities in which the subject security
does not comprise more than five
percent of the value of the basket traded.

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18109

(v) The transaction is not effected for
the purpose of creating actual, or
apparent, active trading in or otherwise
affecting the price of any security.
(vi) A broker or dealer shall be
permitted to act as principal on the
contra-side to fill customer short sale
orders only if the broker’s or dealer’s
position in the covered security, as
committed by the broker or dealer
during the pre-opening period of a
trading day and aggregated across all of
its customers who propose to sell short
the same security on a VWAP basis,
does not exceed 10% of the covered
security’s relevant average daily trading
volume.
(8) Any sale of a covered security in
an electronic trading system that
matches buying and selling interest at
various times throughout the day that
meets the following criteria:
(i) Matches occur at an externally
derived price within the existing market
and above the current national best bid;
(ii) Sellers and purchasers are not
assured of receiving a matching order;
(iii) Sellers and purchasers do not
know when a match will occur;
(iv) Persons relying on the exception
contained in paragraph (c)(8) of this
section shall not be represented in the
primary market offer or otherwise
influence the primary market bid or
offer at the time of the transaction;
(v) Transactions shall not be made for
the purpose of creating actual, or
apparent, active trading in, or
depressing or otherwise manipulating
the price of, any security;
(vi) The covered security:
(A) Qualifies as an ‘‘actively-traded
security’’; or
(B) The proposed short sale
transaction is being conducted as part of
a basket transaction of twenty or more
securities in which the subject security
does not comprise more than five
percent of the value of the basket traded;
and
(vii) During the period of time in
which the electronic trading system may
match buying and selling interest, there
can be no solicitation of customer
orders, or any communication with
customers that the match has not yet
occurred.
(9) Any sale of a covered security by
a broker or dealer effecting the
execution of a customer purchase or the
execution of a customer ‘‘long’’ sale on
a riskless principal basis; provided,
however, the purchase or sell order must
be given the same per-share price at
which the broker or dealer sold shares
to satisfy the facilitated order, exclusive
of any explicitly disclosed markup or
markdown, commission equivalent or
other fee. In addition, for purposes of

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this section, a broker or dealer must
have written policies and procedures in
place to assure that, at a minimum: The
customer order was received prior to the
offsetting transaction; the offsetting
transaction is allocated to a riskless
principal or customer account within 60
seconds of execution; and the broker or
dealer has supervisory systems in place
to produce records that enable the
broker or dealer to accurately and
readily reconstruct, in a time-sequenced
manner, all orders on which a broker or
dealer relies pursuant to this exception.
(10) Any sale of a covered security
(except a sale to a stabilizing bid
complying with § 242.104) by a
registered specialist or registered
exchange market maker for its own
account on any exchange with which it
is registered for such security, or by a
third market maker for its own account
over-the-counter:
(i) Effected at a price equal to the most
recent offer communicated for the
security by such registered specialist,
registered exchange market maker or
third market maker to an exchange or a
national securities association
(‘‘association’’) pursuant to § 242.602, if
such offer, when communicated, was
equal to or above the last sale, regular
way, reported for such security pursuant
to an effective national market system
plan. Provided, however,
(ii) That any self-regulatory
organization, by rule, may prohibit its
registered specialist and registered
exchange market makers from availing
themselves of the exemption afforded by
this paragraph (c)(10) if that selfregulatory organization determines that
such action is necessary or appropriate
in its market in the public interest or for
the protection of investors.
(11) Any sale of a covered security
(except a sale to a stabilizing bid
complying with § 242.104) by any
broker or dealer, for his own account or
for the account of any other person,
effected at a price equal to the most
recent offer communicated by such
broker or dealer to an exchange or
association pursuant to § 242.602 in an
amount less than or equal to the
quotation size associated with such
offer, if such offer, when communicated,
was:
(i) Above the price at which the last
sale, regular way, for such security was
reported pursuant to an effective
national market system plan; or
(ii) At such last sale price, if such last
sale price is above the next preceding
different price at which a sale of such
security, regular way, was reported
pursuant to an effective national market
system plan.

