Rule 201 Final Federal Register Version

Wednesday,
March 10, 2010

Part II

Securities and
Exchange
Commission
17 CFR Part 242

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Amendments to Regulation SHO; Final
Rule

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

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 242
[Release No. 34–61595; File No. S7–08–09]
RIN 3235–AK35

Amendments to Regulation SHO

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

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broker-dealer may mark certain
qualifying sell orders ‘‘short exempt.’’ In
particular, if the broker-dealer chooses
to rely on its own determination that it
is submitting the short sale order to the
trading center at a price that is above the
current national best bid at the time of
submission or to rely on an exception
specified in the Rule, it must mark the
order as ‘‘short exempt.’’ This ‘‘short
exempt’’ marking requirement will aid
surveillance by self-regulatory
organizations (‘‘SROs’’) and the
Commission for compliance with the
provisions of Rule 201 of Regulation
SHO.
DATES: Effective Date: May 10, 2010.
Compliance Date: November 10, 2010.
FOR FURTHER INFORMATION CONTACT:
Josephine J. Tao, Assistant Director;
Victoria Crane, Branch Chief; Katrina
Wilson, Staff Attorney; and Angela
Moudy, Staff Attorney, Division of
Trading and Markets, at (202) 551–5720,
at the Commission, 100 F Street, NE.,
Washington, DC 20549–6628.
SUPPLEMENTARY INFORMATION: The
Commission is amending Rules 200(g)
and 201 of Regulation SHO [17 CFR
242.200(g) and 17 CFR 242.201] under
the Exchange Act.
Table of Contents
I. Executive Summary
II. Background on Short Sale Restrictions
A. Short Selling and Its Market Impact
B. History of Short Sale Price Test
Restrictions in the U.S.
C. Proposal To Adopt a Short Sale Price
Test Restriction or Circuit Breaker
D. Empirical Data Regarding Potential
Market Impact of Short Sale Price Test
Restrictions Submitted in Response to
the Proposal and Re-Opening Release
III. Discussion of Rule 201 of Regulation SHO
A. Operation of the Circuit Breaker Plus
Alternative Uptick Rule
1. Covered Securities
2. Pricing Increment
3. Alternative Uptick Rule
4. Circuit Breaker Approach Generally
5. Circuit Breaker Trigger Level and
Duration
6. Determination Regarding Securities
Subject to Rule 201 and Dissemination of
Such Information
7. Policies and Procedures Approach
B. ‘‘Short Exempt’’ Provisions of Rule 201
1. Broker-Dealer Provision
2. Seller’s Delay in Delivery
3. Odd Lot Transactions
4. Domestic Arbitrage
5. International Arbitrage
6. Over-Allotments and Lay-Off Sales
7. Riskless Principal Transactions
8. Transactions on a Volume-Weighted
Average Price Basis
9. Decision Not To Adopt a Provision That
a Broker-Dealer May Mark an Order
‘‘Short Exempt’’ in Connection With
Bona Fide Market Making Activity
IV. Order Marking

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V. Exemptive Procedures
VI. Overseas Transactions
VII. Rule 201 Implementation Period
VIII. Decision Not To Implement Rule 201 on
a Pilot Basis
IX. Paperwork Reduction Act
A. Background
B. Summary
1. Policies and Procedures Requirement
Under Rule 201
2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
3. Marking Requirements
C. Use of Information
1. Policies and Procedures Requirement
Under Rule 201
2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
3. Marking Requirements
D. Respondents
1. Policies and Procedures Requirement
Under Rule 201
2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
3. Marking Requirements
E. Total Annual Reporting and
Recordkeeping Burdens
1. Policies and Procedures Requirement
Under Rule 201
2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
3. Marking Requirements
F. Collection of Information Is Mandatory
1. Policies and Procedures Requirements
2. Marking Requirements
G. Confidentiality
1. Policies and Procedures Requirements
2. Marking Requirements
H. Record Retention Period
1. Policies and Procedures Requirements
2. Marking Requirements
X. Cost-Benefit Analysis
A. Benefits
1. Alternative Uptick Rule
2. Circuit Breaker Approach
3. Marking Requirements
B. Costs
1. Alternative Uptick Rule
a. Impact on Market Quality
b. Implementation and On-going
Monitoring and Surveillance Costs
i. Policies and Procedures Requirement
Under Rule 201
ii. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
2. Circuit Breaker Approach
a. Impact on Market Quality
b. Implementation and On-going
Monitoring and Surveillance Costs
3. Implementation Period
4. Marking Requirements
XI. Consideration of Burden on Competition
and Promotion of Efficiency,
Competition, and Capital Formation
A. Competition
1. Market Structure for Trading Centers
and Broker-Dealers
2. Discussion of Impacts of Rules 200(g)
and 201 on Competition
B. Capital Formation
C. Efficiency

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
XII. Final Regulatory Flexibility Analysis
A. Need for and Objectives of the Rule
B. Significant Issues Raised by Public
Comment
C. Small Entities Affected by the Rule
D. Projected Reporting, Recordkeeping and
Other Compliance Requirements
E. Agency Action To Minimize Effect on
Small Entities
F. Significant Alternatives
XIII. Statutory Authority
XIV. Text of the Amendments to Regulation
SHO

I. Executive Summary
In July 2007, the Commission
eliminated all short sale price test
restrictions. Prior to that time, short sale
price test restrictions included Rule
10a–1 under the Exchange Act, also
known as the ‘‘uptick rule’’ or ‘‘tick test’’
(‘‘former Rule 10a–1’’), that applied to
exchange-listed securities,1 and the
National Association of Securities
Dealers, Inc.’s (‘‘NASD’’) 2 bid test, Rule
3350 (‘‘NASD’s former bid test’’), that
applied to certain Nasdaq securities.3
The Commission’s removal of short sale
price test restrictions followed a careful,
deliberative rulemaking process, carried
out in multiple stages from 1999
through 2006, and was open to the
public at every stage.
The Commission took a number of
steps as part of that process, including
seeking extensive public comment and
conducting a comprehensive staff study
to assess whether then-current short sale
price test restrictions were appropriate.
For example, beginning in 1999, the
Commission published a concept
release in which it sought comment
regarding short sale price test
regulation, including comment on
whether to eliminate such regulation.4
In 2004, the Commission initiated a
year-long pilot (‘‘Pilot’’) to study the
removal of short sale price tests for
approximately one-third of the largest
stocks.5 Short sale data was made
publicly available during this Pilot to
allow the public and Commission staff
(the ‘‘Staff’’) to study the effects of
eliminating short sale price test
restrictions. The findings of third party
researchers were presented and
discussed in a public Roundtable in
September 2006.6 In addition, the
results of the Staff study of the Pilot

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by a significant price decline in a
particular security, would trigger a
temporary short sale price test for that
security. In connection with this
alternative, we proposed two short sale
price tests. One was the modified uptick
rule—that is, we proposed a circuit
breaker rule that, when triggered by a
significant price decline in a particular
security, would temporarily impose the
proposed modified uptick rule for that
security (‘‘proposed circuit breaker
modified uptick rule’’). The other was
the uptick rule—that is, we proposed a
circuit breaker rule that, when triggered
by a significant market decline in a
particular security, would temporarily
impose the proposed uptick rule for that
security (‘‘proposed circuit breaker
uptick rule’’).
In addition, in the Proposal we
inquired whether a short sale price test
restriction that would permit short
selling at a price above the current
national best bid (the ‘‘alternative uptick
rule’’), would be preferable to the
proposed modified uptick rule and the
proposed uptick rule.11 We sought
comment regarding the application of
the alternative uptick rule as a marketwide permanent short sale price test
restriction or in conjunction with a
circuit breaker.12 As a supplement to
our request for comment in the Proposal
and to help ensure the public had a full
opportunity to comment on, among
other things, the alternative uptick rule,
on August 20, 2009 we re-opened the
comment period to the Proposal.13 In
addition, on May 5, 2009, we held a
Roundtable to Examine Short Sale Price
Test and Circuit Breaker Restrictions
(the ‘‘May 2009 Roundtable’’).14
Panelists included representatives of
public issuers, investors, financial
services firms, SROs and the academic
community.15
Although in recent months there has
been an increase in stability in the
securities markets, we remain
concerned that excessive downward
price pressure on individual securities
accompanied by the fear of
unconstrained short selling can
undermine investor confidence in our
11 See

Proposal, 74 FR at 18072, 18081, 18082.
id.
13 See Exchange Act Release No. 60509 (Aug. 17,
2009), 74 FR 42033 (Aug. 20, 2009) (the ‘‘ReOpening Release’’).
14 See Exchange Act Release No. 59855 (May 1,
2009); Press Release No. 2009–101 (agenda and
panelists included); Press Release No. 2009–88
(preliminary agenda included).
15 See http://www.sec.gov/spotlight/shortsales/
roundtable050509/shortsalesroundtable050509transcript.txt (unofficial transcript of May 2009
Roundtable).
12 See

1 See

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infra note 41 and accompanying text.
2 NASD is now known as the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’).
3 See infra note 43 and accompanying text.
4 See Exchange Act Release No. 42037 (Oct. 20,
1999), 64 FR 57996 (Oct. 28, 1999) (‘‘1999 Concept
Release’’).
5 See Exchange Act Release No. 50104 (July 28,
2004), 69 FR 48032 (Aug. 6, 2004) (‘‘Pilot Release’’).
6 See http://www.sec.gov/about/economic/
shopilottrans091506.pdf (the ‘‘Regulation SHO 2006
Roundtable’’).

data were made publicly available in
draft form in September 2006 and in
final form in February 2007.7
Since then, there has been significant
market turmoil. Concurrent with the
development of the subprime mortgage
crisis and credit crisis in 2007, market
volatility, including steep price
declines, particularly in the stocks of
certain financial services companies,
increased markedly in the U.S. and in
every major stock market around the
world (including markets that continued
to operate under short sale price test
restrictions).8 As market conditions
continued to worsen, investor
confidence eroded, and the Commission
received many requests from the public
to consider imposing restrictions with
respect to short selling, based in part on
the belief that such action would help
restore investor confidence.9
We determined that it was
appropriate to re-examine the
appropriateness of short sale price test
restrictions and seek comment on
whether to restore any such restrictions.
Thus, in April 2009 we proposed two
approaches to restrictions on short
selling, one that would apply on a
permanent, market-wide basis and
another that would apply to a particular
security upon a significant decline in
the price of that security (the ‘‘proposed
circuit breaker approach’’ or ‘‘proposed
circuit breaker rules’’).10
With respect to the permanent,
market-wide approach, we proposed
two alternative price tests. The first
alternative price test, in many ways
similar to NASD’s former bid test,
would be based on the national best bid
(the ‘‘proposed modified uptick rule’’).
The second alternative price test,
similar to former Rule 10a–1, would be
based on the last sale price (the
‘‘proposed uptick rule’’).
With respect to the proposed circuit
breaker approach, we proposed two
basic alternatives. First, we proposed a
circuit breaker rule that, when triggered
by a significant price decline in a
particular security, would temporarily
prohibit any person from selling short
that security, subject to certain
exceptions (‘‘proposed circuit breaker
halt rule’’). Second, we proposed a
circuit breaker rule that, when triggered
7 See http://www.sec.gov/about/economic/
shopilot091506/draft_reg_sho_pilot_report.pdf and
http://www.sec.gov/news/studies/2007/
regshopilot020607.pdf. See also infra notes 48 to 62
and accompanying text (discussing findings of the
Staff study).
8 See Exchange Act Release No. 59748 (Apr. 10,
2009), 74 FR 18042, 18043 (Apr. 20, 2009) (the
‘‘Proposal’’).
9 See id.
10 See Proposal, 74 FR 18042.

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markets generally.16 In addition, we are
concerned about potential future market
turmoil, including significant increases
in market volatility and steep price
declines. Thus, as discussed in more
detail below, after considering the
comments, we have determined that it
is appropriate at this time to adopt in
Rule 201 a targeted short sale price test
restriction that will apply the alternative
uptick rule for the remainder of the day
and the following day if the price of an
individual security declines intra-day
by 10% or more from the prior day’s
closing price for that security as
determined by the covered security’s
listing market.
By not allowing short sellers to sell at
or below the current national best bid
while the circuit breaker is in effect, the
short sale price test restriction in Rule
201 will allow long sellers, who will be
able to sell at the bid, to sell first in a
declining market for a particular
security. As the Commission has noted
previously in connection with short sale
price test restrictions, a goal of such
restrictions is to allow long sellers to
sell first in a declining market.17 A short
seller that is seeking to profit quickly
from accelerated, downward market
moves may find it advantageous to be
able to short sell at the current national
best bid. In addition, by making such
bids accessible only by long sellers
when a security’s price is undergoing
significant downward price pressure,
Rule 201 will help to facilitate and
maintain stability in the markets and
help ensure that they function
efficiently. It will also help restore
investor confidence during times of
substantial uncertainty because, once
the circuit breaker has been triggered for
a particular security, long sellers will
have preferred access to bids for the
security, and the security’s continued
price decline will more likely be due to
long selling and the underlying
16 We note that investor confidence may include
a number of different elements, such as investor
perceptions about fundamental market risk,
investor optimism about the economy, or investor
trust in the fairness of financial markets as
influenced by applicable regulatory protections.
Although the latter can be directly influenced by
Commission actions, the Commission does not have
control over fundamental market risk and economic
optimism. Thus, as used here, the term ‘‘investor
confidence’’ refers to investor trust in the fairness
of financial markets.
17 See Exchange Act Release No. 48709 (Oct. 28,
2003), 68 FR 62972, 62989 (Nov. 6, 2003) (‘‘2003
Regulation SHO Proposing Release’’); see also
Exchange Act Release No. 30772 (June 3, 1992), 57
FR 24415, 24416 (June 9, 1992) (stating that former
Rule 10a–1 was ‘‘designed to limit short selling of
a security in a declining market, by requiring, in
effect, that each successive lower price be
established by a long seller’’).

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fundamentals of the issuer, rather than
to other factors.
In addition, combining the alternative
uptick rule with a circuit breaker will
strike the appropriate balance between
our goal of preventing short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security and the need to allow for
the continued smooth functioning of the
markets, including the provision of
liquidity and price efficiency in the
markets.18 The circuit breaker approach
of Rule 201 will help benefit the market
for a particular security by allowing
participants, when a security is
undergoing a significant intra-day price
decline, an opportunity to re-evaluate
circumstances and respond to volatility
in that security. We also believe that a
circuit breaker will better target short
selling that may be related to potential
bear raids 19 and other forms of
manipulation that may be used to
exacerbate a price decline in a covered
security.
At the same time, however, we
recognize the benefits to the market of
legitimate short selling, such as the
provision of liquidity and price
efficiency. Thus, by imposing a short
sale price test restriction only when an
individual security is undergoing
significant downward price pressure,
the short sale price test restrictions of
Rule 201 will apply to a limited number
of securities, rather than to all securities
all the time. As discussed in more detail
below,20 in response to our request for
comment on an appropriate threshold at
which to trigger the proposed circuit
breaker short sale price test restrictions,
commenters submitted estimates of the
number of securities that would trigger
a circuit breaker rule at a 10%
threshold.21 While commenters’
18 Where we use the terms ‘‘market efficiency’’
and ‘‘price efficiency’’ in this adopting release we
are using terms of art as used in the economic
literature proceeding under the ‘‘efficient markets
hypothesis,’’ under which financial prices are
assumed to reflect all available information and
accordingly adjust quickly to reflect new
information. See, e.g., Eugene F. Fama, 1991,
Efficient capital markets: II, Journal of Finance; 46:
1575–1617; Eugene F. Fama and Kenneth R. French,
1992, The Cross-Section of Expected Stock Returns,
Journal of Finance, 47: 427–465. It should be noted
that economic efficiency and price efficiency are
not identical with the ordinary sense of the word
‘‘efficiency.’’
19 See infra note 36 and accompanying text.
20 See infra Section III.A.5. (discussing the circuit
breaker trigger level).
21 See, e.g., letter from Mary Lou Von Kaenel,
Managing Director, Management Consulting, Jordan
& Jordan, dated June 19, 2009 (‘‘Jordan & Jordan’’);
letter from John C. Nagel, Managing Director and
Deputy General Counsel, Citadel Investment Group,
John Liftin, Managing Director and General
Counsel, The D.E. Shaw Group, and Mark Silber,

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analyses (including the facts and
assumptions used) and their resulting
estimates varied,22 commenters’
estimates reflect that a 10% circuit
breaker threshold, on average, should
affect a limited percentage of covered
securities.23 Given the variations in the
facts and assumptions underlying the
estimates submitted by commenters, the
Staff also looked at trading data to
confirm the reasonableness of those
estimates. The Staff found that, during
the period covering April 9, 2001 to
September 30, 2009,24 the price test
restrictions of Rule 201 would have
been triggered, on an average day, for
approximately 4% of covered
securities.25 The Staff also found that for
a low volatility period, covering January
1, 2004 to December 31, 2006, the 10%
trigger level of Rule 201 would have, on
an average day, been triggered for
approximately 1.3% of covered
securities.26
Thus, Rule 201 is structured so that
the circuit breaker generally will not be
triggered for the majority of covered
securities at any given time and,
thereby, will not interfere with the
smooth functioning of the markets for
those securities, including when prices
in such securities are undergoing
minimal downward price pressure or
are stable or rising. If the short sale price
test restrictions of Rule 201 apply to a
covered security it will be because and
when that security is undergoing
significant downward price pressure.
In addition, to help ensure the Rule’s
workability, we are amending Rule
200(g) of Regulation SHO, substantially
as proposed, to provide that, once the
circuit breaker has been triggered for a
covered security, if a broker-dealer
chooses to rely on its own
determination that it is submitting a
short sale order to a trading center at a
price that is above the current national
best bid at the time of submission or to
rely on an exception specified in the
Rule, it must mark the order ‘‘short
Executive Vice President, Renaissance
Technologies, dated June 19, 2009 (‘‘Citadel et al.
(June 2009)’’); letter from Stuart J. Kaswell,
Executive Vice President, Managing Director and
General Counsel, Managed Funds Association,
dated June 22, 2009 (‘‘MFA (June 2009)’’); letter from
Ira D. Hammerman, Senior Managing Director and
General Counsel, Securities Industry and Financial
Markets Association, dated June 19, 2009 (‘‘SIFMA
(June 2009)’’); letter from Daniel Mathisson,
Managing Director, Credit Suisse Securities (USA),
LLC, dated Sept. 21, 2009 (‘‘Credit Suisse (Sept.
2009)’’).
22 See infra note 306.
23 See infra note 307.
24 See infra note 309.
25 See infra note 310.
26 See infra note 311.

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
exempt.’’ 27 The short sale price test
restrictions of Rule 201 generally will
apply to a small number of securities for
a limited duration, and will continue to
permit short selling rather than, for
example, halting short selling when the
restrictions are in place. As such, we
believe that the circumstances under
which a broker-dealer may need to mark
a short sale order ‘‘short exempt’’ under
Rule 201 are limited.
II. Background on Short Sale
Restrictions
Short selling involves a sale of a
security that the seller does not own or
a sale that is consummated by the
delivery of a security borrowed by, or
for the account of, the seller.28 In order
to deliver the security to the purchaser,
the short seller will borrow the security,
usually from a broker-dealer or an
institutional investor. Typically, the
short seller later closes out the position
by purchasing equivalent securities on
the open market and returning the
security to the lender. In general, short
selling is used to profit from an
expected downward price movement, to
provide liquidity in response to
unanticipated demand, or to hedge the
risk of an economic long position in the
same security or in a related security.29
A. Short Selling and Its Market Impact
Short selling provides the market with
important benefits, including market
liquidity and pricing efficiency.30

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27 We

note that, as discussed in more detail
below, unless a sale order is marked ‘‘short exempt,’’
a trading center’s policies and procedures must be
reasonably designed to prevent the execution or
display of the order at a price that is less than or
equal to the current national best bid.
28 See 17 CFR 242.200(a).
29 See, e.g., Exchange Act Release No. 54891 (Dec.
7, 2006), 71 FR 75068, 75069 (Dec. 13, 2006) (‘‘2006
Price Test Elimination Proposing Release’’); 2003
Regulation SHO Proposing Release, 68 FR at 62974.
In this adopting release, we use the terms ‘‘liquidity
provider’’ and ‘‘liquidity taker,’’ and correlative
terms, in their technical sense in the literature of
market microstructure. See, e.g., Larry Harris,
Trading and Exchanges: Market Microstructure for
Practitioners, at 70 (2003) (an introductory textbook
to the economics of market microstructure). As used
therein, a liquidity taker is a buyer or seller
(including a short seller) who submits an order
designed for immediate execution, such as a market
order or a marketable limit order, while a liquidity
provider is a more patient buyer or seller (including
a short seller) who submits orders that may or may
not be executed, and thus provides depth to the
market. This usage differs from the usage of the
term ‘‘liquidity provider’’ to refer to a bank, central
bank, or other financial institution or investor who
provides cash financing or otherwise increases the
money supply.
30 See id.; see also Exchange Act Release No.
29278 (June 7, 1991), 56 FR 27280 (June 13, 1991);
Exchange Act Release No. 50103 (July 28, 2004), 69
FR 48008, 48009 n.6 (Aug. 6, 2004) (‘‘2004
Regulation SHO Adopting Release’’); Ekkehart
Boehmer and J. Julie Wu, Short Selling and the

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Market liquidity is often provided
through short selling by market
professionals, such as market makers
(including specialists) and block
positioners, who offset temporary
imbalances in the buying and selling
interest for securities. Short sales
effected in the market add to the selling
interest of stock available to purchasers
and reduce the risk that the price paid
by investors is artificially high because
of a temporary imbalance between
buying and selling interest. Short sellers
covering their sales also may add to the
buying interest of stock available to
sellers.31
Short selling also can contribute to
the pricing efficiency of the equities
markets.32 When a short seller
speculates or hedges against a
downward movement in a security, his
transaction is a mirror image of the
person who purchases the security in
anticipation that the security’s price
will rise or to hedge against such an
increase. Both the purchaser and the
short seller hope to profit, or hedge
against loss, by buying the security at
one price and selling at a higher price.
The strategies primarily differ in the
sequence of transactions. Market
participants who believe a stock is
overvalued may engage in short sales in
an attempt to profit from a perceived
divergence of prices from true economic
values. Such short sellers add to stock
pricing efficiency because their
transactions inform the market of their
evaluation of future stock price
performance. This evaluation is
reflected in the resulting market price of
the security.33
Although short selling serves useful
market purposes, it also may be used to
drive down the price of a security or as
a tool to accelerate a declining market
in a security.34 In addition, short selling
Informational Efficiency of Prices, Working Paper,
Jan. 8, 2009.
31 See, e.g., 2006 Price Test Elimination Proposing
Release, 71 FR at 75069; 2003 Regulation SHO
Proposing Release, 68 FR at 62974.
32 See id.
33 See 2006 Price Test Elimination Proposing
Release, 71 FR at 75069–75070; 2003 Regulation
SHO Proposing Release, 68 FR at 62974.
Arbitrageurs also contribute to pricing efficiency by
utilizing short sales to profit from price disparities
between a stock and a derivative security, such as
a convertible security or an option on that stock.
For example, an arbitrageur may purchase a
convertible security and sell the underlying stock
short to profit from a current price differential
between two economically similar positions. See id.
34 See, e.g., Proposal, 74 FR at 18065 (noting that
a short selling circuit breaker rule would be
designed to target only those securities that
experience rapid severe intra-day price declines
and, therefore, might help to prevent short selling
from being used to drive the price of a security
down or to accelerate the decline in the price of
those securities).

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may be used to illegally manipulate
stock prices.35 One example is the ‘‘bear
raid’’ where an equity security is sold
short in an effort to drive down the
price of the security by creating an
imbalance of sell-side interest.36 This
unrestricted short selling could
exacerbate a declining market in a
security by increasing pressure from the
sell-side, eliminating bids, and causing
a further reduction in the price of a
security by creating an appearance that
the security’s price is falling for
fundamental reasons, when the decline,
or the speed of the decline, is being
driven by other factors.37
B. History of Short Sale Price Test
Restrictions in the U.S.
Section 10(a) of the Exchange Act 38
gives the Commission plenary authority
to regulate short sales of securities
registered on a national securities
exchange, as necessary or appropriate in
the public interest or for the protection
of investors.39 After conducting an
inquiry into the effects of concentrated
short selling during the market break of
1937,40 the Commission adopted former
Rule 10a–1 in 1938 to restrict short
selling in a declining market.41
The core provisions of former Rule
10a–1 remained virtually unchanged for
almost seventy years. Over the years,
however, in response to changes in the
securities markets, including changes in
trading strategies and systems used in
35 See, e.g., U.S. v. Russo, 74 F.3d 1383, 1392 (2d
Cir. 1996) (short sales were sufficiently connected
to the manipulation scheme as to constitute a
violation of Exchange Act Section 10(b) and Rule
10b–5); S.E.C. v. Gardiner, 48 S.E.C. Docket 811,
No. 91 Civ. 2091 (S.D.N.Y. Mar. 27, 1991) (alleged
manipulation by sales representative by directing or
inducing customers to sell stock short in order to
depress its price).
36 Many people blamed ‘‘bear raids’’ for the 1929
stock market crash and the market’s prolonged
inability to recover from the crash. See, e.g., Steve
Thel, $850,000 in Six Minutes—The Mechanics of
Securities Manipulation, 79 Cornell L. Rev. 219,
295–296 (1994); Jonathan R. Macey, Mark Mitchell
& Jeffry Netter, Restrictions on Short Sales: An
Analysis of the Uptick Rule and its Role in View
of the October 1987 Stock Market Crash, 74 Cornell
L. Rev. 799, 801–802 (1989).
37 See 2006 Price Test Elimination Proposing
Release, 71 FR at 75070; 2003 Regulation SHO
Proposing Release, 68 FR at 62974.
38 15 U.S.C. 78j(a).
39 See id.; see also 2006 Price Test Elimination
Proposing Release, 71 FR at 75068; 2003 Regulation
SHO Proposing Release, 68 FR at 62973.
40 The study covered two weekly periods, that of
September 7–13, 1937, and that of October 18–23,
1937. See Exchange Act Release No. 1548 (Jan. 24,
1938), 3 FR 213 (Jan. 26, 1938) (‘‘Former Rule 10a–
1 Adopting Release’’).
41 See id. Former Rule 10a–1 provided that,
subject to certain exceptions, a listed security could
be sold short (i) at a price above the price at which
the immediately preceding sale was effected (plus
tick), or (ii) at the last sale price if it was higher
than the last different price (zero plus tick).

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the marketplace, the Commission added
exceptions to former Rule 10a–1 and
granted numerous written requests for
relief from the Rule’s restrictions. These
market changes included
decimalization, the increased use of
matching systems that execute trades at
independently-derived prices during
random times within specific time
intervals,42 and the spread of fully
automated markets. In addition, market
developments over the years led to the
application of different price tests to
securities trading in different markets.43
In July 2004, the Commission adopted
Rule 202T of Regulation SHO,44 which
established procedures for the
Commission to temporarily suspend
short sale price tests for a prescribed set
of securities so that the Commission
could study the effectiveness of these
tests.45 Pursuant to the process
established in Rule 202T, the
Commission issued an order creating
the Pilot, which temporarily suspended
the tick test of former Rule 10a–1 and
any price test of any national securities
exchange or national securities
association for short sales of certain
securities.46 The Pilot was designed to
assist the Commission in assessing
whether changes to short sale price test
regulation were appropriate at that time
in light of then-current market practices

and the purposes underlying short sale
price test regulation.47
The Staff gathered the data made
public during the Pilot, analyzed the
data and provided the Commission with
a summary report on the Pilot (‘‘Staff’s
Summary Pilot Report’’).48 The Staff’s
Summary Pilot Report, which was made
public, examined several aspects of
market quality including the overall
effect of then-current price tests on short
selling, liquidity, volatility and price
efficiency.49 The Pilot was also designed
to allow the Commission and members
of the public to examine whether the
effects of the then-current short sale
price tests were similar across stocks.50
As set forth in the Staff’s Summary
Pilot Report, the Staff found little
empirical justification at that time for
maintaining then-current short sale
price test restrictions, especially for
actively traded securities. Amongst its
results, the Staff found that such short
sale price tests did not have a significant
impact on daily volatility. However, the
Staff also found some evidence that the
short sale price tests dampened intraday volatility for smaller stocks.51
In addition, the Staff found that the
Pilot data provided limited evidence
that then-current price test restrictions
distorted a security’s price.52 The Staff
also found that the price test restrictions

42 See, e.g., letter from Larry E. Bergmann, Senior
Associate Director, Division of Market Regulation,
SEC, to Andre E. Owens, Schiff Hardin & Waite,
dated Apr. 23, 2003 (granting exemptive relief from
former Rule 10a–1 for trades executed through an
alternative trading system (‘‘ATS’’) that matches
buying and selling interest among institutional
investors and broker-dealers at various set times
during the day).
43 See, e.g., Exchange Act Release No. 55245 (Feb.
5, 2007), 72 FR 6635 (Feb. 12, 2007). Former Rule
10a–1 applied only to short sale transactions in
exchange-listed securities. In 1994, the Commission
granted temporary approval to NASD to apply its
own short sale rule, known as the ‘‘bid test,’’ on a
pilot basis that was renewed annually until the
Commission repealed short sale price tests. NASD’s
former bid test prohibited short sales in Nasdaq
Global Market securities (then known as Nasdaq
National Market securities) at or below the current
(inside) bid when the current best (inside) bid was
below the previous best (inside) bid in a security.
As a result, until the Commission eliminated former
Rule 10a–1, and prohibited any SRO from having
a short sale price test in July 2007, Nasdaq Global
Market securities traded on Nasdaq or the over-thecounter (‘‘OTC’’) market and reported to a NASD
facility were subject to a bid test. Nasdaq securities
traded on exchanges other than Nasdaq were not
subject to any price test. In addition, many thinlytraded securities, such as Nasdaq Capital Market
securities and securities quoted on the OTC
Bulletin Board and Pink Sheets, were not subject to
any price test wherever traded. According to the
Staff, in 2005, prior to the start of the Pilot, NASD’s
former bid test applied to approximately 2,800
securities, while former Rule 10a–1 applied to
approximately 4,000 securities.
44 17 CFR 242.202T.
45 See 17 CFR 242.202T; see also 2004 Regulation
SHO Adopting Release, 69 FR at 48012–48013.
46 See Pilot Release, 69 FR 48032.

47 See id. In the 2004 Regulation SHO Adopting
Release, we noted that ‘‘the purpose of the [P]ilot
is to assist the Commission in considering
alternatives, such as: (1) Eliminating a Commissionmandated price test for an appropriate group of
securities, which may be all securities; (2) adopting
a uniform bid test, and any exceptions, with the
possibility of extending a uniform bid test to
securities for which there is currently no price test;
or (3) leaving in place the current price tests.’’ 2004
Regulation SHO Adopting Release, 69 FR at 48010.
48 See http://www.sec.gov/about/economic/
shopilot091506/draft_reg_sho_pilot_report.pdf and
http://www.sec.gov/news/studies/2007/
regshopilot020607.pdf.
49 See Staff’s Summary Pilot Report at 40–47; see
also id. at 22–24 (discussing the selection of
securities included in the Pilot and the control
group).
50 In the 2004 Regulation SHO Adopting Release,
the Commission stated its expectation that data on
trading during the Pilot would be made available
to the public to encourage independent researchers
to study the Pilot. See 2004 Regulation SHO
Adopting Release, 69 FR at 48009, n.9. Accordingly,
nine SROs began publicly releasing transactional
short selling data on Jan. 3, 2005. The nine SROs
at that time were the Amex, ARCA, BSE, CHX,
NASD, Nasdaq, National Stock Exchange, NYSE
and Phlx. The SROs agreed to collect and make
publicly available trading data on each executed
short sale involving equity securities reported by
the SRO to a securities information processor
(‘‘SIP’’). The SROs published the information on a
monthly basis on their Internet Web sites.
51 See Staff’s Summary Pilot Report at 55–56.
52 On the day the Pilot went into effect, listed
Pilot securities underperformed listed control group
securities by approximately 24 basis points. The
Pilot and control group securities, however, had
similar returns over the first six months of the Pilot.
See Staff’s Summary Pilot Report at 8.

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resulted in an increase in quote
depths.53 Realized liquidity levels,
however, were unaffected by the
removal of such short sale price test
restrictions.54 The Pilot data also
provided evidence that the short sale
price test restrictions reduced the
volume of executed short sales to total
volume and, therefore, acted as a
constraint on short selling.55 The Staff
did not find, however, a significant
difference in short interest positions
between those securities subject to a
short sale price test versus those
securities that were not subject to such
a test during the Pilot.56
In addition, the Commission
encouraged outside researchers to
examine the Pilot data. In response to
this request, the Commission received
four completed studies (the ‘‘Academic
Studies’’) from outside researchers that
specifically examined the Pilot data.57
The Commission also held the
Regulation SHO 2006 Roundtable 58 that
focused on the empirical evidence
learned from the Pilot data (the Staff’s
Summary Pilot Report, Academic
Studies, and Regulation SHO 2006
Roundtable are referred to collectively
herein as the ‘‘Pilot Results’’).59 The
Pilot Results contained a variety of
observations, which the Commission
considered in determining whether or
not to propose removal of then-current
short sale price test restrictions and
subsequently whether or not to
eliminate such restrictions. For
example, one study concluded that
former Rule 10a–1 had little or no effect
on price efficiency.60 Another study
found no evidence that former Rule
53 See

Staff’s Summary Pilot Report at 55.
conclusion is based on the result that
changes in effective spreads were not economically
significant (less than a basis point) and that the
changes in the bid and ask depth appear not to
affect the transaction costs paid by investors.
Arguably, the changes in bid and ask depth
appeared to affect the intra-day volatility. However,
the Staff concluded that overall, the Pilot data did
not suggest a deleterious impact on market quality
or liquidity. See Staff’s Summary Pilot Report at
40–42, 55.
55 See Staff’s Summary Pilot Report at 35.
56 See id.
57 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, Aug.
14, 2006; Lynn Bai, 2008, The Uptick Rule of Short
Sale Regulation—Can it Alleviate Downward Price
Pressure from Negative Earnings Shocks? Rutgers
Business Law Journal 5:1–63.
58 See supra note 6.
59 See id.
60 See J. Julie Wu, Uptick Rule, short selling and
price efficiency, Aug. 14, 2006.
54 This

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10a–1 negatively impacted price
discovery.61
Generally, the Pilot Results supported
removal of the short sale price test
restrictions that were in effect at that
time.62 In addition to the Pilot Results,
thirteen other analyses by SEC staff and
various third party researchers were
conducted between 1963 and 2004
addressing price test restrictions.63
Among these were several studies that
evaluated short sale price tests during
times of significant market decline,
including the market break of May 28,
1962, the market decline of September
and October 1976, the market break of
October 19, 1987, and the Nasdaq
market decline of 2000–2001. The
results of these studies were mixed, but
generally the studies found that former
Rule 10a–1 did not prevent short sales
in extreme down markets and did limit
short selling in up markets, and the
studies provided additional support for
the removal of the permanent, marketwide short sale price test restrictions in
existence at that time.
In December 2006, the Commission
proposed to eliminate former Rule
10a–1 by removing restrictions on the
execution prices of short sales, as well
as prohibiting any SRO from having a
short sale price test.64 The Commission
received twenty-seven comment letters
in response to its proposal to eliminate
former Rule 10a–1 and prohibit any
SRO from having a short sale price test.
The comments in response to the
proposed amendments varied. Most
commenters (including individual
traders, an academic, broker-dealers,
SROs and trade associations) advocated
removing all short sale price test
restrictions.65 Generally, these
61 See Lynn Bai, 2008, The Uptick Rule of Short
Sale Regulation—Can it Alleviate Downward Price
Pressure from Negative Earnings Shocks? Rutgers
Business Law Journal 5:1–63.
62 See 2006 Price Test Elimination Proposing
Release, 71 FR at 75072–75075 (discussing the Pilot
Results).
63 See Staff’s Summary Pilot Report at 14, 17–22
(discussing the thirteen studies).
64 See 2006 Price Test Elimination Proposing
Release, 71 FR 75068.
65 See, e.g., letter from Howard Teitelman, CSO,
Trillium Trading, dated Feb. 6, 2007; letter from S.
Kevin An, Deputy General Counsel, E*TRADE,
dated Feb. 9, 2007 (‘‘E*TRADE (Feb. 2007)’’); letter
from Carl Giannone, dated Feb. 11, 2007 (‘‘Giannone
(Feb. 2007)’’); letter from David Schwarz, dated Feb.
12, 2007; letter from John G. Gaine, President,
Managed Funds Association, dated Feb. 12, 2007;
letter from Lisa M. Utasi, Chairman of the Board,
John C. Giesea, President and CEO, Security Traders
Association, dated Feb. 12, 2007 (‘‘STA (Feb.
2007)’’); letter from Gerard S. Citera, Executive
Director, U.S. Equities, UBS, dated Feb. 14, 2007
(‘‘UBS (Feb. 2007)’’); letter from Mary Yeager,
Assistant Secretary, NYSE Euronext, dated Feb. 14,
2007 (‘‘NYSE Euronext (Feb. 2007)’’); letter from
James J. Angel, PhD, CFA, Associate Professor of
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commenters believed that short sale
price test restrictions were no longer
necessary due to increased market
transparency and the existence of realtime regulatory surveillance that could
monitor for and detect any potential
short sale manipulation.66
Two commenters (both individual
investors) opposed the proposed
amendments, noting the need for short
sale price tests to prevent ‘‘bear raids.’’ 67
One commenter, although generally in
support of removing all short sale price
test restrictions, stated the belief that at
some level unrestricted short selling
should be collared.68 This commenter
supported having a 10% circuit breaker
to prevent panic in the event there is a
major market collapse.69 The New York
Stock Exchange (‘‘NYSE’’) also noted its
concern about unrestricted short selling
during periods of unusually rapid and
large market declines. The NYSE stated
that the effects of an unusually rapid
and large market decline could not be
measured or analyzed during the Pilot
because such decline did not occur
during the period studied.70
Effective July 3, 2007, the
Commission eliminated former Rule
10a–1 and added Rule 201 of Regulation
SHO, prohibiting any SRO from having
a short sale price test.71 The
Commission stated that it determined to
eliminate all short sale price test
restrictions after reviewing the
comments received in response to its
proposal to eliminate all short sale price
test restrictions, reviewing the Pilot
Results, and taking into account the
market developments that had occurred
in the securities industry since the
Commission adopted former Rule
10a–1 in 1938.72 In addition, the
Commission stated its belief that the
amendments would bring increased
uniformity to short sale regulation, level
the playing field for market participants,
Georgetown University, dated Feb. 14, 2007; letter
from Ira D. Hammerman, Senior Managing Director
and General Counsel, Securities Industry and
Financial Markets Association, dated Feb. 16, 2007;
see also Exchange Act Release No. 55970 (June 28,
2007), 72 FR 36348, 36350–36351 (July 3, 2007)
(‘‘2007 Price Test Adopting Release’’) (discussing
the comment letters).
66 See, e.g., letter from Giannone (Feb. 2007);
letter from E*TRADE (Feb. 2007); letter from STA
(Feb. 2007); letter from UBS (Feb. 2007); see also
2007 Price Test Adopting Release, 72 FR at 36350–
36351 (discussing the comment letters).
67 See, e.g., letter from Jim Ferguson, dated Dec.
19, 2006; letter from David Patch, dated Jan. 1,
2007; letter from David Patch, dated Jan. 12, 2007.
68 See letter from Giannone (Feb. 2007).
69 See id.
70 See letter from NYSE Euronext (Feb. 2007).
71 See 2007 Price Test Adopting Release, 72 FR
36348.
72 See id. at 36352.

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and remove an opportunity for
regulatory arbitrage.73
C. Proposal To Adopt a Short Sale Price
Test Restriction or Circuit Breaker
On April 8, 2009, following changes
in market conditions since the
elimination of former Rule 10a–1, we
proposed to re-examine and seek
comment on whether to impose price
test restrictions or circuit breaker
restrictions on short selling.74 In the
Proposal, we noted that market
volatility had recently increased
markedly in the U.S., as well as in every
major stock market around the world.75
We also noted that although we were
not aware of specific empirical evidence
that the elimination of short sale price
tests contributed to the increased
volatility in U.S. markets, many
members of the public associate the
removal of former Rule 10a–1 with such
volatility, including steep declines in
some securities’ prices, and loss of
investor confidence in our markets.76
Due to the market conditions with
which we were faced and the resulting
deterioration in investor confidence, we
stated in the Proposal that we believed
it was appropriate to propose amending
Regulation SHO to add a short sale price
test or a circuit breaker rule.77
In response to the Proposal and the
Re-Opening Release, we received over
4,300 unique comment letters.78 A
number of commenters stated that they
do not believe that we should reinstate
any form of short sale price test
restriction, whether in the form of a
short sale price test restriction or a
circuit breaker rule. For example, a
number of commenters noted a lack of
empirical evidence suggesting that such
restrictions would advance the
Commission’s goals of restoring investor
confidence and preventing short selling,
including potentially abusive or
manipulative short selling, from driving
down the market or being used as a tool
to exacerbate a declining market in a
security.79 In response to our specific
73 See

id.
Proposal, 74 FR 18042.
75 See id. at 18049.
76 See id.
77 See Proposal, 74 FR at 18047.
78 See http://www.sec.gov/comments/s7-08-09/
s70809.shtml.
79 See, e.g., letter from Daniel Mathisson,
Managing Director, Credit Suisse Securities (USA),
LLC, dated June 16, 2009 (‘‘Credit Suisse (June
2009)’’); letter from Citadel et al. (June 2009); letter
from Peter Kovac, Chief Operating Officer and
Financial and Operations Principal, EWT, LLC,
dated June 19, 2009 (‘‘EWT (June 2009)’’); letter from
Stephen Schuler, Managing Member, Daniel
Tierney, Managing Member, Global Electronic
Trading Company, dated June 19, 2009 (‘‘GETCO
(June 2009)’’); letter from SIFMA (June 2009); letter
74 See

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request for empirical data in the
Proposal, a number of commenters
submitted data or referenced studies in
support of their position that a short
sale price test restriction would not
have a positive impact on the market.80
from Kimberly Unger, Executive Director, Security
Traders Association of New York, Inc., dated June
18, 2009 (‘‘STANY (June 2009)’’); letter from Karrie
McMillan, General Counsel, Investment Company
Institute, dated June 19, 2009 (‘‘ICI (June 2009)’’);
letter from Megan A. Flaherty, Chief Legal Counsel,
Wolverine Trading, LLC, dated June 19, 2009
(‘‘Wolverine’’); letter from Eric Swanson, SVP and
General Counsel, BATS Exchange, Inc., dated Sept.
21, 2009 (‘‘BATS (Sept. 2009)’’); letter from Michael
R. Trocchio, Esq. on behalf of Bingham McCutchen,
LLP, dated Sept. 30, 2009 (‘‘Bingham McCutchen’’);
letter from James S. Chanos, Chairman, Coalition of
Private Investment Companies, dated Sept. 21, 2009
(‘‘CPIC (Sept. 2009)’’) (citing letter from Credit
Suisse letter (June 2009)); letter from Luke
Fichthorn, Managing Member, John Fichthorn,
Managing Member, Dialectic Capital Management,
LLC, dated Sept. 21, 2009 (‘‘Dialectic Capital (Sept.
2009)’’); letter from Eric W. Hess, General Counsel,
Direct Edge Holdings LLC, dated Sept. 21, 2009
(‘‘Direct Edge (Sept. 2009)’’); letter from Paul M.
Russo, Managing Director and Head of U.S. Equity
Trading, Goldman, Sachs & Co., dated Sept. 21,
2009 (‘‘Goldman Sachs (Sept. 2009)’’); letter from
Suhas Daftuar, Managing Director, Hudson River
Trading LLC, dated Sept. 21, 2009 (‘‘Hudson River
Trading’’); letter from Leonard J. Amoruso, General
Counsel, Knight Capital Group, Inc., dated Sept. 22,
2009 (‘‘Knight Capital (Sept. 2009)’’); letter from
Richard Chase, Managing Director and General
Counsel, RBC Capital Markets Corporation, dated
Sept. 21, 2009 (‘‘RBC (Sept. 2009)’’); letter from Peter
J. Driscoll, Chairman, John C. Giesea, President and
CEO, Security Traders Association, dated Sept. 21,
2009 (‘‘STA (Sept. 2009)’’); letter from Barbara Palk,
President, TD Asset Management, Inc., dated Sept.
14, 2009 (‘‘TD Asset Management’’); letter from
George U. Sauter, Managing Director and Chief
Investment Officer, The Vanguard Group, Inc.,
dated Sept. 21, 2009 (‘‘Vanguard (Sept. 2009)’’);
letter from Chris Concannon, Virtu Financial, LLC,
dated Sept. 21, 2009 (‘‘Virtu Financial’’); letter from
Stuart J. Kaswell, Executive Vice President,
Managing Director and General Counsel, Managed
Funds Association, dated Oct. 1, 2009 (‘‘MFA (Oct.
2009)’’); letter from Jeffrey S. Davis, Vice President
and Deputy General Counsel, The Nasdaq OMX
Group, Inc., dated Oct. 7, 2009 (‘‘Nasdaq OMX
Group (Oct. 2009)’’).
80 See, e.g., letter from Michael D. Lipkin, Adjunct
Assistant Professor, Columbia University, dated
Apr. 9, 2009 (‘‘Prof. Lipkin’’); letter from Eric
Swanson, SVP and General Counsel, BATS
Exchange, Inc., dated May 14, 2009 (‘‘BATS (May
2009)’’); Autore, Billingsley, and Kovacs, Short Sale
Constraints, Dispersion of Opinion, and Market
Quality: Evidence from the Short Sale Ban on U.S.
Financial Stocks (June 19, 2009); letter from
William J. Brodsky, Chairman and CEO, Edward J.
Joyce, President and COO, The Chicago Board
Options Exchange, Inc., dated June 19, 2009 (‘‘CBOE
(June 2009)’’); letter from James S. Chanos,
Chairman, Coalition of Private Investment
Companies, dated June 19, 2009 (‘‘CPIC (June
2009)’’); letter from STANY (June 2009); letter from
SIFMA (June 2009); letter from MFA (June 2009);
letter from ICI (June 2009); letter from Joan
Hinchman, Executive Director, President and CEO,
National Society of Compliance Professionals Inc.,
dated June 19, 2009 (‘‘NSCP’’); letter from Mary
Richardson, Director of Regulatory and Tax
Department, Alternative Investment Management
Association, dated June 19, 2009 (‘‘AIMA’’); letter
from Credit Suisse (June 2009); letter from Rory
O’Kane, President, TD Professional Execution, Inc,
dated June 19, 2009 (‘‘T.D. Pro Ex’’); letter from

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In addition, several commenters stated
they do not believe that short selling
exacerbated market declines during the
Fall 2008 financial crisis, and suggested
that long sale activity was a more
substantial factor in those declines.81
Other commenters stated that short
selling is a small segment of the overall
equity marketplace and active short
sellers are an even smaller group of
participants and, therefore, represented
a de minimus amount of the selling
pressure that the markets experienced
recently.82 As support for their
arguments, commenters referenced,
among other things, two recent studies
by the Staff that were also discussed in
the Proposal.83 In these studies, the Staff
analyzed the impact that a short sale
price test might have had during a
thirteen day period in September
2008,84 as well as whether and the
extent to which short selling and long
selling exerted downward price
pressure during a volatile period in
early September 2008.85 The first of
these studies noted that, although its
data was limited to historical trade and
quote data from a period when no short
sale price test was in place and the
Citadel et al. (June 2009); letter from William
Connell, President and CEO, Allston Trading, LLC,
dated June 18, 2009 (‘‘Allston Trading (June 2009)’’);
letter from Wolverine; letter from Roy J. Katzovicz,
Chief Legal Officer, Pershing Square Capital
Management L.P., dated June 19, 2009 (‘‘Pershing
Square’’); letter from GETCO (June 2009); letter from
Luke Fichthorn, Managing Member, John Fichthorn,
Managing Member, Dialectic Capital Management,
LLC, dated June 18, 2009 (‘‘Dialectic Capital (June
2009)’’); memorandum of a meeting between
representatives of Credit Suisse and the Office of
Commissioner Aguilar, dated July 2, 2009, and
written materials submitted at the meeting (‘‘Credit
Suisse (July 2009)’’); letter from CPIC (Sept. 2009);
letter from STA (Sept. 2009); letter from Ira D.
Hammerman, Senior Managing Director and
General Counsel, Securities Industry and Financial
Markets Association, dated Sept. 21, 2009 (‘‘SIFMA
(Sept. 2009)’’); letter from TD Asset Management;
letter from Goldman Sachs (Sept. 2009); letter from
Peter Kovac, Chief Operating Officer and Financial
and Operations Principal, EWT, LLC, dated Sept.
21, 2009 (‘‘EWT (Sept. 2009)’’); letter from Charles
M. Jones, PhD, Robert W. Lear Professor of Finance
and Economics, Columbia Business School, dated
Sept. 21, 2009 (‘‘Prof. Jones’’). See also infra Section
II.D. (discussing the data and studies submitted
and/or referenced by commenters).
81 See, e.g., letter from MFA (June 2009); letter
from STANY (June 2009); letter from Credit Suisse
(June 2009); letter from STA (Sept. 2009) (noting
that ‘‘[t]he STA believes that long sellers
deleveraging and anticipating withdrawals and
redemptions were largely responsible for the
declines’’).
82 See, e.g., letter from STA (Sept. 2009).
83 See Proposal, 74 FR at 18049.
84 See Staff, Analysis of a short sale price test
using intraday quote and trade data, Dec. 17, 2008
(‘‘Staff Analysis (Dec. 17, 2008)’’) at http://
www.sec.gov/comments/s7-08-09/s70809-368.pdf.
85 See Staff, Analysis of Short Selling Activity
during the First Weeks of September, 2008, Dec. 16,
2008 (‘‘Staff Analysis (Dec. 16, 2008)’’) at http://
www.sec.gov/comments/s7-08-09/s70809-369.pdf.

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shape of order book and trading
sequences might have differed had a
short sale price test been in place, a
short sale price test would likely have
been most restrictive during periods of
low volatility, with greatest impact on
short selling in lower priced and more
active stocks.86 The second study found
that during periods of price declines,
the selling pressure was more intense
from long sellers than from short sellers.
It also found that, on average, short sale
volume as a fraction of total volume was
highest during periods of positive
returns, noting, however, that it was
also possible that there were instances
in which short selling activity peaked
during periods of extreme negative
returns.87
Some commenters stated that the
recent market stability suggests that
investor confidence has been restored
and, therefore, short sale price test
restrictions are not necessary.88 Several
commenters submitted data or
referenced studies showing that investor
confidence has recently improved.89 A
number of commenters expressed
concern that any short sale price test
restriction would carry with it the
unintended consequences of reduced
liquidity and widened bid-ask spreads,
resulting in less efficient pricing in the
securities markets.90 One commenter
stated its belief that because short sale
price test restrictions would weaken and
erode benefits of short selling such as
86 See

Staff Analysis (Dec. 17, 2008).
Staff Analysis (Dec. 16, 2008).
88 See, e.g., letter from Renee M. Toth, President,
National Association of Active Investment
Managers, dated June 12, 2009 (‘‘NAAIM’’); letter
from NSCP; letter from RBC (Sept. 2009).
89 See, e.g., memorandum of meeting between
representative of TD Ameritrade and the Office of
Commissioner Aguilar, dated June 1, 2009, and
written materials submitted at the meeting (‘‘TD
Ameritrade’’); letter from RBC (Sept. 2009); letter
from EWT (Sept. 2009). In addition, one commenter
submitted preliminary data on the relationship
between short selling and investor confidence and
stated that ‘‘[w]hile it is too early to draw
conclusions from this data, the evidence presented
below does not suggest that there is a negative
relationship between short selling activity and
investor confidence.’’ See letter from Ingrid M.
Werner, PhD, Martin and Andrew Murrer Professor
of Finance, Fisher College of Business, The Ohio
State University, dated June 19, 2009 (‘‘Prof.
Werner’’). See also infra Section II.D. (discussing
data submitted and/or referenced by commenters
regarding investor confidence).
90 See e.g., letter from Jeffrey S. Wecker, CEO,
Lime Brokerage LLC, dated June 19, 2009 (‘‘Lime
Brokerage (June 2009)’’) (noting that ‘‘[w]e believe
there would be significant unintended
consequences of the proposed restrictions,
including reduction in overall market liquidity and
widening of spreads * * *’’); letter from Leonard J.
Amoruso, General Counsel, Knight Capital Group,
Inc., dated June 18, 2009 (‘‘Knight Capital (June
2009)’’); letter from MFA (June 2009); see also infra
Section II.D. (discussing empirical data regarding
the potential impact of short sale price test
restrictions).
87 See

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liquidity, price discovery and the ability
to manage risk, they would also weaken
and erode investor confidence.91 Many
commenters stated that the
reinstatement of any short sale price test
restriction would impose significant
costs on market participants and lead to
increased transaction costs for
investors.92 In addition, several
commenters noted that while the
Commission is rightly trying to increase
investor confidence, current short sale
regulations, including Rule 204 of
Regulation SHO and Exchange Act Rule
10b–21, are sufficient to address the
public’s concerns about potentially
abusive short selling.93
A significant number of commenters,
however, continue to urge the
Commission to reinstate some form of
short sale price test restriction because
these commenters believe that such a
measure will help to restore investor
confidence.94 One commenter stated
91 See letter from AIMA; see also letter from CPIC
(June 2009) (stating ‘‘investor confidence will not be
served in the long term by the adoption of rules that
the Commission itself has acknowledged have no
sound empirical basis and may decrease market
efficiency, limit price discovery, provide less
protection against upward stock price
manipulations, increase trading costs, reduce
liquidity and impose other potential costs on
investors’’).
92 See e.g., letter from Scott C. Goebel, Senior Vice
President and General Counsel, Fidelity
Investments, dated June 22, 2009 (‘‘Fidelity’’); letter
from MFA (June 2009); letter from Credit Suisse
(June 2009); letter from EWT (June 2009); letter
from SIFMA (June 2009); letter from Wolverine;
letter from T.D. Pro Ex; letter from ICI (June 2009);
letter from Simon M. Lorne, Chief Legal Officer,
Martin Z. Schwartz, Chief Compliance Officer,
Millennium Management LLC, dated June 19, 2009
(‘‘Millennium’’); letter from Citadel et al. (June
2009).
93 See e.g., letter from Tim Belloto, dated May 5,
2009; letter from MFA (June 2009); letter from
SIFMA (June 2009); letter from Pershing Square;
letter from Paul M. Russo, Managing Director and
Head of U.S. Equity Trading, Goldman, Sachs & Co.,
dated June 19, 2009 (‘‘Goldman Sachs (June 2009)’’);
letter from CBOE (June 2009); letter from Allston
Trading (June 2009); letter from STANY (June
2009); letter from Citadel et al. (June 2009); letter
from STA (Sept. 2009); letter from BATS (Sept.
2009).
94 See, e.g., letter from Herbert C. Roubidoux,
dated May 4, 2009; letter from William K. Barnard,
CEO, Equity Insight, Inc., dated May 4, 2009
(‘‘Equity Insight’’); letter from Henry J. Judd, CEO,
Alethium Corp., dated May 6, 2009; letter from John
Sook, dated May 6, 2009; letter from Boris
Finkelstein, dated May 7, 2009; letter from John E.
Detraz, dated May 8, 2009; letter from Joseph
Giancola, dated May 8, 2009; letter from John W.
Kozak, Chief Financial Officer, Park National
Corporation, dated May 19, 2009 (‘‘Park National’’);
letter from Robert S. Miloszewski, dated June 1,
2009; letter from Dr. George R. Arends, dated June
1, 2009; letter from Kent Hendrickson, dated June
4, 2009; letter from Dennis Nixon, Chairman and
Chief Executive Officer, International Bancshares
Corporation, dated June 9, 2009 (‘‘IBC’’); letter from
Brian P. Hendey, dated June 9, 2009; letter from
Catherine Mapen, dated June 15, 2009; letter from
Jeffrey T. Brown, Senior Vice President, Office of
Legislative and Regulatory Affairs, Charles Schwab

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that ‘‘we believe that a price test could
have a real impact on investors’ and
issuers’ confidence in the equities
market.’’ 95 Some commenters have
stated that a lack of price test
restrictions makes them question
whether they should invest in the stock
market.96 Other commenters have stated
& Co., Inc., dated June 18, 2009 (‘‘Schwab’’); letter
from Michael Gitlin, Head of Global Trading, David
Oestreicher, Chief Legal Counsel, Christopher P.
Hayes, Sr. Legal Counsel, T. Rowe Price Associates,
Inc., dated June 18, 2009 (‘‘T. Rowe Price (June
2009)’’); letter from Michael R. McAlevey, Vice
President and Chief Corporate, Securities and
Finance Counsel, General Electric Company, dated
June 18, 2009 (‘‘GE’’); letter from Janet M. Kissane,
Senior Vice President, Legal and Corporate
Secretary, NYSE Euronext, dated June 19, 2009
(‘‘NYSE Euronext (June 2009)’’); letter from Ronald
C. Long, Director, Regulatory Affairs, Wells Fargo
Advisors, dated June 15, 2009 (‘‘Wells Fargo (June
2009)’’). In addition, prior to the Proposal, a number
of commenters stated that they believe that
reinstatement of some form of price test restriction
would help restore investor confidence. See, e.g.,
letter from Richard F. Vulpi, dated Sept. 24, 2008;
letter from Maureen Christensen, dated Oct. 9,
2008; letter from Peter B. Eckle, CEO Associate
Arrangements, dated Oct. 11, 2008; letter from Joe
Garrett, dated Oct. 15, 2008; letter from Jenna L.
Spurrier, dated Oct. 24, 2008; letter from Scotland
Settle, dated Oct. 27, 2008; letter from Patrick
McQuaid, dated Oct. 29, 2008; letter from Lynn
Miller, dated Nov. 13, 2008; letter from David
Sheridan, dated Nov. 18, 2008; letter from W.
Romain Spell, dated Nov. 19, 2008; letter from Phil
Mason, dated Nov. 19, 2008; letter from Jeff Brower,
dated Nov. 20, 2008; letter from Mike Abraham,
dated Nov. 20, 2008; letter from Marvin Dingott,
dated Nov. 20, 2008; letter from Josh Dodson, dated
Nov. 21, 2008; letter from J. Geddes Parsons, dated
Nov. 21, 2008; letter from Charles Rudisill, dated
Nov. 21, 2008; letter from Mike Ryan, dated Nov.
21, 2008; letter from David B. Campbell and Natalie
H. Win, dated Nov. 25, 2008; letter from Edward L.
Yingling, American Bankers Association, dated Dec.
16, 2008; letter from Robert A. Lee, dated Feb. 10,
2009; letter from Robert Levine, dated Feb. 17,
2009; letter from Karl Findorff, dated Feb. 19, 2009;
letter from Robert Lounsbury, dated Feb. 25, 2009;
letter from Dr. Bill Daniel, dated Feb. 26, 2009;
letter from Glenn A. Webster, dated Feb. 26, 2009;
letter from Arleen Golden, dated Mar. 2, 2009; letter
from Doug Cameron, dated Mar. 2, 2009; letter from
Mike Rogers, dated Mar. 3, 2009; letter from George
A. Flagg, dated Mar. 3, 2009; letter from Kevin
Girard, dated Mar. 4, 2009; letter from Briggs
Diuguid, dated Mar. 5, 2009 (‘‘Briggs Diuguid’’);
letter from Bob Young, dated Mar. 5, 2009; letter
from Troy Williams, dated Mar. 6, 2009; letter from
Paul Kent, dated Mar. 7, 2009; letter from Chris
Baratta, dated Mar. 9, 2009 (‘‘Chris Baratta’’); see
also letter from Professor Constantine Katsoris,
Fordham University School of Law, dated Mar. 4,
2009 (stating that elimination of former Rule
10a–1 ‘‘hardly generates confidence on the part of
a true investor who is entrusting his or her life’s
savings * * * to the current market’’).
95 Letter from NYSE Euronext (June 2009).
96 See, e.g., letter from Phil Koepke, dated May 5,
2009; letter from Joe Wells, dated May 29, 2009;
letter from Michael Anderson, dated June 1, 2009
(noting ‘‘[i]f the SEC fails to act in the best interest
of all investors, then peopel (sic) like myself, will
look at other investment alternatives than the Stock
Market.’’); letter from Anton Kleinschmidt, dated
June 2, 2009 (noting that he ‘‘will not return to the
equity markets’’ until he is ‘‘confident that the wide
range of market predators such as unregulated short
sellers are being effectively controlled’’). In
addition, prior to (and as cited in) the Proposal,

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that they believe a short sale price test
will aid small investors.97 In addition,
some commenters have suggested that
restricting the prices at which securities
may be sold short will help address
steep declines in securities’ prices.98
commenters expressed similar concerns regarding a
lack of price test restrictions. See, e.g., letter from
Jeff Boyd, dated Feb. 10, 2009; letter from Tim
Zanni, dated Feb. 19, 2009.
97 See, e.g., letter from Michael Anderson, dated
June 1, 2009; letter from Carl H. Van Hoozier, Jr.,
dated June 3, 2009; letter from Kevin Adcock, dated
June 3, 2009 (noting that ‘‘[w]ithout this
reinstatement the market will never be judged as
fair, balanced or worth the unfair risks created by
the SEC removing a tried and tested 70+ year old
rule’’); letter from Fran Mazenko, dated June 4,
2009; letter from Daniel H. Owings, dated June 4,
2009 (noting ‘‘the elimination of the uptick rule
* * * prevented the small investor from equal
treatment in the market’’); letter from Kathleen
Jardine, dated June 4, 2009. In addition, prior to
(and as cited in) the Proposal, commenters
expressed similar statements regarding short sale
price tests aiding small investors. See, e.g., letter
from Chris Baratta (noting that while price test
restrictions could not reasonably be expected to
prevent market downturns, they would, in his
opinion, ‘‘give the little investor a chance’’ in the
current conditions); see also letter from Paul D.
Mendelsohn, President, Windham Financial
Services, Inc., dated Mar. 6, 2009 (stating that he
believes former Rule 10a–1 ‘‘protected’’ the markets
and that ‘‘suspension of the uptick rule has opened
a security hole into our financial system’’); letter
from Bob Young, dated Mar. 5, 2009 (suggesting
that reinstatement of the uptick rule ‘‘will not be a
quick or total fix, but it will help’’).
98 See, e.g., letter from Grant D. Wieler, dated May
8, 2009; letter from John J. Piccitto, Managing
Director, John Piccitto Consulting Ltd., dated May
7, 2009 (noting that ‘‘[b]ecause the decline of the
value of a stock can be very steep and very fast
indeed, the ensuing ‘feeding frenzy’ * * * should
be addressed by regulators. Slowing the cascade of
short selling would create both the fact and the
appearance of regulatory control * * *’’); letter
from Mucho Balka, Esq., dated May 30, 2009; letter
from George A. Mitchell, dated June 1, 2009; letter
from Jason Sturm, dated June 1, 2009; letter from
Erin Chieffi, dated June 2, 2009; letter from Paul
Rivett, Vice President and Chief Legal Officer,
Fairfax Financial Holdings Ltd., dated June 17, 2009
(‘‘Fairfax Financial’’); letter from GE; letter from
Michael Lamanna, dated June 17, 2009; letter from
Stanyarne Burrows, dated June 17, 2009; letter from
William R. Harker, Senior Vice President, General
Counsel and Corporate Secretary, Sears Holdings
Corporation, dated June 19, 2009 (‘‘Sears’’); letter
from Glen Shipway, dated Sept. 21, 2009 (‘‘Glen
Shipway (Sept. 2009)’’). In addition, the American
Bankers Association noted that its members, ‘‘both
large and small, have told us that short sellers were
taking advantage of the uptick rule’s absence; that
their stock prices were experiencing excessive
downward pressure unrelated to actual conditions
of the firm. * * *’’ and that its members expressed
‘‘that measures needed to be taken, including
reinstating the uptick rule in some format, to reduce
the avenues for abusive trading practices and to
restore investor confidence.’’ Letter from Sarah A.
Miller, Senior Vice President, Center for Securities,
Trust and Investments, American Bankers
Association, dated July 1, 2009 (‘‘Amer. Bankers
Assoc.’’); see also letter from Paul Tudor Jones II,
Tudor Investment Corporation, dated Oct. 10, 2008
(stating that he believes that one way to
‘‘immediately stem the decline’’ in the stock market
would be to reinstate the uptick rule); letter from
James F. Kane, Jr., dated Feb. 6, 2009 (stating that
he believes that reinstating ‘‘the Up-tick Rule will

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Some Members of Congress and
representatives of one SRO have also
continued to express support for
reinstatement of price test restrictions.99
One such SRO representative noted that
over 95% of its issuers who participated
in a survey believed that the market
would function better with one of the
proposed short sale price test
restrictions.100
As we noted in the Proposal, some
researchers have also indicated that they
believe that they have collected data
that establishes a possible association
between the recent market downturn
and the elimination of former Rule 10a–
go a long way in preventing speculators from
ganging up on a particular stock and forcing it
down’’); letter from Briggs Diuguid (stating that
while short sellers ‘‘make efficient markets,’’ he is
nonetheless concerned that short selling may be a
tool of manipulators when short sales are ‘‘piled on’’
a particular company).
99 See e.g., letter to Mary Schapiro, Chairman,
from Kirsten Gillibrand, United States Senator,
dated June 5, 2009; joint statement of Ted Kaufman,
United States Senator, and Johnny Isakson, United
States Senator, dated Sept. 29, 2009. In addition,
prior to (and as cited in) the Proposal, several
current and former Members of Congress have
called for reinstatement of short sale price test
restrictions. See, e.g., letter to Christopher Cox,
Chairman, from Hillary Rodham Clinton, former
United States Senator, dated Sept. 17, 2008; letter
to Christopher Cox, Chairman, from Bill Sali,
Member of Congress, dated Oct. 1, 2008; letter to
Christopher Cox, Chairman, from Peter T. King,
Member of Congress, dated Oct. 7, 2008; letter to
Mary Schapiro, Chairman, from Gary L. Ackerman,
Member of Congress, dated Jan. 27, 2009; letter to
Mary Schapiro, Chairman, from Rep. Barney Frank
and other Members of the House Financial Services
Committee, dated Mar. 11, 2009; Proposal, 74 FR at
18046–18047 (noting statements by a Member of
Congress and a former U.S. Senator asking the
Commission to reinstate former Rule 10a–1 or some
other form of short sale price test restriction). See
also letter to Mary Schapiro, Chairman, from
Carolyn Maloney, Member of Congress and
Chairman of the Joint Economic Committee, dated
Mar. 23, 2009. We note, however, that other
Members of Congress have expressed concerns
regarding our adopting a short sale price test
restriction. See, e.g., letter to Mary Schapiro,
Chairman, from Michael Crapo, United States
Senator, Jim Bunning, United States Senator, David
Vitter, United States Senator, Michael Enzi, United
States Senator, and Mel Martinez, former United
States Senator, dated June 17, 2009.
With respect to comments by SRO
representatives, see, e.g., letter from Janet M.
Kissane, Senior Vice President, Legal and Corporate
Secretary, NYSE Euronext, dated Sept. 21, 2009
(‘‘NYSE Euronext (Sept. 2009)’’); letter from NYSE
Euronext (June 2009); statement of Larry Leibowitz,
Group Executive Vice President and Head of Global
Technology and US Executions, NYSE Euronext,
dated May 5, 2009 (‘‘NYSE Euronext (May 2009)’’).
In addition, prior to (and as cited in) the Proposal,
one senior SRO representative endorsed the
reinstatement of a short sale price test restriction.
See Edgar Ortega, Short-Sale Rule Undermined as
Bernanke Backs Review, Bloomberg News Service,
Mar. 4, 2009 (noting comments by Duncan
Niederauer, CEO, The NYSE Euronext Group, Inc.,
that imposing a measure such as former Rule
10a–1, ‘‘would go a long way to adding confidence’’
in our markets).
100 See letter from NYSE Euronext (June 2009).

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1.101 Commenters also submitted data or
referenced studies they believe support
the contention that a price test
restriction would have a positive impact
on the market.102 In addition, there have
been reports of significant short selling
in connection with the use of credit
default swaps (‘‘CDS’’), particularly in
the securities of significant financial
institutions,103 and it has been
suggested that the interaction between
and amplifying effects of CDS and short
selling may be a reason to reinstate a
short sale price test.104
Further, as we stated in the Proposal,
questions and comments have been
raised about the role that short selling,
and in particular potentially abusive
short selling, may have had in
connection with the recent price
fluctuations and disruption in our
markets.105 As such, prior to issuing the
Proposal, in the latter part of 2008, we
took a number of other short sale-related
actions aimed at addressing these
concerns. For example, due to our
concerns that false rumors spread by
short sellers regarding financial
institutions of significance in the U.S.
may have fueled market volatility in the
securities of some of these institutions,
on July 15, 2008, we issued an
emergency order (‘‘July Emergency
Order’’) 106 pursuant to section 12(k)(2)
101 See Proposal, 74 FR at 18047, n.64; see also
letter from Yavni Bar-Yam, New England Complex
Systems Institute, dated June 23, 2009 (‘‘Yavni BarYam’’); Dion Harmon and Yaneer Bar-Yam, April
2009, Technical Report on SEC Uptick Rule
Proposals, New England Complex Systems
Institute.
102 See, e.g., letter from NYSE Euronext (June
2009); letter from Schwab; letter from Richard J.
Adler, Managing Director, European Investors, Inc.,
dated June 19, 2009 (‘‘European Investors (June
2009)’’); letter from Richard J. Adler, Managing
Director, European Investors, dated Sept. 21, 2009
(‘‘European Investors (Sept. 2009)’’); letter from
William Furber, High Street Advisors, L.P., dated
June 18, 2009 (‘‘High Street Advisors’’); letter from
Park National; letter from IBC; letter from Daniel P.
Amos, Chairman and CEO, Aflac Incorporated,
dated June 23, 2009 (‘‘Aflac’’); letter from J. Austin
Murphy, PhD, Professor of Finance at Oakland
University, School of Business Administration,
dated Apr. 9, 2009 (‘‘Prof. Murphy’’); letter from
Martin B. Napor, dated June 17, 2009 (‘‘Martin
Napor’’); see also infra Section II.D. (discussing
empirical data submitted in response to the
Proposal and the Re-Opening Release).
103 See Proposal, 74 FR at 18047, n.65 (referring
to an article by George Soros, The Game Changer,
available at http://www.ft.com/cms/s/0/49b1654aed60-11dd-bd60-0000779fd2ac.html). Similarly, in
response to the Proposal, commenters raised
concerns about CDS and short selling. See, e.g.,
letter from Edward D. Herlihy, Theodore A. Levine,
Wachtell, Lipton, Rosen & Katz, dated June 17, 2009
(‘‘Wachtell’’); letter from GE.
104 See Proposal, 74 FR at 18047, n.66 and
accompanying text.
105 See Proposal, 74 FR at 18047–18048.
106 See Exchange Act Release No. 58166 (July 15,
2008), 73 FR 42379 (July 21, 2008).

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of the Exchange Act 107 which imposed
borrowing and delivery requirements on
short sales of the equity securities of
certain financial institutions. We noted
in the July Emergency Order that false
rumors can lead to a loss of investor
confidence. Such loss of investor
confidence can lead to panic selling,
which may be further exacerbated by
‘‘naked’’ short selling. As a result, the
prices of securities may artificially and
unnecessarily decline well below the
price level that would have resulted
from the normal price discovery
process.108 If significant financial
institutions are involved, this chain of
events can threaten disruption of our
markets.109
Due to our concerns regarding the
impact of short selling on the prices of
financial institution securities, on
September 18, 2008, we issued another
emergency order prohibiting short
selling in the publicly traded securities
of certain financial institutions.110 Our
concerns, however, were not limited to
financial institutions, given the
importance of confidence in our markets
and the rapid and steep declines in the
prices of securities that generally we
were seeing at that time.111 Such rapid
and steep price declines can give rise to
questions about the underlying financial
condition of an institution, which in
turn can erode confidence, even without
an underlying fundamental basis.112
This erosion of confidence can impair
the liquidity and ultimate viability of an
institution, with potentially broad
market consequences.113
These concerns resulted in our
issuance on September 17, 2008 of an
emergency order under Section 12(k)(2)
of the Exchange Act, in part targeting
short selling in all equity securities.114
Pursuant to the September Emergency
Order we imposed enhanced delivery
requirements on sales of all equity
securities under Rule 204T of
Regulation SHO.115
107 15

U.S.C. 78l(k)(2).
July Emergency Order, 73 FR 42379.
109 See id.
110 See Exchange Act Release No. 58592 (Sept. 18,
2008), 73 FR 55169 (Sept. 24, 2008) (‘‘Short Sale
Ban Emergency Order’’).
111 See, e.g., July Emergency Order, 73 FR 42379;
Short Sale Ban Emergency Order 73 FR 55169;
Exchange Act Release No. 58572 (Sept. 17, 2008),
73 FR 54875 (Sept. 23, 2008) (‘‘September
Emergency Order’’).
112 See Short Sale Ban Emergency Order, 73 FR
55169; September Emergency Order, 73 FR 54875.
113 See id.
114 See September Emergency Order, 73 FR
54875.
115 See id. In addition, we issued an emergency
order, and subsequent Interim Final Temporary
Rule, Rule 10a–3T, to require disclosure of short
sales and short positions in certain securities. The
temporary rule expired on August 1, 2009. See
108 See

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Rule 204T, among other things,
required participants of a registered
clearing agency to close-out fails to
deliver resulting from short sales of any
equity security by purchasing or
borrowing the security by no later than
the beginning of trading on the day after
the fail to deliver occurred. We adopted
the provisions of the September
Emergency Order as an Interim Final
Temporary Rule in October 2008
because of our continued concern about
the potentially negative market impact
of large and persistent fails to deliver.116
Our adoption of Interim Final
Temporary Rule 204T followed a series
of other steps aimed at reducing such
fails to deliver and addressing
potentially abusive short selling. These
steps included eliminating the
‘‘grandfather’’ and options market maker
exceptions to Regulation SHO’s closeout requirement,117 and proposing and
subsequently adopting a ‘‘naked’’ short
selling anti-fraud rule, Rule 10b–21.118
Although we recognize that fails to
deliver can occur for legitimate reasons,
we remained concerned about the
impact of large and persistent fails to
deliver on market confidence. Results
from Staff analysis indicate that our
actions to further reduce fails to deliver
are having their intended effect. For
example, these results indicate that fails
to deliver in all equity securities have
declined significantly since the
adoption of Interim Final Temporary
Rule 204T.119 To help further our goal
Exchange Act Release No 58591 (Sept. 18, 2008) 73
FR 55175 (Sept. 24, 2008); Exchange Act Release
No. 58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 17,
2008).
116 See Exchange Act Release No. 58773 (Oct. 14,
2008), 73 FR 61706 (Oct. 17, 2008) (‘‘Interim Final
Temporary Rule 204T’’).
117 See Exchange Act Release No. 56212 (Aug. 7,
2007), 72 FR 45544 (Aug. 14, 2007) (eliminating the
‘‘grandfather’’ exception to Regulation SHO’s closeout requirement); September Emergency Order, 73
FR 54875 (eliminating the options market maker
exception to Regulation SHO’s close-out
requirement). Following the issuance of the
September Emergency Order, we adopted
amendments making permanent the elimination of
the options market maker exception. See Exchange
Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690
(Oct. 17, 2008) (‘‘Options Market Maker Elimination
Release’’).
118 See Exchange Act Release No. 58774 (Oct. 14,
2008), 73 FR 61666 (Oct. 17, 2008); September
Emergency Order, 73 FR 54875; Exchange Act
Release No. 57511 (Mar. 17, 2008), 73 FR 15376
(Mar. 21, 2008).
119 See Memorandum from the Staff Re: Impact of
Recent SHO Rule Changes on Fails to Deliver, Nov.
4, 2009 at http://www.sec.gov/spotlight/shortsales/
oeamemo110409.pdf (stating, among other things,
that the average daily number of aggregate fails to
deliver for all securities decreased from 2.21 billion
to 0.25 billion for a total decline of 88.5% when
comparing a pre-Rule to post-Rule period);
Memorandum from the Staff Re: Impact of Recent
SHO Rule Changes on Fails to Deliver, Nov. 26,
2008 at http://www.sec.gov/comments/s7-30-08/

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of reducing fails to deliver by
maintaining the reductions in fails to
deliver achieved by the adoption of
Interim Final Temporary Rule 204T, as
well as other actions taken by the
Commission, we adopted the substance
of Interim Final Temporary Rule 204T
as a permanent rule, Rule 204, in July
2009.120
Despite the significant decline in fails
to deliver and the more recent stability
in the securities markets, concerns
persist about rapid and steep price
declines in securities and erosion of
investor confidence in our markets.
Thus, we continued to examine whether
there are other actions that the
Commission should take, including reevaluating whether a short sale price
test should be reintroduced or a circuit
breaker rule should be imposed.
As we stated in the Proposal, when
we eliminated all short sale price test
restrictions in July 2007, we
acknowledged that circumstances may
develop that could warrant relief from
the prohibition in Rule 201 of
Regulation SHO for a short sale price
test, including a short sale price test of
an SRO, to apply to short sales in any
security.121 Thus, in determining
whether or not to propose, and now
adopt, a short sale price test rule or
circuit breaker rule, we have considered
the recent turmoil in the financial sector
and steep declines and extreme
volatility in securities prices.122
As discussed in this adopting release,
we remain mindful that short selling
provides benefits to the market. For
example, legitimate short selling can
play an important and constructive
functional role in the markets, providing
liquidity and price efficiency. Short
sellers also play an important role in
correcting upward stock price
manipulation.123 Because short sale
price test restrictions may lessen some
of these benefits, it is important that any
short sale price test regulation is
designed to limit any potentially
unnecessary impact on legitimate short
selling.
Thus, as discussed in detail below, we
are adopting in Rule 201 a targeted short
s73008–37.pdf; Memorandum from the Staff Re:
Impact of Recent SHO Rule Changes on Fails to
Deliver, Mar. 20, 2009 at http://www.sec.gov/
comments/s7-30-08/s73008-107.pdf.
120 See Exchange Act Release No. 60388 (July 27,
2009), 74 FR 38266 (July 31, 2009) (‘‘Rule 204
Adopting Release’’). Rule 204 contained some
modifications to address commenters’ concerns. See
id.
121 See Proposal, 74 FR at 18048; see also 2007
Price Test Adopting Release, 72 FR at 36348.
122 See, e.g., Proposal, 74 FR at 18048 (noting the
turbulence in the securities markets at the time we
issued the Proposal and during the eighteen months
prior thereto).
123 See, e.g., Staff’s Summary Pilot Report at 9.

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11241

sale price test restriction that will be
based on the current national best bid
and that will apply only if the price of
an individual security declines intraday by 10% or more from that security’s
prior day’s closing price on the listing
market for that security. We are also
amending Rule 200(g) of Regulation
SHO to address when a broker-dealer
may need to mark certain sell orders
‘‘short exempt.’’
D. Empirical Data Regarding Potential
Market Impact of Short Sale Price Test
Restrictions Submitted in Response to
the Proposal and Re-Opening Release
In the Proposal, we requested that
commenters provide empirical data to
support their views and arguments with
respect to the proposed short sale price
test rules and the proposed circuit
breaker rules.124 Overall, the
interpretations and results of the
analyses submitted were mixed and
sometimes conflicted with each other.
In addition, the methods used in the
empirical analyses submitted ranged
from simple plots of data points to
carefully constructed econometrics. The
Pilot Results, while dated, in our view
should continue to inform our
decisionmaking where relevant, and
none of the empirical studies discussed
below have given us reason to question
the rigor or validity of the Pilot Results.
A number of commenters submitted
data or referenced studies in support of
their position that a short sale price test
restriction would not have a positive
impact on the market.125 In contrast,
124 See,

e.g., Proposal, 74 FR at 18049.
e.g., letter from BATS (May 2009); Autore,
Billingsley, and Kovacs, Short Sale Constraints,
Dispersion of Opinion, and Market Quality:
Evidence from the Short Sale Ban on U.S. Financial
Stocks (June 19, 2009); letter from CBOE (June
2009); letter from CPIC (June 2009); letter from
STANY (June 2009); letter from SIFMA (June 2009);
letter from MFA (June 2009); letter from ICI (June
2009); letter from NSCP; letter from AIMA; letter
from Credit Suisse (June 2009); letter from T.D. Pro
Ex; letter from Citadel et al. (June 2009); letter from
Allston Trading (June 2009); letter from Knight
Capital (June 2009); letter from Wolverine; letter
from Pershing Square; letter from GETCO (June
2009); letter from Dialectic Capital (June 2009);
letter from Hudson River Trading; memorandum
regarding meeting with Credit Suisse (July 2009);
letter from CPIC (Sept. 2009); letter from STA (Sept.
2009); letter from SIFMA (Sept. 2009); letter from
TD Asset Management; letter from Goldman Sachs
(Sept. 2009); letter from EWT (Sept. 2009); letter
from Prof. Jones; see also letter from NAAIM; letter
from Prof. Werner; memorandum regarding meeting
with TD Ameritrade; letter from Adam V. Reed,
Julian Price Associate Professor of Finance,
University of North Carolina at Chapel Hill, dated
Sept. 21, 2009 (‘‘Prof. Reed’’); letter from RBC (Sept.
2009); letter from Daniel Mathisson, Managing
Director, Credit Suisse Securities (USA), LLC, dated
Mar. 30, 2009 (‘‘Credit Suisse (Mar. 2009)’’); Ana
Avramovic, What Happened When Traders’ Shorts
Were Pulled Down?, Credit Suisse Market
125 See,

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and as we noted in the Proposal, some
commenters have indicated that they
believe that they have collected data
that establishes a possible association
between the recent market downturn
and the elimination of former Rule 10a–
1.126 Commenters also submitted data or
referenced studies in support of the
contention that a price test restriction
would have a positive impact on the
market.127 We summarize below
findings from these studies and discuss
our views with respect to the studies.
Several commenters cited empirical
evidence showing that short selling
contributes to market liquidity, price
discovery, and market efficiency and
that restrictions on short selling,
particularly bans on short selling, may
impede liquidity, price discovery, and
market efficiency.128 While we agree
with commenters that short selling
contributes to market liquidity, price
discovery and market efficiency and
while these studies provide relevant
information with respect to the effects of
a short selling ban, they do not address
Commentary (Sept. 2008) (‘‘Avramovic (Sept.
2008)’’).
126 See Proposal, 74 FR at 18047, n.64; see also
letter from Yavni Bar-Yam; Dion Harmon and
Yaneer Bar-Yam, April 2009, Technical Report on
SEC Uptick Rule Proposals, New England Complex
Systems Institute.
127 See, e.g., letter from Jeff Wang, dated May 7,
2009 (‘‘Jeff Wang’’); letter from NYSE Euronext (June
2009); letter from Schwab; letter from European
Investors (June 2009); letter from European
Investors (Sept. 2009); letter from High Street
Advisors; letter from Park National; letter from IBC;
letter from Aflac; letter from GE; letter from Michael
R. Grupe, Executive Vice President, Research &
Investor Outreach, National Association of Real
Estate Investment Trusts, dated June 19, 2009
(‘‘NAREIT’’); letter from Kurt N. Schacht, Managing
Director, Linda L. Rittenhouse, Director, Capital
Markets Policy, CFA Institute Centre for Financial
Market Integrity, dated Aug. 21, 2009 (‘‘CFA’’); letter
from Martin Napor.
128 See, e.g., letter from BATS (May 2009); letter
from AIMA; letter from CBOE (June 2009); letter
from CPIC (June 2009); letter from Credit Suisse
(June 2009); letter from GETCO (June 2009); letter
from ICI (June 2009); letter from NSCP; letter from
TD Asset Management; letter from T.D. Pro Ex;
letter from STANY (June 2009); letter from Hudson
River Trading; letter from Allston Trading (June
2009); letter from Knight Capital (June 2009); letter
from Pershing Square; letter from Wolverine; letter
from Citadel et al. (June 2009) (referencing
Lawrence E. Harris, Ethan Namvar and Blake
Phillips, Price Inflation and Wealth Transfer during
the 2008 SEC Short-Sale Ban, (Apr. 2009)); Matthew
Clifton and Mark Snape, The Effect of Short-selling
Restrictions on Liquidity: Evidence from the London
Stock Exchange (Dec. 19, 2008); Recent Trends in
Trading Activity, Short Sales and Failed Trades and
Study on the Impact of the Prohibition on the Short
Sale of Inter-Listed Financial Sector Issuers by
Investment Industry Regulatory Organization of
Canada (IIROC) (February 2009); See Autore,
Billingsley, and Kovacs, Short Sale Constraints,
Dispersion of Opinion, and Market Quality:
Evidence from the Short Sale Ban on U.S. Financial
Stocks (June 19, 2009); memorandum regarding
meeting with Credit Suisse (July 2009); see also
letter from Credit Suisse (Mar. 2009).

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the effects of a short sale price test
restriction, or more specifically for
purposes of Rule 201, a circuit breaker
that, when triggered, imposes the
alternative uptick rule.129 In fact,
because Rule 201 does not impose a ban
on short selling but instead continues to
allow short selling (although at a price
above the national best bid) when the
short sale price test restriction has been
triggered, the Rule’s structure will help
preserve the benefits of short selling.
Some commenters cited a study (the
‘‘Pre-Borrow Study’’) which did not find
a relationship between changes in short
interest and changes in trading volume,
and which concluded that ‘‘short sales
do not have a significant effect on
market liquidity: Other factors drive
liquidity.’’ 130 We note, however, that
the correlation between changes in short
interest and changes in trading volume
may not be an accurate measure of the
impact of short sales on liquidity.
Economic theory does not tend to
support using changes in trading
volume as a measure of liquidity.131
Trading volume itself, as opposed to
changes in trading volume, is
considered a measure of liquidity,
129 See id. In addition, several commenters cited
research showing that short selling may be
beneficial to price discovery and market efficiency,
but that did not address the effect of a short sale
price test restriction on price discovery or market
efficiency. See letter from CPIC (June 2009) (citing
Jonathan Karpoff and Xiaoxia Lou, Do Short Sellers
Detect Overpriced Firms? Evidence from SEC
Enforcement Actions, Working paper, 2008); letter
from Goldman Sachs (Sept. 2009) (citing Jonathan
Karpoff and Xiaoxia Lou, Short Sellers and
Financial Misconduct, Working paper, 2009); letter
from Pershing Square (citing Jonathan Karpoff and
Xiaoxia Lou, Do Short Sellers Detect Overpriced
Firms? Evidence from SEC Enforcement Actions,
Working paper, 2008); letter from CPIC (Sept. 2009)
(citing Jonathan Karpoff and Xiaoxia Lou, Short
Sellers and Financial Misconduct, Working paper,
2009). Another commenter submitted a study
showing that short sellers trade after news stories
and that short sellers effectively process publicly
available information. See letter from Prof. Reed.
While this study uses short selling volume data to
support its conclusion that short sellers do not
disproportionately engage in information-based
manipulation, it does not directly examine the
impact of a short sale price test restriction, and,
therefore, has limited utility for purposes of
evaluating the potential market impact of Rule 201.
130 See, e.g., letter from Patrick M. Byrne,
Chairman and CEO, Overstock.com, Inc., dated May
29, 2009 (‘‘Overstock.com (May 2009)’’) (citing
Robert J. Shapiro and Nam D. Pham, The Impact of
a Pre-Borrow Requirement for Short Sales on
Failures-to-Deliver and Market Liquidity, Apr. 2009;
letter from Brian D. Pardo, Chairman and CEO, Life
Partners Holding, Inc., dated May 28, 2009 (‘‘Life
Partners Holding’’) (citing the Pre-Borrow Study).
131 The reason why we cannot interpret a change
in trading volume as a measure of liquidity can be
illustrated by the following example: A less liquid
stock can experience an increase (positive change)
in trading volume and a more liquid stock can
experience a decrease in trading volume. Measuring
liquidity by changes in trading volume will
mischaracterize the less liquid stock as more liquid
and the more liquid stock as less liquid.

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though other measures, such as effective
spreads and price impact, are
considered by many to be better
measures of liquidity and are more
commonly used for measuring the
liquidity of equities.132 In addition,
changes in short interest do not
necessarily measure the volume of short
selling. In fact, short interest is a
‘‘snapshot’’ variable, so the change in
short interest does not necessarily
measure correctly the volume of short
selling, which is what the Pre-Borrow
Study is trying to examine. Thus, we do
not believe that the results in the PreBorrow Study cited by commenters
should be interpreted to suggest that
short sales are unimportant for liquidity.
We also note that the Pre-Borrow study
does not reconcile its results to a large
body of conflicting evidence, including
(but not restricted to) analyses in the
comments mentioned above, showing
that short selling contributes to market
liquidity and that restrictions on short
selling, particularly bans on short
selling, may impede liquidity.133
Several commenters provided
analyses showing that short interest
initially fell immediately after the repeal
of former Rule 10a–1 and that either
short interest or short selling volume
fell for specific stocks over periods
leading up to the Short Sale Ban
Emergency Order.134 Overall, these
analyses show that the negative returns
of financial securities in the weeks both
before and during the Short Sale Ban
Emergency Order are unlikely to be the
result of short selling activities.135 We
note that, although these studies create
some doubt about whether certain price
declines during that time period were
caused by short sellers, because the
analyses provided are specific to the
Short Sale Ban Emergency Order and to
a time period during which there was
significant market turmoil, the analyses
are less relevant regarding the potential
impact on returns of the circuit breaker
approach of Rule 201.
Several other commenters stated that
the absence of a short sale price test
restriction has been detrimental to
132 See, e.g., Tarun Chordia, Richard Roll, and
Avanidhar Subrahmanyam, 2001, Market Liquidity
and Trading Activity, Journal of Finance, 34: 501–
530; Joel Hasbrouck and Duane J. Seppi, 2001,
Common Factors in Prices, Order Flows and
Liquidity, Journal of Financial Economics, 59: 383–
411; Yakov Amihud, 2002, Illiquidity and stock
returns: cross-section and time-series effects,
Journal of Financial Markets, 5: 31–56.
133 See supra note 128 (referencing, among others,
empirical evidence cited by commenters as showing
that short selling contributes to market liquidity).
134 See, e.g., letter from Dialectic Capital (June
2009); letter from MFA (June 2009); letter from STA
(Sept. 2009); Avramovic (Sept. 2008).
135 See Avramovic (Sept. 2008); letter from Credit
Suisse (June 2009).

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prices and provided information on
share prices, volume and/or short
interest that they believe support this
statement.136 We note that, while some
of the noted price changes coincide with
changes in short selling activity, some
do not.137 Moreover, because these
studies look at a long horizon (e.g.,
months instead of minutes), it is not
clear that the evidence provided is
relevant to support such conclusion.
Thus, it is difficult to conclude from
these analyses that the absence of a
short sale price test restriction and the
actions of short sellers resulted in issuer
prices falling below their fundamental
values.
One commenter cited a study that
used intra-day short selling transaction
data to examine the impact of short
selling on volatility and found that the
removal of former Rule 10a–1 did not
exacerbate volatility.138 We note that,
while the study analyzed a period prior
to and after the removal of former Rule
10a–1, it analyzed only a six-week
period following the elimination of
former Rule 10a–1, which may
minimize the study’s statistical
significance. We also note that although
the Staff found, in the Staff’s Summary
Pilot Report presenting the Staff’s
analysis of the data made public during
the Pilot, that short sale price tests in
effect at that time did not have a
significant impact on daily volatility,
the Staff also found some evidence that
the short sale price tests dampened
intra-day volatility for smaller stocks.139
In contrast, other commenters
submitted data showing an increase in
volatility from July 2007 through
November 2008 to support the
conclusion that the absence of a short
sale price test restriction caused an
increase in market volatility.140 As
discussed above and in the Proposal,141
concurrent with the subprime mortgage
crises and credit crisis in 2007, U.S.
136 See, e.g., letter from Park National; letter from
GE; letter from Aflac; letter from IBC; letter from Jeff
Wang; letter from Martin Napor.
137 For example, some of the noted price declines
coincide with increases in short interest. See letter
from Aflac; letter from IBC. Other noted price
changes do not correlate with changes in short
interest or short selling activity. See letter from
Dialectic Capital (June 2009); letter from MFA (June
2009); letter from Peter J. Driscoll, Chairman, John
C. Giesea, President and CEO, Security Traders
Association, dated June 19, 2009 (‘‘STA (June
2009)’’); Avramovic (Sept. 2008).
138 See letter from Citadel et al. (June 2009) (citing
Ekkehart Boehmer, Charles M. Jones, and Xioayan
Zhang, Unshackling Short Sellers: The Repeal of the
Uptick Rule (Nov. 2008)).
139 See Staff’s Summary Pilot Report at 55.
140 See, e.g., letter from NAREIT; letter from High
Street Advisors; letter from European Investors
(June 2009); letter from European Investors (Sept.
2009).
141 See Proposal, 74 FR at 18043.

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markets experienced increased volatility
and steep price declines, particularly in
the stocks of certain financial issuers.
We are not aware, however, of any
empirical evidence that the elimination
of short sale price test restrictions
contributed to the increased volatility in
the U.S. markets. In addition, the data
showing an increase in volatility since
the elimination of former Rule 10a–1
submitted by commenters in response to
the Proposal does not address the extent
to which other factors may have
influenced the increased volatility.
Moreover, because these studies look at
a long horizon (e.g., months instead of
minutes), it is not clear that the
evidence provided is relevant to support
such conclusion. Thus, the relationship
between the elimination of short sale
price test restrictions and the increased
volatility remains unclear.
Several commenters submitted data
on the percentage of short sales that
might be affected by a short sale price
test restriction.142 One commenter
submitted data indicating that the
alternative uptick rule, adopted on a
permanent, market-wide basis, could
affect up to 37% of short sale orders.143
As acknowledged by this commenter,
however, this number does not indicate
how severely the short sellers would be
affected, how the number might change
in different market conditions, or
whether the number would result in
changes in market quality.144 In
addition, as acknowledged by the
commenter, the number also does not
account for how order submission
strategies would differ based on the
alternative uptick rule.145
In addition, as discussed in more
detail below,146 in response to our
request for comment on an appropriate
threshold at which to trigger the
proposed circuit breaker short sale price
restrictions, commenters submitted
estimates of the number of securities
that would trigger a circuit breaker rule
at a 10% threshold.147 While
commenters’ analyses (including the
facts and assumptions used) and their
resulting estimates varied,148
142 See letter from Prof. Jones; letter from BATS
(May 2009) (stating that, on its own market during
May, June, September and October 2008, 12% to
13% of all executions were short sellers trading at
a price less than the last execution price).
143 See letter from Prof. Jones (stating that, during
the period from July 6, 2007 through the end of
August 2007, an average of 37% of submitted short
sale orders in NYSE-listed Russell 3000 stocks were
either market orders or marketable limit orders).
144 See id.
145 See id.
146 See infra Section III.A.5. (discussing the
circuit breaker trigger level).
147 See supra note 21.
148 See infra note 306.

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commenters’ estimates reflect that a
10% circuit breaker threshold, on
average, should affect a limited
percentage of covered securities.149
Given the variations in the facts and
assumptions underlying the estimates
submitted by commenters, the Staff also
looked at trading data to confirm the
reasonableness of those estimates. The
Staff found that, during the period
covering April 9, 2001 to September 30,
2009,150 the price test restrictions of
Rule 201 would have been triggered, on
an average day, for approximately 4% of
covered securities.151 The Staff also
found that for a low volatility period,
covering January 1, 2004 to December
31, 2006, the 10% trigger level of Rule
201 would have, on an average day,
been triggered for approximately 1.3%
of covered securities.152 Thus, we
believe that the short sale price test
restriction of Rule 201 is structured so
that generally it will not be triggered for
the majority of covered securities at any
given time and, thereby, will not
interfere with the provision of market
benefits such as liquidity and price
efficiency for those securities, including
when prices in such securities are
undergoing minimal downward price
pressure or are stable or rising.
Several commenters submitted data
on indexes of investor confidence to
argue that investor confidence has been
restored and, therefore, short sale price
test restrictions are not necessary.153 In
addition, one commenter submitted
preliminary data, drawn in part from
investor confidence indexes, on the
relationship between short selling and
investor confidence and stated that
‘‘[w]hile it is too early to draw
conclusions from this data, the evidence
presented * * * does not suggest that
there is a negative relationship between
short selling activity and investor
confidence.’’ 154 Another commenter
submitted a survey showing that its
clients put more money into the markets
between Fall 2008 and Spring 2009 and
that many of its clients do not believe
that an overhaul of financial services
regulation would restore investor
confidence.155
We also note that some other
commenters submitted surveys showing
149 See

infra note 307.
infra note 309.
151 See infra note 310.
152 See infra note 311.
153 See, e.g., letter from RBC (Sept. 2009); letter
from EWT (Sept. 2009); letter from CPIC (June
2009); see also letter from NAAIM (citing press
articles as evidence of increased investor
confidence).
154 Letter from Prof. Werner.
155 See memorandum regarding meeting with TD
Ameritrade.
150 See

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that reinstituting a short sale price test
restriction would improve investor
confidence.156 One commenter
submitted a survey showing that over
95% of the issuers participating in the
survey believed that the market would
function better with a short sale price
test restriction and stated that this data
‘‘suggests that a price test would boost
confidence.’’ 157
While the analyses of investor
confidence indexes submitted by
commenters do contain measures of
investor confidence, we believe that the
investor confidence indexes cited are
designed to capture elements of investor
confidence not directly affected by
regulatory changes. Investor confidence
indexes often capture measures of
systematic risk or optimism about the
economy, as opposed to measures of
investor confidence related to regulation
designed to provide investor
protections. In addition, in light of the
surveys that were submitted in support
of a short sale price test restriction as a
means to restore investor confidence,158
we do not believe that the surveys
submitted to argue that a short sale price
test restriction would not improve
investor confidence 159 provide strong
evidence on this point.
Although in recent months there has
been an increase in stability in the
securities markets, we remain
concerned that excessive downward
price pressure on individual securities
accompanied by the fear of
unconstrained short selling can
undermine investor confidence in our
markets generally. Further, we are
concerned about potential future market
turmoil, including significant increases
in market volatility and significant price
declines, and the impact of any such
future market turmoil on investor
confidence. Thus, we believe it is
appropriate to adopt the targeted short
sale price test restrictions contained in
Rule 201.
In summary, we have reviewed the
empirical data, analyses and studies
submitted and carefully considered
them in connection with our
determination that it is appropriate at
this time to adopt in Rule 201 a short
sale price test restriction combined with
a circuit breaker approach.
156 See, e.g., letter from NYSE Euronext (June
2009); letter from CFA; see also letter from Schwab.
157 Letter from NYSE Euronext (June 2009).
158 See, e.g., letter from Schwab; letter from NYSE
Euronext (June 2009); letter from CFA.
159 See, e.g., memorandum regarding meeting
with TD Ameritrade.

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III. Discussion of Rule 201 of
Regulation SHO
In the Proposal, we proposed two
approaches to restrictions on short
selling: one that would apply on a
market-wide and permanent basis and
one that would apply only to a
particular security during a significant
market decline in the price of that
security (i.e., a circuit breaker
approach).160 With respect to the
permanent, market-wide approach, we
proposed two alternative short sale
price tests: the proposed modified
uptick rule, based on the current
national best bid, and the proposed
uptick rule, based on the last sale price.
With respect to the circuit breaker
approach, we proposed two alternative
circuit breaker tests: one that would
temporarily prohibit short selling in a
particular security when there is a
significant decline in the price of that
security and one that would temporarily
impose either the proposed modified
uptick rule or the proposed uptick rule
on short sales in a particular security
when there is a significant decline in
the price of that security.
In addition, in the Proposal we
inquired whether a short sale price test
restriction that would permit short
selling at a price above the current
national best bid, i.e., the alternative
uptick rule, would be preferable to the
proposed modified uptick rule and the
proposed uptick rule.161 We sought
comment regarding the application of
the alternative uptick rule as a marketwide permanent price test restriction or
in conjunction with a circuit breaker.162
We received two comment letters
regarding applying the alternative
uptick rule on a permanent, marketwide basis 163 and seven comment
letters with respect to applying the
alternative uptick rule in combination
with a circuit breaker.164 To allow us to
160 See

Proposal, 74 FR 18042.
Proposal, 74 FR at 18072, 18081, 18082.
162 See id.
163 See letter from William Hartley, dated May 8,
2009; letter from Glen Shipway, dated June 19, 2009
(‘‘Glen Shipway (June 2009)’’).
164 See letter from BATS (May 2009); letter from
Johnny Peters, ChFC, dated May 20, 2009; letter
from Credit Suisse (June 2009); letter from SIFMA
(June 2009); letter from Goldman Sachs (June 2009);
letter from NYSE Euronext (June 2009); letter from
Eric W. Hess, General Counsel, Direct Edge
Holdings LLC, dated June 23, 2009 (‘‘Direct Edge
(June 2009)’’). In addition, in connection with the
May 2009 Roundtable, panelists expressed support
for the alternative uptick rule. See statement from
NYSE Euronext (May 2009); opening remarks of
James J. Angel, Ph.D., CFA, Associate Professor of
Finance, McDonough School of Business,
Georgetown University, dated May 5, 2009. We also
note that prior to the Proposal, four exchanges,
NYSE Euronext, Nasdaq OMX Group, BATS, and
National Stock Exchange, submitted a comment
161 See

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further consider the alternative uptick
rule, on August 20, 2009, we re-opened
the comment period to the Proposal.165
In addition, on May 5, 2009, we held the
May 2009 Roundtable 166 at which
panelists discussed the proposed short
sale price test restrictions and circuit
breaker rules.
As noted above, we received over
4,300 unique comment letters in
response to the Proposal and ReOpening Release.167 In discussing the
provisions of Rule 201, we highlight and
address below the main issues,
concerns, and suggestions raised by
commenters.
A. Operation of the Circuit Breaker Plus
Alternative Uptick Rule
We are adopting in Rule 201 a circuit
breaker approach combined with the
alternative uptick rule. Specifically,
Rule 201(b)(1) provides that ‘‘[a] trading
center shall establish, maintain, and
enforce written policies and procedures
reasonably designed to: (i) Prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
day; and (ii) Impose the requirements of
paragraph (b)(1)(i) of this section for the
remainder of the day and the following
day when a national best bid for the
covered security is calculated and
disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.’’ 168
Thus, Rule 201 will require a trading
center 169 to have policies and
letter recommending a circuit breaker combined
with a price test that would allow short selling only
at an increment above the current national best bid.
See letter from National Stock Exchange, NYSE
Euronext, Nasdaq OMX Group, and BATS, dated
Mar. 24, 2009 (‘‘National Stock Exchange et al.’’).
NYSE Euronext, in its subsequent comments, stated
that it supported the proposed modified uptick rule
applied on a permanent and market-wide basis
rather than the position expressed in the earlier
March 24, 2009 letter. See statement from NYSE
Euronext (May 2009); letter from NYSE Euronext
(June 2009).
165 See Re-Opening Release, 74 FR 42033.
166 See supra note 14.
167 See supra note 78.
168 Rule 201(b).
169 Consistent with the Proposal, Rule 201(a)(9)
states that the term ‘‘trading center’’ shall have the
same meaning as in Rule 600(b)(78). Rule 600(b)(78)
of Regulation NMS defines a ‘‘trading center’’ as ‘‘a
national securities exchange or national securities
association that operates an SRO trading facility, an
alternative trading system, an exchange market
maker, an OTC market maker, or any other broker
or dealer that executes orders internally by trading

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
procedures reasonably designed to
prevent it from executing or displaying
any short sale order, absent an
exception, at a price that is equal to or
below the national best bid if the price
of that security decreases by 10% or
more from the security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day.170 As
discussed in more detail below, we
believe that such a Rule will help
prevent short sellers from using short
selling as a tool to exacerbate a
declining market in a security.

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1. Covered Securities
Consistent with the proposed
permanent, market-wide short sale price
test restrictions and proposed circuit
breaker rules, Rule 201 will apply to any
‘‘covered security.’’ As proposed and as
adopted, Rule 201 defines ‘‘covered
security’’ to mean any ‘‘NMS stock’’ as
defined under Rule 600(b)(47) of
Regulation NMS.171 Rule 600(b)(47) of
Regulation NMS defines an ‘‘NMS stock’’
as ‘‘any NMS security other than an
option.’’ 172 Rule 600(b)(46) of
Regulation NMS defines an ‘‘NMS
security’’ as ‘‘any security or class of
securities for which transaction reports
are collected, processed, and made
available pursuant to an effective
transaction reporting plan, or an
effective national market system plan
for reporting transactions in listed
options.’’ 173 Thus, Rule 201 will apply
to any security or class of securities,
except options, for which transaction
reports are collected, processed, and
made available pursuant to an effective
transaction reporting plan. As a result,
Rule 201 generally will cover all
securities, except options, listed on a
national securities exchange whether
traded on an exchange or in the OTC
market.174 As discussed further below,
it will not include non-NMS stocks
quoted on the OTC Bulletin Board or
elsewhere in the OTC market.
In response to our requests for
comment, some commenters stated that
as principal or crossing orders as agent.’’ See 17 CFR
242.600(b)(78). The definition encompasses all
entities that may execute short sale orders. Thus,
Rule 201 will apply to any entity that executes short
sale orders.
170 Any such execution or display will also need
to be in compliance with applicable rules regarding
minimum pricing increments. See 17 CFR 242.612.
See also infra Section III.A.2.
171 See Rule 201(a)(1).
172 17 CFR 242.600(b)(47).
173 17 CFR 242.600(b)(46).
174 We note that there may be securities that are
listed on a national securities exchange but that are
not NMS stocks because they do not meet the
definition of ‘‘NMS stock.’’ Thus, these securities
will not be subject to the short sale price test
restrictions of Rule 201.

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any short sale price test adopted by the
Commission for NMS stocks should also
apply to non-NMS stocks quoted on the
OTC Bulletin Board or elsewhere in the
OTC market.175 One commenter
indicated that failure to apply a short
sale price test restriction applicable to
NMS stocks to non-NMS stocks quoted
on the OTC Bulletin Board or elsewhere
in the OTC market would cause
investors to have inappropriately
negative views about the OTC market
and the firms whose securities are
quoted there.176 This commenter and
another commenter also stated that not
including non-NMS stocks quoted on
the OTC Bulletin Board or elsewhere in
the OTC market in a short sale price test
restriction could have a negative impact
on the ability of firms whose securities
are quoted OTC to raise capital.177
Commenters noted that many issuers of
securities that are quoted OTC are
‘‘small, emerging growth companies,’’ 178
that may have a particular need to raise
capital in the equity markets.179 One
commenter noted that ‘‘less liquid stocks
and the stock of less capitalized firms
that trade in the OTC markets are in
need of as much, if not more, protection
from manipulative behavior than NMS
175 See letter from Peter J. Chepucavage, General
Counsel, Plexus Consulting LLC, The International
Association of Small Broker Dealers and Advisors,
dated Apr. 21, 2009; letter from R. Cromwell
Coulson, Chief Executive Officer, Pink OTC
Markets, Inc., dated May 26, 2009 (‘‘Pink OTC’’);
letter from STANY (June 2009); letter from Michael
L. Crowl, Managing Director and Global General
Counsel, Barclays Global Investors, dated June 19,
2009 (‘‘Barclays (June 2009)’’).
176 See letter from Pink OTC.
177 See letter from Pink OTC; letter from STANY
(June 2009).
178 Letter from Pink OTC.
179 See letter from Pink OTC; letter from Alan F.
Eisenberg, Executive Vice President, Emerging
Companies and Business Development,
Biotechnology Industry Organization, dated June
29, 2009 (‘‘BIO’’). BIO requested that biotechnology
companies, many of which BIO stated are emerging
companies that are ‘‘very dependent on capital,
including using the public markets as a source of
financing,’’ be covered by any short sale price test
restriction. Letter from BIO. We also note that one
commenter requested that the Commission adopt a
short sale price test or circuit breaker halt
restriction specifically applicable to financial sector
stocks. See letter from IBC. However, another
commenter stated, ‘‘Restrictions on short selling in
only the issues of financial services providers is
perhaps the least valuable of all the ideas to be
discussed during the short sale debate.’’ See letter
from STA (June 2009). Another commenter noted
that it is not possible to anticipate which industry
sectors may be impacted by potentially
manipulative short selling in the future. See letter
from T. Rowe Price (June 2009). Given the lack of
a widespread call for industry specific short selling
restrictions, and the additional complexities that an
industry specific restriction would raise, such as
identifying and defining the industry or sector to be
covered, we have determined not to apply an
industry specific short selling restriction at this
time.