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(12) Any sale of a security by a
registered market maker or specialist
publishing two-sided quotes to facilitate
customer market or marketable limit
buy orders.
(d) No self-regulatory organization
shall have any rule that is not in
conformity with, or conflicts with this
section.
(e) The provisions of this section shall
apply to short sale orders in a covered
security at times when a last sale price
for the covered security is calculated
and disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.
(f) Upon written application or upon
its own motion, the Commission may
grant an exemption from the provisions
of this section, either unconditionally or
on specified terms and conditions, to
any person or class of persons, to any
transaction or class of transactions, or to
any security or class of securities to the
extent that such exemption is necessary
or appropriate, in the public interest,
and is consistent with the protection of
investors.
Alternative II—Circuit Breaker Rules
A. Circuit Breaker Halt Rule
2. Section 242.200 is amended by
revising paragraph (g) introductory text
and adding paragraph (g)(2) to read as
follows:
§ 242.200 Definition of ‘‘short sale’’ and
marking requirements.

*

*
*
*
*
(g) A broker or dealer must mark all
sell orders of any equity security as
‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’
(1) * * *
(2) A sale order shall be marked
‘‘short exempt’’ if the seller is relying on
an exception from the prohibition
against short selling of § 242.201.
*
*
*
*
*
3. Section 242.201 is revised to read
as follows:
§ 242.201 Circuit breaker.

(a) Definitions. For the purposes of
this section:
(1) The term covered security shall
mean any NMS stock as defined in
§ 242.600(b)(47).
(2) The term regular trading hours
shall have the same meaning as in
§ 242.600(b)(64).
(3) The term national market system
plan shall have the same meaning as in
§ 242.600(b)(43).
(b) If the price of a covered security,
as reported in the consolidated system,
decreases by ten percent or more from
that covered security’s last price
reported during regular trading hours

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the prior day, as reported in the
consolidated system, no person shall,
for his own account or for the account
of any other person, effect a short sale
of that covered security, wherever
traded, at times when a last sale price
for the covered security is calculated
and disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan, for the remainder of the
day.
(c) The provisions of paragraph (b) of
this section shall not apply if the
decrease in the price of a covered
security occurs within thirty minutes
from the end of regular trading hours.
(d) The provisions of paragraph (b) of
this section shall not apply to:
(1) Any sale of a covered security by
a registered market maker, block
positioner, or other market maker
obligated to quote in the over-thecounter market, in each case that are
selling short a covered security as part
of bona fide market making in such
covered security.
(2) Any sale of a covered security by
any person as a result of automatic
exercise or assignment of an equity
option, or in connection with a futures
contract, that is held prior to the trigger
event identified in paragraph (b) of this
section due to expiration of the option
or futures contract.
(3) Any sale of a covered security by
any person that is the writer of a call
option if the sale is as a result of
assignment following exercise by the
holder of the call.
(4) Any sale of a covered security by
any person that is a market maker,
including an over-the-counter market
maker, if the sale is part of a bona fide
market making and hedging activity
related directly to bona fide market
making in: (i) Derivative securities
based on that covered security; or (ii)
exchange traded funds and exchange
traded notes of which that covered
security is a component.
(5) Any sale of a covered security by
any person that is deemed to own the
covered security pursuant to § 242.200,
provided that the person intends to
deliver the security as soon as all
restrictions on delivery have been
removed.
(e) No self-regulatory organization
shall have any rule that is not in
conformity with, or conflicts with, this
section.
(f) Upon written application or upon
its own motion, the Commission may
grant an exemption from the provisions
of this section, either unconditionally or
on specified terms and conditions, to
any person or class of persons, to any
transaction or class of transactions, or to

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any security or class of securities to the
extent that such exemption is necessary
or appropriate, in the public interest,
and is consistent with the protection of
investors.
B. Circuit Breaker With Modified Uptick
Rule
2. Section 242.200 is amended by
revising paragraph (g) introductory text
and adding paragraph (g)(2) to read as
follows:
§ 242.200 Definition of ‘‘short sale’’ and
marking requirements.

*

*
*
*
*
(g) A broker or dealer must mark all
sell orders of any equity security as
‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’
(1) * * *
(2) A sale order shall be marked
‘‘short exempt’’ only if the provisions of
§ 242.201(d) or (e) are met.
*
*
*
*
*
3. Section 242.201 is revised to read
as follows:

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§ 242.201 Circuit breaker.