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stocks’’180 while another stated that
‘‘OTC Bulletin Board and Pink Sheet
securities would appear to be prime
targets for manipulative shorting
practices.’’181 Commenters also noted
that applying a price test rule uniformly
to NMS stocks and to non-NMS stocks
quoted on the OTC Bulletin Board or
elsewhere in the OTC market could
reduce the costs of such a rule because
market participants would need only
one set of programs and systems
designed to ensure compliance with the
rule, rather than different programs and
systems for securities covered by the
rule and securities not covered by the
rule.182
Several commenters, however,
expressed support for the application of
a price test only to NMS stocks.183
Several commenters noted that the
current national best bid and offer are
not currently collected, consolidated
and disseminated for non-NMS stocks
quoted on the OTC Bulletin Board or
elsewhere in the OTC market.184
Further, although one commenter
indicated that the Commission should
plan to phase in application of a price
test rule to non-NMS stocks quoted on
the OTC Bulletin Board or elsewhere in
the OTC market,185 another commenter
expressed concerns that the OTC market
is not ‘‘robust enough to withstand’’
such regulation.186
At this time, we are not applying Rule
201 to non-NMS stocks quoted on the
OTC Bulletin Board or elsewhere in the
OTC market because a national best bid
and offer currently is not required to be
collected, consolidated, and
disseminated for such securities.187
Rule 201 is based on the current
national best bid and its implementation
requires that the national best bid is
collected, consolidated and
disseminated to market participants.
Although several commenters indicated
that it would be possible for non-NMS
stocks quoted on the OTC Bulletin
Board or elsewhere in the OTC market
to join or create a national plan for
disseminating consolidated national
180 Letter

from STANY (June 2009).
from T. Rowe Price (June 2009).
182 See letter from Pink OTC; letter from STANY
(June 2009).
183 See, e.g., letter from Wells Fargo (June 2009);
letter from T. Rowe Price (June 2009); letter from
STA (June 2009); letter from Credit Suisse (Sept.
2009).
184 See letter from Pink OTC; letter from T. Rowe
Price (June 2009).
185 See letter from T. Rowe Price (June 2009).
186 Letter from STA (June 2009).
187 As noted above, former Rule 10a–1 also did
not apply to non-exchange listed securities quoted
on the OTC Bulletin Board or elsewhere in the OTC
market. See supra note 43.
181 Letter

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best bid information for such stocks,188
we are concerned that this would be a
significant undertaking that would add
greatly to the implementation time and
cost of Rule 201, particularly in light of
comments that the implementation
process may be complex even for those
securities for which the national best
bid is currently collected, consolidated,
and disseminated.189
We recognize commenters’ concerns,
however, regarding not applying Rule
201 to non-NMS stocks quoted on the
OTC Bulletin Board or elsewhere in the
OTC market. Thus, at a later time, we
may reconsider whether applying Rule
201 to non-NMS stocks quoted on the
OTC Bulletin Board or elsewhere in the
OTC market may be appropriate.
In response to our requests for
comment, a number of commenters
expressed concerns about the
application of a short sale price test to
equity securities without also
addressing derivative securities.190
188 See, e.g., letter from Pink OTC; letter from
STANY (June 2009); letter from T. Rowe Price (June
2009). The comment letter from Pink OTC indicates
that it ‘‘would be willing to join the current Tape
C UTP network or work with FINRA to create an
OTC/UTP Plan including the best bid and offer
prices for securities quoted on OTCBB and our Pink
Quote Inter-Dealer Quotation System.’’ Letter from
Pink OTC.
189 See infra Section VII. (discussing
implementation time) and Sections X.B.1.b. and
X.B.2.b. (discussing implementation costs).
190 See, e.g., letter from Gregory Bloom, dated
Apr. 10, 2009; letter from Peter J. Driscoll,
Chairman, John C. Giesea, President and CEO,
Security Traders Association, dated Apr. 16, 2009
(‘‘STA (Apr. 2009)’’); letter from Jeffrey D. Morgan,
President and CEO, National Investor Relations
Institute, dated May 29, 2009 (‘‘NIRI’’); letter from
Douglas Engmann, President, Engmann Options,
Inc., dated June 1, 2009 (‘‘Engmann Options’’); letter
from Dale W.R. Rosenthal, Assistant Professor of
Finance, College of Business Administration,
University of Illinois at Chicago, dated June 2, 2009
(‘‘Prof. Rosenthal’’); letter from Leslie Seff,
President, Matthew B. Management, Inc., dated
June 5, 2009 (‘‘Matthew B. Management’’); letter
from Patrick J. Healy, Issuer Advisory Group, dated
June 30, 2009 (‘‘IAG’’); letter from Barclays (June
2009); letter from Jesse J. Greene, Jr., Vice President,
Financial Management and Chief Financial Risk
Officer, International Business Machines
Corporation, dated June 19, 2009 (‘‘IBM’’); letter
from Katherine Tew Darras, General Counsel,
Americas, International Swaps and Derivatives
Association, Inc., dated June 19, 2009 (‘‘ISDA’’);
letter from STA (June 2009); letter from George U.
Sauter, Managing Director and Chief Investment
Officer, The Vanguard Group, Inc., dated June 19,
2009 (‘‘Vanguard (June 2009)’’); letter from GE; letter
from Knight Capital (June 2009); letter from
Wachtell; letter from Keith F. Higgins, Chair,
Committee on Federal Regulation of Securities,
American Bar Association, dated July 8, 2009
(‘‘Amer. Bar Assoc. (July 2009)’’); letter from Jeffrey
S. Wecker, CEO, Lime Brokerage LLC, dated Sept.
21, 2009 (‘‘Lime Brokerage (Sept. 2009)’’); letter from
Jonathan E. Johnson III, President, Overstock.com,
dated Sept. 24, 2009 (‘‘Overstock.com (Sept. 2009)’’);
letter from Kevin Holley, dated Sept. 29, 2009
(‘‘Kevin Holley’’); see also letter from Eric W. Hess,
General Counsel, Direct Edge Holdings LLC, dated
Mar. 30, 2009 (‘‘Direct Edge (Mar. 2009)’’).

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Several commenters indicated that the
ability of market participants to create
‘‘synthetic’’ short positions that are the
economic equivalent of a short sale
through the use of derivative securities
would undermine the effectiveness of a
short sale price test 191 and/or result in
an increased use of derivative products
to create ‘‘synthetic’’ short positions.192
Some commenters indicated that the
Commission should apply some sort of
restriction to derivative securities with
respect to ‘‘synthetic’’ short sales,193
while others suggested that the
Commission should require disclosure
of ‘‘synthetic’’ short positions created
with derivative securities.194 Several
commenters noted concerns with
respect to practical difficulties related to
addressing derivative securities and
short selling issues, and that the
Commission may not have the necessary
legislative authority to address certain
areas.195
As indicated in the Proposal and our
requests for comment,196 we recognize
that the ability to obtain a short position
through the use of derivative products
such as options, futures, contracts for
differences, warrants, CDS or other
swaps (so-called ‘‘synthetic short sales’’)
or other instruments (such as inverse
leveraged exchange traded funds) may
undermine our goals for adopting short
sale price test restrictions. We are also
concerned that synthetic short positions
may increase as a result of the adoption
of Rule 201. Rule 201, however, like
former Rule 10a–1 and NASD’s former
bid test, which also did not apply to
derivative securities, is formulated with
the specific structure of the equity
markets in mind and not for the
substantially different market structure
applicable to many derivatives
securities. In addition, we believe that
applying a Rule 201-type rule to
191 See, e.g., letter from Prof. Rosenthal; letter
from STA (Apr. 2009); letter from Overstock.com
(Sept. 2009); letter from Lime Brokerage (Sept.
2009).
192 See, e.g., letter from Matthew B. Management;
letter from Prof. Rosenthal; letter from Barclays
(June 2009); letter from STA (June 2009); letter from
Vanguard (June 2009); letter from Lime Brokerage
(Sept. 2009).
193 See, e.g., letter from IAG; letter from ISDA;
letter from STA (June 2009); letter from Wachtell;
letter from Matthew B. Management; letter from
James L. Rothenberg, dated Sept. 20, 2009 (‘‘James
Rothenberg’’).
194 See, e.g., letter from IAG; letter from GE; letter
from Wachtell; see also letter from Direct Edge
(Mar. 2009).
195 See letter from Barclays (June 2009); letter
from GE; letter from NIRI; letter from Amer. Bar
Assoc. (July 2009). Two commenters stated that the
Commission should seek authority from Congress to
regulate derivative securities where authority is
currently lacking. See letter from GE; letter from
NIRI.
196 See Proposal, 74 FR at 18071, 18078.

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derivatives securities would
significantly complicate the
implementation process. Thus, we have
determined at this time not to modify
the definition of ‘‘covered security’’ from
that proposed and, therefore, the scope
of securities to which Rule 201 will
apply.
We note, however, that short sales in
the equity markets to hedge derivatives
transactions are subject to Rule 201. In
addition, because we are concerned that
the ability to create a short position
through the use of derivative securities
may undermine the goals of short sale
price test restrictions, we may
reconsider, at a later time, whether
additional regulation of derivative
securities and the use of ‘‘synthetic’’
short positions may be appropriate.
The securities covered by Rule 201
will overlap with the securities covered
by former Rule 10a–1. Former Rule 10a–
1 applied to securities registered on, or
admitted to unlisted trading privileges
on, a national securities exchange, if
trades of the security were reported
pursuant to an effective transaction
reporting plan and information
regarding such trades was made
available in accordance with such plan
on a real-time basis to vendors of market
transaction information. All securities
that would have been subject to former
Rule 10a–1 will also be subject to Rule
201. In addition, certain securities, i.e.,
securities traded on Nasdaq prior to its
regulation as an exchange, that were not
subject to former Rule 10a–1 will be
subject to Rule 201.197
As we discussed in the Proposal,198
market information for NMS stocks,
including quotes, is disseminated
pursuant to three different national
market system plans.199 The national
197 When Nasdaq became a national securities
exchange in 2006, absent an exemption from former
Rule 10a–1, all Nasdaq securities would have been
subject to former Rule 10a–1. The Commission
provided Nasdaq with an exemption from the
application of the provisions of former Rule 10a–
1 to securities traded on Nasdaq because the Pilot
was already in progress, and the Commission
believed it was necessary and appropriate to
maintain the status quo for short sale price tests
during the Pilot and to ensure that market
participants would not be burdened with costs
associated with implementing a price test that
might be temporary. See Exchange Act Release No.
53128 (Jan. 13, 2006), 71 FR 3550 (Jan. 23, 2006)
(order approving application of Nasdaq for
registration as a national securities exchange); see
also letter from James A. Brigagliano Acting
Associate Director, Division of Market Regulation,
SEC, to Marc Menchel, Executive Vice President
and General Counsel, NASD, Inc., dated June 26,
2006.
198 See Proposal, 74 FR at 18050–18051.
199 The three joint-industry plans are (1) the
Consolidated Tape Association Plan (‘‘CTA Plan’’),
which disseminates transaction information for
securities primarily listed on an exchange other
than Nasdaq, (2) the Consolidated Quotation Plan

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
securities exchanges and FINRA
participate in these joint-industry plans
(‘‘Plans’’).200 The Plans establish three
separate networks to disseminate market
information for NMS stocks.201 These
networks are designed to ensure that,
among other things, consolidated bids
from the various trading centers that
trade NMS stocks are continually
collected and disseminated on a realtime basis, in a single stream of
information. Thus, all market
participants will have access to the
consolidated bids for all the securities
that will be subject to Rule 201.202 As
discussed in further detail below,
however, we note that the national best
bid can change rapidly and repeatedly
and potentially there might be latencies
in obtaining data regarding the national
best bid.203

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2. Pricing Increment
Rule 201(b) provides that a trading
center shall establish, maintain, and
enforce written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
day. In Rule 201 we have determined
not to specify at what price a trading
center may execute or display a short
sale order of a covered security
provided it is not at a price that is less
than or equal to the current national
best bid. As we stated in the Proposal,
however, any such execution or display
must be in compliance with applicable
rules regarding minimum pricing
increments.204
(‘‘CQ Plan’’), which disseminates consolidated
quotation information for securities primarily listed
on an exchange other than Nasdaq, and (3) the
Nasdaq UTP Plan, which disseminates consolidated
transaction and quotation information for securities
primarily listed on Nasdaq.
200 Rule 603(b) of Regulation NMS provides that
every national securities exchange on which an
NMS stock is traded and national securities
association shall act jointly pursuant to one or more
effective national market system plans to
disseminate consolidated information, including a
national best bid and national best offer, for NMS
stocks. See 17 CFR 242.603(b).
201 These networks can be categorized as follows:
(1) Network A—securities primarily listed on the
NYSE; (2) Network B—securities listed on
exchanges other than the NYSE and Nasdaq; and (3)
Network C—securities primarily listed on Nasdaq.
202 See Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37503 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
203 See infra Section III.A.7.
204 See Proposal, 74 FR at 18050, n.99, 101
(referencing 17 CFR 242.612).

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In the Proposal and Re-Opening
Release, we did not propose a specific
increment above the national best bid or
last sale price at which short selling
would be permissible. In response to
our requests for comment regarding
pricing increments, however, a number
of commenters stated that any
increment should be greater than one
cent in order to make a price test more
restrictive or effective or to address
decimal pricing concerns.205 Several
commenters noted, however, that the
higher the increment, the more
restrictive such an increment could be
on short selling and, if high enough,
could even be tantamount to a ban on
short selling.206 A study by the Staff
found that even moderate changes in
bid increments can have a big impact on
the constraints imposed on short selling
activity and that, for practical purposes,
high bid increments, such as five or ten
cents, might be equivalent to a ban on
short selling in some stocks, especially
during periods when prices are not
changing rapidly.207
Several commenters supported an
increment of one trading unit, or one
cent,208 while another commenter
suggested that the increment should be
consistent with the minimum pricing
increments specified in Rule 612 of
Regulation NMS.209 One commenter
stated that the Commission should not
specify a minimum increment and
should permit trades to be executed at
the mid-point between the best bid and
best offer, even if the price were less
than one cent above the best bid.210
205 See, e.g., letter from Franco A. Mortarotti,
Managing Director, Zermatt Capital Management,
dated Apr. 10, 2009 (‘‘Zermatt’’); letter from Neal E.
Schear, President, Schear Capital, Inc., dated Apr.
28, 2009 (‘‘Schear’’); letter from Dale T. Forte, dated
Apr. 14, 2009; letter from Arthur Colman, dated
May 4, 2009; letter from Joseph Leegan, dated Mar.
25, 2009; letter from John H. Happke, dated May 7,
2009; letter from Louis G. Marozsan, Jr., dated May
8, 2009; letter from S. Buford Scott, Chairman,
Walter S. Robertson, III, President and CEO, John
Sherman, Jr., Past President and CEO, William P.
Schubmehl, Past President and CEO, Scott &
Stringfellow LLC, dated May 14, 2009 (‘‘Scott &
Stringfellow’’); letter from Martin Napor; letter from
Michael Sigmon, Chairman, Sigmon Wealth
Management, dated June 10, 2009 (‘‘Sigmon Wealth
Management (June 2009)’’); letter from Christopher
Ailman, Chief Investment Officer, California State
Teachers’ Retirement System, dated June 17, 2009;
letter from IBM; letter from Stan Ryckman, dated
June 19, 2009.
206 See, e.g., letter from Citadel et al. (June 2009);
letter from SIFMA (June 2009); letter from STA
(June 2009)); see also letter from Credit Suisse (Mar.
2009).
207 See Staff Analysis (Dec. 17, 2008).
208 See, e.g., letter from Citadel et al. (June 2009);
letter from STA (June 2009).
209 17 CFR 242.612. See letter from NYSE
Euronext (Sept. 2009).
210 See letter from Howard Meyerson, General
Counsel, Liquidnet, Inc., dated June 18, 2009
(‘‘Liquidnet’’).

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Another commenter expressed concerns
that a short sale price test might
advantage subpenny executions if, for
example, certain trading venues were
permitted to comply with the test by
executing transactions at less than one
cent above the national best bid.211
After considering the comments, we
have determined at this time to not
specify in Rule 201 a particular
increment above the national best bid at
which a covered security may be sold
short. We believe that the goals we are
seeking to advance by adopting Rule
201 will be achieved by requiring that
when a covered security becomes
subject to the short sale price test
restrictions of Rule 201, all short selling
must be at a price above the current
national best bid. As discussed above, a
goal of Rule 201 is to help prevent short
selling from being used as a tool to
exacerbate a declining market in a
security. Thus, the price test restriction
of Rule 201 does not permit short selling
at or below the current national best bid.
In addition to achieving this goal,
however, we also recognize the need to
minimize market disruption as well as
the need for the price test restriction in
Rule 201 to not be unduly restrictive.
We believe that restricting short selling
to a price above the current national bid
for a particular security when the circuit
breaker has been triggered for that
security, without specifying at what
price such short sales may occur, will
best achieve these goals.212
3. Alternative Uptick Rule
We have determined to adopt in Rule
201(b) the alternative uptick rule such
that when triggered, short selling will be
permitted only at a price above the
current national best bid. Specifically,
Rule 201(b) will require a trading center
to establish, maintain, and enforce
written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
day.213 As noted above, we have
determined to adopt in Rule 201(b) a
circuit breaker trigger combined with
211 See letter from Alec Hanson, dated Sept. 19,
2009.
212 As noted above, any execution or display of
a short sale order must be in compliance with
applicable rules of Regulation NMS regarding
minimum pricing increments. See supra note 204
and accompanying text.
213 See Rule 201(b).

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the alternative uptick rule. Thus, while
this Section III.A.3. focuses on the
alternative uptick rule in the context of
comments received about the different
price tests that we proposed, the
alternative uptick rule operates in
conjunction with the circuit breaker
approach and should not be considered
as an isolated provision.
In the Proposal and the Re-Opening
Release, we sought comment on three
alternative types of short sale price test
restrictions that could be applied on a
permanent, market-wide basis or in
combination with a circuit breaker: the
proposed uptick rule, the proposed
modified uptick rule, and the alternative
uptick rule.214 The alternative uptick
rule is similar to the proposed modified
uptick rule in that it will use the current
national best bid, rather than the last
sale price, as a reference point for short
sale orders. Unlike the proposed
modified uptick rule and the proposed
uptick rule, the alternative uptick rule
will not allow short selling at the
current national best bid or last sale
price. Instead, the alternative uptick
rule will only permit short selling at an
increment above the current national
best bid, unless an applicable exception
applies.
In response to the Proposal and the
Re-Opening Release, we received a
number of comment letters supporting
and opposing the alternative uptick
rule. Those that opposed the alternative
uptick rule stated, among other things,
that because it will allow short selling
only at a price above the current
national best bid or last sale price,
rather than at the current national best
bid or last sale price, it will be more
disruptive to the market than the
proposed modified uptick rule or
proposed uptick rule.215 Some
commenters stated that the alternative
uptick rule will decrease liquidity,
widen bid-ask spreads, decrease pricing
efficiency, create inefficiencies in the
routing and execution of short sale
orders, increase intra-day volatility, and
result in higher costs to investors.216
214 See Proposal, 74 FR 18042; Re-Opening
Release, 74 FR 42033.
215 See, e.g., letter from William E. McDonnell, Jr.,
Chief Compliance Officer, Atherton Lane Advisers,
LLC, dated Sept. 9, 2009 (‘‘Atherton Lane’’); letter
from Michael J. Simon, Secretary, International
Securities Exchange LLC, dated Sept. 21, 2009 (‘‘ISE
(Sept. 2009)’’); letter from John Nagel, Managing
Director and Deputy General Counsel, Citadel
Investment Group, LLC, John Liftin, Managing
Director and General Counsel, The D.E. Shaw
Group, Mark Silber, Executive Vice President,
Renaissance Technologies, dated Sept. 21, 2009
(‘‘Citadel et al. (Sept. 2009)’’); letter from Bingham
McCutchen; letter from Vanguard (Sept. 2009);
letter from STA (Sept. 2009).
216 See, e.g., letter from Karrie McMillan, General
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Some commenters expressed concerns
that the alternative uptick rule will
exacerbate downward price movements
because market participants may
perceive the presence of short limit
orders as a negative view of a security,
causing buyers to withdraw their
bids.217 Other commenters stated that,
although easier to implement, the
alternative uptick rule would have a
more disruptive effect on the market
than the proposed modified uptick rule
or the proposed uptick rule.218
The alternative uptick rule, like
former Rule 10a–1 and the proposed
uptick rule and proposed modified
uptick rule, when triggered will affect
all short selling, including some
legitimate short selling, as well as
abusive or manipulative short selling.
The alternative uptick rule is by
definition more restrictive than the
proposed modified uptick rule, but
differences between the operation of the
proposed uptick rule and the alternative
uptick rule mean that one approach or
the other would be more restrictive in
particular circumstances.219 The
empirical evidence regarding former
Rule 10a–1 tends to demonstrate that it
did not have a negative effect on market
liquidity and price efficiency.220 We
similarly believe that the alternative
uptick rule will have a minimal, if any,
negative effect on market liquidity or
price efficiency.221
In contrast to those commenters
opposed to the alternative uptick rule,
several commenters expressed support
for the alternative uptick rule, stating
that the alternative uptick rule is
preferable to the proposed modified
uptick rule or the proposed uptick rule
because it will eliminate sequencing
issues, will be easier and less costly to
implement, will be more effective in
21, 2009 (‘‘ICI (Sept. 2009)’’); letter from CPIC (Sept.
2009); letter from STA (Sept. 2009); letter from
Kimberly Unger, Executive Director, Security
Traders Association of New York, Inc., dated Sept.
21, 2009 (‘‘STANY (Sept. 2009)’’); letter from RBC
(Sept. 2009); letter from EWT (Sept. 2009); letter
from MFA (Oct. 2009); letter from Knight Capital
(Sept. 2009).
217 See, e.g., letter from John Gilmartin, Co-CEO
and Ben Londergan, Co-CEO, Group One Trading,
L.P., dated Sept. 14, 2009 (‘‘Group One Trading
(Sept. 2009)’’); letter from STANY (Sept. 2009);
letter from Glen Shipway (Sept. 2009); letter from
Michael L. Crowl, Managing Director, Global
General Counsel, Barclays Global Investors, dated
Sept. 21, 2009 (‘‘Barclays (Sept 2009)’’); letter from
Knight Capital (Sept. 2009); letter from MFA (Oct.
2009).
218 See, e.g., letter from ISE (Sept. 2009); letter
from ICI (Sept. 2009).
219 See, e g., infra note 242 and accompanying
text (discussing automated trade matching systems).
220 See, e.g., the Pilot Results.
221 See infra Section X.B.1.a. (discussing the
impact of Rule 201 on market liquidity and price
efficiency).

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decreasing price pressure on a
security,222 and will reduce the ability
of market participants to use short
selling as a market manipulation tool.223
Some commenters stated that because
the alternative uptick rule will most
effectively prevent short selling from
proactively driving the price of a
security lower, it will also be the most
effective of the proposed short sale price
test restrictions at achieving the
Commission’s goal of helping to restore
investor confidence.224 In discussing the
alternative uptick rule, one commenter
stated that ‘‘[n]ot only does it faithfully
replicate the old uptick rule it improves
upon it by making each and every short
sale a liquidity providing
transaction.’’ 225 Another commenter, in
supporting the alternative uptick rule,
stated that it will ‘‘likely be more
restrictive on short selling than the
original Rule 10a–1 ‘uptick rule’.’’ 226
We have determined to adopt the
alternative uptick rule in combination
with a circuit breaker because we
believe the alternative uptick rule will
be more effective at meeting our goals
than the other proposed rules. Because
the alternative uptick rule, when
triggered, will generally permit short
selling only at a price above the current
national best bid, the alternative uptick
rule will not allow short sales to get
immediate execution at the bid.227 In
other words, short sellers will not be
permitted to act as liquidity takers when
the alternative uptick rule applies, but
will participate, if at all, as liquidity
providers (unless an exception applies),
adding depth to the market. Put another
way, short sale orders will be executed
only when purchasers arrive willing to
222 See, e.g., letter from Direct Edge (Sept. 2009);
letter from BATS (Sept. 2009); letter from Ronald
C. Long, Director, Regulatory Affairs, Wells Fargo
Advisors, dated Sept. 17, 2009 (‘‘Wells Fargo (Sept.
2009)’’); see also letter from SIFMA (Sept. 2009)
(stating that a circuit breaker coupled with the
alternative uptick rule ‘‘would limit instances where
a security is the subject of severe downward
pressure’’); letter from Hudson River Trading
(expressing support for the alternative uptick rule
in conjunction with a circuit breaker as opposed to
other proposed price tests in conjunction with a
circuit breaker).
223 See letter from BATS (Sept. 2009); letter from
Wells Fargo (Sept. 2009); letter from Glen Shipway
(Sept. 2009).
224 Letter from Michael Gitlin, Head of Global
Trading, David Oestreicher, Chief Legal Counsel,
Christopher P. Hayes, Sr. Legal Counsel, T. Rowe
Price Associates, Inc., dated Sept. 21, 2009 (‘‘T.
Rowe Price (Sept. 2009)’’).
225 Letter from Glen Shipway (Sept. 2009).
226 Letter from Virtu Financial.
227 As noted by some commenters, there may be
situations in which a short seller could get
immediate execution, such as where an order is
executed in a facility that provides executions at the
mid-point of the national best bid and offer. See,
e.g., letter from ISE (Sept. 2009); see also letter from
BATS (Sept. 2009).

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
buy at prices above the national best
bid. In addition, by not allowing short
sellers to sell at the current national best
bid, the alternative uptick rule will
generally allow long sellers, by selling at
the bid, to sell first and, thereby, take
liquidity in a declining market for a
security. As the Commission has noted
previously in connection with short sale
price test restrictions, a goal of such
restrictions is to allow long sellers to
sell first in a declining market.228 A
short seller that is seeking to profit
quickly from market moves may find it
advantageous to be able to short sell at
the current national best bid. By placing
long sellers ahead of short sellers in the
execution queue under certain
circumstances, Rule 201 will help
promote capital formation, since
investors should be more willing to hold
long positions if they know that they
may have a preferred position over short
sellers when they wish to sell.
In addition, by making bids accessible
only by long sellers when a security’s
price is undergoing significant
downward price pressure, Rule 201 will
help to facilitate and maintain stability
in the markets and help ensure that they
function efficiently. It will also help
restore investor confidence during times
of substantial uncertainty because, once
the circuit breaker has been triggered for
a particular security, long sellers will
have preferred access to bids for the
security, and the security’s continued
price decline will more likely be due to
long selling and the underlying
fundamentals of the issuer, rather than
to other factors.
As we stated in the Proposal, short
sale price test restrictions, whether a
permanent, market-wide restriction or
in combination with a circuit breaker,
might help prevent short sellers from
accelerating a declining market by
exhausting all remaining bids at one
price level, and causing successively
lower prices to be established by long
sellers.229 Because the alternative uptick
rule will only permit short selling at a
price above the current national best
bid, unless an exception applies, we
believe it will be more effective than the
proposed uptick rule or the proposed
modified uptick rule at helping to
prevent short selling, including
potentially abusive or manipulative
short selling, from being used as a tool
to exacerbate a decline in the price of
228 See

supra note 17.
Proposal, 74 FR at 18050, 18053, 18059,
18061, 18065, 18069; see also Securities and
Exchange Commission, Special Study of Securities
Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., at
251 (1963).
229 See

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a security by exhausting all remaining
bids at one price level.
A number of commenters favored the
proposed circuit breaker halt rule,
stating, among other things, that they
believe it would be the least disruptive
of the proposed rules with respect to
market functioning, while still
achieving the Commission’s underlying
goals,230 and would be the easiest of the
proposed rules to implement.231 We are
concerned, however, that, as expressed
by other commenters, the proposed
circuit breaker halt rule could harm the
market by preventing short sellers from
being able to provide benefits such as
liquidity and price efficiency to the
impacted security during the duration of
the halt or that it could harm investor
confidence.232 We note that in severe
conditions, stocks tend to be less liquid.
Thus, as a rule that permits short selling
only at a price above the national best
bid, the alternative uptick rule will
require that during the period of time
when a covered security is subject to the
rule, short sellers in the security must
act as liquidity providers, not liquidity
takers, in that security.233 In addition,
230 See, e.g., letter from Lime Brokerage (Sept.
2009); see also letter from Lime Brokerage (June
2009) (stating that ‘‘[i]mplementing a ‘‘cooling off’’
period after a steep decline in a given security’s
price will give market participants a chance to
absorb the situation and possibly reassess their
desire to continue short selling’’); letter from Credit
Suisse (June 2009); letter from T.D. Pro Ex.
231 See, e.g., letter from SIFMA (June 2009); letter
from Credit Suisse (June 2009); letter from
Liquidnet; letter from Manisha Kimmel, Executive
Director, Financial Information Forum, dated June
19, 2009 (‘‘FIF (June 2009)’’); letter from Lime
Brokerage (Sept. 2009). Some commenters also
stated that they believe that the proposed circuit
breaker halt rule would be effective at preventing
bear raids, reducing volatility in the market, and
helpful in restoring investor confidence. See, e.g.,
letter from Matthew Samelson, Principal, Woodbine
Associates, dated May 15, 2009 (‘‘Woodbine’’); letter
from Credit Suisse (June 2009); letter from IBC;
letter from Sigmon Wealth Management (June
2009); letter from Wachtell.
232 See, e.g., letter from BATS (May 2009); letter
from Citadel et al. (June 2009); letter from Direct
Edge (June 2009); letter from Wolverine; letter from
Amer. Bankers Assoc. Other commenters viewed
the proposed circuit breaker halt rule as too
restrictive. See, e.g., letter from BATS (May 2009);
letter from Direct Edge (June 2009). Some
commenters argued that the proposed circuit
breaker halt rule could harm investor confidence,
by reducing volume and increasing bid-ask spreads
during the effective period of the halt. See, e.g.,
letter from ICI (June 2009); letter from Amer.
Bankers Assoc.; letter from Citadel et al. (June
2009). Other commenters expressed opposition to
the concept of short sale halts and bans as a general
matter, perceiving such actions as harmful to the
markets, citing prior regulatory halts and short sale
bans as evidence. See, e.g., letter from Josh Galper,
Managing Principal, Finadium LLC, dated Apr. 13,
2009 (‘‘Finadium); letter from Barclays (June 2009);
letter from Citadel et al. (June 2009); letter from
Dialectic Capital (June 2009); letter from Knight
Capital (June 2009); letter from MFA (June 2009).
233 See supra note 29 (discussing the terms
‘‘liquidity provider’’ and ‘‘liquidity taker’’).

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by restricting the ability of short sellers
to take liquidity when a covered
security is undergoing significant price
pressure, it will allow long sellers to
access available liquidity by being able
to sell at the current national best bid.
This, in turn, may result in an increase
in investor confidence during times of
crisis as long sellers will have preferred
access to bids for a security because
when the circuit breaker has been
triggered for a covered security, Rule
201 generally will allow only long
sellers to sell at the bid.234
We have also determined to adopt the
alternative uptick rule because, unlike
the proposed uptick rule, it will be
based on the current national best bid
rather than the last sale price. As we
stated in the Proposal, we believe that
a short sale price test based on the
national best bid is more suitable to
today’s markets than a short sale price
test based on the last sale price.235
234 Too much investor confidence may also be
detrimental to investors because it can lead to
investors making inappropriate decisions. Investor
over-confidence, however, is less likely during
times of crisis. See, e.g., Brad M. Barber and
Terrance Odean, 2000, Trading is Hazardous to
Your Wealth: The Common Stock Investment
Performance of Individual Investors, Journal of
Finance, 55: 773–806.
235 See Proposal, 74 FR at 18053. In response to
our requests for comment in the Proposal and the
Re-Opening Release, a number of commenters to the
Proposal and Re-Opening Release expressed
support for a price test restriction based on the
national best bid rather than the last sale price,
stating that it would be more suitable to today’s
markets. See, e.g., letter from BATS (May 2009);
letter from SIFMA (June 2009); letter from NYSE
Euronext (June 2009); letter from Goldman Sachs
(June 2009); letter from Direct Edge (June 2009);
letter from GE; letter from Bingham McCutchen;
letter from Citadel et al. (June 2009); letter from
Amer. Bar Assoc. (July 2009); letter from Barry
Friedman, Llewellyn Jones, and Derrick Kaiser,
Founding Members, Qtrade Capital Partners LLC,
dated Sept. 21, 2009 (‘‘Qtrade’’); letter from MFA
(Oct. 2009). We also note supporting statements
made by Larry Leibowitz, Group Executive Vice
President at NYSE Euronext, at our May 5, 2009
Roundtable, stating that the proposed uptick rule
would be ineffective in today’s market ‘‘due to
improper price sequencing caused by permitted
reporting delays and the potential for
manipulation.’’ Statement of NYSE Euronext (May
2009). Available at: http://www.sec.gov/comments/
4-581/4581-86.pdf.
We note, however, that a number of commenters
offered support for a price test restriction based on
the last sale price. See, e.g., letter from Zermatt;
letter from Bruce Lueck, Managing Partner, Zephyr
Unicorn Funds, dated Apr. 10, 2009; letter from
Walter Cruttenden, Cruttenden Partners, dated Apr.
14, 2009; letter from Larry Chlebina, President,
Chlebina Capital Management, LLC, dated Apr. 15,
2009 (‘‘Chlebina (Apr. 2009)’’); letter from Chad
McCurdy, Managing Partner, Marlin Capital
Partners, dated Apr. 20, 2009; letter from David
Wagner, CEO, Active Investment Management, LLC,
dated Apr. 22, 2009; letter from Bradley Kelly,
President, Magnum Opus Financial, dated Apr. 29,
2009; letter from Equity Insight; letter from Tony
Wyan, CEO, Tony Wyan and Company, dated May
5, 2009; letter from Aaron Shafter, President, Great

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Although we recognize that a quotation
proposes a transaction, whereas the last
trade price reflects an actual trade, we
note that pursuant to Commission and
SRO rules, quotations for all covered
securities must be firm.236 By requiring
that quotations be firm, the Commission
intended to ensure that quotations
provide reliable information to the
marketplace to assist broker-dealers in
satisfying their best execution
obligations to their customers and to
assist customers in making informed
investment decisions.237 Moreover,
quotation information has significant
value to the marketplace because it
reflects the various factors affecting the
market, including current levels of
buying and selling interest.238 Both
retail and institutional investors rely on
quotation information to understand the
market forces at work at a given time
and to assist in the formulation of
investment strategies.239
Further, we believe that bids generally
are a more accurate reflection of current
prices for a security because changes in
bids are more accurately timed than
transactions. Transactions may be
reported within a 90 second window,
which can easily result in ‘‘stale’’
reports. Even transactions that are
executed and reported automatically
may be out of sequence if they occur in
different trading centers, which can
detract from the accuracy and reliability
of the last sale. For example, trade
reporting for covered securities can
involve multiple trading centers
reporting trades in the same stock from
different locations using different means
of reporting. Thus, for those covered
securities for which a significant
amount of trading occurs manually, or
in multiple trading centers, a price test
based on the national best bid will be a
more accurate and effective means of
regulating short selling than a test based
on the last sale price because the
manner in which trades are reported
may create up-ticks and down-ticks that
may not accurately reflect actual price
movements in the security for the
purpose of a test based on the last sale
price.
We also note that the national best bid
is nearly always a protected bid for the
Mountain Capital Management, LLC, dated May 5,
2009; letter from Richard Casey, Chairman and
CEO, Casey Securities, LLC, dated May 8, 2009;
letter from Scott & Stringfellow; letter from Donald
Rembert Sr., President, Rembert Pendelton and
Jackson, dated May 28, 2009; letter from Sigmon
Wealth Management (June 2009); letter from Sears.
236 See, e.g., 17 CFR 242.602.
237 See, e.g., Exchange Act Release No. 43085
(July 28, 2000), 65 FR 47918, 47924–47925 (Aug. 4,
2000).
238 See id. at 47925.
239 See id.

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trade-through rule of Rule 611 of
Regulation NMS,240 with which every
trading center must comply. Because
trading centers’ execution procedures
must incorporate protected bids, they
will also usually include the national
best bid. Market participants will also
be familiar with using the current
national best bid as a reference point
because NASD’s former bid test, which
was in existence from 1994 to mid-2007,
was based on the current national best
bid.241
In addition, another advantage of the
alternative uptick rule is that it
accommodates trading systems and
strategies used in the marketplace today,
such as the automated trade matching
systems that offer price improvement
based on the national best bid and offer.
These passive pricing systems often
effect trades at an independentlyderived price, such as at the mid-point
of the bid-offer spread. Such pricing
would often not satisfy the tick test of
former Rule 10a–1 because matches
could potentially occur at a price below
the last reported sale price. Thus, we
provided a limited exception from
former Rule 10a–1 for these trading
systems.242 In response to the Proposal
and Re-Opening Release, commenters
noted that a short sale price test
restriction based on the current national
best bid is preferable to a restriction
based on the last sale price because it
would not impede mid-point and
similar derived price trading.243 One
such commenter noted that mid-point
trading is beneficial to the markets
because it provides price improvement
to both sides of the trade.244 The short
sale price test restrictions of Rule 201
will accommodate matching systems
that execute trades at an independentlyderived price because such systems are
designed so that matches occur above
the current national best bid.
We have also determined to adopt the
alternative uptick rule rather than the
proposed uptick rule or the proposed
modified uptick rule because it will not
require monitoring of the sequence of
bids or last sale prices (i.e., whether the
240 See

17 CFR 242.611.
former bid test referenced the national
best bid and was designed to help prevent short
selling at or below the current national best bid in
a declining market. See supra note 43 (discussing
NASD’s former bid test).
242 See, e.g., supra note 42; letter from James A.
Brigagliano, Acting Associate Director, Division of
Market Regulation, SEC, to Alan J. Reed, Jr., First
Vice President and Director of Compliance, Instinet
Group, LLC, dated June 15, 2006 (granting Instinet
modified exemptive relief from Rule 10a–1 for
certain transactions executed through Instinet’s
Intra-day Crossing System).
243 See letter from Liquidnet; letter from GE.
244 See letter from Liquidnet.
241 NASD’s

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current national best bid or last sale
price is above or below the previous
national best bid or last sale price) and,
therefore, will likely be easier to
implement and monitor. As we noted in
the Re-Opening Release, commenters
had stated that the alternative uptick
rule would likely be easier to monitor,
could likely be implemented more
quickly and with less cost, and would
be easier to program into trading and
surveillance systems than the proposed
modified uptick rule or the proposed
uptick rule because it would not require
bid sequencing.245 In response to the
Re-Opening Release, several
commenters made similar statements in
comparing the alternative uptick rule to
the proposed modified uptick rule and
proposed uptick rule.246
The requirements of Rule 201 will
also not result in the type of disparate
short sale regulation that existed under
former Rule 10a–1.247 Rule 201 will
apply a uniform rule to trades in the
same securities that can occur in
multiple, dispersed, and diverse
markets. To further this goal of having
a uniform short sale price test,
consistent with the Proposal, subsection
(e) of Rule 201 provides that no SRO
shall have any rule that is not in
conformity with, or conflicts with, Rule
201.248 One of the reasons for the
elimination of former Rule 10a–1 and
the prohibition on any SRO from having
a short sale price test in July 2007 was
that the application of short sale price
tests had become disjointed, with
different price tests applying to the
same securities trading in different
markets. One commenter noted that a
rule that does not cover all market
centers would result in an unlevel
playing field,249 while another stated
that the Commission should not adopt
a rule that would create an opportunity
245 See

Re-Opening Release, 74 FR at 42034.
e.g., letter from BATS (Sept. 2009); letter
from Credit Suisse (Sept. 2009); letter from John
McCarthy, General Counsel, Global Electronic
Trading Company, dated Sept. 21, 2009 (‘‘GETCO
(Sept. 2009)’’); letter from Hudson River Trading.
Some commenters, however, expressed
disagreement that a price test restriction that will
require sequencing of bids or last sale prices is not
technologically feasible. See, e.g., letter from
Bingham McCutchen; letter from ISE (Sept. 2009);
letter from EWT (Sept. 2009); letter from Vincent
Florack and Steve Crutchfield, Matlock Capital LLC,
dated Sept. 18, 2009 (‘‘Matlock Capital (Sept.
2009)’’); letter from Gary E. Shugrue, President,
Ascendant Capital Partners, dated May 11, 2009
(‘‘Ascendant Capital’’); letter from Robert P. Porter,
President, Paladin Investment LLC, dated May 8,
2009 (‘‘Paladin Investment’’).
247 See Proposal, 74 FR at 18044–18045
(discussing the history of short sale price test
restrictions).
248 See Rule 201(e).
249 See letter from Wells Fargo (June 2009).
246 See,

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for regulatory arbitrage.250 For this same
reason, this commenter supported a
prohibition on any SRO having a rule
that is not in conformity with or
conflicts with Rule 201.251 We believe
that a uniform rule will reduce
compliance and surveillance costs
because systems and surveillance
mechanisms will have to be
programmed to consider a single price
test based on the national best bid,
rather than different tests for different
markets. In addition, a uniform test will
reduce opportunities for regulatory
arbitrage. Accordingly, under Rule 201,
all covered securities, wherever traded,
will be subject to one short sale price
test, the alternative uptick rule.
4. Circuit Breaker Approach Generally
Under Rule 201(b), the alterative
uptick rule will apply only if the price
of a covered security has declined by
10% or more from the covered security’s
closing price as determined by the
listing market for the covered security as
of the end of regular trading hours on
the prior day.252 In the Proposal, we
proposed a permanent, market-wide
approach to short sale price test
restrictions that would result in the
proposed uptick rule or proposed
modified uptick rule applying to all
covered securities all the time.253 We
also proposed a circuit breaker
approach, either as an addition or an
alternative to a permanent, market-wide
approach, which would temporarily
result in either a halt on short selling in
a specific security or the proposed
modified uptick rule or the proposed
uptick rule applying to a specific
security if there was a significant
decline in the price of that security.254
In addition, in the Re-Opening Release,
we stated that the alternative uptick rule
could be implemented market-wide or
in combination with a short selling
circuit breaker.255
A number of commenters stated that
if we determined to adopt a short sale
price test restriction, it should be in
combination with a circuit breaker
rather than on a permanent, marketwide basis.256 For example, one

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250 See

letter from STA (June 2009).
251 See id.
252 See Rule 201(b).
253 See Proposal, 74 FR 18042.
254 See id.
255 See Re-Opening Release, 74 FR 42033.
256 See, e.g., statement of Justin Schack, Vice
President, Market Structure Analysis, Rosenblatt
Securities, Inc., at SEC Roundtable on Short Selling
(May 5, 2009) (‘‘Rosenblatt Securities’’); letter from
Richard T. Chase, Managing Director and General
Counsel, RBC Capital Markets Corporation, dated
June 19, 2009 (‘‘RBC (June 2009)’’); letter from
Michael J. Simon, Secretary, International
Securities Exchange LLC, dated June 19, 2009 (‘‘ISE

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commenter urged us to adopt a circuit
breaker approach because it would be
more narrowly-tailored to address our
concerns about the effects of short
selling in a market subject to a
significant downturn.257 This
commenter noted that in such a market,
circuit breakers likely would be
triggered for a large number of
securities.258 Another commenter stated
that a circuit breaker is preferable
because it ‘‘permits normal market
activity while a stock is trading in a
natural range and short selling is more
likely to benefit the market (by, for
example, increasing price discovery and
liquidity). Conversely, a Circuit Breaker
will restrict short selling when prices
begin to decline substantially and short
selling becomes more likely to be
abusive and potentially harmful.’’ 259
One commenter stated that ‘‘[a] circuit
breaker would better target situations
that could result from * * * potential
bear raids and other forms of
manipulation that may be used to drive
down or accelerate the decline in the
price of a stock.’’ 260
Other commenters stated that
implementing price test restrictions on
a permanent, market-wide basis, rather
than in combination with a circuit
breaker, would substantially diminish
the benefits that short sellers bring to
(June 2009)’’); memorandum of a meeting between
representatives of Penson Worldwide, Inc., and the
Division of Trading and Markets, dated July 21,
2009, and written materials submitted at the
meeting (‘‘Penson’’); letter from Direct Edge (June
2009); letter from BATS (May 2009); letter from
SIFMA (June 2009); letter from MFA (June 2009);
letter from ICI (June 2009); letter from Barclays
(June 2009); letter from Vanguard (June 2009); letter
from Goldman Sachs (June 2009); letter from Credit
Suisse (June 2009); letter from Dialectic Capital
(June 2009); letter from Allston Trading (June 2009);
letter from Knight Capital (June 2009); letter from
GETCO (June 2009); letter from Citadel et al. (June
2009); letter from William Connell, President and
CEO, Allston Trading, LLC, dated Sept. 21, 2009
(‘‘Allston Trading (Sept. 2009)’’); letter from GETCO
(Sept. 2009); letter from Dialectic Capital (Sept.
2009); letter from Credit Suisse (Sept. 2009); letter
from ICI (Sept. 2009); letter from Citadel et al. (Sept.
2009); letter from Direct Edge (Sept. 2009); letter
from RBC (Sept. 2009); letter from Goldman Sachs
(Sept. 2009); letter from BATS (Sept. 2009); letter
from SIFMA (Sept. 2009); letter from MFA (Oct.
2009); letter from AIMA; letter from IAG; letter from
Fidelity; letter from T.D. Pro Ex; letter from
Finadium; letter from Matthew B. Management;
letter from Millennium; letter from Liquidnet; letter
from Qtrade; letter from Hudson River Trading;
letter from Virtu Financial; see also letter from
Credit Suisse (Mar. 2009).
257 See letter from Citadel et al. (Sept. 2009).
258 See id.
259 Letter from Nasdaq OMX Group (Oct. 2009);
see also letter from Goldman Sachs (June 2009);
letter from MFA (June 2009); letter from BATS
(Sept. 2009); letter from Credit Suisse (Sept. 2009);
letter from Virtu Financial.
260 Letter from Hudson River Trading; see also
letter from MFA (June 2009).

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the markets.261 One commenter stated
that a price test restriction should be
adopted with a circuit breaker because
prior empirical studies did not
necessarily include times of severe
market events.262 One commenter stated
that a circuit breaker approach was
preferable because it would be easier to
implement than a permanent, marketwide rule.263
Other commenters were not
supportive of a circuit breaker
approach.264 One such commenter
stated that a permanent, market-wide
price test restriction would be preferable
to a circuit breaker approach because it
is ‘‘more predictable for market
participants and issuers alike, would
raise fewer implementation
complexities, and is less likely to have
a ‘magnet effect’ on the pricing of a
security as it approaches a circuit
breaker trigger point.’’ 265 This
commenter stated that a circuit breaker
is ‘‘unlikely to be perceived as a timely
or effective remedy against abusive
short selling, since restrictions would
only take effect after there had already
been a significant intraday price decline
in a security.’’ 266 Further, this
commenter stated that ‘‘[c]ircuit breakers
may also undermine investor
confidence because they introduce an
element of uncertainty in the pricing of
securities: At a certain point, the price
of a declining security would begin to
reflect not the fundamental value of the
security, but rather the likelihood that a
security will trigger the circuit breaker.
This ‘magnet effect’ could undermine
investor confidence, resulting in less
buying interest in securities nearing the
circuit breaker if there is a perception
that professional traders could use
sophisticated pricing models to profit
from this anomaly while public
investors, lacking access to such tools,
could not.’’ 267
Another commenter stated that it
believes that a circuit breaker approach
is unworkable because it ‘‘may
exacerbate market dislocations by
suddenly and unexpectedly altering the
regulatory regime and liquidity
261 See, e.g., letter from Direct Edge (Sept. 2009);
letter from Credit Suisse (Sept. 2009).
262 See letter from Virtu Financial.
263 See letter from SIFMA (June 2009).
264 See, e.g., letter from Glen Shipway (June
2009); letter from T. Rowe Price (Sept. 2009); letter
from NYSE Euronext (Sept. 2009); letter from EWT
(Sept. 2009).
265 Letter from NYSE Euronext (Sept. 2009).
266 Id.
267 Id.; see also letter from Amer. Bankers Assoc.
(referencing the ‘‘stigmatizing effect’’ on stocks
subject to a circuit breaker); letter from T. Rowe
Price (Sept. 2009) (expressing support for the
alternative uptick rule that would apply on a
permanent, market-wide basis).

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

characteristics of a particular security,
precisely when it is under duress.’’ 268
One commenter stated that it did not
support a circuit breaker approach
because it ‘‘would still allow abusive
short sellers to drive down the price of
a stock at least 10% on any given day
even before the circuit breaker would
kick in.’’ 269 This commenter also stated
that it was concerned that during
periods of extreme volatility, ‘‘circuit
breakers could potentially impact far too
many stocks on any given day and
damage the benefits of short selling.’’ 270
Another commenter stated that it did
not support a circuit breaker approach
because, among other things, it would
add ‘‘an additional element of trading
risk that could result in a decrease in
certain market participant’s [sic]
willingness to supply liquidity in
securities perceived to be potentially
subject to triggering of a circuit
breaker.’’ 271
In line with the Commission’s
position that market impediments
should be minimized, we believe the
short selling circuit breaker approach of
Rule 201 will benefit the market as a
narrowly-tailored response to severe
circumstances.272 As discussed above,
due to the changes in market conditions
and erosion of investor confidence that
occurred recently, investors have
become increasingly concerned about
sudden and excessive declines in prices
that appear to be unrelated to issuer
fundamentals.273 We believe that a
circuit breaker that is triggered by a
significant intra-day decline in price of
an individual security is a targeted
response to address these concerns.
Although a permanent, market-wide
approach that would apply to all
covered securities all the time may, as
one commenter stated,274 provide an
element of predictability, we believe
that the circuit breaker approach of Rule
201 is appropriate because it provides a
balance between achieving our goals for
adopting a short sale price test
restriction and limiting impediments to
the normal operations of the market.
As noted above, some commenters
expressed concerns regarding the
effectiveness and workability of a circuit
breaker approach because the price test
268 Letter
269 Letter

from EWT (Sept. 2009).
from Atherton Lane.

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270 Id.
271 Letter

from NYSE Euronext (June 2009).
Exchange Act Release No. 39846 (Apr. 9,
1998), 63 FR 18477 (Apr. 15, 1998) (order approving
proposals by Amex, BSE, CHX, NASD, NYSE, and
Phlx) (‘‘1998 Release’’).
273 See supra Section II.C. (discussing investor
confidence); see also Proposal, 74 FR at 18046–
18049.
274 See letter from NYSE Euronext (Sept. 2009).
272 See

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restriction will apply only after there
has already been a significant intra-day
price decline in a security, and because
it may exacerbate market dislocations
when a security is under duress. The
Commission has previously noted that
circuit breakers may benefit the market
by allowing participants an opportunity
to re-evaluate circumstances and
respond to volatility.275 Unlike a price
test restriction that would apply on a
permanent, market-wide basis, Rule 201
will restrict short selling for an
individual covered security for a
specified period of time. As we stated in
the Proposal, in discussing a short
selling circuit breaker, one commenter
noted that such a measure could address
the issue of ‘‘bear raids’’ while limiting
the market impact that may arise from
other forms of short sale price test
restrictions.276 In addition, although we
agree that a circuit breaker combined
with a halt on short selling may cause
or exacerbate market dislocations, we do
not believe that the circuit breaker
approach of Rule 201 will have the same
impact because it will continue to allow
short selling, although at a price above
the national best bid, even when the
price test restriction is in effect. Further,
to the extent that the circuit breaker
approach results in market dislocations,
we believe any such dislocations are
justified by the benefits provided by the
Rule.
We have designed the alternative
uptick rule implemented through a
circuit breaker to strike the appropriate
balance between our goal of preventing
potential short sale abuse and the need
to limit impediments to the normal
operations of the market. The
Commission has long held the view that
circuit breakers may help restore
investor confidence during times of
substantial uncertainty.277 We believe
that the requirements of Rule 201 will
produce similar benefits. By imposing
the alternative uptick rule once a
security’s price is experiencing a
significant intra-day price decline, the
short selling circuit breaker rule in Rule
201(b) is designed to target only those
securities that experience such declines
and, therefore, will help to prevent short
selling from being used as a tool to
exacerbate a declining market in a
security. This approach establishes a
narrowly-tailored Rule that will target
only those securities experiencing such
a decline. We believe that addressing
short selling in connection with such a
275 See

1998 Release, 63 FR 18477.
Proposal, 74 FR at 18067, n.252 (noting a
letter from Peter Brown, dated Dec. 12, 2008).
277 See, e.g., 1998 Release, 63 FR 18477; see also
Proposal, 74 FR at 18067.
276 See

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decline in an individual security will
help restore investor confidence in the
markets generally.
As discussed above, short selling is an
important tool in price discovery and
the provision of liquidity to the market,
and we recognize that imposition of a
short selling circuit breaker that when
triggered imposes the alternative uptick
rule could restrict otherwise legitimate
short selling activity during periods of
significant volatility. To the extent that
the alternative uptick rule may
negatively impact the ability of short
sellers to provide liquidity to the
markets and contribute to price
efficiency, we believe any such negative
impact is justified by the benefits
provided by the Rule in preventing
short selling, including potentially
manipulative or abusive short selling,
from driving down further the price of
a security that has already experienced
a significant intra-day price decline.
In addition, we believe that any such
negative impact will be limited both in
duration and reach. First, the circuit
breaker will apply for a limited period
of time, that is, through the end of the
day on which it is triggered and the
following day. Second, because the
restrictions of Rule 201 will apply only
when the price of a covered security has
experienced a significant intra-day price
decline, the circuit breaker approach of
Rule 201 will preserve the potential
benefits of short selling, such as the
provision of liquidity and price
efficiency, for those securities for which
prices are undergoing minimal
downward pressure, or are stable or
rising.278 To the extent that the markets
are experiencing periods of extreme
volatility, we expect that the circuit
breaker will be triggered for more
securities than during periods of low
volatility. We believe this is an
appropriate result of Rule 201 because
it is designed to impose restrictions on
short selling when individual securities
are undergoing significant intra-day
price declines. Because Rule 201 does
not impose a halt on short selling,
however, short selling will be possible
even when the circuit breaker has been
triggered, although it will be limited to
a price above the current national best
bid. A circuit breaker approach will also
allow regulatory, supervisory and
compliance resources to focus on, and
address, those situations where a
278 In addition, as discussed above, based on the
empirical evidence regarding former Rule 10a–1
that tends to demonstrate that it did not have an
effect on market liquidity and price efficiency, we
similarly believe that the alternative uptick rule
will have a minimal, if any, effect on market
liquidity or price efficiency. See supra note 220 and
accompanying text.

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specific security is experiencing
significant downward price pressure.279
As we stated in the Proposal, we
understand that there are concerns
about a potential ‘‘magnet effect’’ that
could arise as an unintended
consequence of a circuit breaker that
imposes a short selling price test
restriction.280 This ‘‘magnet effect’’
could result in short sellers driving
down the price of an equity security in
a rush to execute short sales before the
circuit breaker is triggered. We are also
concerned about short selling demand
building until the circuit breaker is
lifted. In response to our requests for
comments, several commenters stated
that a short sale circuit breaker could
exacerbate downward pressure on
stocks as their value reached the
threshold level.281 Commenters also
discussed the possibility that short
selling demand could be built up until
the short selling restriction is lifted.282
Other commenters, however, discounted
the possibility or impact of a ‘‘magnet
effect,’’ 283 including some commenters
who cited empirical studies that
question whether a circuit breaker
would result in artificial pressure on the
price of individual securities.284
After considering the comments,
including studies cited by commenters,
we do not believe that the evidence is
clear regarding a ‘‘magnet effect.’’ In fact,
many academic studies that have
analyzed circuit breakers in other
contexts found no evidence of such
trading patterns.285 We recognize,
279 See letter from Nasdaq OMX Group (Oct.
2009); letter from SIFMA (Sept. 2009).
280 See, e.g., Proposal, 74 FR at 18067.
281 See, e.g., letter from Vincent Florack and Steve
Crutchfield, Matlock Capital LLC, dated May 26,
2009 (‘‘Matlock Capital (May 2009)’’); letter from
Schwab; letter from Lime Brokerage (June 2009);
letter from STA (June 2009); letter from Glen
Shipway (June 2009); letter from NYSE Euronext
(June 2009); letter from Wolverine; letter from
Direct Edge (June 2009); letter from Amer. Bankers
Assoc.; letter from NYSE Euronext (Sept. 2009); see
also letter from SIFMA (June 2009) (indicating that
an ‘‘on/off’’ circuit breaker trigger could dampen any
magnet effect); letter from Direct Edge (Mar. 2009).
282 See letter from STA (June 2009); letter from
Wolverine.
283 See letter from BATS (May 2009); letter from
Credit Suisse (June 2009); letter from Credit Suisse
(Sept. 2009); letter from Hudson River Trading;
letter from Virtu Financial; see also letter from
Credit Suisse (Mar. 2009).
284 See letter from Credit Suisse (June 2009); letter
from Credit Suisse (Sept. 2009); see also letter from
Credit Suisse (Mar. 2009); letter from Nasdaq OMX
Group (Oct. 2009).
285 See, e.g., letter from Credit Suisse (June 2009);
see also David Abad and Roberto Pascual, On the
Magnet Effect of Price Limits, European Financial
Management, 13:833–852 (2007) (studying the
Spanish stock exchange); Chan et al., Price limit
performance: Evidence from transactions data and
the limit order book, Journal of Empirical Finance,
12: 269–290 (2005) (studying the Kuala Lumpur
Stock Exchange); Anthony D. Hall and Paul

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however, that some of these studies
were conducted in markets dissimilar
from the highly automated markets
currently existing in the United States
and, therefore, that limits their utility in
this context. Overall, however, the most
relevant studies fail to demonstrate a
magnet effect and we believe that
adopting the circuit breaker approach
best serves our goals.
5. Circuit Breaker Trigger Level and
Duration
In the Proposal, we proposed that if
the price of a covered security declined
by at least 10% from the prior day’s
closing price for that covered security,
as measured by the closing price of the
covered security on the consolidated
system, then all short selling in the
covered security would be subject to a
halt or a price test restriction for the
remainder of the trading day.286 To
avoid market disruption that might
occur if a circuit breaker were triggered
late in the trading day, the circuit
breaker rules, as proposed, would not
have been triggered if the specified
market decline threshold was reached in
a covered security within thirty minutes
of the end of regular trading hours.287
In Rule 201(b), we are adopting a 10%
trigger level measured from the closing
price determined by the covered
security’s listing market as of the end of
regular trading hours on the prior
day.288 This differs from the Proposal,
under which the price decline would
have been measured from the covered
security’s last price reported in the
consolidated system during regular
trading hours on the prior day.289 In
addition, we are modifying the
proposed duration of the price test
restriction once the circuit breaker is
triggered. Under Rule 201(b), as
adopted, once the circuit breaker has
been triggered, the price test restriction
will remain in place for the remainder
Korfman, Limits to linear price behavior: Futures
prices regulated by limits, Journal of Futures
Markets, 21:463–488 (2001) (studying five
agriculture futures contracts); Henk Berkman and
Onno Steenbeek, The influence of daily price limits
on trading in Nikkei futures, Journal of Futures
Markets, 18:265–279 (1998) (studying futures
contracts on the Osaka Securities Exchange);
Marcelle Arak and Richard E. Cook, Do daily price
limits act as magnets? The case of treasury bond
futures, Journal of Financial Services Research,
12:5–20 (1997) (studying treasury bond futures).
286 See Proposal, 74 FR at 18066.
287 See id.
288 ‘‘Regular trading hours’’ is defined in Rule 201
to have the same meaning as in Rule 600(b)(64) of
Regulation NMS. See Rule 201(a)(7). Rule
600(b)(64) provides that ‘‘Regular trading hours
means the time between 9:30 a.m. and 4:00 p.m.
Eastern Time, or such other time as is set forth in
the procedures established pursuant to
§ 242.605(a)(2).’’ 17 CFR 242.600(b)(64).
289 See Proposal, 74 FR at 18066.