(a) Definitions. For the purposes of
this section:
(1) The term covered security shall
mean any NMS stock as defined in
§ 242.600(b)(47).
(2) The term regular trading hours
shall have the same meaning as in
§ 242.600(b)(64).
(3) The term down-bid price shall
mean a price that is less than the current
national best bid or, if the last
differently priced national best bid was
greater than the current national best
bid, a price that is less than or equal to
the current national best bid.
(4) The term national best bid shall
have the same meaning as in
§ 242.600(b)(42).
(5) The term national market system
plan shall have the same meaning as in
§ 242.600(b)(43).
(6) The term odd lot shall have the
same meaning as in § 242.600(b)(49).
(7) The term riskless principal shall
mean a transaction in which a broker or
dealer, after having received an order to
buy a security, purchases the security as
principal at the same price to satisfy the
order to buy or, after having received an
order to sell, sells the security as
principal at the same price to satisfy the
order to sell.
(8) The term trading center shall have
the same meaning as in § 242.600(b)(78).
(b) (1) A trading center shall establish,
maintain, and enforce written policies
and procedures reasonably designed to
prevent, when the price of a covered
security decreases by ten percent or
more from that covered security’s last
price reported during regular trading

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hours the prior day, as reported in the
consolidated system, the execution or
display of a short sale order of that
covered security at a down-bid price at
times when a national best bid for the
covered security is calculated and
disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan, for the remainder of the
day. Provided, however,
(i) The policies and procedures must
be reasonably designed to permit the
execution of a displayed short sale order
of a covered security by a trading center
if, at the time of display of the short sale
order, the order was not at a down-bid
price.
(ii) The policies and procedures must
be reasonably designed to permit the
execution or display of a short sale
order of a covered security marked
‘‘short exempt’’ without regard to
whether the order is at a down-bid
price.
(2) A trading center shall regularly
surveil to ascertain the effectiveness of
the policies and procedures required by
paragraph (b)(1) of this section and shall
take prompt action to remedy
deficiencies in such policies and
procedures.
(c) The provisions of paragraph (b) of
this section shall not apply if the
decrease in the price of a covered
security occurs within thirty minutes
from the end of regular trading hours.
(d) A broker or dealer may mark a
short sale order of a covered security
‘‘short exempt’’ if the broker or dealer
that submits the order identifies that the
order is not on a down-bid price at the
time of submission of the order to the
trading center. Provided, however,
(1) The broker or dealer that identifies
a short sale order of a covered security
in accordance with this paragraph must
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent incorrect
identification of orders for purposes of
this paragraph; and
(2) The broker or dealer shall
regularly surveil to ascertain the
effectiveness of the policies and
procedures required by paragraph (c) of
this section and shall take prompt
action to remedy deficiencies in such
policies and procedures.
(e) A broker or dealer may mark a
short sale order of a covered security
‘‘short exempt’’ if the broker or dealer
has a reasonable basis to believe:
(1) The short sale order of a covered
security is by a person that is deemed
to own the covered security pursuant to
§ 242.200, provided that the person
intends to deliver the security as soon

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18111

as all restrictions on delivery have been
removed.
(2) The short sale order of a covered
security is by a market maker to off-set
customer odd-lot orders or to liquidate
an odd-lot position that changes such
broker’s or dealer’s position by no more
than a unit of trading.
(3) The short sale order of a covered
security is for a good faith account by
a person who then owns another
security by virtue of which he is, or
presently will be, entitled to acquire an
equivalent number of securities of the
same class as the securities sold;
provided such sale, or the purchase
which such sale offsets, is effected for
the bona fide purpose of profiting from
a current difference between the price of
the security sold and the security owned
and that such right of acquisition was
originally attached to or represented by
another security or was issued to all the
holders of any such securities of the
issuer.
(4) The short sale order of a covered
security is for a good faith account
submitted to profit from a current price
difference between a security on a
foreign securities market and a security
on a securities market subject to the
jurisdiction of the United States,
provided that the short seller has an
offer to buy on a foreign market that
allows the seller to immediately cover
the short sale at the time it was made.
For the purposes of this section, a
depository receipt of a security shall be
deemed to be the same security as the
security represented by such receipt.
(5)(i) The short sale order of a covered
security is by an underwriter or member
of a syndicate or group participating in
the distribution of a security in
connection with an over-allotment of
securities; or
(ii) Any short sale order with respect
to a lay-off sale by an underwriter or
member of a syndicate or group in
connection with a distribution of
securities through a rights or standby
underwriting commitment.
(6) The short sale order of a covered
security is by a broker or dealer effecting
the execution of a customer purchase or
the execution of a customer ‘‘long’’ sale
on a riskless principal basis; provided,
however, the purchase or sell order must
be given the same per-share price at
which the broker or dealer sold shares
to satisfy the facilitated order, exclusive
of any explicitly disclosed markup or
markdown, commission equivalent or
other fee. In addition, for purposes of
this section, a broker or dealer must
have written policies and procedures in
place to assure that, at a minimum: The
customer order was received prior to the
offsetting transaction; the offsetting