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of the day and for the following day.290
In addition, as discussed in more detail
below, because the price test restriction
will remain in place for the remainder
of the day and for the following day, we
are not adopting in Rule 201 a provision
that the short sale price test restriction
of the Rule will not be triggered if the
10% trigger level is reached in a covered
security within thirty minutes of the
end of regular trading hours.
In the Proposal, we noted our
preliminary belief that a 10% decline in
a security’s price from the prior day’s
closing price would be an appropriate
level at which to trigger the proposed
circuit breaker rules.291 We also noted
that a 10% threshold would be
consistent with current SRO rules that
restrict or halt trading if key market
indexes fall by specified amounts (‘‘SRO
Circuit Breakers’’) 292 and had been
recommended by certain
commenters.293 The Commission
solicited comment on whether a 10%
decline from the prior day’s closing
price would be an appropriate threshold
290 Rule 201(b). We note that if the price of a
covered security declines intra-day by at least 10%
on a day on which the security is already subject
to the short sale price test restriction of Rule 201,
the restriction will be re-triggered and, therefore,
will continue in effect for the remainder of that day
and the following day. For example, if on Monday,
the price of XYZ security declines intra-day by at
least 10%, XYZ security will be subject to the
alternative uptick rule for the remainder of Monday
and for the following day, Tuesday. If then on
Tuesday, the price of XYZ security again declines
intra-day by at least 10%, the circuit breaker will
be re-triggered for that security such that the
alternative uptick rule will apply for the following
day, i.e., Wednesday, as well as for the remainder
of the day on Tuesday.
291 See Proposal, 74 FR at 18066, 18069.
292 See Proposal, 74 FR at 18065–18066. To
protect investors and the markets, the Commission
has approved proposals to restrict or halt trading if
key market indexes fall by specified amounts.
Currently, all stock exchanges and FINRA have
rules or policies to implement coordinated circuit
breaker halts. See 1998 Release, 63 FR 18477; see
also NYSE Rule 80B. The circuit breaker procedures
call for cross-market trading halts when the Dow
Jones Industrial Average (‘‘DJIA’’) declines by 10%,
20%, and 30% from the previous day’s closing
value. See, e.g., BATS Exchange Rule 11.18. The
options markets also have rules applying circuit
breakers. See Amex Rule 950 (applying Amex Rule
117, Trading Halts Due to Extraordinary Market
Volatility, to options transactions); CBOE Rule 6.3B;
ISE Rule 703; NYSE Arca Options Rule 7.5; and
Phlx Rule 133. The futures exchanges that trade
index futures contracts have adopted circuit breaker
halt procedures in conjunction with their price
limit rules for index products. See, e.g., CME Rule
35102.I. The CME will implement a trading halt on
S&P 500 Index futures contracts if a NYSE Rule 80B
trading halt is imposed in the primary securities
market. Trading of S&P 500 Index futures contracts
will resume upon lifting of the NYSE Rule 80B
trading halt. Finally, security futures products are
required to have cross-market circuit breaker
regulatory halt procedures in place. See Exchange
Act Release No. 45956 (May 17, 2002), 67 FR 36740
(May 24, 2002).
293 See Proposal, 74 FR at 18066.

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at which to trigger the proposed circuit
breaker short sale price restrictions.294
We noted that the threshold level would
affect the balance of the costs and
benefits of the Rule; a low trigger level
could result in more securities being
subject to the proposed short sale price
test restrictions, or subject to them more
frequently, and a high trigger level
could result in securities facing more
significant declines before the benefits
of the short sale price test restrictions
applied.295
In response to our request for
comment, several commenters
expressed support for a 10% trigger
level.296 One commenter did not
specifically object to the 10% threshold,
but stated that 10% should be the
minimum trigger level considered.297
One commenter expressed support for a
lower, 5% trigger level.298
Several commenters expressed
support for a trigger level higher than
10%.299 Several of these commenters
stated that a circuit breaker threshold of
10% would be too narrow or
restrictive.300 Other commenters
indicated that a circuit breaker should
only be triggered in extraordinary
circumstances and asked that we
consider a trigger level higher than 10%
due to concerns that a 10% trigger level
would capture ‘‘normal’’ trading
activity.301 Several commenters
indicated that a higher trigger level
would be particularly important for
lower priced securities because a 10%
trigger level would likely be reached
frequently even in the absence of
abnormal activity for such securities.302
Other commenters indicated that, in
294 See

Proposal, 74 FR at 18066, 18069, 18070.
Proposal, 74 FR at 18079, 18081.
296 See, e.g., letter from BATS (May 2009); letter
from Allston Trading (June 2009); letter from IBC.
297 See letter from Direct Edge (June 2009).
298 See letter from James J. Angel, Ph.D., CFA,
Associate Professor of Finance, McDonough School
of Business, Georgetown University, dated Sept. 21,
2009 (‘‘Prof. Angel (Sept. 2009)’’).
299 See, e.g., letter from MFA (June 2009); letter
from Goldman Sachs (June 2009); letter from ISDA;
letter from ISE (June 2009); letter from SIFMA (June
2009); letter from Citadel et al. (June 2009); letter
from Dialectic Capital (Sept. 2009); letter from
Goldman Sachs (Sept. 2009); letter from ISE (Sept.
2009); letter from SIFMA (Sept. 2009); letter from
Virtu Financial; letter from Nasdaq OMX Group
(Oct. 2009).
300 See, e.g., letter from MFA (June 2009); letter
from ISDA; letter from ISE (June 2009); letter from
Virtu Financial; letter from Jordan & Jordan; letter
from Credit Suisse (June 2009).
301 See, e.g., letter from MFA (June 2009); letter
from Citadel et al. (June 2009); letter from Goldman
Sachs (June 2009); letter from ISDA; letter from ISE
(June 2009); letter from SIFMA (June 2009); letter
from Dialectic Capital (Sept. 2009); letter from
SIFMA (Sept. 2009); letter from Virtu Financial.
302 See, e.g., letter from Barclays (June 2009);
letter from ISDA; letter from SIFMA (June 2009);
letter from SIFMA (Sept. 2009).

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addition to price, the trigger level
should factor in other characteristics of
individual securities, such as volume
and volatility.303 One commenter stated
that a higher trigger level would be
especially important for a circuit
breaker in conjunction with the
alternative uptick rule because the
alternative uptick rule is more
restrictive than the other proposed price
tests.304
In addition, several commenters
submitted estimates of the number of
securities that would trigger a circuit
breaker rule at a 10% threshold.305
While commenters’ analyses (including
the facts and assumptions used) and
their resulting estimates varied,306
commenters’ estimates reflect that a
10% circuit breaker threshold, on
average, should affect only a limited
percentage of covered securities.307 For
example, one commenter submitted an
estimate that slightly more than 5% of
a universe of 4,800 NMS common stocks
would have ‘‘tripped the 10% threshold
on average each day’’ during roughly the
first half of 2009.308 In determining that
a 10% threshold is appropriate, we
considered other thresholds and the
data presented by commenters regarding
303 See letter from Direct Edge (June 2009); letter
from Barclays (June 2009); letter from Goldman
Sachs (June 2009); letter from Lime Brokerage (June
2009); letter from Direct Edge (Sept. 2009); letter
from Goldman Sachs (Sept. 2009).
304 See letter from ISE (Sept. 2009).
305 See, e.g., letter from Jordan & Jordan; letter
from Citadel et al. (June 2009); letter from MFA
(June 2009); letter from SIFMA (June 2009); letter
from Credit Suisse (Sept. 2009).
306 See, e.g., letter from Jordan & Jordan
(providing estimated percentages of exchange listed
stocks impacted by a 10% circuit breaker threshold
on sample days); letter from MFA (June 2009)
(providing the average daily number and percentage
of Russell 3000 stocks impacted by a 10% circuit
breaker threshold over a ten year period); letter
from Credit Suisse (Sept. 2009) (providing the
number of times, by month, a circuit breaker with
a 10% threshold would have been triggered for S&P
500 stocks and for Russell 2000 stocks); letter from
SIFMA (June 2009) (referencing two member firms’
estimates, one that provided the average number of
stocks out of 4,800 NMS common stocks that would
have triggered the 10% threshold during roughly
the first half of 2009 and another that measured the
average number of Russell 3000 stocks per day that
declined by 10% from their opening price from
November 2008 to March 2009).
307 See, e.g., letter from MFA (June 2009)
(reflecting that approximately 5% of Russell 3000
stocks would have been impacted at any one time
by a circuit breaker with a 10% threshold during
the period of October 1998 to September 2008);
letter from SIFMA (June 2009) (reflecting that
approximately 3% of Russell 3000 stocks trading
above $10 and 16.5% of Russell 3000 stocks trading
below $10 would have been impacted by a 10%
threshold measured from the security’s opening
price during the period of November 2008 through
March 2009); but cf letter from Jordan & Jordan. We
note that the sample of days in the data reflected
in the letter from Jordan & Jordan is not
representative of typical trading.
308 Letter from SIFMA (June 2009).

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the numbers of securities that they
believed would be subject to a short sale
price test restriction at those different
thresholds. Given the variations in the
facts and assumptions underlying the
estimates submitted by commenters, the
Staff also looked at trading data to
confirm the reasonableness of those
estimates. The Staff found that, over the
period covering April 9, 2001 to
September 30, 2009,309 the 10% trigger
level of Rule 201 would have, on an
average day, been triggered for
approximately 4% of covered
securities.310 The Staff also found that
for a low volatility period, covering
January 1, 2004 to December 31, 2006,
the 10% trigger level of Rule 201 would
have, on an average day, been triggered
for approximately 1.3% of covered
securities.311
After considering the comments, we
believe that a 10% decline in a
security’s price, as measured from the
security’s closing price on the prior day,
is an appropriate level at which to
trigger a circuit breaker. As discussed in
the Proposal, the circuit breaker short
sale price test restrictions were designed
to target a security experiencing a
significant intra-day price decline,
where the concerns about the potential
harmful effects of short selling would be
greatest. In this way, they would be
tailored to help prevent short selling,
including potentially abusive or
manipulative short selling, from being
used as a tool to exacerbate the
declining market in those securities
309 This time period constitutes the period after
full implementation of decimal increments.
310 The Staff estimates that on the average day
during this period, approximately 6.0% of stocks
would have been impacted by the Rule, which is
comprised of 3.4% of stocks that would have
triggered the circuit breaker on a given day, plus an
additional 2.6% of stocks that would have been
affected as a result of having triggered the circuit
breaker on the previous day. We note that the actual
percentage of stocks affected by the Rule in the
future could be different from the historical average,
particularly under different market conditions. In
particular, the percentage of stocks affected by the
Rule is likely to be higher under crisis conditions.
For example, the Staff estimates that on October 10,
2008 approximately 68.1% of stocks would have
traded under a short sale price test during part or
all of the day while on November 24, 2006
approximately 0.6% of stocks would have traded
under a short sale price test during part or all of
the day. The S&P 500 Index was down nearly 15%
on October 10, 2008 from the closing price two days
earlier while the S&P 500 Index was nearly flat on
November 24, 2006 from the closing price two days
earlier. The estimates are calculated based on data
from CRSP US Stock Database ©2009 Center for
Research in Security Prices (CRSP), The University
of Chicago Booth School of Business.
311 The period from 2004 to 2006 exhibited low
daily volatility as measured by the S&P 500 Index.
The estimates are calculated based on data from
CRSP US Stock Database ©2009 Center for Research
in Security Prices (CRSP), The University of
Chicago Booth School of Business.

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
experiencing a significant intra-day
decline and, thereby, help stabilize the
market in those securities and help
address concerns about the erosion in
investor confidence.312 At the same
time, we explained, the proposed circuit
breaker price test restrictions would not
impact trading in the majority of
securities, and so would preserve the
benefits of legitimate short selling, such
as the provision of liquidity and price
efficiency, in those securities.313
Although we recognize commenters’
concerns that a 10% trigger level may
capture some ‘‘normal’’ trading activity,
commenters’ estimates and the Staff’s
analysis show that a 10% circuit breaker
threshold generally should affect only a
limited percentage of covered securities.
This supports the conclusion that Rule
201 provides a tailored approach that
reaches a limited subset of covered
securities that are experiencing a
significant intra-day price decline,
while generally not restricting short
selling in the majority of covered
securities. Thus, by including a 10%
trigger level in Rule 201, the Rule will
not interfere with trading in the majority
of securities most of the time, including
when prices in such securities are
undergoing minimal downward price
pressure or are stable or rising. In
addition, we note that a circuit breaker
approach is more targeted than applying
a short sale price test restriction on a
permanent, market-wide basis, and that
any circuit breaker approach needs to
have a line drawn.
Further, we are concerned that setting
a trigger level higher than 10% would
undermine our goals of helping to
prevent short selling from being used as
a tool to exacerbate a price decline in a
particular security and of increasing
investor confidence because so few
securities would, on average, trigger a
threshold higher than 10%.314 The 10%
threshold for a circuit breaker that,
when triggered, results in all short
selling in a covered security being
subject to the alternative uptick rule
strikes a balance between the need to
restrict short selling in moments of
significant intra-day price declines in a
covered security and the market
participant’s expectation that its short
selling strategy will normally be

available in an efficient and open
marketplace. Thus, we have determined
that a 10% trigger level strikes the right
balance among our goals of facilitating
the smooth functioning of the markets,
preserving investor confidence, and
preventing abusive market practices.
Although we recognize commenters’
concerns that a 10% trigger level may be
reached more frequently for lower
priced securities, at this time we have
determined not to set a higher trigger
level for lower priced securities, or to
base the trigger on other characteristics
of a security. Varying the trigger level
according to characteristics of
individual securities would complicate
and increase costs with respect to
implementation of, compliance with,
and regulatory oversight of, Rule 201.
Moreover, contrary to the concerns of
commenters, we believe that having a
trigger level that is reached more
frequently for lower priced stocks may
be beneficial. As stated in the Staff’s
Summary Pilot Report, during the Pilot,
the Staff found some evidence that short
sale price tests dampened intra-day
volatility in the smallest market
capitalization stocks, which tend to
have lower share prices than larger
market capitalization stocks.315 Thus, a
trigger level that is reached more
frequently for lower priced stocks may
impose the alternative uptick rule in
those situations where it is more likely
to dampen volatility and achieve our
goals in adopting short sale price test
restrictions.
In response to our request for
comment,316 some commenters asked
that we clarify how to determine the
official price from which to measure a
price decline and to designate from
where that price will come.317 In
addition, a number of commenters
expressed concerns that measuring the
trigger level from the prior day’s closing
price for a security would result in a
short selling restriction being applied as
the result of a price change caused by
the overnight release of material news or
other significant events outside of
trading hours.318 Several commenters
asked that the percentage decline be
measured from the covered security’s
315 See

Staff’s Summary Pilot Report at 55–56, 81.
Proposal, 74 FR at 18066, 18079.
317 See, e.g., letter from SIFMA (June 2009).
318 See, e.g., letter from Citadel et al. (June 2009);
letter from GETCO (June 2009); letter from Goldman
Sachs (June 2009); letter from Lime Brokerage (June
2009); letter from SIFMA (June 2009); letter from
Credit Suisse (June 2009); letter from Credit Suisse
(Sept. 2009); letter from Hudson River Trading;
letter from Virtu Financial; see also letter from
CBOE (June 2009) (stating that the opening price
would take into account after hours news and avoid
disorderly openings, particularly on options
settlement dates).
316 See

312 See,

e.g., Proposal, 74 FR at 18065, 18069.
e.g., Proposal, 74 FR at 18065, 18069; see
also Proposal, 74 FR at 18104 (‘‘By targeting only
those securities that experience severe intraday
declines, all three proposed circuit breaker rules
would be narrowly tailored so that most stocks
would not fall under any new short sale
restrictions.’’).
314 See supra notes 305 to 311 (discussing the
limited number of securities that would, on an
average day, trigger a circuit breaker with a 10%
threshold).

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11255

opening price rather than the prior day’s
closing price.319 One commenter
specified that the opening price should
be the official opening price distributed
by a SIP,320 while other commenters
stated that it should be the opening
price on the covered security’s primary
market.321 One commenter stated that
the opening print should not be
included in the measurement of the
trigger level.322 Other commenters,
however, supported our proposal to
measure the decline from the previous
day’s closing price.323 One commenter
noted that measuring the trigger level
from the previous day’s closing price
might be easier to implement in
connection with a policies and
procedures approach.324
As discussed in more detail in Section
III.A.6. below, Rule 201(b)(3) provides
that the listing market for each covered
security must determine whether a
covered security’s price has declined by
10% or more such that it is subject to
the short sale price test restrictions of
Rule 201 and such information must be
disseminated to the trading centers via
the applicable single plan processor.325
As set forth in Rule 201(b)(1), we have
determined that it is appropriate to
measure the price decline from the
covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day. In the
proposed circuit breaker rules, we
proposed that the decline in a covered
security’s price would be measured
from the security’s last price as reported
in the consolidated system during
319 See, e.g., letter from Knight Capital (June
2009); letter from Citadel et al. (June. 2009); letter
from GETCO (June 2009); letter from Goldman
Sachs (June 2009); letter from Lime Brokerage (June
2009); letter from SIFMA (June 2009); letter from
Credit Suisse (June 2009); letter from Credit Suisse
(Sept. 2009); letter from Goldman Sachs (Sept.
2009); letter from Hudson River Trading.
320 See letter from Virtu Financial.
321 See, e.g., letter from Goldman Sachs (June
2009); letter from SIFMA (June 2009).
322 See letter from SIFMA (June 2009).
323 See, e.g., letter from IBC; letter from Nasdaq
OMX Group (Oct. 2009).
324 See letter from SIFMA (June 2009); see also
letter from Glen Shipway (June 2009) (noting that
basing the trigger level on the previous day’s
closing price ‘‘certainly would be a price
mechanism easier to track and to comprehend by
market participants’’).
325 See Rule 201(b)(3); see also infra Section
III.A.6. Rule 201(a)(6) provides that ‘‘[t]he term plan
processor shall have the same meaning as in
§ 242.600(b)(55).’’ Rule 600(b)(55) of Regulation
NMS states: ‘‘Plan processor means any selfregulatory organization or securities information
processor acting as an exclusive processor in
connection with the development, implementation
and/or operation of any facility contemplated by an
effective national market system plan.’’ The single
plan processors are ‘‘exclusive processors’’ as
defined under Section 3(a)(22) of the Exchange Act.
17 CFR 242.600(b)(55). See 15 U.S.C. 78c(a)(22).

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regular trading hours on the prior
day.326 After considering the comments,
we believe that the closing price as
determined by the covered security’s
listing market as of the end of regular
trading hours on the prior day will
provide a more accurate price from
which to measure a decline in price
than the last price reported in the
consolidated system. We believe that
the last price reported in the
consolidated system is more likely to
reflect an anomalous trade, e.g., a trade
that is not consistent with the current
market due to, for example, the 90
second reporting window, or an
uncorrected error. Listing markets
generally have in place specific
procedures designed to ensure the
accuracy and reliability of their closing
prices.327 Thus, we believe it is
appropriate to use the more accurate
closing price as determined by the
covered security’s listing market rather
than the last price reported in the
consolidated system.
We also believe that the price decline
in a covered security under Rule
201(b)(1)(i) should be measured from
the covered security’s closing price
reported on the prior day rather than
from each day’s opening price for the
covered security because the closing
price provides a clearly discernible
price and time from which to measure
the decline. The closing price of a
covered security will be known by or
shortly after the end of regular trading
hours such that the listing markets will
have a price on the following day from
which to determine if a covered security
is subject to the short sale price test
restrictions of Rule 201. An opening
price, on the other hand, is established
only if there is opening interest for a
security, which, for thinly traded
securities, may present issues. In
addition, as noted by one commenter,
we believe that measuring the price
decline from the closing price on the
prior day is preferable because it should
be easier to implement than a
requirement to measure the decline
from the covered security’s opening
price.328 For example, should any
uncertainties in price occur, using the
closing price as a measurement will
provide time to resolve any such
uncertainties before the requirements of
Rule 201 will potentially apply. If the
Rule required that the decline must be
measured from the opening price, any
uncertainties would have to be resolved
in real time, so that if a 10% or more
326 See

Proposal, 74 FR at 18110–18113.
e.g., NYSE Rule 116.40; NYSE Rule

327 See,

123C(3).
328 See letter from SIFMA (June 2009).

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price decline were to occur, the short
sale price test restrictions of Rule 201
could be applied that day in accordance
with the Rule.
As noted above, under Rule 201(b),
once the circuit breaker has been
triggered, the price test restriction will
remain in place for the remainder of the
day and for the following day. This
requirement differs from the proposed
circuit breaker rules that would have
applied a short selling halt or short sale
price test restriction for the remainder of
the day only.
In response to our request for
comment on the duration of the
proposed circuit breaker rules,
comments were mixed. For example,
one commenter suggested that the
Commission should consider extending
the duration of the short selling
restriction through the close of trading
on the trading day following the
triggering of the circuit breaker to allow
sufficient time to achieve the
Commission’s intended purpose of
‘‘halting or slowing a price decline in a
security.’’ 329 Some commenters
supported the proposed period for the
circuit breaker of the remainder of the
trading day 330 for various reasons,
including that the limited duration
would mitigate the potential adverse
impact of a short selling restriction.331
In addition, several commenters
supported a circuit breaker with a
duration of less than the remainder of
the trading day.332
One commenter, however, stated that
the circuit breaker should not be in
effect for multiple days, but also that it
should not be in effect for a matter of
hours because ‘‘frequent changes in the
status of a security would create more
disruption.’’ 333 Several commenters
who supported a circuit breaker with a
duration of less than the remainder of
the trading day stated that the circuit
breaker should be lifted if the security’s
price has recovered and the price
329 See letter from RBC (June 2009); see also letter
from Credit Suisse (Mar. 2009).
330 See, e.g., letter from Direct Edge (June 2009)
(stating that the circuit breaker should be limited
in duration to the end of the trading day with
respect to the proposed circuit breaker halt rule);
letter from AIMA; letter from Goldman Sachs (June
2009).
331 See, e.g., letter from AIMA; see also letter from
Direct Edge (June 2009) (opposing a circuit breaker
duration beyond one trading day specifically with
respect to a circuit breaker triggering a short selling
halt); letter from Barclays (June 2009); letter from
Goldman Sachs (June 2009).
332 See letter from Barclays (June 2009); letter
from Citadel et al. (June 2009); letter from SIFMA
(June 2009); see also letter from Jordan & Jordan
(providing data regarding the extent to which
securities with an ‘‘on/off’’ trigger recovered by the
end of trading).
333 Letter from Goldman Sachs (June 2009).

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decline is less than 10% before the end
of the trading day.334 These commenters
stated, among other things, that such a
recovery may be a common
occurrence 335 and that lifting the circuit
breaker would take into account the
resilience of the markets.336 Another
commenter stated that the circuit
breaker should only be in effect long
enough to re-establish equilibrium
between buying and selling interests
and further noted that the duration of
the circuit breaker should depend on
the time of day when the threshold is
triggered.337
Some commenters supported the
Commission’s proposal that a circuit
breaker would not be triggered if the
10% trigger level were reached in a
covered security within thirty minutes
of the end of regular trading hours.338
Other commenters, however, stated that
the last thirty minutes of the day has
become the most volatile part of the day
and that this is exactly the time that a
rule that would slow short selling and
reduce volatility would be most
needed.339
After considering the comments, we
believe it is appropriate to apply the
alternative uptick rule, when triggered,
for the remainder of the day and the day
following the day on which the circuit
breaker is triggered. We believe that a
circuit breaker that is in effect for the
remainder of the day and the following
day will have the advantage of being
more effective at preventing short
selling from being used as a tool to
exacerbate a security’s decline in price.
As we, and several commenters, have
noted, because the alternative uptick
rule will permit short selling only at a
price above the current national best
bid, it will likely be the most effective
of the proposed price tests at preventing
short selling from driving down further
a security’s price or from exacerbating a
price decline.340 A circuit breaker that
will impose a short selling restriction
for only the remainder of the trading
day, or as some commenters suggested,
for less than the remainder of the
trading day, may not allow sufficient
time for the short selling restriction to
have its desired effect. To the extent that
short selling is causing or contributing
334 See letter from Barclays (June 2009); letter
from SIFMA (June 2009).
335 See letter from SIFMA (June 2009).
336 See letter from Barclays (June 2009).
337 See letter from Citadel et al. (June 2009).
338 See letter from Barclays (June 2009); letter
from Citadel et al. (June 2009).
339 See, e.g., letter from Jibralta Merrill, dated May
5, 2009; letter from Arthur Porcari, dated May 11,
2009; letter from IBC; letter from STA (June 2009).
340 See letter from Wells Fargo (Sept. 2009); letter
from STA (Sept. 2009); letter from Glen Shipway
(Sept. 2009); letter from BATS (Sept. 2009).

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
to downward price pressure, a longer
duration will provide additional time
during which the security will be
subject to reduced downward price
pressure from short selling. In addition,
we note that the circuit breaker could be
triggered at any point during regular
trading hours. Further, as noted by one
commenter, we are concerned that if the
circuit breaker is triggered late in the
day, such that it would be in effect for
only a short period of time, this would
in fact create more disruption rather
than achieving our goals with respect to
short sale price test restrictions for that
security.341 By applying the short sale
price test restriction for the day
following the day on which it is
triggered, the time period will help
ensure that there is not unnecessary
disruption caused by the triggering of
the circuit breaker.
As discussed above, the Commission
has previously noted that circuit
breakers may benefit the market by
allowing participants an opportunity to
re-evaluate circumstances and respond
to volatility.342 We believe that
imposing a short selling restriction for
the remainder of the day and the
following day will help ensure that
market participants have a reasonable
opportunity to become aware of, and
respond to, a significant decline in a
security’s price, and will provide
sufficient time to re-establish market
efficiency in the individual security.
Although, for the reasons discussed
above, we believe it is necessary to
impose the short sale price test
restriction of Rule 201 for longer than
the remainder of the day, we do not
believe it is appropriate to extend the
duration beyond the time period
specified in Rule 201 because we
believe that the duration specified in
Rule 201 strikes the appropriate balance
between achieving our goals in adopting
Rule 201 and not causing unnecessary
market disruption.
In the Proposal, we stated that to
avoid market disruption that may occur
if a circuit breaker is triggered late in the
trading day, the proposed circuit
breaker rules would not be triggered if
the specified market decline threshold
is reached in a covered security within
thirty minutes of the end of regular
trading hours.343 As noted above,
because the short sale price test
restriction of Rule 201 will remain in
place for the remainder of the day and
the following day, we have determined
not to include a provision in Rule 201
stating that the Rule’s restrictions will
341 See

supra note 333 and accompanying text.
supra note 275 and accompanying text.
343 See Proposal, 74 FR at 18066.
342 See

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not be triggered if the 10% trigger level
is reached in a covered security within
thirty minutes of the end of regular
trading hours. We believe it is
appropriate to apply Rule 201 during
the last thirty minutes of regular trading
hours because, due to potential
volatility during this period, it is a time
period when a covered security’s price
may experience a significant decline.
Consistent with the Proposal, we have
determined to apply the price test
restriction, if triggered, during periods
when the national best bid is calculated
and disseminated on a current and
continuing basis by a plan processor.344
As discussed above and as we discussed
in the Proposal,345 market information
for quotes in covered securities is
disseminated pursuant to two different
national market system plans, the CQ
Plan and Nasdaq UTP Plan.346
Quotation information is made available
pursuant to the CQ Plan between 9 a.m.
and 6:30 p.m. ET, while one or more
participants is open for trading. In
addition, quotation information is made
available pursuant to the CQ Plan
during any other period in which any
one or more participants wish to furnish
quotation information to the Plan.347
Quotation information is made available
by the Nasdaq UTP Plan between 9:30
a.m. and 4 p.m. ET. The Nasdaq UTP
Plan also collects, processes, and
disseminates quotation information
between 4 a.m. and 9:30 a.m. ET, and
after 4 p.m. when any participant is
open for trading, until 8 p.m. ET.348
During the time periods in which these
Plans do not operate, real-time quote
information is not collected, calculated
and disseminated.
In response to our request for
comment,349 one commenter stated that
any price test restriction should be
applied during regular trading hours
only because the period when the
current national best bid is calculated,
collected and disseminated ‘‘can vary
depending on whether a participant in
the particular national market system
governing quote consolidation for a
security decides to pay the consolidator
Rule 201(b).
Proposal, 74 FR at 18060, 18064–18065.
346 See supra note 199 and accompanying text.
See also 17 CFR 242.603(b). Rule 603 of Regulation
NMS requires that every national securities
exchange on which an NMS stock is traded and
national securities association shall act jointly
pursuant to one or more effective national market
system plans to disseminate consolidated
information, including a national best bid and
national best offer, on quotations for and
transactions in NMS stocks.
347 See http://www.nyxdata.com/cta.
348 See http://www.utpdata.com/docs/
UTP_PlanAmendment.pdf.
349 See, e.g., Proposal, 74 FR at 18060.

11257

to extend the hours of the calculation of
the bid.’’ 350 In contrast, other
commenters stated that the proposed
price test restrictions should apply at all
times during after-hours trading.351
Because the short sale price test
restrictions of Rule 201 are based on the
current national best bid, we believe
that the restrictions should apply at all
times when the current national best bid
is collected, calculated and
disseminated even though this period
can vary depending on whether a
participant in the particular national
market system governing quote
consolidation for a security decides to
pay the consolidator to extend the hours
of the calculation of the bid.352 Thus,
the price test restrictions of Rule 201
will apply at times when quotation
information and, therefore, the national
best bid, is collected, processed, and
disseminated pursuant to a national
market system plan. We note, however,
that at a later time we may reconsider
whether any changes to Rule 201 would
be necessary to also apply the Rule to
short selling during times when the
national best bid is not collected,
calculated and disseminated, in light of
any new information on short selling
activity during these times.
6. Determination Regarding Securities
Subject to Rule 201 and Dissemination
of Such Information
In the Proposal, we requested
comment regarding who should be
responsible for monitoring the price
declines of individual securities to
determine if they trigger the short
selling circuit breaker, such as brokerdealers or SROs, how such information
should be disseminated to the market,
and who should be responsible for
disseminating the information.353 In
response to our request for comment,
some commenters stated that if we were
to adopt a circuit breaker rule, securities
subject to the Rule should be tracked
and disseminated by the SIP for the
covered security in question, noting that
SIPs currently track and disseminate

344 See
345 See

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350 Letter from Credit Suisse (Sept. 2009); see also
letter from SIFMA (June 2009); letter from Goldman
Sachs (June 2009); letter from T. Rowe Price (June
2009).
351 See, e.g., letter from Michael Sigmon,
Chairman, Sigmon Wealth Management, dated Apr.
14, 2009; letter from IBC.
352 We note that currently, the period during
which the current national best bid is collected,
calculated and disseminated can vary depending on
whether a participant in the particular national
market system governing quote consolidation for a
security has decided to pay the consolidator to
extend the hours of the calculation of the bid.
353 See Proposal, 74 FR at 18078.

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percentage moves 354 and that such a
role would be consistent with the
responsibilities of a SIP to collect,
process, distribute and publish
information with respect to transactions
in, or quotations for, any security for
which it acts as a SIP on a current and
continuing basis.355 One commenter
stated that it would be inappropriate to
allow each market to perform its own
calculation or to impose the
responsibility on a particular market
due to the importance of ensuring that
triggering of a circuit breaker is
communicated to all markets and
market participants on a fair, impartial
and timely basis.356 Other commenters
stated that the listing market for a
covered security should communicate
the triggering of the circuit breaker to
the SIP for the covered security, which
would then redistribute such
information to the market.357 Another
commenter stated that the exchanges
should be required to develop and
maintain ‘‘a centralized real-time list of
all securities subject to the circuit
breaker price test.’’ 358 This commenter
stated that it believes this centralization
‘‘would ensure consistent treatment of
orders and help reduce the costs of
compliance for market participants.’’ 359
One commenter stated that as an
alternative to the listing market
notifying the SIP for a covered security
when the circuit breaker has been
triggered, trading centers could arrange
to receive this information directly from
the listing market.360
After considering the comments, we
have determined that the listing market
for each covered security must
determine whether that covered security
is subject to Rule 201.361 Rule 201(a)(3)
defines the term ‘‘listing market’’ to have
the same meaning as the term ‘‘listing
market’’ as defined in the effective
transaction reporting plan for the
covered security.362 Because the
354 See, e.g., letter from Virtu Financial (also
stating that the SIPs would add a flag to their data
feeds that would announce when the circuit breaker
is in effect).
355 See letter from NYSE Euronext (Sept. 2009);
see also letter from SIFMA (June 2009) (stating that
some of its member firms ‘‘believe that exchangecontrolled SIPs should monitor prices and
disseminate information flags when a security is in
short sale mode * * *’’).
356 See letter from NYSE Euronext (Sept. 2009).
357 See, e.g., letter from Direct Edge (June 2009);
letter from Liquidnet; letter from FIF (June 2009);
letter from Manisha Kimmel, Executive Director,
Financial Information Forum, dated Sept. 23, 2009
(‘‘FIF (Sept. 2009)’’).
358 Letter from RBC (June 2009).
359 Id.
360 See letter from Liquidnet.
361 See Rule 201(b)(3).
362 Rule 201(a)(2). Rule 201(a)(2) provides that
‘‘[t]he term effective transaction reporting plan for

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definition of ‘‘listing market’’ is a
currently-used definition, we believe
users of the Rule will not have difficulty
identifying for a security which entity is
its listing market.
Currently, there are two effective
transaction reporting plans, the CTA
Plan, which disseminates transaction
information for securities primarily
listed on an exchange other than
Nasdaq, and the Nasdaq UTP Plan,
which disseminates consolidated
transaction and quotation information
for securities primarily listed on
Nasdaq.363 Each of these Plans includes
a definition of ‘‘listing market,’’ which
definitions we are incorporating by
reference into Rule 201. We have
determined to incorporate by reference
into Rule 201 the definition of ‘‘listing
market,’’ as that term is defined in the
CTA Plan and the Nasdaq UTP Plan,364
to provide the markets with uniformity
with respect to decisions regarding
trading restrictions for individual NMS
stocks because the listing markets are
already familiar with making
determinations regarding, and imposing
trading restrictions on, individual NMS
stocks. For example, listing markets
already have rules or policies in place
to coordinate trading suspensions or
halts in individual NMS stocks.365
In addition, requiring the listing
market for a covered security to
determine whether the security has
become subject to the short sale price
test restrictions of Rule 201 will help
ensure consistency for each covered
a covered security shall have the same meaning as
in § 242.600(b)(22).’’ Rule 201(a)(2).
363 See supra note 199 (discussing the jointindustry plans).
364 We note that although the definition of a
‘‘listing market’’ in the CTA Plan and Nasdaq UTP
Plan is similar, the Plans differ with respect to how
they treat dually listed securities. The CTA Plan
states that ‘‘the ‘listing market’ for any Eligible
Security shall be that exchange Participant on
which the Eligible Security is listed. If an Eligible
Security is dually listed, ‘listing market’ shall be
that exchange Participant on which the Eligible
Security was originally listed.’’ The Nasdaq UTP
Plan states that ‘‘ ‘Listing Market’ for an Eligible
Security means the Participant’s Market on which
the Eligible Security is listed. If an Eligible Security
is dually listed, Listing Market shall mean the
Participant’s Market on which the Eligible Security
is listed that also has the highest number of the
average of the reported transactions and reported
share volume for the preceding 12-month period.
The Listing Market for dually-listed Eligible
Securities shall be determined at the beginning of
each calendar quarter.’’ Although there are
differences between how each of the Plans
determines the listing market for dually listed
securities, we do not believe this difference will
impact the rule operationally because participants
are already familiar with determining the applicable
listing market for a covered security.
365 See, e.g., Nasdaq Rule 4120 (relating to trading
halts in Nasdaq-listed securities); NYSE Rule 123D
(relating to delayed openings and trading halts in
NYSE-listed securities).

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security with respect to such
determinations as only the listing
market for that covered security will be
making the determination. In addition,
we believe that listing markets will be
in the best position to respond to
anomalous or unforeseeable events that
may impact a covered security’s price,
such as an erroneous trade, because the
listing markets generally have in place
specific procedures designed to address
such events.
As discussed above, in response to
our request for comment,366 some
commenters provided comments
regarding how information that a
covered security has become subject to
the short sale price test restrictions of
Rule 201 should be disseminated to the
markets.367 In order that all market
participants receive information
regarding when a security has become
subject to Rule 201 on a fair, impartial
and timely basis, after considering the
comments we have determined to
provide in Rule 201(b)(3) that once the
listing market has determined that a
security has become subject to the
requirements of Rule 201, the listing
market shall immediately notify the
single plan processor responsible for
consolidation of information for the
covered security in accordance with
Rule 603(b) of Regulation NMS 368 of the
fact that a covered security has become
subject to the short sale price test
restriction of Rule 201. The plan
processor must then disseminate this
information.369
As discussed above, the CTA Plan
disseminates transaction information for
securities primarily listed on an
exchange other than Nasdaq and the
Nasdaq UTP Plan disseminates
consolidated transaction and quotation
information for securities primarily
listed on Nasdaq. In accordance with
Rule 603(b) of Regulation NMS, these
plans, together with the CQ Plan,
provide for the dissemination of all
consolidated information for individual
366 See

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

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

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7. Policies and Procedures Approach
In the Proposal, we stated that the
proposed price test restrictions could be
applied in combination with a policies
and procedures approach, a prohibition
approach, or a combination thereof.371
We have determined to adopt a policies
and procedures approach in Rule
201(b). Rule 201(b) will require trading
centers to establish, maintain, and
enforce written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of the
security decreases by 10% or more from
the covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day.372 In
addition, such policies and procedures
must be reasonably designed to impose
the short sale price test restriction in
Rule 201(b)(1) for the remainder of the
day on which it is triggered and on the
following day when a national best bid
for the covered security is calculated
and disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.373
Several commenters stated that any
short sale price test restriction should be
implemented through a policies and
procedures approach.374 One such
370 See

letter from FIF (June 2009).
Proposal, 74 FR at 18049.
372 See Rule 201(b)(1)(i).
373 See Rule 201(b)(1)(ii).
374 See, e.g., letter from SIFMA (June, 2009); letter
from Goldman Sachs (June 2009); letter from NYSE
Euronext (June 2009); letter from T. Rowe Price
(June 2009); letter from RBC (June 2009); letter from
371 See

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commenter stated that a policies and
procedures approach ‘‘would help
promote compliance by all affected
parties, distribute compliance and
monitoring responsibility, allow
flexibility to address inadvertent
violations (thus likely resulting in fewer
cancellations and trade breaks), and
conserve the enforcement resources of
agencies and other self-regulatory
organizations.’’ 375 Another commenter
noted the ‘‘smooth implementation’’ and
‘‘successful operation’’ of Regulation
NMS, which also uses a policies and
procedures approach, and stated that a
policies and procedures approach for
Rule 201 will ‘‘allow for a smoother
transition into full implementation as
well as a more flexible rule where
triggers based on circuit breakers are
being contemplated.’’ 376
Some commenters stated that any
short sale price test restriction should be
implemented with a policies and
procedures approach as well as a
straight prohibition approach.377 In
supporting this combination approach,
one such commenter noted that a
policies and procedures approach
would be consistent with Regulation
NMS, permit trading centers the
flexibility to tailor such policies and
procedures to their particular markets,
and permit broker-dealers to manage
their order flow. At the same time, this
commenter stated that a prohibition
approach would be familiar to market
participants and will give the
Commission direct enforcement
authority over violations.378
In contrast, some commenters stated
that a short sale price test restriction, if
adopted, should be implemented with a
straight prohibition approach only. For
example, one commenter stated that a
straight prohibition approach is
preferable because ‘‘[v]ariations in
policies and procedures would lead
some to believe certain market
participants are less vigilant than
Schwab; letter from BATS (Sept. 2009); letter from
SIFMA (Sept. 2009); letter from Credit Suisse (Sept.
2009); letter from Virtu Financial; letter from
Goldman Sachs (Sept. 2009); letter from NYSE
Euronext (Sept. 2009); letter from Qtrade; letter
from Citadel et al. (Sept. 2009); letter from MFA
(Oct. 2009).
375 Letter from Citadel et al. (Sept. 2009); see also
letter from AIMA.
376 Letter from Virtu Financial; see also letter
from MFA (Oct. 2009) (stating that it believes that
‘‘implementation concerns would be minimized if
executing market centers (or any broker using an
intermarket sweep order) surveil for compliance as
they could leverage existing architecture developed
to comply with the order protection rule in Reg.
NMS (Rule 611)’’).
377 See, e.g., letter from GE; letter from Wachtell;
letter from Amer. Bankers Assoc.
378 See letter from GE; see also letter from
Wachtell.

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11259

others.’’ 379 Another said a straight
prohibition approach would be easier
for market participants to implement
and understand.380 In addition, several
commenters expressed support for a
rule that would ‘‘prohibit’’ short selling
on a down-bid (or down-tick) 381 or
expressed that they did not support a
policies and procedures approach.382
We recognize some commenters’
preference that a short sale price test
restriction be adopted with a straight
prohibition approach or in combination
with a straight prohibition approach
because it is the approach taken under
former Rule 10a–1 and, therefore, is
familiar to market participants. Further,
some commenters noted there can be
variations in policies and procedures.
As discussed in more detail below,
however, we have determined to adopt
in Rule 201(b)(1) a policies and
procedures approach rather than a
straight prohibition approach (or a
combination thereof) because this
alternative is similar to the policies and
procedures approach under Regulation
NMS and, therefore, market participants
are familiar with a policies and
procedures approach and can build on
such policies and procedures in
implementing Rule 201. In addition, a
policies and procedures approach
provides flexibility to trading centers
and their customers in managing order
flow because it allows trading centers,
together with their customers, to
determine how to handle orders that are
not immediately executable or
displayable by the trading center
because the order is impermissibly
priced. This flexibility potentially
allows for the more efficient functioning
of the securities markets than a rule that
applies a straight prohibition approach.
In addition, we note that the
Commission and SROs will carefully
monitor whether trading centers’
policies and procedures are reasonably
designed to prevent short selling in
violation of Rule 201. To the extent that
a trading center’s policies and
procedures permit any execution or
display of a short sale order not in
accordance with the requirements of the
379 Letter

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

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Rule, such trading center’s policies and
procedures may not be reasonable and
could subject the trading center to
enforcement action. Further, any
conduct by trading centers, or other
market participants, that facilitates short
sales in violation of Rule 201 could also
lead to liability for aiding and abetting
or causing a violation of Regulation
SHO, as well as potential liability under
the anti-fraud and anti-manipulation
provisions of the Federal securities
laws, including sections 9(a), 10(b), and
15(c) of the Exchange Act, and Rule
10b–5 thereunder.
Under Rule 201(b)(1), a trading center
will be required to have written policies
and procedures reasonably designed to
prevent the execution or display of short
sale orders at a price that is less than or
equal to the current national best bid
when the price of a covered security
decreases by 10% or more from the
covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day. In
addition, such policies and procedures
must be reasonably designed to impose
the short sale price test restriction of
Rule 201(b)(1)(i) for the remainder of the
day and the following day. Thus, a
trading center’s policies and procedures
must require that a trading center be
able to determine when a covered
security is subject to the short sale price
test restriction of Rule 201. As discussed
above, due to the importance of
ensuring that the triggering of the
requirements of Rule 201 is
communicated to all market participants
on a fair, impartial and timely basis, we
believe it is appropriate for the listing
market for the covered security to
determine whether that security is
subject to the requirements of Rule 201
and, if it is, for such information to be
disseminated to the market by the single
plan processor. Thus, a trading center’s
policies and procedures must be
reasonably designed so that the trading
center is able to obtain such information
from the single plan processor if the
covered security becomes subject to the
Rule’s requirements.
Upon receipt of a short sale order for
a covered security that is subject to the
Rule’s requirements, a trading center’s
policies and procedures must ensure
that the trading center is able to
determine whether or not the short sale
order can be executed or displayed in
accordance with the provisions of Rule
201(b)(1). If the order is marketable at a
permissible price, the trading center
may present the order for immediate
execution or, if not immediately
marketable, hold it for execution later at
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Rule 201(b)(1) permits a trading
center to display an order provided it is
permissibly priced at the time the
trading center displays the order. If an
order is impermissibly priced, the
trading center could, in accordance with
policies and procedures reasonably
designed to prevent the execution or
display of a short sale order at a price
that is less than or equal to the current
national best bid, re-price the order
upwards to the lowest permissible price
and hold it for later execution at its new
price or better.383 As quoted prices
change, in accordance with Rule
201(b)(1), a trading center may
repeatedly re-price and display an order
at the lowest permissible price down to
the order’s original limit order price (or,
if a market order, until the order is
filled).
In addition, paragraph (b)(1)(iii)(A) of
Rule 201 requires a trading center’s
policies and procedures to be
reasonably designed to permit a trading
center to execute a displayed short sale
order at a price that is less than or equal
to the current national best bid provided
that, at the time the order was initially
displayed by the trading center it was
permissibly priced, i.e., not at a price
that was less than or equal to the thencurrent national best bid.384 As
discussed in the Proposal, this
exception for properly displayed short
sale orders will help avoid a conflict
between Rule 201 and the ‘‘Quote Rule’’
under Rule 602 of Regulation NMS.385
The Quote Rule requires that, subject to
certain exceptions, the broker-dealer
responsible for communicating a
quotation shall be obligated to execute
any order to buy or sell presented to
him, other than an odd lot order, at a
price at least as favorable to such buyer
or seller as the responsible brokerdealer’s published bid or published
offer in any amount up to his published
quotation size.386 Thus, pursuant to this
exception, a trading center will be able
to comply with the ‘‘firm quote’’
requirement of Rule 602 of Regulation
NMS by executing a presented order to
buy against its displayed offer to sell as
long as the displayed offer to sell was
permissibly priced under Rule 201 at
the time it was first displayed, even if
383 For example, if a trading center receives a
short sale order priced at $47.00 when the current
national best bid in the security is $47.00, the
trading center could re-price the order at the
permissible offer price of $47.01, and display the
order for execution at this new limit price.
384 See Rule 201(b)(1)(iii)(A).
385 See Proposal, 74 FR at 18051.
386 See 17 CFR 242.602(b)(2). We note that to the
extent that a short sale order is un-displayed, Rule
201 will prevent the trading center from executing
the order unless at the time of execution, the
execution price complies with the Rule.

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the execution of the transaction will be
at a price that is less than or equal to
the current national best bid at the time
of execution.387
Because a trading center can re-price
and display a previously impermissibly
priced short sale order, the policies and
procedures approach of Rule 201, as
noted by one commenter,388 potentially
allows for the more efficient functioning
of the markets than a rule that applies
a straight prohibition approach. Another
commenter noted that while a
prohibition approach could provide
‘‘bright lines’’ as to the acceptability of
trades, such an approach would result
in an ‘‘inordinate number’’ of trades
being cancelled by trading centers.389
Because trading centers will not have to
reject or cancel impermissibly priced
orders unless instructed to do so by the
trading center’s customer submitting the
short sale order, we believe that the
policies and procedures approach of
Rule 201 will provide more flexibility to
trading centers and their customers and
result in more efficient markets. We
recognize, however, that some trading
centers might not want to re-price an
impermissibly priced short sale order.
Thus, re-pricing is not a requirement
under Rule 201.
In addition, as noted by commenters,
Rule 201 will provide trading centers
and their customers with flexibility in
determining how to handle orders that
are not immediately executable or
displayable by the trading center
because the order is impermissibly
priced. For example, trading centers can
offer their customers various order types
regarding the handling of impermissibly
priced orders such that a trading center
can either reject an impermissibly
priced order or re-price the order
387 We note that such a conflict between the
Quote Rule and Rule 201 should be relatively
infrequent. If a displayed order to sell shares is at
a price that is less than or equal to the national best
bid, this would result in a crossed or locked market.
In accordance with Rule 610(d) of Regulation NMS,
each national securities exchange and national
securities association must establish, maintain, and
enforce written rules that require its members
reasonably to avoid: Displaying quotations that lock
or cross any protected quotation in an NMS stock,
displaying manual quotations that lock or cross any
quotation in an NMS stock disseminated pursuant
to an effective national market system plan; are
reasonably designed to assure reconciliation of
locked or crossed quotations in an NMS stock; and
prohibit its members from engaging in a pattern or
practice of displaying quotations that lock or cross
any protected quotation, or other quotation, in an
NMS stock, unless an exception in such rules
applies. See 17 CFR 242.610(d).
388 See, e.g., letter from Citadel et al. (Sept. 2009)
(noting that a policies and procedures approach is
favorable to a strict prohibition approach in that it
‘‘would help promote compliance’’ and ‘‘address
inadvertent violations’’ of Rule 201).
389 Letter from STA (June 2009).

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upwards to the lowest permissible price
until the order is filled.
As proposed and as adopted, Rule
201(b)(2) requires trading centers to
regularly surveil to ascertain the
effectiveness of the policies and
procedures required by Rule 201(b)(1)
and to take prompt action to remedy
deficiencies in such policies and
procedures.390 As one commenter
noted, this provision places trading
centers in the position of determining
whether an execution complies with the
requirements of Rule 201(b)(1).391 Thus,
short sale orders executed or displayed
at impermissible prices will require the
trading center that executed or
displayed the short sales to take prompt
action to remedy any deficiencies.
The policies and procedures
requirements of Rule 201(b)(1) are
similar to those set forth under
Regulation NMS.392 In accordance with
Regulation NMS, trading centers must
have in place written policies and
procedures in connection with that
Regulation’s Order Protection Rule.393
Thus, as we stated in the Proposal,
trading centers are already familiar with
establishing, maintaining, and enforcing
trading-related policies and procedures,
including programming their trading
systems in accordance with such
policies and procedures.394 Several
commenters agreed with the
Commission’s view that this familiarity
should reduce the implementation time
and costs of the Rule on trading
centers.395
As discussed in the Proposal,396
similar to the requirements under
Regulation NMS in connection with the
Order Protection Rule, at a minimum, a
trading center’s policies and procedures
must enable a trading center to monitor,
on a real-time basis, the national best
bid, so as to determine the price at
which the trading center may execute or
display a short sale order. In addition,
as proposed, a trading center must have
policies and procedures reasonably
designed to permit the execution or
display of a short sale order of a covered
security marked ‘‘short exempt’’ without

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390 See

Rule 201(b)(2).
391 See letter from Wolverine.
392 See Regulation NMS Adopting Release, 70 FR
37496; see also 17 CFR 242.611.
393 See id.
394 See Proposal, 74 FR at 18051–18052.
395 See, e.g., letter from Amer. Bankers Assoc.;
letter from Schwab; letter from Credit Suisse (Sept.
2009); letter from GE; letter from Goldman Sachs
(June 2009); letter from NYSE Euronext (June 2009);
letter from SIFMA (June 2009); letter from T. Rowe
Price (June 2009); letter from Virtu Financial
(noting familiarity with the policies and procedures
approach of Regulation NMS should reduce the
implementation costs of Rule 201).
396 See Proposal, 74 FR at 18052.

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regard to whether the order is at a price
that is less than or equal to the current
national best bid.397 A trading center’s
policies and procedures will not,
however, have to include mechanisms
to determine on which provision a
broker-dealer is relying in marking an
order ‘‘short exempt’’ in accordance with
paragraph (c) or (d) of Rule 201.398 We
note that we did not receive comments
that specifically discussed a trading
center’s policies and procedures with
respect to the monitoring, on a real-time
basis, of the national best bid, or its
policies and procedures related to
orders marked ‘‘short exempt.’’
As discussed in the Proposal,399 a
trading center must also take such steps
as will be necessary to enable it to
enforce its policies and procedures
effectively. For example, trading centers
may establish policies and procedures
that include regular exception reports to
evaluate their trading practices. If a
trading center’s policies and procedures
include exception reports, any such
reports will need to be examined by the
trading center to affirm that a trading
center’s policies and procedures have
been followed by its personnel and
properly coded into its automated
systems and, if not, promptly identify
the reasons and take remedial action. In
addition, we note that one commenter
stated, and we agree, that as a means for
developing an effective set of policies
and procedures for compliance with the
provisions of Rule 201, trading centers
should conduct ‘‘regular post-trade
analysis.’’ 400 Another commenter stated
that significant oversight of policies and
procedures is necessary to prevent
trades from being directed toward
venues that become known for lax
supervision regarding compliance with
Rule 201.401
To help ensure compliance with Rule
201, as discussed in the Proposal,402
trading centers may also have policies
and procedures that will enable a
trading center to have a record
identifying the current national best bid
at the time of execution or display of a
short sale order. Such ‘‘snapshots’’ of the
397 See

Rule 201(b)(1)(iii)(B); see also infra
Section III.B. (discussing short sale orders marked
‘‘short exempt’’).
398 See infra Section III.B.; see also Rules 201(c)
and 201(d)
399 See Proposal, 74 FR at 18052.
400 See letter from Jordan & Jordan.
401 See letter from STA (June 2009). We note that
to the extent that a trading center is lax with respect
to its supervision regarding Rule 201, such trading
center could be subject to enforcement action. In
addition, the Commission and SROs will monitor
whether trading centers adequately monitor their
compliance with Rule 201 as part of their
examinations.
402 See Proposal, 74 FR at 18052.

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market will aid SROs in evaluating a
trading center’s written policies and
procedures and compliance with Rule
201. In addition, such snapshots will
aid trading centers in verifying that a
short sale order was priced in
accordance with the provisions of
proposed Rule 201(b)(1) if bid
‘‘flickering,’’ i.e., rapid and repeated
changes in the current national best bid
during the period between identification
of the current national best bid and the
execution or display of the short sale
order, creates confusion regarding
whether or not the short sale order was
executed or displayed at a permissible
price. Snapshots of the market at the
time of execution or display of an order
will also aid trading centers in dealing
with time lags in receiving data
regarding the national best bid from
different data sources. A trading center’s
policies and procedures will be required
to address latencies in obtaining data
regarding the national best bid. In
addition, to the extent such latencies
occur, a trading center’s policies and
procedures will need to implement
reasonable steps to monitor such
latencies on a continuing basis and take
appropriate steps to address a problem
should one develop.
Some commenters requested
clarification regarding whether, in
determining the current national best
bid, trading centers and/or brokerdealers, as applicable, may rely on the
current national best bid as
disseminated by proprietary feeds as
well as the current national best bid
disseminated by SIPs.403 In addition,
several commenters indicated that
trading centers and/or broker-dealers
should be required to rely on one source
of the national best bid,404 such as the
current national best bid disseminated
by SIPs.405 One commenter stated that
‘‘[s]uch centralization would ensure
consistent treatment of orders,’’ 406 and
another commenter stated that it would
‘‘eliminate redundant effort across
broker-dealers and maintain uniformity
across exchanges.’’ 407 Other
403 See, e.g., letter from Glen Shipway (Sept.
2009); see also letter from Credit Suisse (June 2009);
letter from FIF (June 2009); letter from Goldman
Sachs (June 2009); letter from Lime Brokerage (June
2009); letter from RBC (June 2009); letter from
SIFMA (June 2009); letter from Direct Edge (June
2009); letter from BATS (Sept. 2009); letter from
Credit Suisse (Sept. 2009); letter from Lime
Brokerage (Sept. 2009); letter from Qtrade.
404 See, e.g., letter from FIF (June 2009); letter
from RBC (June 2009); letter from NYSE Euronext
(Sept. 2009).
405 See, e.g., letter from FIF (June 2009); letter
from NYSE Euronext (Sept. 2009); see also letter
from Direct Edge (June 2009).
406 Letter from RBC (June 2009).
407 Letter from FIF (June 2009).

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commenters, however, questioned
whether a unitary data feed would be
beneficial, stating that ‘‘[e]ven utilizing
a unitary data feed would be
problematic, however, given the
‘flickering’ that occurs,’’ 408 and that
latencies in the receipt of data by market
participants is of concern, ‘‘even if they
are working with the same SIP or
exchange feed.’’ 409 Another commenter
noted concerns with respect to market
disruption as a result of a single
mandated data feed, stating that ‘‘the
entire market could be disrupted
significantly by a single point of failure
at the aggregator.’’ 410
We recognize commenters’ concerns
regarding the potential impact that
receiving national best bid information
from different data feeds might have on
the application of Rule 201, including
latencies that may occur in receiving
such information from different data
feeds.411 We do not believe, however,
that it is appropriate to mandate that the
receipt of the current national best bid
must be from any one particular data
feed because a policies and procedures
approach that provides for a ‘‘snapshot’’
of the applicable current national best
bid will allow trading centers to deal
with time lags in receiving data
regarding the national best bid from
different data sources. Thus, Rule 201
does not require modifications to how
data feeds are currently received.
As discussed in the Proposal, trading
centers will be required to conduct
regular surveillance of their policies and
procedures under Rule 201.
Specifically, Rule 201(b)(2) provides
that a trading center must regularly
surveil to ascertain the effectiveness of
the policies and procedures required
under the Rule and must take prompt
action to remedy deficiencies in such
policies and procedures.412 This
provision will reinforce the requirement
of Rule 201(b)(1) to maintain and
enforce policies and procedures by
explicitly assigning an affirmative
responsibility to trading centers to
surveil to ascertain the effectiveness of
their policies and procedures.413 Thus,
under the Rule, trading centers may not
merely establish policies and
procedures that may be reasonable
408 Letter

from Direct Edge (June 2009).
from Lime Brokerage (June 2009); see
also letter from Lime Brokerage (Sept. 2009).
410 Letter from Credit Suisse (June 2009).
411 See infra Section X.B.1.b.i. and Section
X.B.1.b.ii. (discussing the potential impact of not
mandating receipt of the current national best bid
from one particular data feed on the
implementation costs of Rule 201).
412 See Rule 201(b)(2).
413 We note that Rule 611(a)(2) of Regulation NMS
contains a similar provision for trading centers. See
17 CFR 242.611(a)(2).

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when created and assume that such
policies and procedures will continue to
satisfy the requirements of Rule 201(b).
Rather, trading centers will be required
to regularly assess the continuing
effectiveness of their policies and
procedures and take prompt action
when needed to remedy deficiencies. In
particular, trading centers will need to
engage in regular and periodic
surveillance to determine whether
executions or displays of short sale
orders on impermissible bids are
occurring without an applicable
exception and whether the trading
center has failed to implement and
maintain policies and procedures that
would have reasonably prevented such
impermissible executions or displays of
short sale orders. We note that, although
discussed in the Proposal, we did not
receive comments that specifically
addressed the requirement that trading
centers must conduct regular
surveillance of their policies and
procedures under Rule 201.
B. ‘‘Short Exempt’’ Provisions of Rule
201
In the Proposal, we proposed that a
trading center’s policies and procedures
must be reasonably designed to permit
the execution or display of a short sale
order of a covered security marked
‘‘short exempt’’ without regard to
whether the order otherwise met the
short sale price test restrictions.414 In
addition, we included provisions in the
Proposal that set out circumstances
under which a broker-dealer could mark
a sale order as ‘‘short exempt.’’ 415
After considering the comments and
consistent with the Proposal, we have
determined to include in Rule
201(b)(1)(iii)(B) a requirement that a
trading center’s policies and procedures
must be reasonably designed to permit
the execution or display of a short sale
order of a covered security marked
‘‘short exempt’’ without regard to
whether the order is at a price that is
less than or equal to the current national
best bid.416 We have also determined to
414 See,

e.g., Proposal, 74 FR at 18107, 18111.
e.g., Proposal, 74 FR at 18108, 18111–
18112. We note that we proposed provisions
relating to when a broker-dealer may mark a sale
order as ‘‘short exempt.’’ In discussing the ‘‘short
exempt’’ marking provisions in paragraphs (c) and
(d) of Rule 201, we set forth below how and why
the provisions, as adopted, differ from the
provisions as set forth in the proposed circuit
breaker with modified uptick rule because that rule
most closely resembles Rule 201, as adopted. To
that end, we note that the circumstances under
which a sale order may be marked as ‘‘short exempt’’
are contained in paragraphs (c) and (d) of Rule 201,
as adopted, whereas such circumstances were
contained in paragraphs (d) and (e) of the proposed
circuit breaker with modified uptick rule.
416 See Rule 201(b)(1)(iii)(B).
415 See,

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include in Rule 201(c) and (d)
provisions that specify the
circumstances under which a brokerdealer may mark certain sale orders as
‘‘short exempt’’ so that a trading center
may execute or display such orders
without regard to whether they are
priced in accordance with the
requirements of Rule 201(b).417 The
provisions contained in paragraphs (c)
and (d) of Rule 201 are designed to
promote the workability of the Rule,
while at the same time furthering the
Commission’s goals.
The provisions contained in
paragraph (d) of Rule 201 parallel
exceptions to former Rule 10a–1 and
exemptive relief granted pursuant to
that rule.418 These exceptions and
exemptions from former Rule 10a–1 had
been in place for several years. As we
noted in the Proposal, we believe that
the rationales underlying these
exceptions and exemptions from former
Rule 10a–1 still hold true today.419
Moreover, due to the limited scope of
these exceptions and exemptions, we do
not believe that including them will
undermine the Commission’s goals for
adopting Rule 201. To the extent that
commenters addressed our inclusion of
these exceptions and exemptions, we
discuss such comments below.
A number of commenters stated that
if we were to adopt a form of short sale
price test restriction, it should include
exceptions beyond those that we
proposed in the Proposal and ReOpening Release, particularly if we were
to adopt a short sale price test
restriction based on the alternative
uptick rule.420 Some commenters stated
that the exceptions included in the
Proposal and the Re-Opening Release
were insufficient, stating that broader
and/or additional exceptions would be
necessary to, among other things,
provide stability and liquidity to the
market 421 and so as not to impair price
discovery.422 For example, commenters
requested exceptions for activity
excepted from, or necessary to comply
with, Regulation NMS.423 Commenters
417 See

Rule 201(c); 201(d).
Proposal, 74 FR at 18054 (discussing how
the ‘‘short exempt’’ marking provisions of the
proposed modified uptick rule would parallel
exceptions to former Rule 10a–1 and exemptive
relief granted pursuant to that rule).
419 See Proposal, 74 FR at 18054–18059.
420 See, e.g., letter from SIFMA (Sept. 2009); letter
from NYSE Euronext (Sept. 2009); letter from EWT
(Sept. 2009); letter from GETCO (Sept. 2009).
421 See, e.g., letter from SIFMA (June 2009); letter
from NYSE Euronext (June 2009).
422 See, e.g., letter from NYSE Euronext (June
2009).
423 See, e.g., letter from SIFMA (June 2009); letter
from RBC (June 2009); letter from Goldman Sachs
(June 2009). We note that where a broker-dealer is
418 See

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
also requested an exception for
exchange traded funds (‘‘ETFs’’) and
similar broad-based indices and baskets
of stocks.424 Some commenters
requested exceptions for short sales in
connection with the facilitation of
capital raising transactions, through
stock issuances and convertible
instruments, by issuers and selling
shareholders.425 In connection with
convertible instruments, commenters
stated that there needs to be an
exception from any short sale price test
restriction to allow investors purchasing
a convertible instrument to hedge their
long exposure.426 Other exceptions
requested relate to automated electronic
buy-side trading,427 bona fide hedging
generally,428 ‘‘exchange for physicals’’
transactions,429 index expirations,430
and market on open 431 and market on
close orders.432

In addition, as discussed in more
detail in Section III.B.9. below,
commenters requested an exception for
short sales by market makers engaged in
bona fide market making activities,
including market makers in OTC and
listed derivatives, options, convertibles
and ETFs, and block positioners.433
Several commenters, however, stated
that the Commission should be cautious
of adopting numerous exceptions and
discussed problems that may arise from
adopting a short sale price test
restriction with many or complex
exceptions, such as additional
implementation difficulties, greater
compliance costs, lack of uniformity
that may cause unfair application of the
rule, increased opportunities for gaming
and abuse, and, overall, a less effective
rule that only applies to a limited
numbers of short sales.434 Commenters

routing an inter-market sweep order (‘‘ISO’’) solely
to facilitate its execution of a customer’s long sale
in compliance with Rule 611, such ISOs may be
marked as ‘‘short exempt.’’ This will allow the
destination trading centers to execute the orders
against better-priced protected quotations without
regard to the short sale price test restrictions of Rule
201. Such ISOs must not be marked as ‘‘long.’’
424 See, e.g., letter from SIFMA (June 2009); letter
from NYSE Euronext (June 2009); letter from MFA
(June 2009); letter from RBC (June 2009); letter from
ICI (June 2009); letter from Citadel et al. (June
2009); letter from Credit Suisse (June 2009); letter
from ISDA; letter from NYSE Euronext (Sept. 2009);
letter from Direct Edge (Sept. 2009); letter from
Knight Capital (Sept. 2009); letter from Virtu
Financial; letter from EWT (Sept. 2009).
425 See, e.g., letter from SIFMA (June 2009); see
also letter from ISDA.
426 See, e.g., letter from SIFMA (June 2009).
427 See, e.g., letter from MFA (June 2009).
428 See, e.g., letter from MFA (June 2009); letter
from Credit Suisse (June 2009); letter from ISDA;
letter from John K. Robinson, General Counsel, P.
Schoenfeld Asset Management LP, dated July 2,
2009 (‘‘P. Schoenfeld Asset Management’’).
429 See, e.g., letter from SIFMA (June 2009); letter
from RBC (June 2009).
430 See, e.g., letter from SIFMA (June 2009).
431 See, e.g., letter from RBC (June 2009); letter
from Goldman Sachs (June 2009); letter from
Goldman Sachs (Sept. 2009).
432 See, e.g., letter from SIFMA (June 2009); letter
from RBC (June 2009); letter from Credit Suisse
(June 2009); letter from EWT (Sept. 2009); letter
from Goldman Sachs (June 2009); letter from
Goldman Sachs (Sept. 2009). We also note that
some commenters stated that we should include a
marking error exception in connection with any
short sale price test restriction we adopt. See, e.g.,
letter from RBC (June 2009); letter from SIFMA
(June 2009). In connection with the proposed uptick
rule, we proposed an exception for any sale by a
broker-dealer of a covered security for an account
in which it has no interest, pursuant to an order
marked ‘‘long.’’ See Proposal, 74 FR at 18109. This
exception would have applied where a brokerdealer effects a sale of an order marked ‘‘long’’ by
another broker-dealer, but the order was mismarked such that it should have been marked as a
short sale order. We do not believe that a similar
exception is necessary under Rule 201 because Rule
201, unlike the proposed uptick rule, is based on
a policies and procedures approach rather than a
straight prohibition approach. Thus, if a trading
center’s written policies and procedures are

reasonably designed to prevent the execution or
display of a short sale order of a covered security
at a price that is less than or equal to the current
national best bid, it is unlikely that such trading
center’s participation in any violation of the Rule
due to a mis-marking by a broker-dealer could be
knowing or reckless. See Proposal, 74 FR at 18063.
As we stated in the Proposal, knowledge may be
inferred where a broker-dealer has previously
accepted orders marked ‘‘long’’ from the same
counterparty that required borrowed shares for
delivery or that resulted in a ‘‘fail to deliver.’’ See
Proposal, 74 FR at 18063 n.212; see also 2004
Regulation SHO Adopting Release, 69 FR at 48019,
n.111 (stating that ‘‘[i]t may be unreasonable for a
broker-dealer to treat a sale as long where orders
marked ‘long’ from the same customer repeatedly
require borrowed shares for delivery or result in
‘fails to deliver.’ A broker-dealer also may not treat
a sale as long if the broker-dealer knows or has
reason to know that the customer borrowed shares
being sold.’’).
433 See, e.g., letter from SIFMA (June 2009); letter
from NYSE Euronext (June 2009); letter from Knight
Capital (June 2009); letter from EWT (June 2009);
letter from STANY (June 2009); letter from Credit
Suisse (June 2009); letter from CBOE (June 2009);
letter from RBC (June 2009); letter from Citadel et
al. (June 2009); letter from NYSE Euronext (Sept.
2009); letter from Direct Edge (Sept. 2009); letter
from Virtu Financial; letter from EWT (Sept. 2009);
letter from Credit Suisse (Sept. 2009). Some
commenters also asked for an exception for, or
clarification that, a short sale price test restriction
would not apply to short sales pursuant to all
options assignments and exercises. See, e.g., letter
from SIFMA (June 2009); letter from CBOE (June
2009); letter from Boston Options Exchange,
Chicago Board Options Exchange, International
Securities Exchange, Nasdaq Options Market,
Nasdaq OMX PHLX, NYSE Amex, NYSE Arca and
The Options Clearing Corporation, dated June 22,
2009 (‘‘Boston Options Exchange et al. (June
2009)’’); letter from RBC (June 2009). We note that
because short sales pursuant to options exercises
and assignments (whether or not automatic) are
unrelated to the current national best bid, Rule 201
does not apply to such sales.
434 See, e.g., letter from Paladin Investment; letter
from Douglas M. Branson, W. Edward Sell Professor
of Business Law, University of Pittsburgh School of
Law, dated June 10, 2009 (‘‘Prof. Branson’’); letter
from Wells Fargo (June 2009); letter from CPIC (June
2009); letter from IAG; letter from IBC; letter from
Jordan & Jordan; letter from Kelly Capital; letter
from Lime Brokerage (June 2009); letter from
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11263

stated that a short sale price test
restriction with numerous exceptions
will create loopholes and a rule that is
easy to circumvent, thus resulting in a
rule that applies to little trading activity
and fails to serve the purpose for which
it was adopted.435 One commenter
stated that emphasis should first be
placed on ‘‘a sales price restriction on
short sales, its possible effects on
helping restore a measure of price
continuity, and its possible deleterious
effects on informational efficiency
* * * with exceptions to be evolved as
time goes by and as the industry
petitions for them.’’ 436 Another
commenter noted that a short sale price
test restriction with many exceptions
will impose additional burdens on the
Commission’s inspection staff, which
will be tasked with ‘‘retracing
transactions to discern which were
eligible for exceptions, which were not,
and if any were disguised.’’ 437
In addition, one commenter noted
that the exceptions that accompany any
price test restriction will be driven by
the approach adopted.438 This
commenter noted that a permanent,
market-wide approach may necessitate
more exceptions than one triggered by a
temporary circuit breaker.439 This
commenter further noted that ‘‘a circuit
breaker short sale ban may necessitate
more or different exceptions than a
circuit breaker that still permits short
selling to occur.’’ 440
Although, as noted above,
commenters requested a variety of
exceptions in addition to those set forth
in the Proposal, at this time, we have
determined to include in Rule 201(c)
and (d) only the ‘‘short exempt’’ marking
provisions that we proposed. We believe
that these limited provisions will help
ensure the smooth functioning of the
markets while at the same time not
undermining our goals for adopting
Rule 201.
In addition, we note that a number of
commenters that discussed the need for
additional and/or broader exceptions
referenced the absence of some of the
requested exceptions during the Short
letter from Lime Brokerage (Sept. 2009); letter from
Glen Shipway (Sept. 2009); letter from Qtrade.
435 See, e.g., letter from Paladin Investment; letter
from Prof. Branson; letter from CPIC (June 2009);
letter from Wells Fargo (June 2009); letter from IBC
(June 2009); letter from Jordan & Jordan; letter from
Lime Brokerage (June 2009); letter from
Millennium.
436 Letter from Prof. Branson.
437 Letter from CPIC (June 2009).
438 See, e.g., letter from ICI (June 2009).
439 See letter from ICI (June 2009).
440 Letter from ICI (June 2009).

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Sale Ban Emergency Order 441 and the
effect on market quality of the Short
Sale Ban Emergency Order in the
absence of such exceptions.442 These
commenters noted the absence from the
Short Sale Ban Emergency Order of
exceptions for certain convertible
arbitrage or hedging activities 443 and for
automated electronic buy-side
trading.444 We note, however, that
unlike the Short Sale Ban Emergency
Order, which halted all short selling in
the securities subject to the emergency
order for its three-week duration, the
short sale restrictions of Rule 201 will
apply for a limited duration and will
only apply to a covered security if such
security has experienced a significant
intra-day price decline (of 10% or
more). Thus, Rule 201 will not impact
trading in the vast majority of covered
securities on an average day.445 If a
covered security becomes subject to the
short sale price test restrictions of Rule
201 it will occur because that security’s
price is experiencing extreme
downward price pressure and it is these
securities that Rule 201 is designed to
address by helping to prevent short
selling from being used as a tool to
exacerbate its price decline. If, as
requested by commenters, we were to
expand the scope of short selling
activities that would not be subject to
Rule 201, we are concerned such
exceptions could undermine this goal of
Rule 201.
In addition, although short selling
will be restricted if the price of a
covered security decreases by 10% or
more, in contrast to securities subject to
the Short Sale Ban Emergency Order,
Rule 201 will still permit short selling
in the covered security even when the
restriction is in place, although at a
price above the current national best
bid. Thus, short sellers engaged in the
various activities for which commenters
are requesting additional or expanded
exceptions will continue to be able to
sell short even when the price test
restriction is in effect. In addition, the
restriction on short selling will be in
place for a limited duration, that is, the
441 See supra Section II.C. (discussing the Short
Sale Ban Emergency Order).
442 See, e.g., letter from SIFMA (June 2009); letter
from RBC (June 2009); letter from CPIC (June 2009);
letter from Goldman Sachs (June 2009); letter from
MFA (June 2009).
443 See, e.g., letter from RBC (June 2009)
(attaching and discussing letter from Philip Taylor
and Scott DeCanio, Directors, RBC Capital Markets
Corp., dated Sept. 25, 2008); letter from CPIC (June
2009); letter from Goldman Sachs (June 2009); letter
from SIFMA (June 2009); letter from MFA (June
2009).
444 See, e.g., letter from MFA (June 2009).
445 See supra Section III.A.5. (discussing analyses
regarding the number of securities that will trigger
the circuit breaker on an average day).

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remainder of the day on which the
circuit beaker level is triggered and the
following day, further reducing the need
for additional exceptions.
We also note that with respect to
ETFs, although under former Rule
10a–1 the Commission issued limited
exemptive relief for certain ETFs via
authority delegated to the Staff, that
relief was issued on a case-by-case basis
for a permanent, market-wide short sale
price test rule.446 Since the elimination
of former Rule 10a–1, there has been a
significant growth in ETF trading
volume and an expansion in different
structures of ETF products.447
Commenters who opposed an exception
for these products noted the growth in
ETF trading volume and new ETF
products among the reasons not to
provide an exception for ETFs from any
short sale price test restriction.448 We do
not believe that a general ETF exception
is necessary because the circuit breaker
approach of Rule 201 will generally
result in the majority of ETFs not being
subject to its short sale price test
restrictions because ETFs are generally
diversified, whereas single stocks are
not. If such securities do become subject
to its restrictions, the restrictions will be
in place for a limited duration and will
continue to permit short selling even
when in place.
For the reasons discussed above, at
this time we believe it is appropriate to
limit the scope and number of
circumstances under which a brokerdealer may mark a sell order as ‘‘short
exempt.’’ We recognize, however, the
concerns raised by commenters and
note that to help ensure the future
446 See, e.g., letter from Racquel L. Russell, Esq.,
Branch Chief, Office of Trading Practices and
Processing, Division of Market Regulation, to
George T. Simon, Esq., Foley & Lardner LLP, dated
June 21, 2006; letter from James A. Brigagliano,
Assistant Director, Division of Market Regulation, to
Claire P. McGrath, Vice President and Special
Counsel, Amex, dated Aug. 17, 2001. We note that
each of the approvals for relief under former Rule
10a–1 was conditioned on the ETF meeting certain
enumerated conditions, either specific to certain
products or included as part of a broader ‘‘class
exemption.’’
447 See, e.g., Investment Company Institute, 2009
Investment Company Fact Book, (49 ed.); National
Stock Exchange, NSX Annouces Record January
ETF Trading Volume Surpasses $2.2 Trillion, News
& Views, Feb. 14, 2008 available at http://
www.nsx.com/content/news/story/90.
448 See, e.g., letter from Robert E. Koza, dated May
4, 2009; letter from Robert W. Angove, President,
Santiam Mountain Investment, dated May 5, 2009;
letter from David Tarrell, dated May 6, 2009; letter
from Mitchel Schlesinger, Principal, FBB Capital
Partners, dated May 8, 2009; letter from Paladin
Investment; letter from Shelby Frisch, dated May
15, 2009; letter from Robert Cannataro, dated June
5, 2009; letter from High Street Advisors; letter from
European Investors (June 2009); letter from
Ascendant Capital; letter from Kelly Capital; letter
from European Investors (Sept. 2009); letter from
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workability of Rule 201, or for other
reasons, we may reconsider whether
certain exceptions or exemptions are
warranted.
1. Broker-Dealer Provision
After the 10% circuit breaker is
triggered for a covered security, Rule
201(c) will permit a broker-dealer
submitting a short sale order for the
covered security to a trading center to
mark the order ‘‘short exempt’’ if the
broker-dealer identifies the order as
being at a price above the current
national best bid at the time of
submission.449 We have modified this
provision from the Proposal to clarify
that a broker-dealer may only mark an
order as ‘‘short exempt’’ after the circuit
breaker has been triggered for a covered
security.450 In addition, consistent with
the Proposal, Rule 201(c) requires any
broker-dealer relying on this provision
to establish, maintain, and enforce
written policies and procedures that are
reasonably designed to prevent the
incorrect identification of orders as
being priced in accordance with the
requirements of Rule 201(c) and
requires the broker-dealer regularly to
surveil to ascertain the effectiveness of
these policies and procedures, and to
take prompt action to remedy
deficiencies.451
As discussed above, in response to
our request for comment,452 several
commenters stated that if we were to
adopt a short sale price test restriction,
it should include a broker-dealer
provision.453 One commenter stated that
the broker-dealer provision is necessary
to prevent contradictory requirements
for broker-dealers under Regulation
NMS and Regulation SHO.454
Other commenters disagreed, stating
that they do not think that the brokerdealer provision is necessary. One
commenter pointed to problems that
may arise from the provision, such as
increasing the potential for confusion in
the marketplace, creating an unlevel
playing field, and penalizing
participants who have the most efficient
market data infrastructures.455
Commenters also noted that the brokerdealer provision has the potential to
449 See

Rule 201(c).
have also made technical modifications to
Rule 201(c) to reflect that it is the broker-dealer
submitting the order that must also mark the order
as ‘‘short exempt’’ and to reflect the difference in
operation of the alternative uptick rule from the
proposed circuit breaker with modified uptick rule.
451 See Rule 201(c).
452 See Proposal, 74 FR at 18073–18074.
453 See, e.g., letter from SIFMA (June 2009); letter
from BATS (May 2009); letter from EWT (Sept.
2009); letter from Qtrade.
454 See letter from EWT (Sept. 2009).
455 See letter from Lime Brokerage (June 2009).
450 We

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
greatly increase costs to the industry
and to adversely impact the ability of
smaller broker-dealers to compete.456
One commenter stated that, what it
termed a ‘‘requirement,’’ that brokerdealers maintain ‘‘snapshots,’’ may
impose significant costs, including costs
associated with technology, data
storage, and surveillance and review
and that the Commission’s cost
estimates of over $100,000 per brokerdealer ‘‘seem to underestimate the cost
to large, full service broker-dealers,
since the volume of orders handled by
these firms are likely to lead to
significantly greater technology and
storage costs alone as well as more
frequent reviews.’’ 457 We note that, as
discussed in the Proposal and in more
detail below, we believe that
‘‘snapshots’’ of the market could aid
broker-dealers in complying with Rule
201(c), but Rule 201 does not ‘‘require’’
such snapshots.458
Another commenter expressed the
belief that a majority of broker-dealer
participants that service customer
orders will want to take advantage of the
provision to remain competitive and to
ensure that client orders receive the best
possible execution, which will result in
many non-trading center participants
becoming subject to market data
‘‘snapshotting’’ and other compliancerelated changes.459
After considering the comments, as
discussed above, we have determined to
include in Rule 201(c) a provision to
permit a broker-dealer submitting a
short sale order for a covered security to
a trading center after the circuit breaker
is triggered for a covered security, to
mark the order ‘‘short exempt’’ if the
broker-dealer identifies the order as
being at a price above the current
national best bid at the time of
submission.460 Rule 201(c) will provide
broker-dealers with the option to
manage their order flow, rather than
having to always rely on their trading
centers to manage their order flow on
their behalf.
Although we recognize commenters’
concerns, including regarding potential
increased costs to the industry with
respect to technology, data storage and
surveillance, we note that most brokerdealers may already have developed
‘‘snapshot’’ capability in connection
with Regulation NMS’s Order Protection
Rule. We also agree that ‘‘snapshot’’
capability will require data storage by
456 See letter from STANY (June 2009); letter from
Lime Brokerage (June 2009); letter from NSCP.
457 Letter from NSCP.
458 See Proposal, 74 FR at 18054–18055.
459 See letter from Lime Brokerage (June 2009).
460 See Rule 201(c).

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broker-dealers; however, as noted by
one commenter,461 because the
alternative uptick rule does not require
sequencing of the national best bid, the
data storage requirements under the
alternative uptick rule are lower than
they would be under the proposed
modified uptick rule or the proposed
uptick rule. In addition, we believe that
the costs of a policies and procedures
approach that provides for a snapshot of
the applicable current national best bid
of the security are justified because
snapshot capability will aid brokerdealers in dealing with time lags in
receiving data regarding the national
best bid from different data sources and
facilitate verification of whether a short
sale order was executed or displayed at
a permissible price.
In addition, we note that this
provision will not undermine our goals
for short sale regulation because any
broker-dealer marking an order ‘‘short
exempt’’ in accordance with this
provision must have mechanisms in
place to enable the broker-dealer to
identify the short sale order as priced in
accordance with the provisions of Rule
201(c). In accordance with Rule
201(c)(1), these mechanisms must
include written policies and procedures
reasonably designed to prevent the
incorrect identification of orders as
being permissibly priced in accordance
with the provisions of 201(c).462 Thus,
although a broker-dealer relying on this
provision in marking an order ‘‘short
exempt’’ will not need to identify the
order as permissibly priced to the
trading center, it will need to have
written policies and procedures in place
reasonably designed to enable it to
identify that an order was permissibly
priced at the time of submission of the
order to a trading center.463 We believe
these policies and procedures will
further our goals by helping to ensure
that short sale orders are not incorrectly
marked as ‘‘short exempt,’’ and, thereby,
helping to preclude impermissible short
sales from being executed when the
price test restriction has been
triggered.464
At a minimum, a broker-dealer’s
policies and procedures must be
reasonably designed to enable a brokerdealer to monitor, on a real-time basis,
the national best bid, so as to determine
the price at which the broker-dealer may
461 See

letter from STA (Sept. 2009).
Rule 201(c)(1).
463 Such policies and procedures should be
similar to those required for trading centers
complying with paragraph (b) of Rule 201.
464 We also note that it would be a violation of
Rule 200(g) to mark a short sale order as ‘‘short
exempt’’ when a security is not subject to the
alternative uptick rule.
462 See

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submit a short sale order to a trading
center in compliance with the
provisions of Rule 201(c). To ensure
compliance with Rule 201(c), a brokerdealer may also have policies and
procedures that will enable it to have a
record identifying the current national
best bid at the time of submission of a
short sale order. Such ‘‘snapshots’’ of the
market will also aid SROs in evaluating
a broker-dealer’s written policies and
procedures and compliance with Rule
201(c). In addition, such snapshots will
aid broker-dealers in verifying that a
short sale order was priced in
accordance with the provisions of Rule
201(c) if bid flickering during the period
between identification of the current
national best bid and the submission of
the short sale order to a trading center
creates confusion regarding whether or
not the short sale order was submitted
at a permissible price. Snapshots of the
market at the time of submission of an
order will also aid broker-dealers in
dealing with time lags in receiving data
regarding the national best bid from
different data sources. Under Rule
201(c)(2), latencies in obtaining data
regarding the national best bid will need
to be addressed.465 In addition, to the
extent such latencies occur, a brokerdealer’s policies and procedures will
need to implement reasonable steps to
monitor such latencies on a continuing
basis and take appropriate steps to
address a problem should one develop.
Surveillance will be a required part of
a broker-dealer’s satisfaction of its legal
obligations. Rule 201(c)(2) provides that
a broker-dealer must regularly surveil to
ascertain the effectiveness of the
policies and procedures required under
Rule 201(c)(1) and must take prompt
action to remedy deficiencies in such
policies and procedures.466 This
provision will reinforce the on-going
maintenance and enforcement
requirements of Rule 201(c) by
explicitly assigning an affirmative
responsibility to broker-dealers to
surveil to ascertain the effectiveness of
their policies and procedures.467 Thus,
under paragraphs (c)(1) and (c)(2) of
Rule 201, broker-dealers may not merely
establish policies and procedures that
may be reasonable when created and
assume that such policies and
procedures will continue to satisfy the
requirements of the Rule. Rather,
broker-dealers will be required to
regularly assess the continuing
effectiveness of their procedures and
465 See

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

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take prompt action when needed to
remedy deficiencies. In particular, each
broker-dealer will need to engage in
regular and periodic surveillance to
determine whether it is submitting short
sale orders marked ‘‘short exempt’’
without complying with the
requirements of Rule 201(c) and
whether the broker-dealer has failed to
implement and maintain policies and
procedures that would have reasonably
prevented such impermissible
submissions.
A broker-dealer will also need to take
such steps as will be necessary to enable
it to enforce its policies and procedures
effectively.468 For example, brokerdealers may establish policies and
procedures that include regular
exception reports to evaluate their
trading practices. If a broker-dealer’s
policies and procedures include
exception reports, any such reports will
need to be examined to affirm that a
broker-dealer’s policies and procedures
have been followed by its personnel and
properly coded into its automated
systems and, if not, promptly identify
the reasons and take remedial action.
2. Seller’s Delay in Delivery 469
We are adopting Rule 201(d)(1)
without modification to provide that a
broker-dealer may mark an order ‘‘short
exempt’’ if the broker-dealer has a
reasonable basis to believe that the
seller owns the security being sold and
that the seller intends to deliver the
security as soon as all restrictions on
delivery have been removed.470
Specifically, Rule 201(d)(1) provides
that a broker-dealer may mark a short
sale order ‘‘short exempt’’ if the brokerdealer has a reasonable basis to believe
the short sale order of a covered security
is by a person that is ‘‘deemed to own’’
the covered security pursuant to Rule
200 of Regulation SHO,471 provided that
the person intends to deliver the
security as soon as all restrictions on
delivery have been removed.472
468 See

Rule 201(c)(2).
note that we have modified paragraph (d)
of Rule 201 from that provision as proposed to
reflect that a broker-dealer may only mark an order
as ‘‘short exempt’’ pursuant to the provisions in
paragraph (d) after the circuit breaker has been
triggered for a covered security.
470 Subsection (e)(1) of former Rule 10a–1
contained an exception relating to a seller’s delay
in the delivery of securities. The provision in Rule
201(d)(1) parallels the exception in former Rule
10a–1(e)(1).
471 See 17 CFR 242.200(a)–(f) (defining the term
‘‘deemed to own’’).
472 See Rule 201(d)(1). This provision is also
consistent with Rule 203(b)(2)(ii) and Rule 204(a)(2)
of Regulation SHO. Rule 203(b)(2)(ii) provides an
exception from the ‘‘locate’’ requirement of Rule
203(b)(1) of Regulation SHO for ‘‘[a]ny sale of a
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Rule 200(g)(1) of Regulation SHO
provides that a sale can be marked
‘‘long’’ only if the seller is deemed to
own the security being sold and either
(i) the security is in the broker-dealer’s
physical possession or control; or (ii) it
is reasonably expected that the security
will be in the broker-dealer’s possession
or control by settlement of the
transaction.473 Thus, even where a seller
owns a security, if delivery will be
delayed, such as in the sale of formerly
restricted securities pursuant to Rule
144 of the Securities Act of 1933,474 or
where a convertible security, option, or
warrant has been tendered for
conversion or exchange, but the
underlying security is not reasonably
expected to be received by settlement
date, such sales must be marked ‘‘short.’’
As a result, Rule 201(d)(1) is necessary
to allow for sales of securities that,
although owned, are subject to the
provisions of Regulation SHO governing
short sales due solely to the seller being
unable to deliver the covered security to
its broker-dealer prior to settlement
based on circumstances outside the
seller’s control. In response to our
request for comment, commenters that
specifically addressed this provision
were supportive of it.475
After considering the comments, we
believe it is appropriate to adopt Rule
201(d)(1) as proposed. This provision is
consistent with the goals of Rule 201
and with other provisions of Regulation
SHO related to sales of securities that
although owned are subject to the
provisions of Regulation SHO governing
short sales. Thus, we are adopting Rule
201(d)(1) such that the provision will
to § 242.200, provided that the broker or dealer has
been reasonably informed that the person intends
to deliver such security as soon as all restrictions
on delivery have been removed * * *’’. Rule
204(a)(2) provides additional time to close out fails
to deliver ‘‘[i]f a participant of a registered clearing
agency has a fail to deliver position at a registered
clearing agency in any equity security resulting
from a sale of a security that person is deemed to
own pursuant to § 242.200 and that such person
intends to deliver as soon as all restrictions on
delivery have been removed, the participant shall,
by no later than the beginning of regular trading
hours on the thirty-fifth consecutive calendar day
following the trade date for the transaction,
immediately close out the fail to deliver position by
purchasing securities of like kind and quantity.’’ We
note that to the extent that an exception to
Regulation SHO’s locate requirement applies to a
short sale order, such order must be marked ‘‘short’’
in accordance with Rule 200(g) of Regulation SHO
unless the order can be marked ‘‘short exempt’’
pursuant to Rule 200(g)(2) of Regulation SHO.
473 See 17 CFR 242.200(g)(1).
474 17 CFR 230.144.
475 See, e.g., letter from BATS (May 2009); letter
from SIFMA (June 2009); letter from Jesse D. Hill,
Director of Regulatory Relations, Office of
Regulatory Counsel, Edward Jones, dated Sept. 21,
2009 (‘‘Edward Jones’’); letter from NYSE Euronext
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apply to the sale of any covered
securities that a seller is deemed to own
pursuant to Rule 200 of Regulation SHO
and cannot deliver by settlement date
based on circumstances outside the
seller’s control, provided the seller
intends to deliver the securities as soon
as all restrictions on delivery have been
removed.476
3. Odd Lot Transactions
We are adopting in Rule 201(d)(2),
without modification, the ability for a
broker-dealer to mark a short sale order
as ‘‘short exempt’’ if the broker-dealer
has a reasonable basis to believe that the
short sale order is by a market maker to
offset a customer odd-lot 477 order or to
liquidate an odd-lot position that
changes such broker-dealer’s position by
no more than a unit of trading.478 In
response to our request for comment,
commenters that specifically addressed
this provision were supportive of
476 Such circumstances could include the
situation where a convertible security, option or
warrant has been tendered for conversion or
exchange, but the underlying security is not
reasonably expected to be received by settlement
date. See Regulation SHO Adopting Release, 69 FR
at 48015; see also 17 CFR 242.200(b) (defining when
a person shall be ‘‘deemed to own’’ a security). In
addition, we understand that sellers that own
restricted equity securities that wish to sell such
securities pursuant to an effective registration
statement pursuant to Rule 415 under the Securities
Act of 1933 experience similar types of potential
settlement delays as those persons selling Rule 144
securities. Thus sales of such securities pursuant to
Rule 415 may be marked ‘‘short exempt’’ in
accordance with Rule 201(d)(1) if the securities
subject to the sale are outstanding at the time they
are sold, and the sale occurs after the registration
statement has become effective. In addition, and as
noted by one commenter, we understand that sales
made pursuant to broker-dealer assisted cashless
exercises of compensatory options to purchase a
company’s securities may result in potential
settlement delays that would otherwise require the
seller to mark such sales ‘‘short’’ pursuant to the
definition under Rule 200(g) of Regulation SHO.
Such sales may be marked ‘‘short exempt’’ pursuant
to Rule 201(d)(1). See Rule 204 Adopting Release,
74 FR at 38277, n.141; see also 17 CFR 230.415.
477 Rule 201(a)(5) provides that the term ‘‘odd lot’’
shall have the same meaning as in 17 CFR
242.600(b)(49). Rule 600(b)(49) defines an ‘‘odd lot’’
as ‘‘an order for the purchase or sale of an NMS
stock in an amount less than a round lot.’’ 17 CFR
242.600(b)(49).
478 See Rule 201(d)(2). SRO rules define a ‘‘unit
of trading’’ or ‘‘normal unit of trading,’’ and the term
generally means 100 shares, i.e., a round lot. For
example, FINRA Rule 6320A(a)(7) defines a ‘‘normal
unit of trading’’ to mean ‘‘100 shares of a security
unless, with respect to a particular security, FINRA
determines that a normal unit of trading shall
constitute other than 100 shares.’’ NYSE Rule 55
states that ‘‘[t]he unit of trading in stocks shall be
100 shares, except that in the case of certain stocks
designated by the Exchange the unit of trading shall
be such lesser number of shares as may be
determined by the Exchange, with respect to each
stock so designated. * * *’’

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inclusion of this provision in any short
sale price test restriction.479
Under former Rule 10a–1, an
exception for certain odd-lot
transactions was created in an effort to
reduce the burden and inconvenience
that short sale restrictions would place
on odd-lot transactions. In 1938, the
Commission found that odd-lot
transactions played a very minor role in
potential manipulation by short
selling.480 Initially, sales of odd-lots
were not subject to the restrictions of
former Rule 10a–1.481 However, the
Commission became concerned over the
volume of odd-lot transactions, which
possibly indicated that the exception
was being used to circumvent the rule.
As a result, the exception was changed
to include the two odd lot exceptions
described below.482
Former Rule 10a–1(e)(3) contained a
limited exception that allowed short
sales by odd-lot dealers registered in the
security and by third market makers of
covered securities to fill customer odd
lot orders. Former Rule 10a–1(e)(4)
provided an exception under the rule
for any sale to liquidate an odd-lot
position by a single round lot sell order
that changed the broker-dealer’s
position by no more than a unit of
trading.
Rule 201(d)(2), as proposed and
adopted, generally parallels the
exceptions in subsections (e)(3) and
(e)(4) of former Rule 10a–1. In addition,
however, as proposed, we are extending
the provision to cover all market makers
acting in the capacity of an odd-lot
dealer. When former Rule 10a–1 was
adopted, odd-lot dealers dealt
exclusively with odd-lot transactions,
and were so registered. Today, market
makers registered in a security typically
also act as odd-lot dealers of the
security. Thus, as proposed, we are
broadening the provision in Rule
201(d)(2) to all broker-dealers acting as
‘‘market makers’’ in odd lots.483
We believe that a provision that will
allow a broker-dealer to mark a short
sale order ‘‘short exempt’’ if it has a
reasonable basis to believe that the short
479 See, e.g., letter from BATS (May 2009); letter
from SIFMA (June 2009); letter from NYSE
Euronext (Sept. 2009).
480 See Former Rule 10a–1 Adopting Release, 3
FR 213.
481 The Commission initially adopted three
exceptions for odd-lot transactions. While the first
one, excepting all odd-lot transactions, seemed to
make other odd-lot exceptions unnecessary, the
1938 adopting release included all three exceptions
without discussion. See Former Rule 10a–1
Adopting Release, 3 FR 213.
482 See Exchange Act Release No. 11030 (Sept. 27,
1974), 39 FR 35570 (Oct. 2, 1974) (‘‘1974 Release’’).
483 Section 3(a)(38) of the Exchange Act defines
the term ‘‘market maker,’’ and includes specialists.
See 15 U.S.C. 78c(a)(38).

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sale order is by a market maker to offset
a customer odd-lot order or liquidate an
odd-lot position that changes such
broker-dealer’s position by no more than
a unit of trading, will continue to be of
utility under Rule 201 and will not be
in conflict with the goals of the Rule.
Because odd-lot transactions by
market makers to facilitate customer
orders are not of a size that could
facilitate a downward movement in the
particular security, we do not believe
that Rule 201(d)(2) will adversely affect
the goals of short sale regulation that
Rule 201 seeks to advance. Thus, we
believe that a broker-dealer should be
able to mark such orders ‘‘short exempt’’
so that those acting in the capacity of a
‘‘market maker,’’ with the commensurate
negative and positive obligations, will
be able to offset a customer odd-lot
order and liquidate an odd-lot position
without a trading center’s policies and
procedures preventing the execution or
display of such orders at a price that is
less than or equal to the current national
best bid.
4. Domestic Arbitrage
We are adopting in Rule 201(d)(3)
without modification the ability for a
broker-dealer to mark as ‘‘short exempt’’
short sale orders associated with certain
bona fide domestic arbitrage
transactions. Although commenters
generally stated that a domestic
arbitrage provision should be included
in any short sale price test restriction,
some commenters also stated that the
provision, as proposed, should be
expanded to cover more trading
scenarios.484 However, one commenter
stated that arbitrage activities are not
unique in contributing to market
efficiency and any short sale price test
restriction that the Commission adopts
should require few, if any, exceptions to
maintain market quality.485
484 See, e.g., letter from SIFMA (June 2009)
(stating that the exception should cover convertible
arbitrage strategies); letter from AIMA (stating that
the provisions relating to domestic and
international arbitrage are too narrow in scope, and
that they should be broadened to include: (1) Bona
fide strategies and risk management tools that
provide necessary market liquidity and efficiency,
and (2) other forms of convertible securities that
differ from standard American-style convertibles);
letter from Credit Suisse (June 2009); letter from
Citadel et al. (June 2009) (stating that the exception
should be broadened to cover any transaction in
connection with domestic arbitrage, even if not
contemporaneous in time); letter from RBC (June
2009) (stating that the exception should
accommodate convertible arbitrage strategies as
well as arbitrage strategies that do not meet the
contemporaneous requirement of this provision);
letter from MFA (June 2009) (stating that we should
broaden the domestic arbitrage provision to include
‘‘bona fide hedging transactions,’’ such as risk
arbitrage and statistical arbitrage transactions).
485 See letter from Hudson River Trading; see also
letter from Liquidnet (expressing concern regarding

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As discussed above, the short sale
price test restriction adopted in Rule
201(b) will apply to a covered security
only after the security has experienced
a significant intra-day price decline,
will remain in place for a limited period
of time, and will continue to permit
short selling at a price above the
national best bid (rather than, for
example, halting all short selling in that
security). As such, we do not believe it
is appropriate at this time to broaden
the scope of the domestic arbitrage
provision. Due to the already limited
scope and applicability of Rule 201, we
believe that expanding the domestic
arbitrage provision to cover more
trading scenarios would undermine our
goals in adopting Rule 201. Thus, we are
adopting the provision as proposed.
Subsection (e)(7) of former Rule 10a–
1 contained an exception related to
domestic arbitrage.486 That exception
applied to bona fide arbitrage
undertaken to profit from a current
difference in price between a
convertible security and the underlying
common stock.487 The term ‘‘bona fide
arbitrage’’ describes an activity
undertaken by market professionals in
which essentially contemporaneous
purchases and sales are effected in order
to lock in a gross profit or spread
resulting from a current differential in
pricing of two related securities.488 For
example, a person may sell short
securities to profit from a current price
differential based upon a convertible
security that entitles him to acquire a
number of securities equivalent to the
securities sold short. We continue to
believe that bona fide arbitrage activities
are beneficial to the markets because
the complexity of the arbitrage and other exceptions
to a short sale price test restriction and concern that
the exceptions could result in different rules
applying to different industry participants).
486 See Exchange Act Release No. 1645 (Apr. 8,
1938).
487 See 1999 Concept Release, 64 FR 57996.
488 1999 Concept Release, 64 FR at 58001, n.54
and accompanying text (discussing the domestic
arbitrage exception under former Rule 10a–1). See
also Section 220.6(b) of Regulation T, which states
that the term ‘‘bona fide arbitrage’’ means: ‘‘(1) A
purchase or sale of a security in one market together
with an offsetting sale or purchase of the same
security in a different market at as nearly the same
time as practicable for the purpose of taking
advantage of a difference in prices in the two
markets; or (2) A purchase of a security which is,
without restriction other than the payment of
money, exchangeable or convertible within 90
calendar days of the purchase into a second security
together with an offsetting sale of the second
security at or about the same time, for the purpose
of taking advantage of a concurrent disparity in the
prices of the two securities.’’ 12 CFR 220.6(b). See
also Exchange Act Release No. 15533 (Jan. 29,
1979), 44 FR 6084 (Jan. 31, 1979) (‘‘1979 Release’’)
(interpretation concerning the application of
Exchange Act Section 11(a)(1) to bona fide
arbitrage).

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they tend to reduce pricing disparities
between related securities and, thereby,
promote market efficiency.489
Rule 201(d)(3) parallels the exception
in former Rule 10a–1(e)(7). Specifically,
Rule 201(d)(3) provides that a brokerdealer may mark a short sale order of a
covered security ‘‘short exempt’’ if the
broker-dealer has a reasonable basis to
believe that the short sale order is ‘‘for
a good faith account of a person who
then owns another security by virtue of
which he is, or presently will be,
entitled to acquire an equivalent
number of securities of the same class
as the securities sold; provided such
sale, or the purchase which such sale
offsets, is effected for the bona fide
purpose of profiting from a current
difference between the price of the
security sold and the security owned
and that such right of acquisition was
originally attached to or represented by
another security or was issued to all the
holders of any such securities of the
issuer.’’ 490
The domestic arbitrage exception in
former Rule 10a–1 was intended to be
consistent with the arbitrage provision
of Regulation T.491 Thus, consistent
with that provision, former Rule 10a–
1(e)(7) referred to a ‘‘special arbitrage
account’’ and not a ‘‘good faith
account.’’ 492 The Federal Reserve Board
amended Regulation T in 1998 to
eliminate the ‘‘special arbitrage account’’
and to allow the functions formerly
effected in that account to be effected in
a ‘‘good faith account.’’ Consistent with
that language, Rule 201(d)(3) refers to a
‘‘good faith account.’’
Because allowing domestic arbitrage
at a price that is less than or equal to
the current national best bid will
potentially promote market efficiency,
we have included in Rule 201 a limited
provision to allow broker-dealers to
mark short sale orders ‘‘short exempt’’
where the broker-dealer has a
reasonable basis to believe that the
conditions in proposed Rule 201(d)(3)
have been met. Thus, Rule 201 is
designed to permit the execution or
display of such orders in connection
with bona fide arbitrage transactions
involving convertible, exchangeable,
and other rights to acquire the securities
sold short, where such rights of
acquisition were originally attached to,
or represented by, another security, or
were issued to all the holders of any
such class of securities of the issuer.
489 See

1979 Release, 44 FR 6084.
201(d)(3).
491 See 12 CFR 220.6.
492 See Proposal, 74 FR at 18056.
490 Rule

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5. International Arbitrage
We are adopting Rule 201(d)(4)
without modification to allow a brokerdealer to mark as ‘‘short exempt’’ short
sale orders associated with certain
international arbitrage transactions. In
response to our request for comment,
commenters were generally supportive
of this provision relating to
international arbitrage.493 Some
commenters, however, stated that they
believe that the provision should be
expanded to cover more trading
scenarios.494
As discussed above, the short sale
price test restriction of Rule 201(b) will
apply to a covered security only after
the security has experienced a
significant intra-day price decline, will
remain in place for a limited period of
time, and will continue to permit short
selling at a price above the current
national best bid (rather than, for
example, halting all short selling in that
security). As such, we do not believe it
is appropriate at this time to broaden
the scope of the international arbitrage
provision. Due to the already limited
scope and applicability of Rule 201, we
believe that expanding the scope of the
international arbitrage provision to
cover more trading scenarios would
undermine our goals in adopting Rule
201 because its scope would be even
further limited, thereby risking not
achieving our goals in adopting Rule
201. Thus, we are adopting the
provision as proposed.
Former Rule 10a–1(e)(8) included an
international arbitrage exception that
was adopted in 1939.495 In adopting the
exception, the Commission stated that it
was necessary to facilitate ‘‘transactions
which are of a true arbitrage nature,
namely, transactions in which a
position is taken on one exchange
which is to be immediately covered on
a foreign market.’’ 496 We believe
likewise that such transactions will
have utility under Rule 201. As
discussed above in connection with
domestic arbitrage, bona fide arbitrage
transactions promote market efficiency
because they equalize prices at an
493 See, e.g., letter from SIFMA (June 2009); letter
from RBC (June 2009); letter from NYSE Euronext
(Sept. 2009); letter from STANY (Sept. 2009).
494 See, e.g., letter from RBC (June 2009) (stating
that the exception should accommodate convertible
arbitrage strategies as well as arbitrage strategies
that do not meet the contemporaneous requirement
of this provision); letter from Credit Suisse (June
2009); see also supra note 484 (discussing
comments regarding the domestic arbitrage
provision).
495 See Exchange Act Release No. 2039 (Mar. 10,
1939), 4 FR 1209 (Mar. 14, 1939).
496 See id.

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instant in time in different markets or
between relatively equivalent securities.
Rule 201(d)(4) parallels the exception
contained in former Rule 10a–1(e)(8).
Specifically, Rule 201(d)(4) provides
that a broker-dealer may mark a short
sale order of a covered security ‘‘short
exempt’’ if the broker-dealer has a
reasonable basis to believe that the short
sale order is ‘‘for a good faith account
and submitted to profit from a current
price difference between a security on a
foreign securities market and a security
on a securities market subject to the
jurisdiction of the United States,
provided that the short seller has an
offer to buy on a foreign market that
allows the seller to immediately cover
the short sale at the time it was
made.’’ 497
In Rule 201(d)(4), we have simplified
the language of former Rule 10a–1(e)(8)
to make it more understandable.498 In
addition, we have changed the reference
in former Rule 10a–1(e)(8) from a
‘‘special international arbitrage account’’
to a ‘‘good faith account.’’ As discussed
above in connection with the domestic
arbitrage provision of Rule 201(d)(3),
this revision will make the provision
consistent with the arbitrage provision
in Regulation T.
In addition, as proposed, we have
incorporated language from the
exception in former Rule 10a–1(e)(12)
that provided that, for purposes of the
international arbitrage exception, a
depository receipt for a security shall be
deemed to be the same security
represented by the receipt. This
language was originally included in the
Commission’s 1939 release adopting the
international arbitrage exception, but
was incorporated separately in former
Rule 10a–1(e)(12).499 Although we
requested comment in the Proposal
regarding whether a depository receipt
for a security should be deemed to be
the same security represented by the
receipt, we did not receive comments
specific to this request.500 As proposed,
497 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 in such
foreign securities market and intends to accept such
offer immediately.’’
499 See supra note 495.
500 See Proposal, 74 FR at 18057.
498 Former

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
we are incorporating in Rule 201(d)(4)
the language from the exception in
former Rule 10a–1(e)(12).501
As with the exception in former Rule
10a–1(e)(8), Rule 201(d)(4) will apply
only to bona fide arbitrage transactions.
Thus, this provision will only be
applicable if at the time of the short sale
there is a corresponding offer in a
foreign securities market, so that the
immediate covering purchase will have
the effect of neutralizing the short sale.
We believe Rule 201(d)(4) is necessary
to facilitate arbitrage transactions in
which a position is taken in a security
in the U.S. market, and which is to be
immediately covered in a foreign
market.502 Thus, we do not believe that
permitting broker-dealers to mark these
orders ‘‘short exempt’’ will undermine
our goals for adopting Rule 201, and, as
described above, we believe facilitating
or permitting these transactions has
utility in terms of promoting market and
pricing efficiency.
6. Over-Allotments and Lay-Off Sales

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We have determined to adopt without
modification in Rule 201(d)(5) a
provision that will permit a brokerdealer to mark as ‘‘short exempt’’ short
sale orders by underwriters or syndicate
members participating in a distribution
in connection with an over-allotment,
and any short sale orders for purposes
of lay-off sales by such persons in
connection with a distribution of
securities through a rights or standby
underwriting commitment.503 In
response to our request for comment,
commenters were generally supportive
of inclusion of this provision relating to
certain syndicate activity.504 Some
commenters, however, asked that we
expand this provision beyond overallotment and lay-off sales.505
As discussed above, the short sale
price test restriction of Rule 201(b) will
apply to a covered security only after
the security has experienced a
501 To the extent that the short sale is of a
depository receipt and the seller intends to
purchase the same security represented by the
depository receipt to immediately cover the short
sale of the depository receipt, the sale may be
marked ‘‘short exempt’’ provided that the seller
reasonably believes at the time of the sale that it
will be able to convert the security to be purchased
into the depository receipt and deliver the
depository receipt by settlement date for the sale.
502 We note that the requirement that the
transaction be ‘‘immediately’’ covered on a foreign
market requires the foreign market to be open for
trading at the time of the transaction. See Proposal,
74 FR at 18057, n.166; see also 2003 Regulation
SHO Proposing Release, 68 FR at 62986, n.119.
503 See Rule 201(d)(5).
504 See, e.g., letter from BATS (May 2009); letter
from SIFMA (June 2009); letter from NYSE
Euronext (Sept. 2009).
505 See, e.g., letter from SIFMA (June 2009).