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transaction is allocated to a riskless
principal or customer account within 60
seconds of execution; and the broker or
dealer has supervisory systems in place
to produce records that enable the
broker or dealer to accurately and
readily reconstruct, in a time-sequenced
manner, all orders on which a broker or
dealer relies pursuant to this exception.
(7) The short sale order is for the sale
of a covered security at the volume
weighted average price (VWAP) that
meets the following criteria:
(i) The VWAP for the covered security
is calculated by:
(A) Calculating the values for every
regular way trade reported in the
consolidated system for the security
during the regular trading session, by
multiplying each such price by the total
number of shares traded at that price;
(B) Compiling an aggregate sum of all
values; and
(C) Dividing the aggregate sum by the
total number of reported shares for that
day in the security.
(ii) The transactions are reported
using a special VWAP trade modifier.
(iii) No short sales used to calculate
the VWAP are marked ‘‘short exempt.’’
(iv) The VWAP matched security:
(A) Qualifies as an ‘‘actively-traded
security’’; or
(B) The proposed short sale
transaction is being conducted as part of
a basket transaction of twenty or more
securities in which the subject security
does not comprise more than five
percent of the value of the basket traded.
(v) The transaction is not effected for
the purpose of creating actual, or
apparent, active trading in or otherwise
affecting the price of any security.
(vi) A broker or dealer shall be
permitted to act as principal on the
contra-side to fill customer short sale
orders only if the broker’s or dealer’s
position in the covered security, as
committed by the broker or dealer
during the pre-opening period of a
trading day and aggregated across all of
its customers who propose to sell short
the same security on a VWAP basis,
does not exceed 10% of the covered
security’s relevant average daily trading
volume.
(f) No self-regulatory organization
shall have any rule that is not in
conformity with, or conflicts with, this
section.
(g) Upon written application or upon
its own motion, the Commission may
grant an exemption from the provisions
of this section, either unconditionally or
on specified terms and conditions, to
any person or class of persons, to any
transaction or class of transactions, or to
any security or class of securities to the
extent that such exemption is necessary

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or appropriate, in the public interest,
and is consistent with the protection of
investors.
C. Circuit Breaker With Uptick Rule
2. Section 242.200 is amended by
revising paragraph (g) introductory text
and adding paragraph (g)(2) to read as
follows:
§ 242.200 Definition of ‘‘short sale’’ and
marking requirements.

*

*
*
*
*
(g) A broker or dealer must mark all
sell orders of any equity security as
‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’
(1) * * *
(2) A sale order shall be marked
‘‘short exempt’’ if the seller is relying on
an exception from the price test of
§ 242.201.
*
*
*
*
*
3. Section 242.201 is revised to read
as follows:
§ 242.201 Circuit breaker.

(a) Definitions. For the purposes of
this section:
(1) The term covered security shall
mean any NMS stock as defined in
§ 242.600(b)(47).
(2) The term regular trading hours
shall have the same meaning as in
§ 242.600(b)(64).
(3) The term actively traded security
shall have the same meaning as in
§ 242.101(c)(1).
(4) The term average daily trading
volume shall have the same meaning as
in § 242.100(b).
(5) The term national market system
plan shall have the same meaning as in
§ 242.600(b)(43).
(6) The term odd lot shall have the
same meaning as in § 242.600(b)(49).
(7) The term riskless principal shall
mean a transaction in which a broker or
dealer, after having received an order to
buy a security, purchases the security as
principal at the same price to satisfy the
order to buy or, after having received an
order to sell, sells the security as
principal at the same price to satisfy the
order to sell.
(b) If the price of a covered security,
as reported in the consolidated system,
decreases by ten percent or more from
that covered security’s last price
reported during regular trading hours
the prior day, as reported in the
consolidated system, no person shall,
for his own account or for the account
of any other person, effect a short sale
of that covered security, wherever
traded, at times when a last sale price
for the covered security is calculated
and disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market