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significant intra-day price decline, will
remain in place for a limited period of
time, and will continue to permit short
selling at a price above the national best
bid (rather than, for example, halting all
short selling in that security). As such,
we do not believe it is appropriate at
this time to broaden the scope of the
provision relating to over-allotment and
lay-off sales. Due to the already limited
scope and applicability of Rule 201, we
believe that expanding the scope of this
provision to cover other sales effected in
connection with a distribution would
undermine our goals in adopting Rule
201 because it would further limit the
scope of the Rule, thereby risking not
achieving our goals in adopting Rule
201. Thus, we are adopting the
provision as proposed. In addition, we
note that we are including a ‘‘short
exempt’’ marking provision for
syndicate and lay-off sales in part
because, as discussed further below, we
have historically excepted such activity
from short sale rules.
Former Rule 10a–1(e)(10) contained
an exception for over-allotment and layoff sales.506 Although the exception was
not adopted until 1974, the
Commission’s approval of the concept
of excepting over-allotments and lay-off
sales from short sale rules is longstanding.507 In addition, we note that
recently we excepted these sales from
the July Emergency Order, which among
other things required that short sellers
borrow or arrange to borrow securities
prior to effecting a short sale, stating
that it was not necessary for the Order
to cover such sales because such activity
is covered by Regulation M under the
Exchange Act,508 an anti-manipulation
rule.509 In accordance with the longstanding Commission position regarding
these sales, we are including in Rule
201(d)(5) a provision to permit brokerdealers to mark as ‘‘short exempt’’ short
sale orders in connection with overallotment and lay-off sales, which
provision also parallels the exception in
former Rule 10a–1(e)(10).
7. Riskless Principal Transactions
We have determined to adopt without
modification in Rule 201(d)(6) a
provision that will permit a brokerdealer to mark as ‘‘short exempt’’ short
sale orders where broker-dealers are
506 See

1974 Release, 39 FR 35570.
e.g., Exchange Act Release No. 3454 (July
6, 1946), in which the Commission approved the
NYSE’s special offering plan, which permitted short
sales in the form of over-allotments to facilitate
market stabilization.
508 17 CFR 242.100 et seq.
509 See Exchange Act Release No. 58190 (July 18,
2008), 73 FR 42837 (July 23, 2008) (amending the
July Emergency Order to include exceptions for
certain short sales).
507 See,

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11269

facilitating customer buy orders or sell
orders where the customer is net long,
and the broker-dealer is net short but is
effecting the sale as riskless
principal.510 In response to our request
for comment, commenters that
specifically addressed this provision
supported its inclusion.511
As discussed in the Proposal,512 in
2005, the Commission, via authority
delegated to the Staff, granted
exemptive relief under former Rule 10a–
1 for any broker-dealer that facilitates a
customer buy or long sell order on a
riskless principal basis.513 In granting
the relief, the Commission noted
representations made in the letter
requesting relief that, in the situation
where the amount of securities that the
broker-dealer purchases for the
customer may not be sufficient to give
the broker-dealer an overall net ‘‘long’’
position, former Rule 10a–1 would
constrain the ability of the broker-dealer
to fill the customer buy order. Further,
the Commission noted representations
in the letter requesting relief that,
because such short sales would be
effected only in response to a customer
buy order, this should vitiate any
concerns about such sales having a
depressing impact on the security’s
price.514
In addition, the Commission noted
representations made in the letter
requesting relief that where a brokerdealer is facilitating a customer long
sale order in a riskless principal
transaction, because the ultimate seller
is long the shares being sold, these
transactions present none of the
potential abuses that former Rule 10a–
1 was designed to address.515 The
Commission also noted representations
that the application of former Rule 10a–
1 to riskless principal transactions
involving a customer long sale can
inhibit the broker-dealer’s ability to
provide timely (or any) execution to
such customer long sale. Specifically, if
the broker-dealer has a net short
position, the broker-dealer will be
restricted from executing its own
principal trade to complete the first leg
of the riskless principal transaction.516
510 See

Rule 201(d)(6).
e.g., letter from BATS (May 2009); letter
from SIFMA (June 2009); letter from Credit Suisse
(June 2009); letter from NYSE Euronext (Sept.
2009).
512 See Proposal, 74 FR at 18057–18058.
513 See letter from James A. Brigagliano, Assistant
Director, Division of Market Regulation, SEC, to Ira
Hammerman, Senior Vice President and General
Counsel, Securities Industry Association, dated July
18, 2005 (‘‘Riskless Principal Letter’’).
514 See id.
515 See id.
516 See id.
511 See,

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Thus, compliance with former Rule
10a–1 would adversely affect a brokerdealer’s ability to provide best execution
to a customer order.517
Taken together, Rules 201(a)(8) and
(d)(6) parallel the conditions for relief in
the Riskless Principal Letter.518
Consistent with the relief granted in the
Riskless Principal Letter, we believe that
including a provision to permit a
broker-dealer to mark ‘‘short exempt’’
short sale orders in connection with
riskless principal transactions is
appropriate and will not undermine our
goals in adopting short sale price test
regulation. In particular, we note that
such a provision will facilitate a brokerdealer’s ability to provide best execution
to customer orders. In addition, such
provision will apply only where the
customer is selling long.
Rule 201(a)(8) defines the term
‘‘riskless principal’’ to mean ‘‘a
transaction in which a broker or dealer,
after having received an order to buy a
security, purchases the security as
principal at the same price to satisfy the
order to buy, exclusive of any explicitly
disclosed markup or markdown,
commission equivalent, or other fee, or,
after having received an order to sell,
sells the security as principal at the
same price to satisfy the order to sell,
exclusive of any explicitly disclosed
markup or markdown, commission
equivalent, or other fee.’’ 519
Rule 201(d)(6) provides that a brokerdealer may mark a short sale order
‘‘short exempt’’ if the broker-dealer has
a reasonable basis to believe that the
short sale order is to effect the execution
of a customer purchase or the execution
of a customer ‘‘long’’ sale on a riskless
principal basis.520 In addition, Rule
517 See

id.
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).
519 Rule 201(a)(8). In addition to being consistent
with the conditions in the Riskless Principal Letter
and Rule 10b–18(a)(12) of the Exchange Act, this
definition is consistent with the definition of
‘‘riskless principal’’ in FINRA Rule 6642. See FINRA
Rule 6642(d). We note that Rule 201(a)(8), as
adopted, is slightly modified from the definition in
the Proposal in that we have added language to
clarify that the term ‘‘same price’’ shall be exclusive
of any explicitly disclosed markup or markdown,
commission equivalent, or other fee. This language
is consistent with the conditions in the Riskless
Principal Letter and Rule 10b–18(a)(12). It is also
consistent with FINRA’s trade reporting rules
which require a riskless principal transaction in
which both legs are executed at the same price to
be reported once, in the same manner as an agency
transaction, exclusive of any markup, markdown,
commission equivalent, or other fee. See FINRA
Rule 6380A(d)(3)(B).
520 See Rule 201(d)(6). Due to the modification to
the definition of ‘‘riskless principal’’ in Rule
201(a)(8), we have not included in Rule 201(d)(6)
the proposed language that stated that the purchase

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201(d)(6) requires the broker-dealer, if it
marks an order ‘‘short exempt’’ under
this provision, to have written policies
and procedures in place to assure that,
at a minimum: (i) The customer order
was received prior to the offsetting
transaction; (ii) the offsetting transaction
is allocated to a riskless principal or
customer account within 60 seconds of
execution; and (iii) that it has
supervisory systems in place to produce
records that enable the broker-dealer to
accurately and readily reconstruct, in a
time-sequenced manner, all orders on
which the broker-dealer relies pursuant
to this provision.521
We believe that Rule 201(d)(6) will
provide broker-dealers with additional
flexibility to facilitate customer orders
and provide best execution. In addition,
we believe that the conditions set forth
in Rule 201(d)(6) will provide a
mechanism for the surveillance of the
provision’s use by linking it to specific
incoming orders and executions, and by
requiring broker-dealers to establish
procedures for handling such
transactions. These requirements will
help ensure that broker-dealers are
complying with Rule 201(d)(6).
8. Transactions on a Volume-Weighted
Average Price Basis
We have determined to adopt in Rule
201(d)(7) without modification the
ability for a broker-dealer to mark as
‘‘short exempt’’ certain short sale orders
executed on a volume-weighted average
price (‘‘VWAP’’) basis. In response to the
Proposal, commenters to this provision
were supportive of the provision. Some
commenters, however, requested that
we expand this provision to, for
example, cover all benchmark orders,
similar to the exception in Rule 611 of
Regulation NMS.522 As discussed above,
the short sale price test restriction of
or sell order must be given the same per-share price
at which the broker-dealer sold or bought shares to
satisfy the facilitated order, exclusive of any
explicitly disclosed markup or markdown,
commission equivalent or other fee. See also supra
note 519.
521 See Rule 201(d)(6). We note that we
determined to adopt, as proposed, in Rule 201(d)(6)
an explicit requirement that broker-dealers must
establish policies and procedures for handling such
transactions to be consistent with the conditions in
the Riskless Principal Letter and Rule 10b–
18(a)(12), which also contain such a requirement.
522 See, e.g., letter from SIFMA (June 2009); letter
from RBC (June 2009); see also letter from Goldman
Sachs (June 2009); letter from ICI (June 2009)
(stating that a broadened exception would be
necessary to facilitate execution of the types of large
orders executed by institutional investors and that
such benchmark orders do not raise concerns of
manipulation or negative market effects that a short
sale price test restriction would be designed to
prevent); letter from Credit Suisse (Sept. 2009)
(positing that the exception should be extended to
cover any orders executed on a similar formulaic
basis as VWAP orders).

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Rule 201(b) will apply to a covered
security only after the security has
experienced a significant intra-day price
decline, will remain in place for a
limited period of time, and will
continue to permit short selling at a
price above the current national best bid
(rather than, for example, halting all
short selling in that security). As such,
we do not believe it is appropriate at
this time to broaden the scope of the
provision relating to transactions on a
VWAP basis. Due to the already limited
scope and applicability of Rule 201, we
believe that expanding the scope of this
provision to cover other transactions
would undermine our goals in adopting
Rule 201 because it would further limit
the scope of the Rule, thereby risking
not achieving our goals in adopting Rule
201. Thus, we are adopting the
provision as proposed.
Under former Rule 10a–1, the
Commission, via authority delegated to
the Staff, granted limited relief from that
rule in connection with short sales
executed on a VWAP basis.523 The relief
was limited to VWAP transactions that
are arranged or ‘‘matched’’ before the
market opens at 9:30 a.m., but are not
assigned a price until after the close of
trading when the VWAP value is
calculated. The Commission granted the
exemptions based, in part, on the fact
that these VWAP short sale transactions
appeared to pose little risk of facilitating
the type of market effects that former
Rule 10a–1 was designed to prevent.524
In particular, the Commission noted that
the pre-opening VWAP short sale
transactions do not participate in or
affect the determination of the VWAP
for a particular security.525 Moreover,
the Commission stated that all trades
used to calculate the day’s VWAP
would continue to be subject to former
Rule 10a–1.526
Consistent with the relief granted
under former Rule 10a–1 and with the
Proposal, we are providing that a
broker-dealer may mark as ‘‘short
523 See e.g. letter from Larry E. Bergmann, Senior
Associate Director, Division of Market Regulation,
SEC, to Edith Hallahan, Associate General Counsel,
Phlx, dated Mar. 24, 1999; letter from Larry E.
Bergmann, Senior Associate Director, Division of
Market Regulation, SEC, to Soo J. Yim, Wilmer,
Cutler & Pickering, dated Dec. 7, 2000; letter from
James Brigagliano, Assistant Director, Division of
Market Regulation, SEC, to Andre E. Owens, Schiff
Hardin & Waite, dated Mar. 30, 2001; letter from
James Brigagliano, Assistant Director, Division of
Market Regulation, SEC, to Sam Scott Miller, Esq.,
Orrick, Herrington & Sutcliffe LLP, dated May 12,
2001; letter from James Brigagliano, Assistant
Director, Division of Market Regulation, SEC, to
William W. Uchimoto, Esq., Vie Institutional
Services, dated Feb. 12, 2003.
524 See id.
525 See id.
526 See id.

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
exempt’’ certain short sale orders
executed at the VWAP. Rule 201(d)(7)
differs from the relief granted under
former Rule 10a–1, however, in that it
is not limited to VWAP transactions that
are arranged or ‘‘matched’’ before the
market opens at 9:30 a.m., or that are
not assigned a price until after the close
of trading when the VWAP value is
calculated. As noted in the Proposal, we
believe this restriction is not necessary
because VWAP short sale transactions
appear to pose little risk of facilitating
the type of market effects that a short
sale price test restriction is designed to
prevent. In addition, in contrast to the
Proposal, we have not included in Rule
201 the requirement that no short sale
orders marked ‘‘short exempt’’ may be
used to calculate the VWAP. We have
not incorporated this condition into
Rule 201(d)(7) because the information
used to calculate the VWAP will not
contain information regarding whether
an order was marked ‘‘short exempt.’’
Thus, pursuant to Rule 201(d)(7), a
broker-dealer may mark a short sale
order of a covered security ‘‘short
exempt’’ if the broker-dealer has a
reasonable basis to believe that the short
sale order is for the sale of a covered
security at the VWAP that meets the
following conditions: 527 (1) The VWAP
for the covered security is calculated by:
Calculating the values for every regular
way trade reported in the consolidated
system for the security during the
regular trading session, by multiplying
each such price by the total number of
shares traded at that price; compiling an
aggregate sum of all values; and
dividing the aggregate sum by the total
number of reported shares for that day
in the security; (2) the transactions are
reported using a special VWAP trade
modifier; (3) the VWAP matched
security qualifies as an ‘‘actively-traded
security’’ (as defined under Rules
101(c)(1) and 102(d)(1) of Regulation
M), or where the subject listed security
is not an ‘‘actively-traded security,’’ the
proposed short sale transaction will be
permitted only if it is conducted as part
of a basket transaction of twenty or more
securities in which the subject security
does not comprise more than 5% of the
value of the basket traded; (4) the
transaction is not effected for the
purpose of creating actual, or apparent,
active trading in or otherwise affecting
the price of any security; and (5) a
broker or dealer will act as principal on
the contra-side to fill customer short
sale orders only if the broker-dealer’s
position in the covered security, as
committed by the broker-dealer during
the pre-opening period of a trading day
527 See

Rule 201(d)(7).

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and aggregated across all of its
customers who propose to sell short the
same security on a VWAP basis, does
not exceed 10% of the covered
security’s relevant average daily trading
volume, as defined in Regulation M.528
Except as discussed above, the
conditions set forth in Rule 201(d)(7)
parallel the conditions contained in the
exemptive relief from former Rule 10a–
1 granted for VWAP short sale
transactions. We believe that these
conditions worked well in restricting
the exemptive relief to situations that
generally would not raise the harms that
short sale price tests are designed to
prevent. We believe they will be
similarly effective in serving that
function today and, therefore, we have
incorporated them into Rule 201(d)(7).
9. Decision Not To Adopt a Provision
That a Broker-Dealer May Mark an
Order ‘‘Short Exempt’’ in Connection
With Bona Fide Market Making Activity
As discussed in the Proposal, former
Rule 10a–1(e)(5) provided a limited
exception from the restrictions of that
rule for ‘‘[a]ny sale * * * by a registered
specialist or registered exchange market
maker for its own account on any
exchange with which it is registered for
such security, or by a third market
maker for its own account over-thecounter, (i) Effected at a price equal to
or above the last sale, regular way,
reported for such security pursuant to
an effective transaction reporting plan
* * *. Provided, however, That any
exchange, by rule, may prohibit its
registered specialist and registered
exchange market makers from availing
themselves of the exemption afforded by
this paragraph (e)(5) if that exchange
determines that such action is necessary
or appropriate in its market in the
public interest or for the protection of
investors.’’ 529 Unless prohibited by
exchange rule, this exception was
intended to permit registered specialists
or market makers to protect customer
orders against transactions in other
markets in the consolidated system by
allowing them to sell short at a price
equal to the last trade price reported to
the consolidated system, even if that
sale was on a minus or zero-minus
tick.530 Although former Rule 10a–1
528 See Rule 201(d)(7); 17 CFR 242.100(b)
(defining average daily trading volume),
242.101(c)(1), 242.102(d)(1).
529 See Proposal, 74 FR at 18059.
530 See 1974 Release, 39 FR 35570. Former Rule
10a–1(a)(1)(i) referenced the last sale price reported
to an effective transaction reporting plan, but
former Rule 10a–1(a)(2) also permitted an exchange
to make an election to use the last sale price
reported in that exchange market. Certain
exchanges, such as the NYSE, implemented short

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included this exception for market
makers, exchanges adopted rules that
prohibited their registered specialists
and market makers from availing
themselves of this exception.531 In
addition, former Rule 10a–1 did not
contain a general exception for short
selling in connection with bona fide
market making activities.532
In the Proposal, in connection with
one proposed rule, the proposed circuit
breaker halt rule, we included a
provision that would permit a brokerdealer to mark a short sale order ‘‘short
exempt’’ in connection with certain
bona fide market making activities.
None of the other proposed rules
contained a ‘‘short exempt’’ marking
provision with respect to bona fide
market making activities. In connection
with the proposed circuit breaker halt
rule, we included an exception for
equity and options market makers
engaged in bona fide market making
activities.533 We also included in the
proposed circuit breaker halt rule an
exception related to bona fide market
making in derivatives.534
sale price test rules consistent with former Rule
10a–1(a)(2). See, e.g., former NYSE Rule 440B.
531 See 1974 Release, 39 FR 35570.
532 We note, however, that NASD’s former bid test
contained an exception for short sales executed by
qualified market makers in connection with bona
fide market making. Although the NASD’s former
bid test contained an exception for short sales
executed by qualified market makers in connection
with bona fide market making activity, we
understand that market makers relied on the
exception a small percentage of the time. For
example, a 1997 study indicates that during a
sample month in 1997, market maker short sales at
or below the inside bid accounted for only 2.41%
of their total share volume. See D. Timothy
McCormick and Bram Zeigler, The Nasdaq Short
Sale Rule: Analysis of Market Quality Effects and
The Market Maker Exemption, NASD Economic
Research, (August 7, 1997) at 27; see also 2003
Regulation SHO Proposing Release, 68 FR at 62989.
In addition, we note that when the Commission
approved NASD’s former bid test and the market
maker exception to the bid test, it noted concerns
that the market maker exception could create
opportunities for abusive short selling. See
Exchange Act Release No. 34277 (June 29, 1994), 59
FR 34885 (July 7, 1994). See also supra note 43
(discussing NASD Rule 3350).
533 See Proposal, 74 FR at 18110. Proposed Rule
201(d)(1) of the proposed circuit breaker halt rule
provided that the short selling halt would not apply
to ‘‘[a]ny sale of a covered security by a registered
market maker, block positioner, or other market
maker obligated to quote in the over-the-counter
market, in each case that are selling short a covered
security as part of bona fide market making in such
covered security.’’ Id.
534 See id. Proposed Rule 201(d)(4) of the
proposed circuit breaker halt rule provided that the
short selling halt would not apply to ‘‘[a]ny sale of
a covered security by any person that is a market
maker, including an over-the-counter market maker,
if the sale is part of a bona fide market making and
hedging activity related directly to bona fide market
making in: (i) Derivative securities based on that
covered security; or (ii) exchange traded funds and
exchange traded notes of which that covered
security is a component.’’ Id.

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In response to our decision not to
provide in the Proposal for most of the
proposed alternatives that a brokerdealer may mark an order ‘‘short
exempt’’ in connection with bona fide
market making activity, we received a
wide variety of comments both
supporting and opposing such a
provision. Many commenters stated that
any short sale price test restriction
adopted by the Commission must
include an exception for market makers
due to the large amount of liquidity that
they provide to the markets; although
comments varied with respect to the
necessity of such an exception to the
various proposed price test restrictions
and circuit breaker rules and to whom
such an exception should apply.535
Commenters stated that the lack of a
market maker exception to any short
sale price test restriction could result in,
among other things, reduced liquidity,
increased bid-ask spreads, increased
volatility, increased barriers to entry for
new market makers, reduced
competition among market makers, and
increased costs to market makers and
investors.536 Some commenters stated
that the Commission should consider
exceptions that would permit high
535 See, e.g., roundtable statement of Rosenblatt
Securities; letter from BATS (May 2009); letter from
Matlock Capital (May 2009); letter from Pink OTC;
letter from Direct Edge (June 2009); letter from
Engmann Options; letter from Prof. Rosenthal; letter
from Credit Suisse (June 2009); letter from John
Gilmartin, Co-CEO and Ben Londergan, Co-CEO,
Group One Trading, L.P., dated June 17, 2009
(‘‘Group One Trading (June 2009)’’); letter from
Allston Trading (June 2009); letter from Knight
Capital (June 2009); letter from STANY (June 2009);
letter from AIMA; letter from Barclays (June 2009);
letter from Citadel et al. (June 2009); letter from
EWT (June 2009); letter from GETCO (June 2009);
letter from Goldman Sachs (June 2009); letter from
ICI (June 2009); letter from NYSE Euronext (June
2009); letter from RBC (June 2009); letter from
SIFMA (June 2009); letter from STA (June 2009);
letter from T.D. Pro Ex; letter from Vanguard (June
2009); letter from Direct Edge (Sept. 2009); letter
from BATS (Sept. 2009); letter from Credit Suisse
(Sept. 2009); letter from Group One Trading (Sept.
2009); letter from Allston Trading (Sept. 2009);
letter from Knight Capital (Sept. 2009); letter from
STANY (Sept. 2009); letter from Citadel et al. (Sept.
2009); letter from EWT (Sept. 2009); letter from
GETCO (Sept. 2009); letter from Goldman Sachs
(Sept. 2009); letter from NYSE Euronext (Sept.
2009); letter from RBC (Sept. 2009); letter from
SIFMA (Sept. 2009); letter from William J. Brodsky,
Chairman and CEO, The Chicago Board Options
Exchange, Inc., dated Sept. 21, 2009 (‘‘CBOE (Sept.
2009)’’); letter from Edward Jones; letter from Virtu
Financial.
536 See, e.g., letter from SIFMA (June 2009); letter
from Knight Capital (June 2009); letter from EWT
(June 2009); letter from GETCO (June 2009); letter
from Goldman Sachs (June 2009); letter from EWT
(Sept. 2009); letter from Virtu Financial; but cf.
letter from Dr. Jim DeCosta, dated Sept. 14, 2009
(‘‘Dr. Jim DeCosta’’) (noting that there are currently
few barriers to entry for market makers and abuse
can arise from small market makers, who are in
need of business, being willing to misuse a bona
fide market maker exemption in exchange for order
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frequency traders 537 and other market
makers to continue to provide the same
level of liquidity to the markets.538
Some commenters stated that an
exception for options market makers, in
particular, would be necessary for any
short sale price test restriction, citing
the important role that short selling
plays in an options market maker’s
ability to hedge risk and the negative
impact that a short sale price test
restriction would have on options
market quality, liquidity, bid-ask
spreads, quote size, and investor
costs.539 One commenter noted that
although former Rule 10a–1 did not
contain an options market maker
exception, the NASD’s former bid test
contained an exception that ‘‘allowed
options market makers to provide
liquidity and depth for listed options by
allowing them to hedge,’’ but that also
had ‘‘limited definitions and scope.’’ 540
Another commenter recognized the risk
of a transference effect resulting from an
options market maker exception,
namely that an exception may facilitate
short selling by buying puts from or
selling calls to market makers, but stated
that there was no empirical evidence
showing that the risk is more than
theoretical.541
537 See

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

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Some commenters stated that a
market maker exception should include
market makers in listed and OTC
derivatives.542 Other commenters stated
that a market maker exception should
cover block positioners.543 In addition,
some commenters stated that a market
maker exception should include market
makers in convertibles and warrants.544
Several commenters stated that an
exception for market makers in ETFs
should be included in any price test
restriction adopted by the
Commission.545
In addition, some commenters stated
that to not include an exception for
bona fide market making activities is
inconsistent with the Commission’s
short sale-related emergency orders
issued in mid- to late-2008, which
included various forms of exceptions for
bona fide market making activities.546
Commenters also noted that since its
adoption in 2004, Regulation SHO has
included an exception for bona fide
market making activities from the
‘‘locate’’ requirement of Rule
203(b)(1).547 Several commenters also
noted that fails to deliver resulting from
certain bona fide market making activity
are provided additional time to be
closed out under Regulation SHO’s
close-out requirements.548
542 See, e.g., letter from Direct Edge (June 2009);
letter from Credit Suisse (June 2009); letter from
STANY (June 2009); letter from Barclays (June
2009); letter from Goldman Sachs (June 2009); letter
from ICI (June 2009); letter from NYSE Euronext
(June 2009); letter from RBC (June 2009); letter from
SIFMA (June 2009); letter from ISDA; letter from
Direct Edge (Sept. 2009); letter from Credit Suisse
(Sept. 2009); letter from STANY (Sept. 2009); letter
from Goldman Sachs (Sept. 2009); letter from RBC
(Sept. 2009); letter from SIFMA (Sept. 2009).
543 See letter from Credit Suisse (June 2009); letter
from RBC (June 2009); letter from SIFMA (June
2009); letter from SIFMA (Sept. 2009); letter from
Credit Suisse (Sept. 2009); letter from RBC (Sept.
2009).
544 See, e.g., letter from Credit Suisse (June 2009);
letter from SIFMA (June 2009); letter from Credit
Suisse (Sept. 2009); letter from Direct Edge (Sept.
2009); letter from SIFMA (Sept. 2009).
545 See, e.g., letter from Credit Suisse (June 2009);
letter from Allston Trading (June 2009); letter from
STANY (June 2009); letter from Goldman Sachs
(June 2009); letter from ICI (June 2009); letter from
SIFMA (June 2009); letter from SIFMA (Sept. 2009);
letter from Credit Suisse (Sept. 2009); letter from
STANY (Sept. 2009); letter from Goldman Sachs
(Sept. 2009); letter from Direct Edge (Sept. 2009).
546 See, e.g., letter from SIFMA (June 2009); letter
from RBC (June 2009); letter from CBOE (June
2009); letter from Boston Options Exchange et al.
(June 2009); letter from ISE (June 2009); letter from
Citadel et al. (June 2009); letter from Goldman
Sachs (June 2009); see also supra Section II.C.
(discussing the Commission’s emergency orders).
547 See, e.g., letter from SIFMA (June 2009); letter
from CBOE (June 2009); letter from Boston Options
Exchange et al. (June 2009); letter from Goldman
Sachs (June 2009); letter from GETCO (June 2009);
see also 17 CFR 242.203(b)(2)(iii).
548 See, e.g., letter from Goldman Sachs (June
2009); letter from Wolverine; letter from Boston

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Several commenters, however,
discussed the importance of limiting a
market maker exception to bona fide
market making activity and requested
that the Commission define the term
strictly so as to eliminate the possibility
for gaming.549 Moreover, some
commenters stated that a market maker
exception may not be necessary. For
example, commenters noted that equity
market makers will usually sell at their
offer quote, which would not be
inhibited by any price test restriction.550
One commenter stated that if we were
to adopt a circuit breaker approach with
the alternative uptick rule, an equity
market making exception may not be as
critical because equity market makers
generally post their offers one price
increment above the national best
bid.551 This commenter stated that ‘‘[i]n
a market characterized by the kind of
decline that would trigger a circuit
breaker, remaining above the [national
best bid] will tend to be the natural
norm.’’ 552
Other commenters stated that there
should not be an exception for market
makers in any short sale price test
restriction that the Commission
adopts.553 One commenter noted that
the activities of market makers ‘‘are not
unique in contributing to market
efficiency; all market participants,
regardless of trading frequency or
professional expertise, improve market
quality by their very participation,
whether or not their trading activity is
arbitrage or professional market making
* * * the Commission’s goal should be
to implement rules that are sufficiently
Options Exchange et al. (June 2009); letter from
GETCO (Sept. 2009); letter from Virtu Financial;
letter from Nasdaq OMX Group (Oct. 2009); see also
17 CFR 242.204(a)(3).
549 See letter from Pink OTC; letter from SIFMA
(June 2009); letter from STA (June 2009); letter from
SIFMA (Sept. 2009); see also letter from NYSE
Euronext (June 2009); letter from NYSE Euronext
(Sept. 2009) (stating that the definition should
contain some obligation to the market).
550 See letter from CBOE (June 2009); letter from
GETCO (June 2009). Although GETCO stated that a
market maker typically should not need an
exception because the market maker will be able to
sell short on the offer when providing liquidity, this
commenter also noted that market makers such as
GETCO ‘‘often employ market making strategies that
sometimes include removing liquidity on the bid as
part of the overall strategy, which may include
short selling.’’ GETCO stated that such strategies
result in tighter spreads, more liquidity and
potentially lower costs to investors. See letter from
GETCO (June 2009).
551 See letter from Direct Edge (Sept. 2009).
552 Letter from Direct Edge (Sept. 2009).
553 See, e.g., letter from David G. Furr, dated Apr.
20, 2009; letter from R. Skinner, dated Apr. 21,
2009; letter from Frazer; letter from IBC; letter from
Vitus Lask, dated June 20, 2009; letter from Stephen
R. Porpora, dated Sept. 10, 2009; letter from Hudson
River Trading; letter from David Furr, dated Nov.
3, 2009.

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focused and require few, if any,
exceptions to maintain market
quality.’’ 554 In addition, as discussed in
Section III.B. above, several commenters
cautioned against the Commission
adopting numerous exceptions and
discussed problems that may arise from
adopting a short sale price test
restriction with many or complex
exceptions, such as additional
implementation difficulties, greater
compliance costs, lack of uniformity
that may cause unfair application of the
rule, increased opportunities for gaming
and abuse, and, overall, a less effective
rule that only applies to a limited
number of short sales.555
At this time, we believe that including
a provision to permit broker-dealers to
mark as ‘‘short exempt’’ short sale orders
in connection with market making
activity in the equity or options markets
is not necessary and would not advance
the goals of our adopting a short sale
price test restriction. We recognize that
there are distinct differences between
options market making and market
making in the equity markets and that
Rule 201 may impact these markets
differently. In addition, we recognize
commenters’ concerns regarding the
potential negative market impact of not
including an exception for market
making activity in the equity or options
markets. Due to the reasons discussed
below, however, we believe such
impact, if any, would be limited. In
addition, we believe that the potential
costs of not including exceptions for
equity and options market makers are
justified by the benefits provided by the
Rule in preventing short selling,
including potentially manipulative or
abusive short selling, from driving down
further the price of a security that has
already experienced a significant intraday price decline.
We believe that the potential negative
market impact from not including an
equity or options market maker
exception to Rule 201 will be limited, in
large part, because Rule 201 is a
narrowly-tailored Rule that will impose
a short sale price test restriction only if
the price of a covered security declines
by 10% or more from the covered
security’s closing price as determined
by the listing market for the covered
security as of the end of regular trading
hours on the prior day. In addition, once
triggered, the short sale price test
restriction will apply for a limited
period of time—the remainder of the
day on which the circuit breaker has
been triggered and the following day.
Thus, unlike NASD’s former bid test or
554 Letter
555 See

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11273

former Rule 10a–1 (which also did not
include an exception for bona fide
market making activity), Rule 201 does
not impose a short sale price test
restriction that will apply all the time to
all covered securities. Nor does Rule
201 impose a halt on short selling.
Instead, Rule 201 is a targeted Rule that
will not impact trading in the majority
of covered securities. As discussed in
more detail above,556 in response to our
request for comment on an appropriate
threshold at which to trigger the
proposed circuit breaker short sale price
restrictions, commenters submitted
estimates of the number of securities
that would trigger a circuit breaker rule
at a 10% threshold 557 and the estimates
reflect that a 10% circuit breaker
threshold, on average, should result in
a limited percentage of covered
securities triggering the threshold.558 In
addition, following its review of trading
data, the Staff found that, during the
period covering April 9, 2001 to
September 30, 2009, the price test
restrictions of Rule 201 would have, on
an average day, been triggered for
approximately 4% of covered
securities.559 The Staff also found that
for a low volatility period, covering
January 1, 2004 to December 31, 2006,
the 10% trigger level of Rule 201 would
have, on an average day, been triggered
for approximately 1.3% of covered
securities.560
In addition, we believe that any
negative market impact due to the lack
of a bona fide market making exception
for equity market makers will be
limited, if any, because as noted by
some commenters, for the most part,
equity market makers sell at their offer
quote.561 Thus, the price test restriction
of Rule 201, that requires short selling
at a price above the national best bid
and only if the circuit breaker has been
triggered, is consistent with equity
market making strategies because these
market makers generally post their offer
quotes at a price above the national best
bid.562 In addition, because equity
market makers typically provide
liquidity on the opposite side of the
market, if a covered security is
experiencing significant downward
price pressure such that it is subject to
556 See supra Section III.A.5. (discussing the
circuit breaker trigger level).
557 See, e.g., letter from Jordan & Jordan; letter
from Citadel et al. (June 2009); letter from MFA
(June 2009); letter from SIFMA (June 2009); letter
from Credit Suisse (Sept. 2009).
558 See supra notes 305 to 308 and accompanying
text.
559 See supra note 310 and accompanying text.
560 See supra note 311 and accompanying text.
561 See, e.g., letter from CBOE (June 2009); letter
from GETCO (June 2009).
562 See letter from Direct Edge (Sept. 2009).

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Rule 201, market makers will tend to be
buying not selling the security. Thus,
equity market makers will continue to
be able to provide liquidity in that
security.
Although a number of commenters
expressed concerns regarding the lack of
an options market maker exception from
a price test restriction, we do not believe
that such an exception under Rule 201
is necessary because, unlike with a ban
on short selling, options market makers
will be able to sell short to hedge their
positions even when the restriction is in
place.563 In addition, not all covered
securities have options traded on them
(‘‘optionable covered securities’’). As
discussed above, data provided by
commenters and Staff analysis indicate
that, on an average day, a limited
number of all covered securities would
trigger a 10% circuit breaker level.564
Thus, an even more limited number of
optionable covered securities would
trigger a 10% circuit breaker, thereby
further reducing the need for an options
market maker exception to the Rule’s
requirements. To the extent that an
optionable covered security is subject to
Rule 201, we recognize this may result
in a delay in an options market maker’s
ability to sell short to hedge a
position.565 Such delay, and the
resulting uncertainty options market
makers may face (including as the price
of an optionable covered security
approaches the circuit breaker)
regarding their ability to obtain
immediate execution of their short sale
hedging transactions, may have a
negative impact on the options markets,
such as the widening of options quote
spreads.
We believe, however, that this
potential negative market impact and
any resulting costs to options market
makers will be limited and are justified
by the benefits of the Rule. As discussed
above, we believe these costs will be
limited because, among other things,
due to the Rule’s circuit breaker
563 We note that some commenters, in stating that
a short sale price test restriction should include an
options market maker exception, provided support
for their arguments by referencing the impact of the
Short Sale Ban Emergency Order that halted short
selling in the securities subject to the emergency
order, rather than imposing a short sale price test
restriction that would continue to allow short
selling while the restriction is in effect. See, e.g.,
letter from CBOE.
564 See supra note 310 and 311 and
accompanying text.
565 We note that one commenter stated that
‘‘[options market makers] need immediacy in their
hedges, which means selling at lower than the
inside offer quote.’’ See letter from CBOE (June
2009). Rule 201, if triggered, limits short selling to
a price above the current national best bid. Thus,
it does not prevent short selling at a price between
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approach, the Rule’s restrictions will
not apply to most optionable covered
securities most of the time. In addition,
even when a security is experiencing
excessive downward price pressure
such that the short sale price test
restriction of Rule 201 has been
triggered for a particular security, we
expect there will be purchasers in the
market willing to buy the security at the
offer or at a price between the current
national best bid and offer. Thus, for
securities that are subject to Rule 201,
there will be buying interest in the
market that will result in execution of
short sale hedging transactions.
We have also determined not to
include an options market maker
exception because we are concerned
about creating an un-level playing field
between options market makers and
market makers in other derivatives that
sell short to hedge their positions in the
derivative.566 For the reasons discussed
above and below, we do not believe that
any market maker exception is
necessary.
We are also concerned that the
inclusion of an exception for equity or
options market makers may create an
opportunity for potential misuse.
Whether from misuse or proper use, if
a large volume of short selling were
excepted from the short sale price test
restrictions of the Rule, such an
exception could potentially undermine
our goals for adopting the Rule.567 We
are also concerned that the inclusion of
an exception could result in significant
additional surveillance and compliance
costs necessary to help to determine
whether market participants are validly
claiming the applicable exception and
566 We also note that, as discussed in Section
III.A.1. above, we, as well as some commenters, are
concerned about the ability to obtain a short
position through the use of derivative products and
that synthetic short positions may increase as a
result of the adoption of a short sale price test
restriction. We are concerned that inclusion of an
exception in Rule 201 for short sale hedging
transactions would make such an increase even
more likely. See supra Section III.A.1.
567 See, e.g., Ekkehart Boehmer, Charles M. Jones
and Xiaoyan Zhang, 2009, Shackling Short Sellers:
The 2008 Shorting Ban. This study on the Short
Sale Ban Emergency Order found that ‘‘[d]uring the
shorting ban (19 Sep through 8 Oct), [NYSEexecuted] short sales are 7.72% of overall trading
volume for stocks on the original ban list, compared
to 19.32% of overall trading volume over the same
time interval for the matching set of non-banned
stocks.’’ The authors of the study attributed the ongoing short sales in the banned stocks to market
makers selling short as part of their market making
and hedging activity, as such activity was excepted
from the Short Sale Ban Emergency Order. See id.
While short sale volume decreased in the banned
stocks, based on this study’s results and its
comparison of ban and non-ban stocks,
approximately 40% of the short sale trading volume
would be expected to be exempt short selling. This
short selling may have occurred as a result of
market making exceptions.

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to prevent any misuse. In determining
not to include such an exception, we
also considered these additional costs.
Although some commenters noted
that the NASD’s former bid test
contained exceptions for equity and
options market makers, as noted above,
former Rule 10a–1, which was in place
for almost seventy years, and applied on
a permanent, market-wide basis, did not
contain any such exceptions. We are not
aware of any negative impact on market
quality or any significant costs to
investors arising from the lack of such
exceptions. In addition, we note that
although Regulation SHO currently
contains a limited exception from its
locate requirement 568 and an additional
two days to close out fails to deliver
under its close-out requirement for
certain market making activity,569 these
exceptions relate to the ability to obtain
shares in time to make delivery by
settlement date rather than to
downward price pressure and potential
price manipulation resulting from short
selling. Thus, although commenters
noted these exceptions as support for an
exception from a short sale price test
restriction, we do not agree that the
inclusion of such exceptions to
Regulation SHO’s locate and close-out
requirements necessitates the inclusion
of such an exception in Rule 201.
Moreover, we note that we recently
eliminated an exception to Regulation
SHO’s close-out requirement relating to
fails to deliver resulting from options
market making activity because, as we
noted in the Options Market Maker
Elimination Release, a substantial level
of fails to deliver continued to persist in
threshold securities, and it appeared
that a significant number of the fails
were as a result of the options market
maker exception.570 In addition, in
adopting that amendment, we noted that
although we acknowledged
commenters’ concerns regarding the
potential impact of the elimination of
the options market maker exception on
market making risk, quote depths,
spread widths, and market liquidity, we
believed that these potential effects
were justified by the benefits of
requiring such fails to deliver to be
closed out within specific time-frames
568 See

17 CFR 242.203(b)(2)(iii).
17 CFR 242.204(a)(3).
570 See Options Market Maker Elimination
Release, 73 FR at 61696. In addition, as we stated
in the Options Market Maker Elimination Release,
preliminary analysis by the Staff indicated that
there was a significant increase in fails to deliver
in threshold securities with options traded on them
following elimination of the grandfather exception
to Regulation SHO’s close-out requirement. See id.
at 61693.
569 See

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rather than being allowed to persist
indefinitely.571
Similarly, although we recognize
commenters’ concerns about the
potential impact of the lack of an
options market maker exception or a
general equity market maker exception
on market liquidity, volatility, spread
widths, and investor costs, we believe,
for the reasons discussed, that these
potential costs are justified by the
benefits of requiring that when a
covered security’s price is undergoing
significant downward price pressure,
short selling in the security by market
makers generally is restricted. Moreover,
as discussed above, because the short
sale price test restriction of Rule 201(b)
will apply to a covered security only
after the security has experienced a
significant intra-day price decline, will
remain in place for a limited period of
time, and will continue to permit short
selling at a price above the current
national best bid (rather than, for
example, halt all short selling in that
security) even when the restriction is in
place, we believe that the negative
market impact, if any, when the
restriction is in place, will be limited.572
For the reasons discussed above,
rather than provide an exception for
short selling in connection with bona
fide market making activity, whether in
the equity or options markets, we have
determined to limit the extent to which
market makers will be permitted to sell
short without restriction under Rule
201. We note, however, as discussed
above, Rule 201 permits broker-dealers
to mark short sale orders as ‘‘short
exempt’’ in connection with riskless
principal transactions. We also note that
under Rule 201, a trading center’s
policies and procedures will be
designed to permit the execution or
display of short sale orders at the offer.
As discussed above, and as noted by
some commenters, equity market
makers typically will sell at their offer
quote.573 Thus, Rule 201 generally will
not restrict short selling by equity
market makers engaged in bona fide

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571 See

id. at 61696. As discussed above and as
noted by several commenters to the Proposal and
Re-Opening Release, since the elimination of the
options market maker exception to Regulation
SHO’s close-out requirement, among other
Commission actions, data from the Staff indicates
there has been a significant reduction in fails to
deliver. See supra note 119 (discussing the recent
reduction in fails to deliver).
572 See supra Sections III.A.3. and III.A.4.
(discussing, among other things, the market impact
of the alternative uptick rule in combination with
a circuit breaker approach); see also infra Sections
X.B.1.a. and X.B.2.a. (discussing the market impact
of the alternative uptick rule and the circuit breaker
approach).
573 See supra notes 550, 561, and 562 and
accompanying text.

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market making activity. Moreover, in
connection with both equity and
options market makers, because most
covered securities and, to an even
greater extent, most optionable covered
securities, will not be subject to the
short sale price test restriction of Rule
201, these market makers will be able to
continue to provide liquidity and hedge
positions, as applicable, by selling short
at or below the national best bid in most
securities most of the time. For all these
reasons, at this time we do not believe
it is necessary to provide that a brokerdealer may mark an order ‘‘short
exempt’’ where the short sale order is in
connection with bona fide market
making activity, whether in the equity
or options markets.574
IV. Order Marking
In the Proposal, we proposed
amending Rule 200(g) of Regulation
SHO to add a ‘‘short exempt’’ marking
requirement.575 Rule 200(g) of
Regulation SHO provides that a brokerdealer must mark all sell orders of any
security as ‘‘long’’ or ‘‘short.’’ 576 As
initially adopted, Regulation SHO
included an additional marking
requirement of ‘‘short exempt’’
applicable to short sale orders if the
seller was ‘‘relying on an exception from
the tick test of 17 CFR 240.10a–1, or any
short sale price test of any exchange or
national securities association.’’ 577 We
adopted amendments to Rule 200(g) of
Regulation SHO to remove the ‘‘short
exempt’’ marking requirement in
conjunction with our elimination of
former Rule 10a–1.578
In conjunction with the adoption of
Rule 201 of Regulation SHO to add a
short sale circuit breaker rule, we are
amending Rule 200(g) of Regulation
SHO, substantially as proposed, to again
impose a ‘‘short exempt’’ marking
requirement.579 Specifically, Rule
200(g), as amended, provides that ‘‘[a]
broker or dealer must mark all sell
orders of any equity security as ‘‘long,’’
574 We note, however, as discussed in more detail
below, we have instructed the Staff to assess the
impact of the Rule on the options markets and to
provide a written assessment of the impact. See
infra Section VIII.
575 See Proposal, 74 FR at 18082–18083.
576 See 17 CFR 242.200(g).
577 See 2004 Regulation SHO Adopting Release,
69 FR at 48030.
578 See 2007 Price Test Adopting Release, 72 FR
36348.
579 In connection with Rule 200(g), we note that
we have made one technical modification to Rule
200(g)(2) from the language in the proposed circuit
breaker with modified uptick rule. Specifically, we
have specified the subsections of Rule 201—
subsections (c) and (d)—that set forth the
circumstances under which a short sale order may
be marked ‘‘short exempt.’’

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‘‘short,’’ or ‘‘short exempt.’’ 580 In
addition, Rule 200(g)(2) provides that a
sale order shall be marked ‘‘short
exempt’’ only if the provisions of
paragraph (c) or (d) of Rule 201 are
met.581
In response to our requests for
comment, several commenters noted
that a new ‘‘short exempt’’ marking
requirement would require adjustments
to front end systems, that many firms
have multiple front end systems, and
that such costs would be multiplied for
firms with correspondent clearing
operations because each correspondent
firm can have its own front end
system.582 Commenters also stated that
market participants would need to make
adjustments to reporting systems,
including blue sheets, OATS, and OTS
reporting systems,583 in addition to
order entry and routing applications.584
In contrast, several commenters
indicated that requiring broker-dealers
to mark all sell orders ‘‘long,’’ ‘‘short,’’ or
‘‘short exempt’’ would provide valuable
information to the Commission 585 and
that such information would be worth
the costs of requiring such marking.586
One commenter indicated that the
information provided by a ‘‘short
exempt’’ marking requirement would
provide the Commission with data on
the extent to which exceptions are being
used to circumvent the requirements of
Rule 201.587 In addition, with respect to
implementation periods, one
commenter stated that the ‘‘short
exempt’’ marking requirement would
require coding for new fields in order
records, which should be accomplished
in approximately three months.588
After considering the comments, we
have determined to adopt the proposed
‘‘short exempt’’ marking requirement,
including the requirement that a sale
order shall be marked ‘‘short exempt’’
only if the provisions of paragraph (c) or
(d) of Rule 201 are met. The ‘‘short
exempt’’ marking requirement will
provide a record that a broker-dealer is
availing itself of one of the provisions of
paragraph (c) or (d) of Rule 201. The
records provided pursuant to the ‘‘short
exempt’’ marking requirements of Rule
200(g) will also aid surveillance by
SROs and the Commission for
580 Rule

200(g).
Rule 200(g)(2).
582 See letter from RBC (June 2009); letter from
NSCP; see also letter from FIF (June 2009).
583 See letter from RBC (June 2009); letter from
NSCP; letter from FIF (June 2009).
584 See letter from FIF (June 2009).
585 See, e.g., letter from CFA; letter from STA
(June 2009).
586 See, e.g., letter from STA (June 2009).
587 See id.
588 See id.
581 See

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compliance with the provisions of Rule
201. In addition, under the policies and
procedures approach required by Rule
201, the ‘‘short exempt’’ marking
requirement will indicate to a trading
center whether it must execute or
display a short sale order without regard
to whether the short sale order is at a
price that is less than or equal to the
current national best bid.
We recognize that the ‘‘short exempt’’
marking requirement will increase
implementation and compliance costs,
including costs related to adjusting
front-end systems, reporting systems,
and order entry and routing
applications.589 We believe, however,
that these costs are justified by the
benefit of the information that the ‘‘short
exempt’’ marking requirement will
provide. In addition, to allow sufficient
time to make any necessary systems
changes, we are providing for a six
month implementation period for the
‘‘short exempt’’ marking requirement of
Rule 200(g) such that market
participants will have to comply with
this requirement six months following
the effective date of these amendments.
We believe that a six month
implementation period will provide
market participants with sufficient time
in which to modify their systems and
procedures in order to comply with the
proposed marking requirements. In
addition, the six month implementation
period is consistent with the
implementation period for Rule 201.
V. Exemptive Procedures
Consistent with the provisions
proposed, Rule 201(f) as adopted
includes provisions establishing
procedures for the Commission, upon
written request or its own motion, to
grant an exemption from the Rule’s
provisions, either unconditionally or on
specified terms and conditions, if the
Commission determines that such
exemption is necessary or appropriate
in the public interest and is consistent
with the protection of investors.590
Pursuant to this provision, we will
consider and act upon appropriate
requests for relief from the provisions of
Rule 201 and will consider the
particular facts and circumstances
relevant to each such request and any
appropriate conditions to be imposed as
part of the exemption.
In response to our request for
comment, one commenter stated that ‘‘it
is important for the Commission to have
detailed procedures for granting
589 See infra Section X.A.3. and Section X.B.4.
(discussing the benefits and costs of the ‘‘short
exempt’’ order marking requirement).
590 See Rule 201(f).

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exemptions,’’ but that exemptions can
decrease overall compliance with the
rule by encouraging other market
participants to tailor their situation to
qualify for an exemption.591 The
commenter stated that the Commission
‘‘must set the bar high for those seeking
exemptive relief.’’ 592
We have determined to include in
Rule 201 a provision related to granting
exemptions from the Rule’s provisions
in order to provide clear procedures for
requests and grants of exemptions. As
stated above, we will consider requests
for relief and grant exemptions from
Rule 201 if the Commission determines
that an exemption is necessary or
appropriate in the public interest and is
consistent with the protection of
investors, taking into account the
particular facts and circumstances
relevant to each such request and any
appropriate conditions to be imposed in
connection with the exemption.
VI. Overseas Transactions
In connection with former Rule 10a–
1, the Commission consistently took the
position that the rule applied to trades
in securities subject to that rule where
the trade was ‘‘agreed to’’ in the U.S., but
booked overseas.593 In addition, in the
591 Letter

from STA (June 2009).

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

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2004 Regulation SHO Adopting Release
we stated that any broker-dealer using
the United States jurisdictional means
to effect short sales in securities traded
in the United States would be subject to
Regulation SHO, regardless of whether
the broker-dealer is registered with the
Commission or relying on an exemption
from registration.594 For example, a U.S.
money manager decides to sell a block
of 500,000 shares in a covered security.
The money manager negotiates a price
with a U.S. broker-dealer, who sends the
order ticket to its foreign trading desk
for execution. In our view, this trade
was agreed to in the United States and
occurred in the United States as much
as if the trade had been executed by the
broker-dealer at a U.S. trading desk.
Consistent with these prior statements,
we stated in the Proposal that if a short
sale is agreed to in the United States, it
must be effected in accordance with the
requirements of the proposed rules,
unless otherwise excepted.595
In response to our request for
comment, one commenter stated that
‘‘[g]enerally speaking, the Commission
has taken the position that the
provisions of Regulation SHO apply to
transactions in covered securities
‘agreed to’ in the United States, but sent
to a foreign market for execution.
Notwithstanding, there has been ongoing confusion in this area. The
Commission should use this
opportunity to clarify the applicability
of the restrictions (and Regulation SHO
generally) to transactions in covered
securities executed on overseas
markets.’’ 596 Consistent with our prior
statements, we note that Rule 201
applies to any short sale effected using
the United States jurisdictional means,
regardless of the jurisdiction in which
the short sale is executed.
VII. Rule 201 Implementation Period
In the Proposal and Re-Opening
Release, we proposed a three-month and
two-month implementation period,
respectively, and requested comment
regarding these implementation
periods.597 We are adopting in Rule 201
a six-month implementation period,
such that trading centers will have to
comply with Rule 201 six months
following the effective date of Rule 201.
We believe that this implementation
period will provide trading centers,
Market Regulation, SEC, Market 2000: An
Examination of Current Equity Market
Developments (Jan. 1994), Study VII, p. 2.
594 See 2004 Regulation SHO Adopting Release,
69 FR at 48014, n.54.
595 See Proposal, 74 FR at 18083–18084.
596 Letter from RBC (June 2009).
597 See Proposal, 74 FR at 18042; Re-Opening
Release, 74 FR at 42036.

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broker-dealers and other market
participants with sufficient time in
which to modify their systems, policies
and procedures in order to comply with
the requirements of Rule 201.
In response to our request for
comment, commenters indicated that a
circuit breaker rule triggering the
alternative uptick rule will require an
implementation period of between three
and twelve months.598 Several
commenters noted that because the
alternative uptick rule, unlike the other
proposed price tests, would not require
sequencing of bids or last sale prices,
the alternative uptick rule could be
implemented more quickly than the
other proposed price tests and could be
implemented within three to six
months.599 One commenter noted that
implementation concerns with respect
to a short sale price test restriction
could be minimized, provided that
trading centers ‘‘could leverage existing
architecture developed to comply with
the Order Protection Rule in Reg NMS
(Rule 611).’’ 600 Another commenter
noted that implementation of a circuit
breaker triggering the alternative uptick
rule would be easier to implement,
‘‘provided that the Commission permits
firms to leverage the numerous systems
changes made to facilitate compliance
with Regulation NMS (including the use
of internal market data rather than
consolidated data supplied by the
industry plans).’’ 601 Other commenters
noted that adopting the alternative
uptick rule in conjunction with a circuit
breaker, rather than as a permanent,
market-wide rule, would not add
significantly to the implementation time
required.602
Several commenters, however, did not
agree that the absence of a sequencing
requirement would shorten the
implementation time required for the
alternative uptick rule.603 In addition,
several commenters did not agree that
previous implementation of Regulation
NMS might allow for quicker
598 See, e.g., letter from FIF (Sept. 2009); letter
from Citadel et al. (Sept. 2009); letter from Credit
Suisse (Sept. 2009); letter from Direct Edge (Sept.
2009); letter from EWT (Sept. 2009); letter from
NYSE Euronext (Sept. 2009); letter from RBC (Sept.
2009); letter from SIFMA (Sept. 2009); letter from
MFA (Oct. 2009); letter from Amer. Bankers Assoc.;
see also letter from NSCP; letter from RBC (June
2009); letter from STA (June 2009).
599 See, e.g., letter from Credit Suisse (June 2009);
letter from Credit Suisse (Sept. 2009); letter from
STA (Sept. 2009); letter from FIF (Sept. 2009).
600 Letter from MFA (Oct. 2009).
601 Letter from Goldman Sachs (Sept. 2009).
602 See, e.g., letter from Credit Suisse (Sept. 2009);
letter from Nasdaq OMX Group (Oct. 2009).
603 See, e.g., letter from Citadel et al. (Sept. 2009);
letter from NYSE Euronext (Sept. 2009); letter from
RBC (Sept. 2009); letter from SIFMA (Sept. 2009).

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implementation of a price test.604 Other
commenters stated that adopting the
alternative uptick rule in conjunction
with a circuit breaker would add to the
implementation time.605 Some
commenters expressed concerns that
allowing for certain exceptions could
affect the implementation time.606
We believe that a six month
implementation period is
appropriate.607 This implementation
period, which is longer than the
implementation periods proposed in the
Proposal and the Re-opening Release,
takes into consideration commenters’
concerns that implementation of a price
test could be complex. We do not
believe that a longer implementation
time is warranted because Rule 201 will
not require monitoring of the sequence
of bids or last sale prices, unlike other
proposed price tests, and because Rule
201 will require the implementation of
policies and procedures similar to those
required for trading centers under
Regulation NMS. In addition, market
participants will be able to leverage the
numerous systems changes made and
current architecture developed to
facilitate compliance with Regulation
NMS. These factors should reduce
implementation time.
In addition, we believe the six month
implementation period will allow
sufficient time to address any
complexities implementing the circuit
breaker and the ‘‘short exempt’’ order
marking requirement.608 We note that
broker-dealers are already familiar with
and have experience implementing a
‘‘short exempt’’ marking requirement as
Regulation SHO, as originally adopted,
included such a requirement.609 The
‘‘short exempt’’ marking requirement
was eliminated together with the
elimination of all short sale price test
restrictions in July 2007.610 In addition,
we note that broker-dealers were able to
604 See, e.g., letter from NSCP; letter from RBC
(June 2009).
605 See letter from Direct Edge (Sept. 2009)
(stating that adopting the alternative uptick rule
with a circuit breaker would add approximately
four to six weeks to the development process); letter
from NYSE Euronext (Sept. 2009).
606 See letter from Goldman Sachs (Sept. 2009);
letter from FIF (Sept. 2009).
607 We note that, in effect, market participants
will have approximately eight months from
publication in the Federal Register to implement
Rule 201. Rule 201 will not become effective until
sixty days following publication in the Federal
Register and the Compliance Date for Rule 201 is
six months following the Rule’s Effective Date.
608 See supra Section III.B. (discussing the ‘‘short
exempt’’ marking provisions of Rule 201) and supra
Section IV. (discussing the ‘‘short exempt’’ marking
requirement of Rule 200(g)).
609 See 2004 Regulation SHO Adopting Release,
69 FR 48008.
610 See 2007 Price Test Adopting Release, 72 FR
36348.

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make significant systems changes to deprogram the ‘‘short exempt’’ marking
requirement from their systems in less
than 90 days from the compliance date
for elimination of the requirement.611
Thus, we believe that a six month
implementation period should be
sufficient.
We also believe that a six month
implementation period is appropriate
for any systems changes that must be
made by listing markets and single plan
processors to comply with Rule 201. As
discussed above, the single plan
processors currently receive information
from listing markets regarding trading
restrictions (i.e. Regulatory Halts as
defined in those plans) on individual
securities and disseminate such
information. Thus, the requirements of
Rule 201(b)(3) are similar to existing
obligations on plan processors pursuant
to the requirements of Regulation NMS,
the CTA and CQ Plans and the Nasdaq
UTP Plan. Due to this similarity, we
believe that a six month implementation
period is appropriate.
VIII. Decision Not To Implement Rule
201 on a Pilot Basis
In the Proposal, we requested
comment regarding whether, before
determining whether to adopt a short
sale price test restriction or circuit
breaker rule on a permanent basis, we
should adopt a rule that would apply on
a pilot basis to specified securities.612 In
response to our request for comment, a
number of commenters stated that any
price test restriction should be adopted
on a pilot basis.613 A number of
commenters indicated that a pilot study
should be conducted prior to adoption
of a price test on a permanent basis in
order to gather empirical evidence on
the effectiveness and/or market impact
611 See letter from Josephine J. Tao, Assistant
Director, Division of Market Regulation, SEC, to Ira
Hammerman, Senior Managing Director and
General Counsel, Securities Industry and Financial
Markets Association, dated July 2, 2007.
612 See, e.g., Proposal, 74 FR at 18071.
613 See, e.g., letter from BATS (May 2009); letter
from IAG; letter from BIO; letter from James J.
Angel, PhD, CFA, Associate Professor of Finance,
McDonough School of Business, Georgetown
University, dated June 19, 2009 (‘‘Prof. Angel (June
2009)’’); letter from Barclays (June 2009); letter from
Citadel et al. (June 2009); letter from EWT (June
2009); letter from NSCP; letter from RBC (June
2009); letter from STA (June 2009); letter from
NYSE Euronext (June 2009); letter from Knight
Capital (June 2009); letter from STANY (June 2009);
letter from T. Rowe Price (June 2009); letter from
Credit Suisse (June 2009); memorandum regarding
meeting with Penson; letter from CFA; letter from
Knight Capital (Sept. 2009); letter from Prof. Angel
(Sept. 2009); letter from Dialectic Capital (Sept.
2009); letter from Direct Edge (Sept. 2009); letter
from EWT (Sept. 2009); letter from NYSE Euronext
(Sept. 2009); letter from Qtrade; letter from RBC
(Sept. 2009); letter from STANY (Sept. 2009); letter
from Virtu Financial.

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of a price test.614 Some commenters
stated that adopting a price test on a
pilot basis only would limit any
negative market impact to the subset of
securities subject to the price test.615
Another commenter stated that a pilot
study would allow the Commission to
gather data on the effects of a price test
as compared to a control group not
subject to a price test.616 One
commenter noted that a pilot study
would allow the Commission to observe
the effects of a price test under current
market conditions,617 while another
stated that the Commission should
study a price test in the context of
severe market conditions.618 Another
commenter stated that a pilot study is
particularly important for the alternative
uptick rule because it has not been in
effect in the market previously and
would be more restrictive than other
proposed price tests.619 Other
commenters noted that a pilot study
could provide data regarding the impact
or need for various exceptions to a price
test.620 Several commenters indicated
that pilot study data should be made
publicly available to permit third parties
to analyze the results of the pilot
study.621
In contrast, several commenters stated
that the Commission should not adopt
614 See, e.g., letter from BATS (May 2009); letter
from BIO; letter from Prof. Angel (June 2009); letter
from Credit Suisse (June 2009); letter from Knight
Capital (June 2009); letter from NSCP; letter from
RBC (June 2009); letter from STANY (June 2009);
memorandum regarding meeting with Penson; letter
from CFA; letter from Prof. Angel (Sept. 2009);
letter from Dialectic Capital (Sept. 2009); letter from
Direct Edge (Sept. 2009); letter from EWT (Sept.
2009); letter from Knight Capital (Sept. 2009); letter
from Qtrade; letter from RBC (Sept. 2009); letter
from STANY (Sept. 2009); see also letter from Park
National (stating that a review of a price test based
on the national best bid should be conducted six
months after implementation to ensure
effectiveness). We also note that a number of
commenters indicated that the Commission should
gather empirical evidence through further study,
though not necessarily in the form of a pilot study,
prior to adopting a price test. See, e.g., letter from
BATS (May 2009); letter from Citadel et al. (June
2009); letter from Dialectic Capital (June 2009);
letter from Geoffrey F. Foisie, Investments Manager,
Shawbrook, dated June 16, 2009; letter from Amer.
Bar Assoc. (July 2009); letter from Jeffrey W. Rubin,
Chair, Committee on Federal Regulation of
Securities, American Bar Association, dated Sept.
30, 2009 (‘‘Amer. Bar Assoc. (Sept. 2009)’’); letter
from Goldman Sachs (Sept. 2009).
615 See, e.g., letter from Credit Suisse (June 2009);
letter from STA (June 2009).
616 See letter from Citadel et al. (June 2009).
617 See letter from NYSE Euronext (June 2009).
618 See letter from Virtu Financial.
619 See letter from STANY (Sept. 2009).
620 See, e.g., letter from T. Rowe Price (June 2009);
letter from Direct Edge (Sept. 2009); see also letter
from Wells Fargo (June 2009) (noting that additional
study regarding an exception for bona fide market
making activity would be needed if the Commission
adopted a circuit breaker rule).
621 See letter from BATS (May 2009); letter from
STA (June 2009).

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a price test restriction on a pilot
basis.622 Several of these commenters
expressed concerns regarding the costs
to implement a price test on a pilot
basis,623 with some stating that such
costs would outweigh the benefits of a
pilot study.624 One commenter stated
that a price test should be implemented
as soon as possible, without a pilot
study, because a pilot study would
produce little or no benefit.625 Several
commenters expressed support for a
‘‘sunset’’ provision allowing the
Commission to more easily remove a
price test restriction if it was
determined that the restriction was not
meeting the Commission’s goals or was
harming the market.626
We have determined not to adopt
Rule 201 on a pilot basis. We believe
that adopting the rule on a temporary
pilot basis and/or only for a subset of
securities will not advance the goals of
our adopting Rule 201. For example,
one goal in adopting Rule 201 is to
address erosion of investor confidence
in our markets. We believe that adopting
Rule 201 on a pilot basis, such that the
Rule would apply for the duration of the
pilot only, could undermine this goal
because, among other things, investors
would know that the Rule is in place for
a limited period of time rather than on
a permanent basis and, therefore, may
believe that any benefits that result from
the Rule could be temporary.
In addition, we note that unlike the
Pilot, which removed then-existing
short sale price test restrictions for a
subset of securities, undertaking a pilot
study in connection with Rule 201
would require market participants to
undertake as much time, effort and
expense as full implementation of the
new rule. As noted by one commenter,
the implementation cost would be the
same whether the Rule is adopted on a
pilot or a permanent basis.627 We also
do not believe a ‘‘sunset’’ provision
would advance our goal of restoring
investor confidence because, as with a
pilot, investors would know that the
Rule is in place for a limited period of
622 See, e.g., letter from Amer. Bankers Assoc.;
letter from SIFMA (June 2009); letter from IBC.
623 See, e.g., letter from Amer. Bankers Assoc.;
letter from NYSE Euronext (June 2009); letter from
SIFMA (June 2009); letter from STA (June 2009).
624 See, e.g., letter from Amer. Bankers Assoc.;
letter from SIFMA (June 2009).
625 See letter from IBC.
626 See, e.g., letter from SIFMA (June 2009); letter
from Dialectic Capital (June 2009). One commenter
also cited easier removal of the price test restriction
as an argument for a pilot study. See letter from
STANY (June 2009).
627 See letter from STA (June 2009). We note that
a number of commenters expressed concerns
regarding the implementation costs of a price test.
See infra Sections X.B.1.b. and X.B.2.b. (discussing
implementation costs).

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time rather than on a permanent basis
and, therefore, may believe that any
benefits that result from the Rule could
be temporary.
We encourage researchers, however,
to provide the Commission with their
own empirical analyses regarding the
impact of the Rule on the options
markets, and on market quality in
general. We will, moreover, carefully
monitor the operation of the Rule to
assess its impact and effectiveness,
including the Rule’s impact on market
quality, to determine whether any
modifications to the Rule are warranted.
In addition, we have instructed the Staff
to assess the impact of the Rule on the
options markets and to provide us with
a written report of their assessment
within the shortest time practicable for
completing a meaningful study, which
we expect, in any event, will not exceed
two years from the Compliance Date.
To the extent that we determine at
any time that any of the current
parameters of Rule 201, such as the
exceptions to the Rule, the 10% trigger
level, the duration of the price test
restriction if triggered, the basing of the
trigger level on the prior day’s closing
price as determined by the covered
security’s listing market, or changed
market conditions, result in Rule 201
not adequately addressing our concerns
or meeting our goals in adopting Rule
201, we will consider whether to amend
Rule 201, or grant relief thereunder, as
appropriate at that time.
IX. Paperwork Reduction Act
A. Background
Certain provisions of the amendments
to Regulation SHO contain new
‘‘collection of information’’ requirements
within the meaning of the Paperwork
Reduction Act of 1995 (‘‘PRA’’).628 We
submitted the collection of information
to the Office of Management and Budget
(‘‘OMB’’) for review and approval in
accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid OMB control number.
The title for the collection of
information is ‘‘Rules 201 and 200(g)’’
and the OMB control number for the
collection of information is 3235–0651.
We are adopting amendments to Rules
201 and 200(g) of Regulation SHO under
the Exchange Act. The amendments to
Rule 201 impose a short sale-related
circuit breaker that, if triggered, will
impose a short sale price test restriction
on a particular security for a limited
628 44

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

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B. Summary
As detailed below, several provisions
under the amendments to Regulation
SHO impose a new ‘‘collection of
information’’ within the meaning of the
PRA.
1. Policies and Procedures Requirement
Under Rule 201
Rule 201 imposes a new ‘‘collection of
information’’ within the meaning of the
PRA. Rule 201 requires that a trading
center establish, maintain, and enforce
written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
629 Rule 201(b). See also supra Section III.A.7.
(discussing the policies and procedures approach).
630 Id.
631 See Rules 200(g) and 200(g)(2); see also supra
Section IV. (discussing the amendments to Rule
200(g)).

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day.632 In addition, the Rule requires
that the trading center establish,
maintain, and enforce written policies
and procedures reasonably designed to
impose this short sale price test
restriction for the remainder of the day
and the following day when a national
best bid for the covered security is
calculated and disseminated on a
current and continuing basis by a plan
processor pursuant to an effective
national market system plan. Thus, a
trading center’s policies and procedures
must be reasonably designed to permit
the trading center to be able to obtain
information from the single plan
processor regarding whether a covered
security is subject to the short sale price
test restriction of Rule 201; if the
covered security is subject to the short
sale price test restriction of Rule 201, to
determine whether or not the short sale
order is priced in accordance with the
provisions of Rule 201(b); and to
recognize when an order is marked
‘‘short exempt’’ such that the trading
center’s policies and procedures do not
prevent the execution or display of such
orders at a price that is less than or
equal to the current national best bid,
even if the covered security is subject to
the short sale price test restriction of
Rule 201.633
At a minimum, a trading center’s
policies and procedures must enable a
trading center to monitor, on a real-time
basis, the national best bid, so as to
determine the price at which the trading
center may execute or display a short
sale order. As mentioned above, a
trading center must have policies and
procedures reasonably designed to
permit the execution or display of a
short sale order of a covered security
marked ‘‘short exempt’’ without regard
to whether the order is at a price that
is less than or equal to the current
national best bid.634
A trading center must also take such
steps as will be necessary to enable it to
enforce its policies and procedures
effectively. A trading center must
regularly surveil to ascertain the
effectiveness of the policies and
procedures required under the Rule and
must take prompt action to remedy
deficiencies in such policies and
procedures.635 The nature and extent of
632 Rule 201(b). See also supra Section III.A.7.
(discussing the policies and procedures approach).
633 Id.
634 Rule 200(g)(2). The broker-dealer marking the
order ‘‘short exempt’’ will have responsibility for
being able to identify on which provision of Rule
201 it was relying in marking the order ‘‘short
exempt.’’
635 This provision will reinforce the on-going
maintenance and enforcement requirements of Rule
201(b)(1) by explicitly assigning an affirmative

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11279

the policies and procedures that a
trading center must establish to comply
with these requirements will depend
upon the type, size, and nature of the
trading center.
2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
Rule 201 contains a broker-dealer
provision that requires a new ‘‘collection
of information’’ under the PRA. Rule
201(c) permits a broker-dealer
submitting a short sale order for the
covered security to a trading center to
mark the order ‘‘short exempt’’ if the
broker-dealer identifies the order as
being at a price above the current
national best bid at the time of
submission.636 This provision requires a
new collection of information in that a
broker-dealer marking an order ‘‘short
exempt’’ under Rule 201(c) must
identify a short sale order as priced in
accordance with the requirements of
Rule 201(c); establish, maintain, and
enforce written policies and procedures
reasonably designed to prevent the
incorrect identification of orders as
being priced in accordance with the
requirements of Rule 201(c); regularly
surveil to ascertain the effectiveness of
these policies and procedures, and to
take prompt action to remedy
deficiencies.637
Rule 201 also contains a riskless
principal provision that requires a new
‘‘collection of information’’ under the
PRA. Specifically, Rule 201(d)(6)
permits a broker-dealer to mark as ‘‘short
exempt’’ short sale orders where brokerdealers are facilitating customer buy
orders or sell orders where the customer
is net long, and the broker-dealer is net
short but is effecting the sale as riskless
principal, provided certain conditions
are satisfied.638 This provision requires
a new collection of information in that
it requires a broker-dealer marking an
order ‘‘short exempt’’ under this
provision to have written policies and
procedures in place to assure that, at a
responsibility to trading centers to surveil to
ascertain the effectiveness of their policies and
procedures. See Rule 201(b)(2). We note that Rule
611(a)(2) of Regulation NMS contains a similar
provision for trading centers. See 17 CFR
242.611(a)(2).
636 See Rule 201(c). As a result, a trading center’s
policies and procedures will need to be reasonably
designed to permit the execution or display of such
orders without regard to whether the order is at a
price that is less than or equal to the current
national best bid. See Rule 201(b)(1)(iii).
637 See Rules 201(c)(1) and 201(c)(2).
638 See Rule 201(d)(6). As a result, a trading
center’s policies and procedures will need to be
reasonably designed to permit the execution or
display of such orders without regard to whether
the order is at a price that is less than or equal to
the current national best bid. See Rule 201(b)(1)(iii).

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minimum: (i) The customer order was
received prior to the offsetting
transaction; (ii) the offsetting transaction
is allocated to a riskless principal or
customer account within 60 seconds of
execution; and (iii) that it has
supervisory systems in place to produce
records that enable the broker-dealer to
accurately and readily reconstruct, in a
time-sequenced manner, all orders on
which the broker-dealer relies pursuant
to this provision.639
3. Marking Requirements
While the current marking
requirements in Rule 200(g) of
Regulation SHO, which require brokerdealers to mark all sell orders of any
equity security as either ‘‘long’’ or
‘‘short,’’ 640 remain in effect, the
amendments to Rule 200(g) add a new
marking requirement of ‘‘short
exempt.’’ 641 In particular, if the brokerdealer chooses to rely on its own
determination that it is submitting the
short sale order to the trading center at
a price that is above the current national
best bid at the time of submission or to
rely on an exception specified in the
Rule, it must mark the order as ‘‘short
exempt.’’ 642 The new ‘‘short exempt’’
marking requirements impose a new
collection of information.
C. Use of Information
1. Policies and Procedures Requirement
Under Rule 201

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

Rule 201(d)(6).
CFR 242.200(g).
641 See Rule 200(g); see also supra Section IV.
(discussing the amendments to Rule 200(g)).
642 See Rule 200(g)(2).
643 See Rule 201(b).

2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
The broker-dealer provision in Rule
201(c) permits a broker-dealer
submitting a short sale order for the
covered security to a trading center to
mark the order ‘‘short exempt’’ if the
broker-dealer identifies the order as
being at a price above the current
national best bid at the time of
submission.644 This provision includes
a policies and procedures requirement
that is designed to help prevent
incorrect identification of orders for
purposes of Rule 201(c)’s broker-dealer
provision. The information collected
will also enable the Commission and
SROs to examine for compliance with
the requirements of the exception.
Moreover, the information collected
under the written policies and
procedures requirement in the riskless
principal exception in Rule 201(d)(6) 645
will help assure that broker-dealers
comply with the requirements of this
provision. The information collected
will also enable the Commission and
SROs to examine for compliance with
the requirements of the exception.
3. Marking Requirements
The amendments to Rule 200(g) add
a new marking requirement of ‘‘short
exempt.’’ 646 In particular, if the brokerdealer chooses to rely on its own
determination that it is submitting the
short sale order to the trading center at
a price that is above the current national
best bid at the time of submission or to
rely on an exception specified in the
Rule, it must mark the order as ‘‘short
exempt.’’ 647 The purpose of the
information collected is to enable the
Commission and SROs to monitor
whether a person entering a sell order
covered by Rule 201 is acting in
accordance with one of the provisions
contained in paragraph (c) or (d) of the
Rule. In particular, the ‘‘short exempt’’
marking requirement will provide a
record that will aid in surveillance for
compliance with the provisions of Rule
201. It also will provide an indication to
a trading center regarding whether or
not it must execute or display a short
sale order in accordance with the Rule’s
provisions. In addition, it will help a
trading center determine whether its
policies and procedures are reasonable
and whether its surveillance is effective.

639 See
640 17

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644 See

Rule 201(c).
Rule 201(d)(6).
646 See Rule 200(g); see also supra Section IV.
(discussing the amendments to Rule 200(g)).
647 See Rule 200(g)(2).
645 See

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

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

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2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
The collection of information required
in connection with the broker-dealer
provision in Rule 201(c) and in
connection with the riskless principal
provision in Rule 201(d)(6) applies to all
registered brokers-dealers submitting
short sale orders in reliance on these
provisions. While not all broker-dealers
likely will enter sell orders in securities
covered by the amendments to Rules
200(g) and 201 in a manner that will
subject them to this collection of
information, we estimate, for purposes
of the PRA, that all of the approximately
5,178 652 registered broker-dealers will
do so.
3. Marking Requirements
The collection of information that is
required pursuant to the ‘‘short exempt’’
marking requirements of Rule 200(g)
applies to all registered brokers-dealers
submitting short sale orders marked
‘‘short exempt’’ in accordance with the
provisions contained in paragraph (c) or
(d) of Rule 201. While not all brokerdealers likely will enter sell orders in
securities covered by the amendments
to Rules 200(g) and 201 in a manner that
will subject them to this collection of
information, we estimate, for purposes
of the PRA, that all of the approximately
5,178 653 registered broker-dealers will
do so.

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E. Total Annual Reporting and
Recordkeeping Burdens
1. Policies and Procedures Requirement
Under Rule 201
Rule 201 requires each trading center
to establish, maintain, and enforce
written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid during the period
when the circuit breaker is in effect.654
Thus, trading centers must develop
written policies and procedures
reasonably designed to permit the
trading center to be able to obtain
information from the single plan
processor regarding whether a covered
security is subject to the short sale price
test restriction of Rule 201; if the
covered security is subject to the short
sale price test restriction of Rule 201, to
652 This number is based on a review of 2008
FOCUS Report filings reflecting registered brokerdealers, including introducing broker-dealers. This
number does not include broker-dealers that are
delinquent on FOCUS Report filings.
653 Id.
654 See Rule 201(b)(1).

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determine whether or not the short sale
order is priced in accordance with the
provisions of Rule 201(b); and to
recognize when an order is marked
‘‘short exempt’’ such that the trading
center’s policies and procedures do not
prevent the execution or display of such
orders at a price that is less than or
equal to the current national best bid,
even if the covered security is subject to
the short sale price test restriction of
Rule 201.
In the Proposal, we provided
estimates of the reporting and
recordkeeping burdens for trading
centers under the proposed short sale
price test restrictions, both on a
permanent, market-wide basis and in
conjunction with a circuit breaker.655
We also requested comment, in the
Proposal and the Re-Opening Release, as
to whether the proposed burden
estimates were appropriate or whether
such estimates should be increased or
reduced, and if so, for which entities
and by how much.656
One commenter provided a cost
estimate, including costs for
‘‘development man-hours’’ of $500,000
per firm for implementation of a new
short sale price test restriction by
trading centers, either on a permanent,
market-wide basis, or in conjunction
with a circuit breaker.657 One
commenter stated that a new short sale
price test restriction would involve
‘‘significant implementation costs’’ and
‘‘the generation and retention of
voluminous compliance reports’’ but did
not provide a specific estimate of the
cost or hours that would be involved.658
Several commenters expressed general
concerns regarding the time and cost
that would be imposed for
implementation and on-going
monitoring and surveillance of a new
short sale price test restriction,
including a policies and procedures
requirement, but did not provide
specific estimates of such time and
cost.659
We considered these comments in
reviewing the burden estimates for
trading centers that we proposed with
655 See

Proposal, 74 FR at 18087.
Proposal, 74 FR at 18088; Re-Opening
Release, 74 FR at 42036.
657 Letter from Wolverine. Wolverine provided an
estimate of $500,000 per firm for implementation
costs, which it applied to both non-SRO trading
centers and other registered broker-dealers.
658 Letter from EWT (Sept. 2009).
659 See, e.g., letter from RBC (June 2009); letter
from STANY (June 2009); letter from CPIC (June
2009); letter from EWT (Sept. 2009); letter from RBC
(Sept. 2009). We received time estimates only with
respect to the Commission’s proposed
implementation time and did not receive comments
regarding estimated PRA burden hours. See supra
Section VII. (discussing comments on
implementation time).
656 See

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11281

respect to the collection of information
requirements in Rule 201. We believe
that the cost and time required for
implementation of Rule 201 will be
lower than some commenters’ stated
estimates 660 because we believe that the
implementation and on-going
monitoring and surveillance costs of the
alternative uptick rule will be lower
than the implementation and on-going
monitoring and surveillance costs that
would be associated with adoption of
the proposed modified uptick rule or
the proposed uptick rule. Unlike the
proposed modified uptick rule and the
proposed uptick rule, which would
have required sequencing of the
national best bid or last sale price (i.e.,
whether the current national best bid or
last sale price is above or below the
previous national best bid or last sale
price), the alternative uptick rule
references only the current national best
bid.
A number of commenters stated that
because the alternative uptick rule
would not require monitoring of the
sequence of bids or last sale prices,
implementing the alternative uptick rule
would be less costly 661 or easier than
implementing the proposed modified
uptick rule or the proposed uptick
rule.662 In addition, several commenters
stated that the alternative uptick rule
would be easier to program into trading
and surveillance systems than the
proposed modified uptick rule or the
proposed uptick rule.663 Another
commenter stated, with respect to the
alternative uptick rule, that ‘‘actual
implementation costs in terms of time
and capital expenditure would be
660 We received comments expressing concerns
about the implementation and on-going monitoring
and compliance costs of a short sale price test
restriction that were not specific to the alternative
uptick rule. See, e.g., letter from RBC (June 2009);
letter from STANY (June 2009); letter from CPIC
(June 2009); letter from Wolverine.
661 See, e.g., letter from BATS (May 2009); letter
from Michael L. Crowl, Managing Director, Global
General Counsel, Barclays Global Investors, dated
Sept. 21, 2009 (‘‘Barclays (Sept. 2009)’’); letter from
BATS (Sept. 2009); letter from GETCO (Sept. 2009);
letter from ICI (Sept. 2009); letter from Glen
Shipway (Sept. 2009); letter from STA (Sept. 2009).
In addition, several commenters acknowledged that
implementation of the alternative uptick rule will
likely be less costly, without referencing the
sequencing issue. See, e.g., letter from Atherton
Lane; letter from STANY (Sept. 2009).
662 See, e.g., letter from Credit Suisse (June 2009);
letter from Goldman Sachs (June 2009); letter from
SIFMA (June 2009); letter from Glen Shipway (Sept.
2009); letter from SIFMA (Sept. 2009). In addition,
one commenter acknowledged that implementation
of the alternative uptick rule will likely be easier,
without referencing the sequencing issue. See letter
from Allston Trading (Sept. 2009).
663 See, e.g., letter from BATS (May 2009); letter
from Goldman Sachs (June 2009); letter from Glen
Shipway (Sept. 2009); letter from ICI (Sept. 2009);
see also letter from National Stock Exchange et al.

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negligible when compared to those
involved in implementing either the
uptick rule or modified uptick rule.’’ 664
Several commenters indicated that
implementation of the alternative uptick
rule would not be easier or less costly
than implementation of the proposed
modified uptick rule or the proposed
uptick rule.665 However, we note that
some of these commenters presented
concerns that were not directly related
to the alternative uptick rule 666 or to
implementation costs or difficulties.667
Additionally, one commenter did not
provide the reasoning for its belief that
the alternative uptick rule would not be
easier or less costly to implement.668
Several commenters indicated that
their belief that other commenters’
estimates regarding the difficulty or
costs of implementing and monitoring
the proposed modified uptick rule and
the proposed uptick rule were
exaggerated.669 We recognize that some
commenters’ estimates of the costs of
the proposed modified uptick rule or
the proposed uptick rule may have been
conservative. We also believe that
because the alternative uptick rule does
not include a sequencing requirement,
the implementation and on-going
monitoring and surveillance costs of the
alternative uptick rule will be less than
such costs would be with respect to the
other proposed short sale price test
restrictions.
In addition, as noted in the Proposal,
while we have based our burden
estimates, in part, on the burden
estimates provided in connection with
the adoption of Regulation NMS,670 we
believe that these estimates may be on
the high end because trading centers
have already had to establish policies
and procedures in connection with that
Regulation’s Order Protection Rule,
which could help form the basis for the
664 Letter

from BATS (Sept. 2009).
e.g., letter from Matlock Capital (Sept.
2009); letter from NYSE Euronext (Sept. 2009);
letter from RBC (Sept. 2009); letter from Knight
Capital (Sept. 2009).
666 See, e.g., letter from NYSE Euronext (Sept.
2009) (stating that implementation of the alternative
uptick rule would be more difficult on the basis that
the alternative uptick rule would be paired with a
circuit breaker and attributing implementation
difficulties to the circuit breaker approach, not the
alternative uptick rule); letter from RBC (Sept. 2009)
(expressing concern about the implementation cost
of any short sale price test restriction in general).
667 See, e.g., letter from Knight Capital (Sept.
2009) (characterizing a potential increase in
friction, confusion, or inefficiency in the market as
an implementation difficulty that may arise from
the alternative uptick rule).
668 See letter from Matlock Capital (Sept. 2009).
669 See, e.g., letter from Matlock Capital (Sept.
2009); letter from ISE (Sept. 2009); letter from
Bingham McCutchen.
670 See Regulation NMS Adopting Release, 70 FR
37496; see also Proposal, 74 FR at 18087.

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policies and procedures for Rule 201.
Several commenters agreed, stating that
previous experience with the policies
and procedures required under
Regulation NMS might reduce the
implementation and on-going
monitoring and compliance burdens on
trading centers.671 In contrast, some
commenters indicated that the
Commission overstated the benefit of
such previous experience,672 because,
for example, ‘‘systems re-written and
architected for Reg NMS * * * did not
include any short sale restrictions,’’ 673
or because such systems will require
modifications in order to be used in the
context of a short sale price test
restriction.674 However, we considered
these issues when considering the
impact of previous experience with the
policies and procedures requirement of
Regulation NMS’s Order Protection
Rule. We continue to believe that
because most trading centers already
have in place systems and written
policies and procedures to comply with
Regulation NMS’s Order Protection
Rule, most trading centers will already
be already familiar with establishing,
maintaining, and enforcing tradingrelated policies and procedures, which
will mitigate the burden of
implementation of the policies and
procedures requirement under Rule 201.
We realize, however, that the exact
nature and extent of the policies and
procedures that a trading center is
required to establish likely will vary
depending upon the type, size, and
nature of the trading center. Thus, our
estimates take into account different
types of trading centers and we realize
that these estimates may be on the lowend for some trading centers while they
may be on the high-end for other trading
centers.
We considered whether our estimates
of the burdens associated with the
collection of information requirements
for trading centers with respect to the
proposed modified uptick rule included
in the Proposal 675 would change under
the circuit breaker approach of Rule
201, but, as discussed below, concluded
that these estimates continue to
represent reasonable estimates under
the circuit breaker approach in
combination with the alternative uptick
rule.
671 See, e.g., letter from EWT (Sept. 2009); letter
from MFA (Oct. 2009).
672 See, e.g., letter from FIF (June 2009); letter
from NSCP; letter from RBC (June 2009).
673 Letter from FIF (June 2009); see also letter
from RBC (June 2009).
674 See letter from NSCP; letter from RBC (June
2009).
675 See Proposal, 74 FR at 18087.

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Despite some commenters’ concerns
regarding the implementation costs of a
circuit breaker rule,676 we believe that
the circuit breaker approach will result
in largely the same implementation
costs as we estimated would be incurred
if we adopted a permanent, market-wide
short sale price test restriction.677 As
one commenter stated ‘‘[o]nce the price
test is in place, there is minimal
incremental effort required to add a
Circuit Breaker that controls the
application of the price test.’’ 678
Similarly, another commenter stated
that ‘‘[t]he additional coding required to
implement a circuit breaker is minimal
* * *’’ 679 We believe that there will be
only minimal, if any, implementation
costs for a circuit breaker approach in
addition to the costs we estimated
previously for the implementation of a
permanent, market-wide short sale price
test rule because trading centers would
need to establish written policies and
procedures to implement the short sale
price test restriction regardless of
whether the short sale price test
restriction is adopted on a permanent,
market-wide basis or, in the case of Rule
201, adopted in conjunction with a
circuit breaker. Several other
commenters agreed, stating that the
costs of the circuit breaker approach
would be similar to, or only
incrementally higher than, the costs of
a permanent, market-wide approach.680
In addition, with respect to on-going
monitoring and surveillance costs of the
circuit breaker approach, we recognize,
as noted by one commenter,681 that
trading centers will need to
continuously monitor whether a
security is subject to the provisions of
Rule 201 and that there will be costs
associated with such monitoring.
However, we believe that these costs
will be offset because, under the circuit
breaker approach, the alternative uptick
rule is time limited and will only apply
676 See, e.g., letter from T. Rowe Price (June 2009);
letter from Glen Shipway (June 2009); see also letter
from STANY (June 2009) (stating that costs savings
of a circuit breaker approach would be reduced if
the circuit breaker triggered a short sale price test
restriction); letter from NYSE Euronext (Sept. 2009)
(stating that ‘‘a circuit breaker approach raises
significant implementation complexities’’); letter
from SIFMA (June 2009) (including a survey
reflecting implementation costs of a circuit breaker
triggering a short sale price test based on the
national best bid). We note that one commenter
indicated that adoption of a circuit breaker
approach would add approximately four to six
weeks to the implementation time of the alternative
uptick rule. See letter from Direct Edge (Sept. 2009);
see also supra Section VII. (discussing comments on
implementation time).
677 See Proposal, 74 FR at 18087.
678 Letter from Nasdaq OMX Group (Oct. 2009).
679 Letter from Credit Suisse (Sept. 2009).
680 See, e.g., letter from STA (June 2009).
681 See letter from Glen Shipway (June 2009).

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on a stock-by-stock basis, which will
reduce our previously estimated costs
for on-going monitoring and
surveillance. This is because trading
centers only need to monitor and surveil
for compliance with the alternative
uptick rule during the limited period of
time that the circuit breaker is in effect
with respect to a specific security. As
such, the circuit breaker approach will
allow regulatory, supervisory and
compliance resources to focus on, and
to address, those situations where a
specific security is experiencing
significant downward price pressure. As
noted by one commenter, a circuit
breaker ‘‘is particularly efficient in
stable and rising markets because it
avoids imposing continuous monitoring
and compliance costs where there is
little or no corresponding risk of abusive
short selling.’’ 682
Further, although, under the circuit
breaker approach, market participants
will need to monitor whether a stock is
subject to Rule 201, we believe that
familiarity with a circuit breaker
approach may help mitigate such
compliance costs. As discussed in the
Proposal, currently, all stock exchanges
and FINRA have rules or policies to
implement coordinated circuit breaker
halts.683 Moreover, SROs have rules or
policies in place to coordinate
individual security trading halts
corresponding to significant news
events.684
On balance, we believe that the
estimates of the burdens associated with
the collection of information
requirements for trading centers
included in the Proposal 685 are
appropriate with respect to Rule 201.
Thus, our estimates have not changed
from the Proposal, except to the extent
that total burden estimates have
changed because we have updated the
estimated number of trading centers.686
682 Letter from Nasdaq OMX Group (Oct. 2009);
see also letter from SIFMA (Sept. 2009).
683 See supra note 292.
684 See, e.g., FINRA Rule 6120; see also Proposal,
74 FR at 18065–18066 (discussing the background
on circuit breakers).
685 See Proposal, 74 FR at 18087.
686 The Proposal indicated that there were
approximately 372 non-SRO trading centers,
including approximately 325 firms that were
registered equity market makers or specialists at
year-end 2007 (this number was derived from
annual FOCUS reports and discussion with SRO
staff), as well as 47 ATSs that operate trading
systems that trade NMS stocks. See Proposal, 74 FR
at 18086. We now estimate that there are
approximately 407 non-SRO trading centers,
including approximately 357 firms that were
registered equity market makers or specialists at
year-end 2008 (this number was derived from
annual FOCUS reports and discussion with SRO
staff), as well as 50 ATSs that operate trading
systems that trade covered securities. See supra
note 651. We also note that the number of SRO

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Although the exact nature and extent
of the policies and procedures that a
trading center must establish likely will
vary depending upon the nature of the
trading center (e.g., SRO vs. non-SRO,
full service broker-dealer vs. market
maker), we estimate that it initially will,
on average, take an SRO trading center
approximately 220 hours 687 of legal,
compliance, information technology and
business operations personnel time,688
and a non-SRO trading center
approximately 160 hours 689 of legal,
compliance, information technology and
business operations personnel time,690
to develop the required policies and
procedures.
In addition to these estimates (of 220
hours for SRO respondents and 160
hours for non-SRO respondents), we
expect that SRO and non-SRO
respondents will incur one-time
external costs for outsourced legal
services. While we recognize that the
amount of legal outsourcing utilized to
help establish written policies and
procedures may vary widely from entity
to entity, we estimate that on average,
each trading center will outsource 50
trading centers has changed from 11 in the Proposal
to 10. See supra note 650.
687 For purposes of this adopting release, we are
basing our estimates on the burden hour estimates
provided in connection with the adoption of
Regulation NMS because the policies and
procedures developed in connection with that
Regulation’s Order Protection Rule are in many
ways similar to what a trading center will need to
do to comply with Rule 201. See Regulation NMS
Adopting Release, 70 FR 37496; see also Proposal,
74 FR at 18087. We note, however, that these
estimates may be on the high end because trading
centers have already had to establish similar
policies and procedures to comply with Regulation
NMS.
688 Based on experience and estimates provided
in connection with Regulation NMS, we anticipate
that of the 220 hours we estimate will be spent to
establish the required policies and procedures, 70
hours will be spent by legal personnel, 105 hours
will be spent by compliance personnel, 20 hours
will be spent by information technology personnel
and 25 hours will be spent by business operations
personnel of the SRO trading center.
689 For purposes of this adopting release, we are
basing our estimates on the burden hour estimates
provided in connection with the adoption of
Regulation NMS because the policies and
procedures developed in connection with that
Regulation’s Order Protection Rule are in many
ways similar to what a trading center will need to
do to comply with the Rule 201. See Regulation
NMS Adopting Release, 70 FR 37496; see also
Proposal, 74 FR at 18087. We note, however, that
these estimates may be on the high end because
trading centers have already had to establish similar
policies and procedures to comply with Regulation
NMS.
690 Based on experience and the estimates
provided in connection with Regulation NMS, we
anticipate that of the 160 hours we estimate will be
spent to establish policies and procedures, 37 hours
will be spent by legal personnel, 77 hours will be
spent by compliance personnel, 23 hours will be
spent by information technology personnel and 23
hours will be spent by business operations
personnel of the non-SRO trading center.

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hours of legal time in order to establish
policies and procedures in accordance
with the amendments.691
We estimate that there will be an
initial one-time burden of, on average,
220 (not including the outsourced 50
hours of legal time) burden hours per
SRO trading center or 2,200 hours,692
and, on average, 160 (not including the
outsourced 50 hours of legal time)
burden hours per non-SRO trading
center or 65,120 hours,693 for a total of
67,320 burden hours to establish the
required written policies and
procedures.694 We estimate a cost of, on
average, approximately $8,340,000 for
both SRO and non-SRO trading centers
resulting from outsourced legal work.695
Once a trading center has established
the required written policies and
procedures, we estimate that, on
average, it will take an SRO and nonSRO trading center each approximately
two hours per month of on-going
internal legal time and three hours of
on-going internal compliance time to
ensure that its written policies and
procedures are up-to-date and remain in
compliance with the amendments to
Rule 201, or a total of 60 hours annually
per respondent.696 In addition, we
estimate that, on average, it will take an
SRO and non-SRO trading center each
approximately 16 hours per month of
on-going compliance time, 8 hours per
month of on-going information
technology time, and 4 hours per month
of on-going legal time associated with
on-going monitoring and surveillance
for and enforcement of trading in
691 As discussed above, we base our burden
estimate of 50 hours of outsourced legal time on the
burden estimate used for Regulation NMS because
the policies and procedures developed in
connection with that Regulation’s Order Protection
Rule are in many ways similar to what a trading
center will need to do to comply with Rule 201. See
Regulation NMS Adopting Release, 70 FR 37496;
see also Proposal, 74 FR at 18087.
692 The estimated 2,200 burden hours necessary
for SRO trading centers to establish policies and
procedures are calculated by multiplying 10 times
220 hours (10 × 220 hours = 2,200 hours).
693 The estimated 65,120 burden hours necessary
for non-SRO trading centers to establish policies
and procedures are calculated by multiplying 407
times 160 hours (407 × 160 hours = 65,120 hours).
694 See Rule 201(b).
695 This figure was calculated as follows: (50 legal
hours × $400 × 10 SRO trading centers) + (50 legal
hours × $400 × 407 non-SRO trading centers) =
$8,340,000. Based on industry sources, we estimate
that the average hourly rate for outsourced legal
services in the securities industry is $400.
696 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. See Regulation NMS Adopting Release,
70 FR 37496; see also Proposal, 74 FR at 18087.

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compliance with Rule 201, or a total of
336 hours annually per respondent.697
2. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
To rely on the broker-dealer provision
of Rule 201(c), a broker-dealer marking
a short sale order in a covered security
‘‘short exempt’’ under Rule 201(c) must
identify the order as being at a price
above the current national best bid at
the time of submission to the trading
center and must establish, maintain, and
enforce written policies and procedures
that are reasonably designed to prevent
the incorrect identification of orders as
being submitted to the trading center at
a permissible price.698 At a minimum,
the broker-dealer’s policies and
procedures must be reasonably designed
to enable a broker-dealer to monitor, on
a real-time basis, the national best bid
so as to determine the price at which the
broker-dealer may submit a short sale
order to a trading center in compliance
with the requirements of Rule 201(c). In
addition, a broker-dealer must take such
steps as necessary to enable it to enforce
its policies and procedures
effectively.699
To rely on the riskless principal
provision under Rule 201(d)(6) a brokerdealer must have written policies and
procedures in place to assure that, at a
minimum: (i) The customer order was
received prior to the offsetting
transaction; (ii) the offsetting transaction
is allocated to a riskless principal or
customer account within 60 seconds of
execution; and (iii) that it has
supervisory systems in place to produce
records that enable the broker-dealer to
accurately and readily reconstruct, in a
time-sequenced manner, all orders on
which the broker-dealer relies pursuant
to this provision.700
In the Proposal, we provided
estimates of the reporting and
recordkeeping burdens for broker-

dealers to implement, monitor and
surveil on an on-going basis the policies
and procedures required to rely on the
broker-dealer provision of Rule 201(c) or
the riskless principal provision under
Rule 201(d)(6).701 We also requested
comment, in the Proposal and the ReOpening Release, as to whether the
proposed burden estimates were
appropriate or whether such estimates
should be increased or reduced, and if
so, for which entities and by how
much.702 The following discussion of
comments on the proposed burden
estimates for broker-dealers includes
comments that were discussed above
with respect to the burden estimates for
trading centers 703 because, in some
cases, commenters provided comments
and estimates on the costs of
establishing and monitoring policies
and procedures under the proposed
short sale price tests without
distinguishing between costs that would
be applicable to trading centers as
opposed to broker-dealers.
One commenter provided a cost
estimate, including costs for
‘‘development man-hours’’ of $500,000
per firm for implementation of Rule 201
by broker-dealers.704 One commenter
stated that a new short sale price test
restriction would involve ‘‘significant
implementation costs’’ and ‘‘the
generation and retention of voluminous
compliance reports’’ but did not provide
a specific estimate of the cost or hours
that would be involved.705 Several
commenters expressed general concerns
regarding the time and cost that would
be imposed on market participants for
implementation and on-going
monitoring and surveillance of a new
short sale price test restriction,
including a policies and procedures
requirement but did not provide specific
estimates of such time and cost.706
In addition, several commenters noted
that implementation and on-going
701 See

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697 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 burden estimate of 336
hours is based on experience and what was
estimated for Regulation NMS regarding similarly
required on-going monitoring and surveillance for
and enforcement of trading in compliance with that
regulation’s policies and procedures requirement.
698 See Rule 201(c).
699 This will include the requirement that brokerdealers regularly surveil to ascertain the
effectiveness of their policies and procedures and
take prompt remedial steps. This provision is
intended to reinforce the on-going maintenance and
enforcement requirements of the provision
contained in Rule 201(c)(1) by explicitly assigning
an affirmative responsibility to broker-dealers to
surveil to ascertain the effectiveness of their
policies and procedures. See Rule 201(c)(2).
700 See Rule 201(d)(6).

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Proposal, 74 FR at 18088–18089.
Proposal, 74 FR at 18089; Re-Opening
Release, 74 FR at 42036.
703 See supra Section IX.E.1. (discussing reporting
and recordkeeping burdens for trading centers).
704 Letter from Wolverine. Wolverine provided an
estimate of $500,000 per firm for implementation
costs, which it applied to both non-SRO trading
centers and other registered broker-dealers.
705 Letter from EWT (Sept. 2009). EWT also did
not specify whether this comment on our estimated
annual reporting and recordkeeping burdens with
respect to provisions of the proposed rules that
would require a new ‘‘collection of information’’
was specific to the provisions applicable to trading
centers or to the provisions applicable to brokerdealers.
706 See, e.g., supra note 659. These commenters’
concerns regarding implementation costs either
were expressed with respect to market participants
generally or included references to obligations that
would be imposed on, or changes that would have
to be made by, broker-dealers.
702 See

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monitoring and surveillance of the
requirements of the broker-dealer
provision would impose significant
costs on broker-dealers, but did not
provide an estimate of such costs.707
Several commenters stated that the costs
of the broker-dealer provision could be
particularly burdensome for smaller
broker-dealers, but did not provide a
time or cost estimate of such burdens.708
We considered these comments in
reviewing the burden estimates for
broker-dealers that we proposed with
respect to the collection of information
requirements in Rule 201. We believe
that the cost and time required for
implementation and on-going
monitoring and surveillance of the
policies and procedures required to rely
on the broker-dealer provision of Rule
201(c) will be lower than some
commenters’ stated estimates 709
because the alternative uptick rule
references only the current national best
bid, unlike the proposed modified
uptick rule and the proposed uptick
rule, which would have required
sequencing of the national best bid or
last sale price.710 Because the
alternative uptick rule does not require
sequencing of the national best bid, we
believe that the policies and procedures
required in order to rely on the brokerdealer provision under the alternative
uptick rule, which are similar to those
required for non-SRO trading centers in
complying with paragraph (b) of Rule
201, will be easier and less costly to
707 See, e.g., letter from Credit Suisse (June 2009);
letter from FIF (June 2009); letter from Lime
Brokerage (June 2009); letter from NSCP; letter from
STANY (June 2009); letter from EWT (Sept. 2009).
708 See, e.g., letter from Credit Suisse (June 2009);
letter from NSCP; letter from T.D. Pro Ex. We
received time estimates on the Commission’s
proposed implementation time, but did not receive
comments with respect to the estimated PRA
burden hours. See supra Section VII. (discussing
comments on implementation time).
709 We received comments expressing concerns
about the implementation and on-going monitoring
and compliance costs to broker-dealers of a short
sale price test restriction that were not specific to
the alternative uptick rule. See, e.g., letter from
Credit Suisse (June 2009); letter from RBC (June
2009); letter from STANY (June 2009); letter from
CPIC (June 2009); letter from Wolverine; letter from
T.D. Pro Ex; letter from FIF (June 2009); letter from
Lime Brokerage (June 2009); letter from NSCP.
710 We also note that it is possible that some
smaller broker-dealers that determine to rely on the
broker-dealer provision may determine that it is
cost-effective for them to outsource certain
functions necessary to comply with Rule 201(c) to
larger broker-dealers, rather than performing such
functions in house, to remain competitive in the
market. This may help mitigate costs associated
with implementing and complying with Rule
201(c). Additionally, they may decide to purchase
order management software from technology firms.
Order management software providers may
integrate changes imposed by Rules 200(g) and 201
into their products, thereby providing another costeffective way for smaller broker-dealers to comply
with the requirement of Rule 201(c).

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implement and monitor than would be
the case under the proposed modified
uptick rule or the proposed uptick
rule.711 We note that one of the
commenters that expressed concerns
about the implementation cost of the
broker-dealer provision also
acknowledged that a rule ‘‘that would
not require data centralization and
sequencing would be significantly less
complex and faster to implement.’’ 712
We disagree with several commenters
who stated that, although
implementation and on-going
monitoring and surveillance of the
alternative uptick rule might be easier
and/or less costly for trading centers,
this would not hold true for brokerdealers.713 One of these commenters
stated that ‘‘in order to avoid rejection
of short sale orders under an alternative
uptick rule, programming would need to
be implemented to anticipate changes in
the national best bid between the time
a short sale order is entered and the
time it reaches the relevant market
center.’’ 714 However, the broker-dealer
provision of Rule 201(c) is designed
specifically to help avoid this result.
Under the broker-dealer provision, a
broker-dealer may, in accordance with
the policies and procedures required by
the provision, identify the order as
being at a price that is above the current
national best bid at the time the order
is submitted to the trading center and
mark the order ‘‘short exempt.’’ Trading
centers are required to have written
policies and procedures in place to
permit the execution or display of a
short sale order of a covered security
marked ‘‘short exempt’’ without regard
to whether the order is at a price that
is less than or equal to the current
national best bid.715
In addition, as noted in the Proposal,
while we have based our burden
estimates on the burden estimates
provided in connection with the
adoption of Regulation NMS with
respect to non-SRO trading centers
(which includes broker-dealers),716 we
note that these estimates may be on the
high end for those broker-dealers that
have already had to establish policies
and procedures in connection with that
Regulation’s Order Protection Rule,
which could help form the basis for the
711 See supra notes 660 to 669 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs).
712 Letter from Credit Suisse (June 2009).
713 See, e.g., letter from Citadel et al. (Sept. 2009);
letter from EWT (Sept. 2009); letter from Lime
Brokerage (Sept. 2009).
714 Letter from Citadel et al. (Sept. 2009).
715 See Rule 201(b)(1)(iii).
716 See supra note 670.

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policies and procedures for the brokerdealer provision of Rule 201(c), or the
riskless principal provision under Rule
201(d)(6). Several commenters agreed,
indicating that broker-dealers’ previous
experience with the policies and
procedures required under Regulation
NMS might reduce the implementation
and on-going monitoring and
compliance burdens on brokerdealers.717 Some commenters stated that
the Commission overstated the benefit
of such previous experience 718 because,
for example, ‘‘systems re-written and
architected for Reg NMS * * * did not
include any short sale restrictions,’’ 719
or because such systems will require
modifications in order to be used in the
context of a short sale price test
restriction.720 However, we considered
these issues when considering the
impact of previous experience with the
policies and procedures requirement of
Regulation NMS’s Order Protection
Rule. We continue to believe that
because broker-dealers may already
have in place systems and written
policies and procedures in connection
with Regulation NMS’s Order Protection
Rule, those broker-dealers will already
be familiar with establishing,
maintaining, and enforcing tradingrelated policies and procedures, which
will mitigate the burden of
implementation of the policies and
procedures requirement under the
broker-dealer provision of Rule 201(c),
or the riskless principal provision under
Rule 201(d)(6). We realize, however,
that the exact nature and extent of the
policies and procedures that a brokerdealer must establish likely will vary
depending upon the type, size, and
nature of the broker-dealer. Thus, our
estimates take into account different
types of broker-dealers and we realize
that these estimates may be on the lowend for some broker-dealers while they
may be on the high-end for other brokerdealers.
We considered whether our estimates
of the burdens associated with the
collection of information requirements
for broker-dealers with respect to the
proposed modified uptick rule included
in the Proposal 721 would change under
the circuit breaker approach of Rule
201, but concluded, as discussed below,
that these estimates continue to
717 See,

e.g., letter from EWT (Sept. 2009); letter
from MFA (Oct. 2009).
718 See, e.g., letter from FIF (June 2009); letter
from NSCP; letter from RBC (June 2009).
719 Letter from FIF (June 2009); see also letter
from RBC (June 2009).
720 See letter from NSCP; letter from RBC (June
2009).
721 See Proposal, 74 FR at 18088–18089.

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represent reasonable estimates under
the circuit breaker approach.
As discussed previously,722 despite
some commenters’ concerns regarding
the implementation costs of a circuit
breaker rule,723 we believe that the
circuit breaker approach will result in
largely the same implementation costs
as we estimated would be incurred if we
adopted a permanent, market-wide short
sale price test restriction.724 We believe
that that there will be only minimal, if
any, implementation costs for a circuit
breaker approach in addition to the
costs we estimated previously for the
implementation of a permanent, marketwide short sale price test rule because
broker-dealers relying on Rule 201(c) or
Rule 201(d)(6) must establish written
policies and procedures required to
comply with those provisions regardless
of whether the short sale price test
restriction is adopted on a permanent,
market-wide basis or, in the case of Rule
201, adopted in conjunction with a
circuit breaker. Several other
commenters agreed, stating that the
costs of the circuit breaker approach
would be similar to, or only
incrementally higher than, the costs of
a permanent, market-wide approach.725
In addition, with respect to on-going
monitoring and surveillance costs of the
circuit breaker approach, we recognize,
as noted by one commenter,726 that
broker-dealers relying on Rule 201(c) or
Rule 201(d)(6) must continuously
monitor whether a security is subject to
the provisions of Rule 201 and that
there will be costs associated with such
monitoring. However, we believe that
these costs will be offset because, under
the circuit breaker approach, the
alternative uptick rule is time limited
and will only apply on a stock by stock
basis, which will reduce our previously
estimated costs for on-going monitoring
and surveillance. This is because
broker-dealers relying on Rule 201(c)
will only need to monitor and surveil
for compliance with the alternative
uptick rule, and broker-dealers relying
on Rule 201(d)(6) will only need to
monitor for compliance with the
requirements of that provision, during
the limited period of time that the
circuit breaker is in effect with respect
to a specific security. As such, the
circuit breaker approach will allow
722 See supra Section IX.E.1. (discussing
estimated burdens of the collection of information
requirements applicable to trading centers under
Rule 201).
723 See supra note 676.
724 See Proposal, 74 FR at 18088.
725 See, e.g., letter from Nasdaq OMX Group (Oct.
2009); letter from Credit Suisse (Sept. 2009); letter
from STA (June 2009).
726 See letter from Glen Shipway (June 2009).

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regulatory, supervisory and compliance
resources to focus on, and to address,
those situations where a specific
security is experiencing significant
downward price pressure.727
On balance, we believe that the
estimates of the burdens associated with
the collection of information
requirements for broker-dealers
included in the Proposal 728 are
appropriate with respect to Rule 201.
Thus, our estimates have not changed
from the Proposal, except to the extent
that total burden estimates have
changed because we have updated the
estimated number of broker-dealers.729
Although the exact nature and extent
of the required policies and procedures
that a broker-dealer must establish
under the broker-dealer or the riskless
principal provisions likely will vary
depending upon the nature of the
broker-dealer (e.g., full service brokerdealer vs. market maker), we estimate
that it initially will, on average, take a
broker-dealer approximately 160
hours 730 of legal, compliance,
information technology and business
operations personnel time,731 to develop
the required policies and procedures. In
addition to this estimate of 160 hours,
we expect that broker-dealers will incur
one-time external costs for outsourced
legal services. While we recognize that
the amount of legal outsourcing utilized
to help establish written policies and
procedures will vary widely from entity
to entity, we estimate that on average,
each broker-dealer will outsource 50
727 See, e.g., letter from Nasdaq OMX Group (Oct.
2009); letter from SIFMA (Sept. 2009).
728 See Proposal, 74 FR at 18088–18089.
729 The Proposal indicated that there were
approximately 5,561 broker-dealers. This number
was based on a review of 2007 FOCUS Report
filings reflecting registered broker-dealers,
including introducing broker-dealers. This number
did not include broker-dealers that were delinquent
on FOCUS Report filings. See Proposal, 74 FR at
18086. We now estimate that there are
approximately 5,178 broker-dealers. See supra note
652 and accompanying text.
730 We base this estimate of 160 hours on the
estimated burden hours we believe it will take a
non-SRO trading center (which includes brokerdealers) to develop similarly required policies and
procedures, since the policies and procedures
required under the broker-dealer provision or the
riskless principal exception will be similar to those
required for non-SRO trading centers in complying
with paragraph (b) of Rule 201. See Regulation NMS
Adopting Release, 70 FR 37496; see also Proposal,
74 FR at 18087.
731 Based on experience and the estimates
provided in connection with Regulation NMS, we
anticipate that of the 160 hours we estimate will be
spent to establish policies and procedures, 37 hours
will be spent by legal personnel, 77 hours will be
spent by compliance personnel, 23 hours will be
spent by information technology personnel and 23
hours will be spent by business operations
personnel of the broker-dealer.