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system plan, for the remainder of the
day, if trades in such security are
reported pursuant to an effective
national market system plan and
information as to such trades is made
available in accordance with such plan
on a real-time basis to vendors of market
transaction information:
(1) Below the price at which the last
sale thereof, regular way, was reported
pursuant to an effective national market
system plan; or
(2) At such price unless such price is
above the next preceding different price
at which a sale of such security, regular
way, was reported pursuant to an
effective national market system plan.
(c) The provisions of paragraph (b) of
this section shall not apply if the
decrease in the price of a covered
security occurs within thirty minutes
from the end of regular trading hours.
(d) The provisions of paragraph (b) of
this section shall not apply to:
(1) Any sale by any person of a
covered security that the person is
deemed to own pursuant to § 242.200,
provided that the person intends to
deliver the security as soon as all
restrictions on delivery have been
removed.
(2) Any sale by a broker or dealer of
a covered security for an account in
which it has no interest, pursuant to an
order marked long.
(3) Any sale of a covered security by
a market maker to off-set customer oddlot orders or to liquidate an odd-lot
position which changes such broker’s or
dealer’s position by no more than a unit
of trading.
(4) Any sale of a covered security for
a good faith account by a person who
then owns another security by virtue of
which he is, or presently will be,
entitled to acquire an equivalent
number of securities of the same class
as the securities sold; provided such
sale, or the purchase which such sale
offsets, is effected for the bona fide
purpose of profiting from a current
difference between the price of the
security sold and the security owned
and that such right of acquisition was
originally attached to or represented by
another security or was issued to all the
holders of any such securities of the
issuer.
(5) Any sale of a covered security for
a good faith account submitted to profit
from a current price difference between
a security on a foreign securities market
and a security on a securities market
subject to the jurisdiction of the United
States, provided that the short seller has
an offer to buy on a foreign market that
allows the seller to immediately cover
the short sale at the time it was made.
For the purposes of this section, a

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Federal Register / Vol. 74, No. 74 / Monday, April 20, 2009 / Proposed Rules
depository receipt of a security shall be
deemed to be the same security as the
security represented by such receipt.
(6)(i) Any sale of a covered security by
an underwriter or member of a
syndicate or group participating in the
distribution of a security in connection
with an over-allotment of securities; or
(ii) Any lay-off sale by an underwriter
or member of a syndicate or group in
connection with a distribution of
securities through a rights or standby
underwriting commitment.
(7) Any sale of a covered security at
the volume weighted average price
(VWAP) that meets the following
criteria:
(i) The VWAP for the covered security
is calculated by:
(A) Calculating the values for every
regular way trade reported in the
consolidated system for the security
during the regular trading session, by
multiplying each such price by the total
number of shares traded at that price;
(B) Compiling an aggregate sum of all
values; and
(C) Dividing the aggregate sum by the
total number of reported shares for that
day in the security.
(ii) The transactions are reported
using a special VWAP trade modifier.
(iii) No short sales used to calculate
the VWAP are marked ‘‘short exempt.’’
(iv) The VWAP matched security:
(A) Qualifies as an ‘‘actively-traded
security’’; or
(B) The proposed short sale
transaction is being conducted as part of
a basket transaction of twenty or more
securities in which the subject security
does not comprise more than five
percent of the value of the basket traded.
(v) The transaction is not effected for
the purpose of creating actual, or
apparent, active trading in or otherwise
affecting the price of any security.
(vi) A broker or dealer shall be
permitted to act as principal on the
contra-side to fill customer short sale
orders only if the broker’s or dealer’s
position in the covered security, as
committed by the broker or dealer
during the pre-opening period of a
trading day and aggregated across all of
its customers who propose to sell short
the same security on a VWAP basis,
does not exceed 10% of the covered
security’s relevant average daily trading
volume.
(8) Any sale of a covered security in
an electronic trading system that
matches buying and selling interest at
various times throughout the day that
meets the following criteria:
(i) Matches occur at an externally
derived price within the existing market
and above the current national best bid;
(ii) Sellers and purchasers are not
assured of receiving a matching order;

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(iii) Sellers and purchasers do not
know when a match will occur;
(iv) Persons relying on the exception
contained in paragraph (c)(8) of this
section shall not be represented in the
primary market offer or otherwise
influence the primary market bid or
offer at the time of the transaction;
(v) Transactions shall not be made for
the purpose of creating actual, or
apparent, active trading in, or
depressing or otherwise manipulating
the price of, any security;
(vi) The covered security:
(A) Qualifies as an ‘‘actively-traded
security’’; or
(B) The proposed short sale
transaction is being conducted as part of
a basket transaction of twenty or more
securities in which the subject security
does not comprise more than five
percent of the value of the basket traded;
and
(vii) During the period of time in
which the electronic trading system may
match buying and selling interest, there
can be no solicitation of customer
orders, or any communication with
customers that the match has not yet
occurred.
(9) Any sale of a covered security by
a broker or dealer effecting the
execution of a customer purchase or the
execution of a customer ‘‘long’’ sale on
a riskless principal basis; provided,
however, the purchase or sell order must
be given the same per-share price at
which the broker or dealer sold shares
to satisfy the facilitated order, exclusive
of any explicitly disclosed markup or
markdown, commission equivalent or
other fee. In addition, for purposes of
this section, a broker or dealer must
have written policies and procedures in
place to assure that, at a minimum: the
customer order was received prior to the
offsetting transaction; the offsetting
transaction is allocated to a riskless
principal or customer account within 60
seconds of execution; and the broker or
dealer has supervisory systems in place
to produce records that enable the
broker or dealer to accurately and
readily reconstruct, in a time-sequenced
manner, all orders on which a broker or
dealer relies pursuant to this exception.
(10) Any sale of a covered security
(except a sale to a stabilizing bid
complying with § 242.104) by a
registered specialist or registered
exchange market maker for its own
account on any exchange with which it
is registered for such security, or by a
third market maker for its own account
over-the-counter:
(i) Effected at a price equal to the most
recent offer communicated for the
security by such registered specialist,
registered exchange market maker or

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third market maker to an exchange or a
national securities association
(‘‘association’’) pursuant to § 242.602, if
such offer, when communicated, was
equal to or above the last sale, regular
way, reported for such security pursuant
to an effective national market system
plan. Provided, however,
(ii) That any self-regulatory
organization, by rule, may prohibit its
registered specialist and registered
exchange market makers from availing
themselves of the exemption afforded by
this paragraph (d)(10) if that selfregulatory organization determines that
such action is necessary or appropriate
in its market in the public interest or for
the protection of investors.
(11) Any sale of a covered security
(except a sale to a stabilizing bid
complying with § 242.104) by any
broker or dealer, for his own account or
for the account of any other person,
effected at a price equal to the most
recent offer communicated by such
broker or dealer to an exchange or
association pursuant to § 242.602 in an
amount less than or equal to the
quotation size associated with such
offer, if such offer, when communicated,
was:
(i) Above the price at which the last
sale, regular way, for such security was
reported pursuant to an effective
national market system plan; or
(ii) At such last sale price, if such last
sale price is above the next preceding
different price at which a sale of such
security, regular way, was reported
pursuant to an effective national market
system plan.
(12) Any sale of a security by a
registered market maker or specialist
publishing two-sided quotes to facilitate
customer market or marketable limit
buy orders.
(e) No self-regulatory organization
shall have any rule that is not in
conformity with, or conflicts with this
section.
(f) Upon written application or upon
its own motion, the Commission may
grant an exemption from the provisions
of this section, either unconditionally or
on specified terms and conditions, to
any person or class of persons, to any
transaction or class of transactions, or to
any security or class of securities to the
extent that such exemption is necessary
or appropriate, in the public interest,
and is consistent with the protection of
investors.
By the Commission.
Dated: April 10, 2009.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–8730 Filed 4–17–09; 8:45 am]
BILLING CODE

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