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hours 732 of legal time in order to
establish policies and procedures in
accordance with the broker-dealer
provision in Rule 201(c) and the riskless
principal provision in Rule 201(d)(6).
We estimate that, on average, there
will be an initial one-time burden of 160
burden hours per broker-dealer or
828,480 hours 733 to establish policies
and procedures required under the
broker-dealer provision in Rule 201(c)
and the riskless principal provision in
Rule 201(d)(6). We estimate an average
cost of approximately $103,560,000 for
broker-dealers resulting from
outsourced legal work.734
Once a broker-dealer has established
written policies and procedures that are
required under Rule 201(c) or Rule
201(d)(6), we estimate that it will take,
on average, a broker-dealer
approximately two hours per month of
internal legal time and three hours of
internal compliance time to ensure that
its written policies and procedures are
up-to-date and remain in compliance
with Rule 201(c) or 201(d)(6), or a total
of 60 hours annually per respondent.735
In addition, we estimate that, on
average, it will take a broker-dealer
approximately 16 hours per month of
on-going compliance time, 8 hours per
month of on-going information
technology time, and 4 hours per month
of on-going legal time associated with
on-going monitoring and surveillance
for and enforcement of trading in
compliance with Rule 201, or a total of
336 hours annually per respondent.736
732 As discussed above, we base our burden
estimate of 50 hours of outsourced legal time on the
burden estimate used for Regulation NMS because
the policies and procedures developed in
connection with that Regulation’s Order Protection
Rule are in many ways similar to what a brokerdealer will need to do to comply with the policies
and procedures required under the broker-dealer
provision and the riskless principal exception of
Rule 201. See Regulation NMS Adopting Release,
70 FR 37496; see also Proposal, 74 FR at 18087.
733 The estimated 828,480 burden hours necessary
for a broker-dealer to establish policies and
procedures are calculated by multiplying 5,178
times 160 hours (5,178 × 160 hours = 828,480
hours). See supra note 730.
734 This figure was calculated as follows: (50 legal
hours × $400 × 5,178 broker-dealers) =
$103,560,000. Based on industry sources, we
estimate that the average hourly rate for outsourced
legal services in the securities industry is $400.
735 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
estimated for a Regulation NMS respondent to
ensure that its written policies and procedures were
up-to-date and remained in compliance.
736 This figure was calculated as follows: (16
compliance hours × 12 months) + (8 information
technology hours × 12 months) + (4 legal hours ×
12 months) = 336 hours annually per respondent.
As discussed above, this burden estimate of 336
hours is based on experience and what was
estimated for Regulation NMS for similarly required

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3. Marking Requirements
The amendments to Rule 200(g) add
a new marking requirement of ‘‘short
exempt.’’ 737 In particular, if the brokerdealer chooses to rely on its own
determination that it is submitting the
short sale order to the trading center at
a price that is above the current national
best bid at the time of submission or to
rely on an exception specified in the
Rule, it must mark the order as ‘‘short
exempt.’’ 738
In the Proposal, we provided
estimates of the reporting and
recordkeeping burdens for the ‘‘short
exempt’’ marking requirement. We also
requested comment, in the Proposal and
Re-Opening Release, on the accuracy of
such estimates.739
Several commenters noted that the
‘‘short exempt’’ marking requirement
would impose significant
implementation costs, but did not
provide a specific estimate of such
costs.740 One commenter stated that
costs of the ‘‘short exempt’’ marking
requirement would be worth the
benefits gained.741 We considered these
comments in reviewing the burden
estimates of the ‘‘short exempt’’ marking
requirement of Rule 200(g).
We also considered whether our
estimates of the burdens associated with
the collection of information
requirements for broker-dealers with
respect to the amendments to Rule
200(g) in conjunction with the proposed
modified uptick rule included in the
Proposal 742 would change under the
circuit breaker approach of Rule 201,
but concluded, as discussed below, that
these estimates continue to represent
reasonable estimates under the circuit
breaker approach.
We believe that the ‘‘short exempt’’
marking requirements of Rule 200(g), in
conjunction with a circuit breaker
approach, will result in largely the same
implementation costs as would be
incurred if the ‘‘short exempt’’ marking
requirements were combined with a
market-wide short sale price test
restriction. This is because brokerdealers relying on the provisions of Rule
201(c) or Rule 201(d) would need to
make systems changes to implement the
‘‘short exempt’’ marking requirements
on-going monitoring and surveillance for and
enforcement of trading in compliance with that
regulation’s policies and procedures requirement.
737 See Rule 200(g); see also supra Section IV.
(discussing the amendments to Rule 200(g)).
738 See Rule 200(g)(2).
739 See Proposal, 74 FR at 18089; Re-Opening
Release, 74 FR at 42036.
740 See, e.g., letter from FIF (June 2009); letter
from NSCP; letter from RBC (June 2009).
741 See letter from STA (June 2009).
742 See Proposal, 74 FR at 18089.

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regardless of whether the short sale
price test restriction is adopted on a
permanent, market-wide basis or, in the
case of Rule 201, adopted in
conjunction with a circuit breaker.
In addition, with respect to on-going
monitoring and surveillance costs of the
‘‘short exempt’’ marking requirements in
conjunction with a circuit breaker
approach, we recognize, as noted by one
commenter,743 that market participants
will need to continuously monitor
whether a security is subject to the
provisions of Rule 201 and that there
will be costs associated with such
monitoring. However, we believe that
these costs will be offset because, under
the circuit breaker approach, use of the
‘‘short exempt’’ provisions of Rule 201(c)
and Rule 201(d) and the related marking
requirements are time limited and will
only apply on a stock by stock basis,
which will reduce our previously
estimated costs for on-going monitoring
and surveillance. This is because
broker-dealers who choose to rely on
Rule 201(c) or Rule 201(d) will only
need to monitor and surveil for
compliance with the requirements of
those provisions and will only need to
mark qualifying orders ‘‘short exempt’’
during the limited period of time that
the circuit breaker is in effect with
respect to a specific security. As such,
the circuit breaker approach will allow
regulatory, supervisory and compliance
resources to focus on, and to address,
those situations where a specific
security is experiencing significant
downward price pressure.744
On balance, we believe our proposed
estimates of the burdens associated with
the collection of information
requirements of the ‘‘short exempt’’
marking requirement 745 are appropriate
with respect to Rule 200(g) as adopted.
Thus, our estimates have not changed
from the Proposal, except to the extent
that total burden estimates have
changed because we have updated the
estimated number of broker-dealers.746
We believe that the implementation
cost of the ‘‘short exempt’’ marking
requirement will likely be similar to the
implementation cost of the order
marking requirements of Rule 200(g) of
Regulation SHO, which had originally
included the category of ‘‘short exempt.’’
Industry sources at that time estimated
initial implementation costs for the
former ‘‘short exempt’’ marking
requirement to be approximately
743 See

letter from Glen Shipway (June 2009).
e.g., letter from Nasdaq OMX Group (Oct.
2009); letter from SIFMA (Sept. 2009).
745 See Proposal, 74 FR at 18089.
746 See supra note 729.
744 See,

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$100,000 to $125,000.747 Based on these
estimates, as adjusted for inflation, we
estimate that the initial implementation
cost of the ‘‘short exempt’’ marking
requirement will be approximately
$115,000 to $145,000 per brokerdealer 748 for a total initial
implementation cost of approximately
$595,470,000 to $750,810,000 for all
broker-dealers.749
While not all broker-dealers likely
will enter sell orders in securities
covered by the amendments to Rules
200(g) and 201 in a manner that will
subject them to this collection of
information, we estimate, for purposes
of the PRA, that all of the approximately
5,178 registered broker-dealers will do
so. For purposes of the PRA, the Staff
has estimated that a total of
approximately 12.9 billion ‘‘short
exempt’’ orders are entered annually.750
This is an average of approximately
2,491,309 annual responses by each
respondent.751 As we discussed in the
Proposal, each response of marking sell
orders ‘‘short exempt’’ will take
approximately .000139 hours (.5
seconds) to complete. This estimate is
based on the same time estimate for
marking sell orders ‘‘long’’ or ‘‘short’’
used upon adoption of Rule 200(g)
under Regulation SHO.752 We believe
this estimate is appropriate because, in
747 See 2004 Regulation SHO Adopting Release,
69 FR at 48023.
748 The adjustment for inflation was calculated
using information in the Consumer Price Index,
U.S. Department of Labor, Bureau of Labor
Statistics.
749 These figures were calculated as follows:
($115,000 × 5,178) = $595,470,000 and ($145,000 ×
5,178) = $750,810,000.
750 As we stated in the Proposal, our estimate of
12.9 billion ‘‘short exempt’’ orders was calculated
based on a review of short sale trades and short sale
orders during August 2008. We believe that August
2008 data is representative of a normal month of
trading. Specifically, we calculated that there were
about 263 million short sale trades during August
2008 for Amex, FINRA, Nasdaq, NYSE Arca, and
NYSE market centers. Based on a review of Rule
605 reports from the three largest market centers
during August 2008, we estimate a ratio of 14.4
orders to trades. We gross up 263 million short sale
trades by 14.4, which yields 3.8 billion short sale
orders during August 2008 or an annualized figure
of 45.4 billion. We estimate that approximately
28.5% of short sale orders are short exempt using
Nasdaq short sale data from January to April 2005.
We multiply 45.4 billion times 0.285 to obtain our
estimate of 12.9 billion short exempt orders. See
Proposal, 74 FR at 18089. We also note that,
because the circuit breaker rule will not be in place
at all times or for all securities, the frequency and,
therefore, the estimated burden of marking ‘‘short
exempt’’ is expected to be lower. We did not receive
any comments on the estimated number of annual
‘‘short exempt’’ orders.
751 This figure was calculated as follows: 12.9
billion ‘‘short exempt’’ orders divided by 5,178
broker-dealers.
752 See 2004 Regulation SHO Adopting Release,
69 FR at 48023, n.140; see also 2003 Regulation
SHO Proposing Release, 68 FR at 63000, n.232.

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11287

accordance with the current marking
requirements of Rule 200(g) of
Regulation SHO, broker-dealers are
already required to mark a sell order
either ‘‘long’’ or ‘‘short.’’ Thus, most
broker-dealers already have the
necessary mechanisms and procedures
in place and are already familiar with
processes and procedures to comply
with the marking requirements of Rule
200(g) of Regulation SHO and brokerdealers will be able to continue to use
the same mechanisms, processes and
procedures to comply with the
amendments to Rules 200(g) and
200(g)(2). We note, however, that this
estimate may be too high given
technological advances, such as
automation of sell order marking, since
the adoption of Rule 200(g) in 2004.
Thus, the total approximate estimated
annual hour burden per year is
1,793,100 burden hours (12,900,000,000
orders marked ‘‘short exempt’’
multiplied by 0.000139 hours/order
marked ‘‘short exempt’’). Our estimate
for the paperwork compliance for the
marking requirement of Rule 200(g) for
each broker-dealer is approximately 346
burden hours (2,491,309 responses
multiplied by 0.000139 hours/
responses) or (a total of 1,793,100
burden hours divided by 5,178
respondents).
F. Collection of Information Is
Mandatory
1. Policies and Procedures
Requirements
The collection of information required
under Rule 201’s policies and
procedures requirement is mandatory
for trading centers executing and
displaying short sale orders in covered
securities. The collection of information
required under Rule 201’s policies and
procedures requirements in connection
with the broker-dealer provision in Rule
201(c) and the riskless principal
exception in Rule 201(d)(6) is
mandatory for broker-dealers relying on
these provisions.
2. Marking Requirements
The collection of information is
mandatory for all broker-dealers
submitting sale orders marked ‘‘short
exempt’’ in reliance on one of the
provisions contained in paragraph (c) or
(d) of Rule 201.
G. Confidentiality
1. Policies and Procedures
Requirements
We expect that the information
collected pursuant to Rule 201’s
required policies and procedures for
trading centers will be communicated to

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the members, subscribers, and
employees (as applicable) of all trading
centers. In addition, the information
collected pursuant to Rule 201’s
required policies and procedures for
trading centers will be retained by the
trading centers and will be available to
the Commission and SRO examiners
upon request, but not subject to public
availability. The information collected
pursuant to Rule 201’s broker-dealer
provision and the riskless principal
exception will be retained by the brokerdealers and will be available to the
Commission and SRO examiners upon
request, but not subject to public
availability.
2. Marking Requirements
The information collected pursuant to
the ‘‘short exempt’’ marking
requirements in Rule 200(g) and Rule
200(g)(2) will be submitted to trading
centers and will be available to the
Commission and SRO examiners upon
request. The information collected
pursuant to the ‘‘short exempt’’ marking
requirement may be publicly available
because it may be published, in a form
that would not identify individual
broker-dealers, by SROs that publish on
their Internet Web sites aggregate short
selling volume data in each individual
equity security for that day and, on a
one-month delayed basis, information
regarding individual short sale
transactions in all exchange-listed
equity securities.
H. Record Retention Period
1. Policies and Procedures
Requirements
Any records generated in connection
with Rule 201’s requirements that
trading centers and broker-dealers (with
respect to the broker-dealer and riskless
principal provisions) establish written
policies and procedures must be
preserved in accordance with, and for
the periods specified in, Exchange Act
Rules 17a–1 753 for SRO trading centers
and 17a–4(e)(7) 754 for non-SRO trading
centers and registered broker-dealers.

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2. Marking Requirements
The amendments to Rule 200(g) and
Rule 200(g)(2) do not contain any new
record retention requirements. All
registered broker-dealers that are subject
to the amendments are currently
required to retain records in accordance
with Rule 17a–4(e)(7) under the
Exchange Act.755
753 17
754 17

CFR 240.17a–1.
CFR 240.17a–4(e)(7).

755 Id.

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X. Cost-Benefit Analysis
We are sensitive to the costs and
benefits of our rules. To assist us in
evaluating the costs and benefits of the
amendments to Regulation SHO, in the
Proposal and the Re-Opening Release,
we encouraged commenters to discuss
any costs or benefits that the proposed
rules might impose.756 In particular, we
requested comment on the potential
costs for any modification to both
computer systems and surveillance
mechanisms and for information
gathering, management, and
recordkeeping systems or procedures, as
well as any potential benefits resulting
from the proposed amendments for
registrants, issuers, investors, brokerdealers, other securities industry
professionals, regulators, and others.757
We also requested comment as to the
extent to which placing price
restrictions on short selling could
impact or lessen some of the benefits of
legitimate short selling or could lead to
a decrease in market efficiency, price
discovery, or liquidity.758 Commenters
were requested to provide analysis and
data to support their views on the costs
and benefits associated with the
proposed amendments to Rule 201 and
Rule 200(g).759 We discuss below the
benefits and costs, including cost
mitigation features, of Rule 201.
A. Benefits
We believe it is appropriate at this
time to adopt in Rule 201 a circuit
breaker approach combined with the
alternative uptick rule. Specifically,
Rule 201(b) requires that a trading
center establish, maintain, and enforce
written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
day.760 In addition, the Rule requires
that the trading center establish,
maintain, and enforce written policies
and procedures reasonably designed to
impose this short sale price test
restriction for the remainder of the day
and the following day when a national
best bid for the covered security is
calculated and disseminated on a

current and continuing basis by a plan
processor pursuant to an effective
national market system plan.761
In conjunction with the amendments
to Rule 201, we are amending Rule
200(g) of Regulation SHO to provide
that a broker-dealer may mark certain
qualifying sell orders ‘‘short exempt.’’ In
particular, if the broker-dealer chooses
to rely on its own determination that it
is submitting the short sale order to the
trading center at a price that is above the
current national best bid at the time of
submission or to rely on an exception
specified in the Rule, it must mark the
order as ‘‘short exempt.’’ 762
We discuss below the benefits of Rule
201 with respect to two inter-related
aspects of the Rule: the short sale price
test restriction, specifically the
alternative uptick rule, and the circuit
breaker approach that triggers
application of that restriction. We have
separated the discussion into two parts
in order to more clearly address the
comments that we received with respect
to the various aspects of Rule 201.
However, the circuit breaker approach
and the alternative uptick rule under
Rule 201 operate in conjunction with
one another and should not be
considered isolated provisions.
1. Alternative Uptick Rule
The alternative uptick rule is
designed to prevent the execution or
display of short sale orders at a price
that is less than or equal to the current
national best bid. By not allowing short
sellers to sell at or below the current
national best bid, the alternative uptick
rule will allow long sellers, by selling at
the bid, to sell first in a declining
market for a particular security. As the
Commission has noted previously in
connection with short sale price test
restrictions, a goal of such restrictions is
to allow long sellers to sell first in a
declining market.763 A short seller that
is seeking to profit quickly from
accelerated, downward market moves
may find it advantageous to be able to
short sell at the current national best
bid. By placing long sellers ahead of
short sellers in the execution queue
under certain circumstances, Rule 201
will help promote capital formation,
since investors may be more willing to
hold long positions if they know they
may have a preferred position over short
sellers when they wish to sell.764
761 Rule

756 See

Proposal, 74 FR at 18090; Re-Opening
Release, 74 FR at 42037.
757 See Proposal, 74 FR at 18090.
758 See id.
759 See id.; Re-Opening Release, 74 FR at 42037.
760 Rule 201(b).

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201(b).
Rules 200(g) and 200(g)(2).
763 See supra note 17.
764 But see infra notes 821 to 827 and
accompanying text (discussing the potential
negative impact of Rule 201 on various trading
strategies that include short selling).
762 See

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In addition, because the alternative
uptick rule, when triggered, will
generally permit short selling only at a
price above the current national best
bid, the alternative uptick rule will not
allow short sales to get immediate
execution at the bid.765 In other words,
short sellers will not be permitted to act
as liquidity takers when the alternative
uptick rule applies, but will participate,
if at all, as liquidity providers (unless an
exception applies), adding depth to the
market. Put another way, unless an
exception applies, short sales will
execute only when purchasers arrive
willing to buy at prices above the
national best bid. In discussing the
alternative uptick rule, one commenter
stated that ‘‘[n]ot only does it faithfully
replicate the old uptick rule it improves
upon it by making each and every short
sale a liquidity providing
transaction.’’ 766
Further, the alternative uptick rule is
designed to help restore investor
confidence in the securities markets.767
It will also help restore investor
confidence during times of substantial
uncertainty because, once the circuit
breaker has been triggered for a
particular security, long sellers will
have preferred access to bids for the
security, and the security’s continued
price decline will more likely be due to
long selling and the underlying
fundamentals of the issuer, rather than
to other factors. Bolstering investor
confidence in the markets should help
to encourage investors to be more
willing to invest in the markets, thus
adding depth and liquidity to the
markets. In addition, we note that a
number of commenters stated that they
believe that a short sale price test
restriction will aid small investors.768
As we stated in the Proposal, short
sale price test restrictions, whether a
permanent market-wide restriction or in
combination with a circuit breaker,
might help prevent short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security.769 Because the alternative
765 As noted by some commenters, there may be
situations in which a short seller could get
immediate execution, such as where an order is
executed in a facility that provides executions at the
mid-point of the national best bid and offer. See,
e.g., letter from ISE (Sept. 2009); see also letter from
BATS (Sept. 2009).
766 Letter from Glen Shipway (Sept. 2009).
767 See, e.g., supra note 94 (citing comment letters
suggesting that reinstatement of short price test
restrictions in some form will help restore investor
confidence in the markets).
768 See supra note 97 (citing commenters who
stated that a short sale price test restriction would
aid small investors).
769 See Proposal, 74 FR at 18050, 18053, 18059,
18061, 18065, 18069; see also Securities and

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uptick rule only permits short selling at
a price above the current national best
bid, unless an exception applies, we
believe it will be more effective than the
proposed uptick rule or the proposed
modified uptick rule at achieving our
goals in helping to prevent short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security. Several commenters stated
that the alternative uptick rule would
dramatically decrease price pressure on
a security 770 and, thereby, the ability of
market participants to use short selling
as a market manipulation tool.771
Another commenter, in supporting the
alternative uptick rule, stated that it
would ‘‘likely be more restrictive on
short selling than the original Rule
10a–1 ‘uptick rule’.’’ 772
In addition, we believe that the
alternative uptick rule is preferable to
the proposed modified uptick rule or
the proposed uptick rule, in part,
because it will be easier and less costly
to implement and monitor. Unlike the
proposed modified uptick rule and the
proposed uptick rule, which would
have required sequencing of the
national best bid or last sale price, the
alternative uptick rule references only
the current national best bid. Several
commenters expressed support for the
alternative uptick rule, stating that the
alternative uptick rule was preferable to
the proposed modified uptick rule or
the proposed uptick rule because it
would eliminate sequencing issues 773
and would be easier and less costly to
implement.774 One commenter noted
that the alternative uptick rule would
Exchange Commission, Special Study of Securities
Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., at
251 (1963).
770 See, e.g., letter from BATS (Sept. 2009); letter
from Wells Fargo (Sept. 2009); see also letter from
SIFMA (Sept. 2009) (stating that a circuit breaker
coupled with the alternative uptick rule ‘‘would
limit instances where a security is the subject of
severe downward pressure’’).
771 See letter from BATS (Sept. 2009); letter from
Wells Fargo (Sept. 2009); letter from STA (Sept.
2009); letter from Glen Shipway (Sept. 2009).
772 Letter from Virtu Financial.
773 See, e.g., letter from Direct Edge (June 2009);
letter from BATS (Sept. 2009); letter from Credit
Suisse (Sept. 2009); letter from STA (Sept. 2009);
letter from Wells Fargo (Sept. 2009); see also letter
from Hudson River Trading (expressing a
preference for the alternative uptick rule, as
opposed to the proposed modified uptick rule or
the proposed uptick rule, if in conjunction with a
circuit breaker); see also supra notes 661 to 664 and
accompanying text.
774 See, e.g., letter from BATS (Sept. 2009); letter
from Credit Suisse (Sept. 2009); letter from
European Investors (Sept. 2009); letter from
Goldman Sachs (Sept. 2009); letter from STA (Sept.
2009); letter from Glen Shipway (Sept. 2009); letter
from T. Rowe Price (Sept. 2009); letter from Wells
Fargo (Sept. 2009); see also letter from Hudson
River Trading; see also supra notes 661 to 664 and
accompanying text.

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11289

simplify on-going surveillance and
enforcement, as compared to the other
proposed short sale price test
restrictions.775 In addition, we believe
that the implementation and on-going
monitoring and compliance costs of the
alternative uptick rule are justified by
the benefits provided in preventing
short selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security.
2. Circuit Breaker Approach
Under the circuit breaker approach,
the alterative uptick rule will apply only
if the price of a covered security has
declined by 10% or more from the
covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day.776 In
addition, the short sale price test
restriction will only remain in place for
the remainder of the day and for the
following day.777 The listing market for
each covered security must determine
whether that covered security is subject
to Rule 201 778 and must immediately
notify the single plan processor
responsible for consolidation of
information for the covered security in
accordance with Rule 603(b) of
Regulation NMS 779 of the fact that a
covered security has become subject to
the short sale price test restriction of
Rule 201. The plan processor must then
disseminate this information.780
We believe that a circuit breaker
approach strikes the appropriate balance
between our goal of preventing short
selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security and the
need to allow for the continued smooth
functioning of the markets, including
the provision of liquidity and price
efficiency in the markets.781 The circuit
breaker approach of Rule 201 will help
benefit the market for a particular
security by allowing participants, when
a security is undergoing a significant
intra-day price decline, an opportunity
to re-evaluate circumstances and
respond to volatility in that security. We
also believe that a circuit breaker will
better target short selling that may be
related to potential bear raids 782 and
other forms of manipulation that may be
775 See

letter from SIFMA (Sept. 2009).
Rule 201(b).
777 See id.
778 See Rule 201(b)(3).
779 17 CFR 242.603(b); see supra note 368.
780 See Rule 201(b)(3); 17 CFR 242.603(b).
781 See supra Section III.A.4.
782 See supra note 36 and accompanying text.
776 See

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used to exacerbate a price decline in a
covered security.
In response to our requests for
comment, some commenters expressed
support for a circuit breaker approach
because it would be more narrowlytailored to address our concerns about
the effects of short selling in a market
subject to a significant downturn than a
permanent, market-wide short sale price
test restriction.783 For example, one
commenter noted that ‘‘by implementing
the alternative uptick rule only after a
circuit breaker threshold has been
reached, [the commenter] believes the
Commission would strike the
appropriate balance between the
desirable goals of maximizing efficiency
when the market is operating within
normal trading ranges and prohibiting
potentially abusive short selling when it
is not, while refraining from imposing
excessive implementation costs on the
industry.’’ 784 Another commenter stated
that a circuit breaker is preferable
because it ‘‘will restrict short selling
when prices begin to decline
substantially and short selling becomes
more likely to be abusive and
potentially harmful.’’ 785
As discussed above, short selling is an
important tool in price discovery and
the provision of liquidity to the market,
and we recognize that imposition of a
short selling circuit breaker that when
triggered imposes the alternative uptick
rule could restrict otherwise legitimate
short selling activity during periods of
significant volatility. Under the circuit
breaker approach, the alternative uptick
rule will only be imposed when a
covered security has experienced an
intra-day price decline of 10% or more
and will only apply for the remainder of
the day and the following day. As
discussed previously,786 commenters’
estimates and the Staff’s analysis show
that a 10% circuit breaker threshold
generally should affect only a limited
percentage of covered securities. In
addition, when triggered, the short sale
price test restriction will apply for a
limited period of time, i.e., the
783 See, e.g., letter from Direct Edge (June 2009);
letter from Citadel et al. (Sept. 2009); letter from
Direct Edge (Sept. 2009); letter from BATS (Sept.
2009); letter from Goldman Sachs (Sept. 2009);
letter from Hudson River Trading (Sept. 2009);
letter from Qtrade; letter from SIFMA (Sept. 2009);
letter from Virtu Financial; see also letter from
Goldman Sachs (June 2009); letter from SIFMA
(June 2009); letter from Nasdaq OMX Group (Oct.
2009).
784 Letter from BATS (Sept. 2009).
785 Letter from Nasdaq OMX Group (Oct. 2009);
see also letter from Goldman Sachs (June 2009);
letter from BATS (Sept. 2009); letter from SIFMA
(Sept. 2009); letter from Credit Suisse (Sept. 2009);
letter from Virtu Financial.
786 See supra Section III.A.5. (discussing the
circuit breaker trigger level).

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remainder of the day and the following
day, rather than all the time. Thus, Rule
201 is structured so that it will not be
triggered for the majority of covered
securities most of the time and, thereby,
will not interfere with the smooth
functioning of the markets for those
securities, including when prices in
such securities are undergoing minimal
downward price pressure or are stable
or rising. To the extent that Rule 201
results in a disruption to the smooth
functioning of the markets, including
the provision of liquidity and price
efficiency in the markets, we believe
that such costs are justified by the
benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
Several commenters stated their belief
that implementing short sale price test
restrictions on a permanent, marketwide basis, rather than in combination
with a circuit breaker, would
substantially diminish the benefits that
short sellers bring to the markets.787
Another commenter stated that a circuit
breaker is preferable to a permanent,
market-wide short sale price test
restriction because it ‘‘permits normal
market activity while a stock is trading
in a natural range and short selling is
more likely to benefit the market (by, for
example, increasing price discovery and
liquidity).’’ 788
The Commission has long held the
view that circuit breakers may help
restore investor confidence during times
of substantial uncertainty.789 We believe
that the requirements of Rule 201 will
produce such benefits. By imposing the
alternative uptick rule once a security’s
price is experiencing a significant intraday price decline, the short selling
circuit breaker rule in Rule 201(b) is
designed to target only those securities
that experience such declines and,
therefore, will help to prevent short
selling from being used as a tool to
exacerbate the decline in the price of
those securities. This approach
establishes a narrowly-tailored Rule that
targets only those securities
experiencing such a decline and which
only applies a short sale price test
restriction for a limited period of time.
We believe that addressing short selling
787 See, e.g., letter from Direct Edge (Sept. 2009);
letter from Credit Suisse (Sept. 2009).
788 Letter from Nasdaq OMX Group (Oct. 2009);
see also letter from Goldman Sachs (June 2009);
letter from BATS (Sept. 2009); letter from SIFMA
(Sept. 2009); letter from Credit Suisse (Sept. 2009);
letter from Virtu Financial.
789 See, e.g., 1998 Release, 63 FR 18477; see also
Proposal, 74 FR at 18067.

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in connection with such declines will
help restore investor confidence in the
markets generally. One commenter
noted that ‘‘preventing rapid declines in
stock prices strengthens investor
confidence.’’ 790 Another commenter
stated that a circuit breaker triggering a
short sale price test restriction would
provide ‘‘investors with confidence that
short sellers will be restricted from
conducting any perceived market
manipulation strategies such as ‘bear
raids.’ ’’ 791
A circuit breaker approach will also
allow regulatory, supervisory and
compliance resources to focus on, and
to address, those situations where a
specific security is experiencing
significant downward price pressure. As
noted by one commenter, a circuit
breaker ‘‘is particularly efficient in
stable and rising markets because it
avoids imposing continuous monitoring
and compliance costs where there is
little or no corresponding risk of abusive
short selling.’’ 792
Requiring the listing market for a
covered security to determine whether
the security has become subject to the
short sale price test restrictions of Rule
201 will help ensure consistency for
each covered security with respect to
such determinations as only the listing
market for that covered security will be
making the determination. In addition,
we believe that listing markets will be
in the best position to respond to
anomalous or unforeseeable events that
may impact a covered security’s price,
such as an erroneous trade, because the
listing markets generally have in place
specific procedures designed to address
such events.793 Further, because the
single plan processors currently receive
information from listing markets
regarding trading restrictions (i.e.
Regulatory Halts as defined in those
plans) on individual securities and
disseminate such information, the
requirements of Rule 201(b)(3) are
similar to existing obligations on plan
processors pursuant to the requirements
of Regulation NMS, the CTA and CQ
Plans and the Nasdaq UTP Plan.
3. Marking Requirements
The ‘‘short exempt’’ marking
requirements under Rule 200(g) will
provide a record that a broker-dealer is
availing itself of the provisions of
790 Letter

from BIO.
from Brian M. Collie, Esq., Associate,
Taurus Compliance Consulting, LLC, dated June 19,
2009 (‘‘Taurus Compliance’’).
792 Letter from Nasdaq OMX Group (Oct. 2009);
see also letter from SIFMA (Sept. 2009).
793 See supra note 327 (discussing NYSE’s
procedures to ensure the accuracy and reliability of
its closing price).
791 Letter

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
paragraph (c) or (d) of Rule 201. Thus,
the records created pursuant to the
‘‘short exempt’’ marking requirements of
Rule 200(g) will aid surveillance by
SROs and the Commission for
compliance with the provisions of Rule
201. In addition, the ‘‘short exempt’’
marking requirement will provide an
indication to a trading center regarding
when it must execute or display a short
sale order without regard to whether the
order is at a price that is less than or
equal to the current national best bid
and will aid broker-dealers in
complying with their legal
requirements.
In response to our requests for
comment, several commenters indicated
that requiring broker-dealers to mark all
sell orders ‘‘long,’’ ‘‘short,’’ or ‘‘short
exempt’’ would provide valuable
information to the Commission 794 and
that such information would be worth
the costs of requiring such marking.795
One commenter stated that the
information provided by a ‘‘short
exempt’’ marking requirement would
provide the Commission with data on
the extent to which exceptions are being
used to circumvent the requirements of
Rule 201.796
B. Costs

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In the Proposal, we discussed the
anticipated costs of the proposed short
sale price test restrictions, both on a
permanent, market-wide basis and in
conjunction with a circuit breaker.797
We requested comment, in the Proposal
and Re-Opening Release, on the costs
associated with the proposed
amendments.798 In particular, we
requested comment on the potential
costs for any modification to both
computer systems and surveillance
mechanisms and for information
gathering, management, and
recordkeeping systems or procedures.799
We also requested comment as to the
extent to which placing price
restrictions on short selling could
impact or lessen some of the benefits of
legitimate short selling or could lead to
a decrease in market efficiency, price
discovery, or liquidity.800 We discuss
the comments that we received with
respect to the costs of Rule 201 in detail
in Sections X.B.1., X.B.2., X.B.3 and
X.B.4., below.
794 See, e.g., letter from STA (June 2009); letter
from CFA.
795 See, e.g., letter from STA (June 2009).
796 See letter from STA (June 2009).
797 See Proposal, 74 FR at 18092–18100.
798 See Proposal, 74 FR at 18100; Re-Opening
Release, 74 FR at 42037.
799 See Proposal, 74 FR at 18090.
800 See id.

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We recognize that Rule 201 will
impose costs on market participants to
implement and assure compliance with
the requirements of the Rule. After
considering empirical evidence
regarding former Rule 10a–1 and the
comments that we received in response
to the Proposal and the Re-Opening
Release, as discussed below, we believe
that Rule 201 will have a minimal, if
any, negative effect on market liquidity,
price efficiency, and quote depths.801 In
addition, we recognize that there will be
market costs associated with Rule 201 in
terms of the potential impact of such a
short sale-related circuit breaker on
execution speed and probability. By
requiring for a limited time-period that
short sales may only be executed or
displayed above the current national
best bid once a covered security has
experienced an intra-day price decline
of 10% or more, Rule 201 may slow the
speed of executions and impose
additional costs on market participants,
including buyers.802 Such costs may
increase the costs of legitimate short
selling.
To the extent that Rule 201 results in
increased costs for short selling in
covered securities that trigger the
alternative uptick rule, it may increase
the trading costs of legitimate short
selling for these securities and may
result in a reduction in short selling
generally. Restricting short selling may
also reduce ‘‘long’’ activity where the
short selling is part of a larger trading
strategy.
We believe, however, that such costs
will be mitigated by the circuit breaker
approach of Rule 201. Under the circuit
breaker approach, the alternative uptick
rule will only be imposed when a
covered security has experienced an
intra-day price decline of 10% or more
and will only apply for the remainder of
the day and the following day. As
discussed previously,803 commenters’
estimates and the Staff’s analysis show
801 See infra note 878 (citing empirical evidence
showing that former Rule 10a–1 did not have an
effect on market liquidity and price efficiency and
that price test restrictions resulted in an increase in
quote depths). We note that, although the
alternative uptick rule is by definition more
restrictive than the proposed modified uptick rule,
differences between the operation of the proposed
uptick rule and the alternative uptick rule mean
that one approach or the other would be more
restrictive in particular circumstances. See, e g.,
supra note 242 and accompanying text (discussing
automated trade matching systems).
802 As discussed above, on the day the Pilot went
into effect, listed Pilot securities underperformed
listed control group securities by approximately 24
basis points. The Pilot and control group securities,
however, had similar returns over the first six
months of the Pilot. See supra note 52 (referencing
Staff’s Summary Pilot Report at 8).
803 See supra Section III.A.5. (discussing the
circuit breaker trigger level).

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that a 10% circuit breaker threshold
generally should affect only a limited
percentage of covered securities. In
addition, when triggered, the short sale
price test restriction will apply for a
limited period of time, i.e., the
remainder of the day and the following
day, rather than all the time. Thus, Rule
201 is structured so that it will not be
triggered for the majority of covered
securities most of the time and, thereby,
will not interfere with the smooth
functioning of the markets for those
securities, including when prices in
such securities are undergoing minimal
downward price pressure or are stable
or rising. To the extent that Rule 201
results in increased costs for short
selling in covered securities that trigger
the alternative uptick rule, a reduction
in short selling generally, and a
reduction in ‘‘long’’ activity where the
short selling is part of a larger trading
strategy, we believe that such costs are
justified by the benefits provided by the
Rule in preventing short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security.
In addition, we recognize that Rule
201, when triggered, will impose a short
sale price test restriction, when,
currently, there is an absence of any
short sale price test restrictions. This
will result in costs in terms of
modifications to systems and
surveillance mechanisms, as well as
changes to processes and procedures.
We anticipate that these changes will
likely result in immediate
implementation costs for trading centers
and SROs and other market participants
associated with reprogramming trading
and surveillance systems to account for
short sale price test restrictions based on
best bid information, as discussed in
more detail below. We also believe Rule
201 will impose costs on trading centers
and SROs and other market participants
related to systems changes to computer
software, reprogramming costs, and
surveillance and compliance costs, as
well as staff time and technology
resources, associated with monitoring
compliance with Rule 201, as discussed
below.
Moreover, imposing a short salerelated circuit breaker that, if triggered,
will impose a short sale price test
restriction, when there are currently no
short sale price test restrictions in place
also may mean that staff (compliance
personnel, associated persons, etc.) may
need to be trained or re-trained
regarding rules related to short sale
price test restrictions. As such, we
believe Rule 201 may impose training
and compliance costs for trading

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centers, SROs, and other market
participants.
However, as discussed below, because
the alternative uptick rule references
only the current national best bid,
unlike the proposed modified uptick
rule and the proposed uptick rule,
which would have required sequencing
of the national best bid or last sale price,
we believe that the alternative uptick
rule will be easier and less costly to
implement and monitor than the
proposed modified uptick rule or the
proposed uptick rule.804
Further, we note that the policies and
procedures that are required to be
implemented under Rule 201 are similar
to those that are required under the
Order Protection Rule of Regulation
NMS.805 Thus, we believe trading
centers and broker-dealers may already
be familiar with establishing,
maintaining, and enforcing tradingrelated policies and procedures,
including programming their trading
systems in accordance with such
policies and procedures. We believe this
familiarity may reduce the
implementation costs of Rule 201 and
may make Rule 201 less burdensome to
implement.
In addition, we believe that the
implementation, and on-going
monitoring and compliance costs of
Rule 201 are justified by the benefits
provided by the Rule in preventing
short selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security.
We discuss below the costs of Rule
201 with respect to two inter-related
aspects of the Rule: The short sale price
test restriction, specifically the
alternative uptick rule, and the circuit
breaker approach that triggers
application of that restriction. We have
separated the discussion into two parts
in order to more clearly address the
comments that we received with respect
to the various aspects of Rule 201.
However, the circuit breaker approach
and the alternative uptick rule under
Rule 201 operate in conjunction with
one another and should not be
considered isolated provisions.

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1. Alternative Uptick Rule
Rule 201 requires a trading center to
have written policies and procedures
reasonably designed to prevent the
804 See infra Section X.B.1.b.i. and Section
X.B.1.b.ii. (discussing the implementation and ongoing monitoring and surveillance costs of the
alternative uptick rule on trading centers and
broker-dealers).
805 See Regulation NMS Adopting Release, 70 FR
37496; see also Proposal, 74 FR at 18087; 17 CFR
242.611.

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execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
day.806
a. Impact on Market Quality
As stated above, in the Proposal and
Re-Opening Release, we requested
comment on the costs of a short sale
price test restriction,807 and specifically
as to the extent to which placing price
restrictions on short selling could
impact or lessen some of the benefits of
legitimate short selling or could lead to
a decrease in market efficiency, price
discovery, or liquidity.808
The Commission received comments
stating that the alternative uptick rule,
or any short sale price restriction for
that matter, would reduce the benefits
that short selling provides to the
markets.809 For example, commenters
stated that a short sale price test
restriction would negatively impact
liquidity,810 market volume,811 bid-ask
806 See

Rule 201(b)(1).
Proposal, 74 FR at 18090, 18100; ReOpening Release, 74 FR at 42037.
808 See Proposal, 74 FR at 18090.
809 See, e.g., letter from Prof. Lipkin; letter from
Citadel et al. (June 2009); letter from GETCO (June
2009); letter from Goldman Sachs (June 2009); letter
from ICI (June 2009); letter from ISDA; letter from
Lime Brokerage (June 2009); letter from RBC (June
2009); letter from Vanguard (June 2009); letter from
Allston Trading (Sept. 2009); letter from TD Asset
Management; letter from EWT (Sept. 2009); letter
from BATS (Sept. 2009); letter from Citadel et al.
(Sept. 2009); letter from CPIC (Sept. 2009); letter
from Credit Suisse (Sept. 2009); letter from EWT
(Sept. 2009); letter from Dialectic Capital (Sept.
2009); letter from GETCO (Sept. 2009); letter from
Hudson River Trading; letter from Lime Brokerage
(Sept. 2009); letter from RBC (Sept. 2009); letter
from STA (Sept. 2009); letter from STANY (Sept.
2009); letter from Vanguard (Sept. 2009); letter from
Bingham McCutchen; letter from MFA (Oct. 2009);
letter from Nasdaq OMX Group (Oct. 2009); see also
letter from Credit Suisse (Mar. 2009).
810 See, e.g., letter from Chad Stogel, Trillium
Trading, LLC, dated May 26, 2009 (‘‘Chad Stogel’’);
letter from Citadel et al. (June 2009); letter from
Credit Suisse (June 2009); letter from Lime
Brokerage (June 2009); letter from MFA (June 2009);
letter from STA (June 2009); letter from EWT (Sept.
2009); letter from BATS (Sept. 2009); letter from
Citadel et al. (Sept. 2009); letter from Lime
Brokerage (Sept. 2009); letter from RBC (Sept.
2009); letter from STA (Sept. 2009); letter from
Bingham McCutchen; see also letter from Credit
Suisse (Mar. 2009).
811 See, e.g., letter from Chad Stogel; letter from
Citadel et al. (June 2009); letter from Credit Suisse
(June 2009); letter from MFA (June 2009); letter
from STA (June 2009); letter from EWT (Sept. 2009);
letter from BATS (Sept. 2009); letter from Citadel
et al. (Sept. 2009); letter from RBC (Sept. 2009);
letter from Bingham McCutchen; see also letter from
Credit Suisse (Mar. 2009).
807 See

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spreads and price discovery.812 Several
commenters also stated that a short sale
price test restriction might increase
volatility.813
We believe, however, that the short
sale price test restriction of Rule 201
will have a limited negative effect on
liquidity, market volume, bid-ask
spreads, price discovery and volatility.
The Pilot Results found that the former
tick test of Rule 10a–1 and former bid
test of NASD, which were permanent,
market-wide short sale price tests, did
not have a significant impact on daily
volatility, and also found some evidence
that the short sale price tests dampened
intra-day volatility for smaller stocks.814
In addition, the Pilot Results found that
the Pilot data provided limited evidence
that then-current short sale price test
restrictions distort a security’s price.
The Pilot Results also found that the
short sale price test restrictions resulted
in an increase in quote depths.815
Realized liquidity levels, however, were
unaffected by the removal of such short
sale price test restrictions.816 In
addition, one study concluded that
former Rule 10a–1 had little or no effect
on price efficiency.817 Another study
found no evidence that former Rule
10a–1 negatively impacted price
discovery.818 Due to differences in the
operation of former Rule 10a–1 and Rule
201, when it applies, the alternative
uptick rule under Rule 201 will be more
restrictive than former Rule 10a–1 in
some circumstances and less restrictive
in others.819 As discussed above,
however, due to the circuit breaker
approach in Rule 201, the alternative
uptick rule of Rule 201 generally will
apply to a limited number of covered
securities 820 and will apply only when
812 See, e.g., letter from Credit Suisse (June 2009);
letter from MFA (June 2009); letter from Lime
Brokerage (June 2009); letter from STA (June 2009);
letter from RBC (Sept. 2009); see also letter from
Credit Suisse (Mar. 2009).
813 See, e.g., letter from Prof. Lipkin; letter from
AIMA; letter from Citadel et al. (June 2009); letter
from Credit Suisse (June 2009); letter from RBC
(June 2009); letter from SIFMA (June 2009); letter
from Citadel et al. (Sept. 2009); letter from TD Asset
Management; letter from Barclays (Sept. 2009); see
also letter from NSCP.
814 See Staff’s Summary Pilot Report at 55–56.
815 See Staff’s Summary Pilot Report at 55; see
also Karl B. Diether, Kuan Hui Lee and Ingrid M.
Werner, 2009, It’s SHO Time! Short-Sale Price-Tests
and Market Quality, Journal of Finance 64:37.
816 See supra note 54.
817 See J. Julie Wu, Uptick Rule, short selling and
price efficiency, Aug. 14, 2006.
818 See Lynn Bai, 2008, The Uptick Rule of Short
Sale Regulation—Can it Alleviate Downward Price
Pressure from Negative Earnings Shocks? Rutgers
Business Law Journal 5:1–63.
819 See, e g., supra note 242 and accompanying
text (discussing automated trade matching systems).
820 See supra Section III.A.5. (discussing the
circuit breaker trigger level and duration).

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the circuit breaker has been triggered for
a covered security. As such, it will not
be triggered for the majority of covered
securities at any given time and, when
triggered, will remain in effect for a
short duration—that day and the
following day. Considering the
empirical studies and the comments,
and because of the limited scope and
duration of Rule 201, we believe that the
impact of Rule 201, if any, on liquidity,
market volume, bid-ask spreads, price
discovery and volatility will be limited.
To the extent that Rule 201 negatively
impacts liquidity, market volume, bidask spreads, price discovery and
volatility, we believe that such costs are
justified by the benefits provided by the
Rule in preventing short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security.
The Commission received a number
of comments addressing the extent to
which a short sale price test restriction
might cause a reduction in short
selling.821 For example, commenters
stated that a reduction in short selling
might result from: The implementation
costs and on-going compliance costs of
a short sale price test restriction; 822
uncertainty about whether a short sale
order can be executed; 823 and reduced
use of trading strategies that are market
neutral or that rely on the ability to
hedge through short sales.824 Several
commenters stated that the alternative
uptick rule would restrict short sales
more than the other proposed short sale
price test restrictions, specifically
because it would not allow immediate
execution, and fewer short sales might
821 See, e.g., letter from Peter J. Driscoll,
Chairman, John C. Giesea, President and CEO,
Security Traders Association, dated May 4, 2009
(‘‘STA (May 2009)’’); letter from Citadel et al. (June
2009); letter from CPIC (June 2009); letter from MFA
(June 2009); letter from Allston Trading (Sept.
2009); letter from Barclays (Sept. 2009); letter from
CBOE (Sept. 2009); letter from Citadel et al. (Sept.
2009); letter from CPIC (Sept. 2009); letter from
EWT (Sept. 2009); letter from GETCO (Sept. 2009);
letter from ICI (Sept. 2009); letter from ISE (Sept.
2009); letter from RBC (Sept. 2009); letter from MFA
(Oct. 2009).
822 See, e.g., letter from CPIC (June 2009); letter
from Barclays (Sept. 2009).
823 See, e.g., letter from STA (May 2009); letter
from Citadel et al. (June 2009); letter from STA
(June 2009); letter from Barclays (Sept. 2009); letter
from STA (Sept. 2009); see also letter from Lime
Brokerage (June 2009) (explaining specifically the
increased risk that would be associated with virtual
market making strategies).
824 See, e.g., letter from STA (May 2009); letter
from Credit Suisse (June 2009); letter from STA
(June 2009); letter from Barclays (Sept. 2009); letter
from STA (Sept. 2009); letter from MFA (Oct. 2009);
see also letter from Lime Brokerage (June 2009)
(explaining specifically the increased risk that
would be associated with virtual market making
strategies).

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be executed as a result.825 A number of
commenters stated that a reduction in
short selling would result in decreased
liquidity, wider price spreads, and more
costly trading for investors overall.826
Some commenters stated that such an
increase in costs to investors would
have a negative effect on investor
confidence.827
The short sale price test restriction of
Rule 201 may cause a limited reduction
in short selling as a result of the
implementation costs and on-going
compliance costs of a short sale price
test restriction; uncertainty about
whether a short sale order can be
executed; and reduced use of trading
strategies that are market neutral or that
rely on the ability to hedge through
short sales. However, the alternative
uptick rule will only be imposed when
a covered security has experienced an
intra-day price decline of 10% or more
and will only apply for the remainder of
the day and the following day. Due to
the limited scope and applicability of
Rule 201, we believe that any reduction
in short selling will be limited.828 In
addition, we believe that any such
reduction in short selling will have a
minimal, if any, resulting negative
impact on liquidity and price efficiency.
As noted above, the Pilot Results found
that the Pilot data provided limited
evidence that then-current short sale
price test restrictions, which were
permanent and market-wide, distort a
security’s price. The Pilot Results also
found that the short sale price test
restrictions resulted in an increase in
quote depths.829 Realized liquidity
825 See, e.g., letter from Allston Trading (Sept.
2009); letter from Barclays (Sept. 2009); letter from
CBOE (Sept. 2009); letter from Citadel et al. (Sept.
2009); letter from CPIC (Sept. 2009); letter from
EWT (Sept. 2009); letter from GETCO (Sept. 2009);
letter from ICI (Sept. 2009); letter from ISE (Sept.
2009); letter from RBC (Sept. 2009); letter from MFA
(Oct. 2009).
826 See, e.g., letter from STA (May 2009); letter
from Chad Stogel; letter from Allston Trading (June
2009); letter from Credit Suisse (June 2009); letter
from STA (June 2009); letter from STA (Sept. 2009);
letter from MFA (June 2009).
827 See, e.g., letter from Citadel et al. (June 2009);
letter from Vanguard (June 2009); letter from
Allston Trading (Sept. 2009); letter from EWT (Sept.
2009); letter from GETCO (Sept. 2009); see also
letter from NSCP (stating that, without empirical
evidence of inefficiency or failure in the equity
markets that both caused deterioration of investor
confidence and that would be remedied by a short
sale price test restriction, a loss in confidence in the
Commission as a fair and impartial regulator could
do more harm in the long-run to damage the
confidence of investors); letter from STA (June
2009) (stating that ‘‘[p]romulgating a rule that would
not have any impact on the execution of abusive
short sales may, in fact, foster further deterioration
of investor confidence’’).
828 See supra Section III.A.5. (discussing the
circuit breaker trigger level and duration).
829 See Staff’s Summary Pilot Report at 55 and
supporting text; see also Karl B. Diether, Kuan Hui

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11293

levels, however, were unaffected by the
removal of such short sale price test
restrictions.830 In addition, one study
concluded that former Rule 10a–1 had
little or no negative effect on price
efficiency.831 Another study found no
evidence that former Rule 10a–1
negatively impacted price discovery.832
Due to differences in the operation of
former Rule 10a–1 and Rule 201, when
it applies, the alternative uptick rule
under Rule 201 will be more restrictive
than former Rule 10a–1 in some
circumstances and less restrictive in
others.833 As discussed above, however,
due to the circuit breaker approach in
Rule 201, the alternative uptick rule of
Rule 201 generally will apply to a
limited number of covered securities 834
and will apply only when the circuit
breaker has been triggered for a covered
security. As such, it will not be triggered
for the majority of covered securities at
any given time and, when triggered, will
remain in effect for a short duration—
that day and the following day.
Considering the empirical studies and
the comments, and due to the limited
scope and duration of Rule 201, we
believe that any reduction in short
selling as a result of Rule 201 will have
a minimal, if any, negative impact on
liquidity and price efficiency. To the
extent that Rule 201 has a negative
impact on liquidity and price efficiency,
we believe that such costs are justified
by the benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
In addition, commenters stated that a
short sale price test restriction in
general, or the alternative uptick rule
specifically, might negatively impact
various trading strategies that include
short selling,835 such as high frequency
Lee and Ingrid M. Werner, 2009, It’s SHO Time!
Short-Sale Price-Tests and Market Quality, Journal
of Finance 64:37.
830 See supra note 54.
831 See J. Julie Wu, Uptick Rule, short selling and
price efficiency, Aug. 14, 2006.
832 See Lynn Bai, 2008, The Uptick Rule of Short
Sale Regulation—Can it Alleviate Downward Price
Pressure from Negative Earnings Shocks? Rutgers
Business Law Journal 5:1–63.
833 See, e g., supra note 242 and accompanying
text (discussing automated trade matching systems).
834 See supra Section III.A.5. (discussing the
circuit breaker trigger level and duration).
835 See, e.g., letter from Citadel et al. (June 2009);
letter from Credit Suisse (June 2009); letter from
ISDA; letter from RBC (June 2009); letter from STA
(June 2009); letter from Vanguard (June 2009); letter
from EWT (Sept. 2009); letter from TD Asset
Management; letter from Lime Brokerage (Sept.
2009); letter from Bingham McCutchen; letter from
MFA (Oct. 2009); see also letter from Credit Suisse
(Mar. 2009).

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

e.g., letter from Bingham McCutchen.
e.g., letter from ISDA.
838 See, e.g., letter from Citadel et al. (June 2009);
letter from Credit Suisse (June 2009); letter from
EWT (Sept. 2009); letter from TD Asset
Management; letter from MFA (Oct. 2009). This
category includes such trading methods as long
short equity strategies, convertible securities
investors, and hedged strategies such as 130/30
portfolios. See id.
839 See, e.g., letter from Citadel et al. (June 2009);
letter from Credit Suisse (June 2009); letter from
Goldman Sachs (June 2009); letter from SIFMA
(June 2009).
840 See, e.g., letter from Citadel et al. (June 2009).
841 See letter from TD Asset Management.
842 See, e.g., letter from Lime Brokerage (June
2009); letter from Lime Brokerage (Sept. 2009).
843 See, e.g., letter from Citadel et al. (June 2009);
letter from Lime Brokerage (Sept. 2009); letter from
Bingham McCutchen; letter from Credit Suisse
(June 2009).
844 See, e.g., letter from Chad Stogel; letter from
Citadel et al. (June 2009); letter from Lime
Brokerage (June 2009); letter from STA (June 2009);
letter from EWT (Sept. 2009); letter from BATS
(Sept. 2009); letter from Citadel et al. (Sept. 2009);
letter from Lime Brokerage (Sept. 2009); letter from
STA (Sept. 2009); letter from Bingham McCutchen.
845 See e.g., letter from Citadel et al. (June 2009);
letter from Citadel et al. (Sept. 2009).
846 See, e.g., letter from Citadel et al. (June 2009);
letter from Credit Suisse (June 2009); letter from
Goldman Sachs (June 2009); letter from SIFMA
(June 2009).
847 See, e.g., letter from Credit Suisse (June 2009).
848 See, e.g., letter from Prof. Rosenthal; letter
from Barclays (June 2009) (warning that a mere
transfer of short selling activity to other types of
markets would impair the price discovery,
efficiency, safety, and soundness of the public
equity markets); letter from STA (June 2009)
(discussing a possible shift to the derivative
markets); letter from RBC (June 2009) (discussing
sales of calls, purchases of puts, and short selling

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To the extent that Rule 201 may have
a negative effect on various trading
strategies that include short selling, we
believe any such negative effect will be
limited. Under Rule 201, although short
selling will be restricted for a limited
time by the alternative uptick rule if the
price of a covered security decreases by
10% or more, unlike with securities
subject to the Short Sale Ban Emergency
Order, Rule 201 will permit short selling
at a price above the current national best
bid in the covered security even when
the restriction is in place. Thus, short
sellers engaged in various trading
strategies that include short selling will
generally continue to be able to sell
short for the limited period of time
when the short sale price test restriction
is in effect. In addition, we note that
many of the above comments on
potential market-wide impacts of a short
sale price test restriction on various
trading strategies that include short
selling were not specific to a short sale
price test applied in conjunction with a
circuit breaker.849 Under the circuit
breaker approach, the alternative uptick
rule will only be imposed when a
covered security has experienced an
intra-day price decline of 10% or more
and will only apply for the remainder of
the day and the following day.850 We
believe that the negative impact of Rule
201, if any, on various trading strategies
that include short selling will be limited
because of the limited scope and
duration of Rule 201. To the extent that
Rule 201 has a negative impact on
various trading strategies that include
short selling, we believe that such costs
are justified by the benefits provided by
the Rule in preventing short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security.
We recognize that imposing a short
sale price test restriction with respect to
NMS stocks, without a similar
restriction on derivative securities,
could increase the use of derivative
securities to create a short position and
that such ‘‘synthetic’’ short positions
could increase as a result of Rule 201.
of security futures as methods to bypass the price
restrictions); letter from Vanguard (June 2009)
(discussing the use of synthetic short sales through
OTC derivatives); see also supra Section III.A.1.
(discussing the creation of ‘‘synthetic’’ short
positions that are the economic equivalent of a
short sale through the use of derivative securities).
849 See, e.g., letter from Bingham McCutchen;
letter from ISDA; letter from TD Asset Management;
letter from EWT (Sept. 2009); letter from Lime
Brokerage (Sept. 2009); letter from Citadel et al.
(Sept. 2009); letter from STA (Sept. 2009); letter
from BATS (Sept. 2009); letter from MFA (Oct.
2009).
850 See supra Section III.A.5. (discussing the
circuit breaker trigger level and duration).

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As discussed in Section III.A.1., above,
however, short sales in the equity
markets to hedge derivatives
transactions are subject to Rule 201. In
addition, we remain concerned that the
ability to create a short position through
the use of derivative securities may
undermine the goals of short sale price
test restrictions. At a later time, we may
reconsider whether additional
regulation of derivative securities and
the use of ‘‘synthetic’’ short positions
may be appropriate.
Several commenters discussed how
constraints on short selling might harm
price discovery and pricing
efficiency.851 Commenters stated that,
under the alternative uptick rule, only
long sellers could hit bids displayed as
part of the national market system,
which would result in long sellers
exclusively dictating the market price of
purchases, which would harm price
discovery.852 Additionally, commenters
stated that the alternative uptick rule
would restrict the informational content
that short sale orders contain to only
passive orders, meaning that the
information would not be fully
communicated in the price discovery
process and pricing inefficiency would
arise.853 Other commenters stated that
the alternative uptick rule might result
in an inflated transaction price 854 or
upward stock price manipulation.855
851 See, e.g., letter from Matlock Capital (May
2009); letter from Prof. Rosenthal; letter from
Goldman Sachs (June 2009); Autore, Billingsley,
and Kovacs, Short Sale Constraints, Dispersion of
Opinion, and Market Quality: Evidence from the
Short Sale Ban on U.S. Financial Stocks (June 19,
2009); letter from GETCO (June 2009); letter from
STA (June 2009); letter from Allston Trading (Sept.
2009); letter from Bingham McCutchen; letter from
Citadel et al. (Sept. 2009); letter from CPIC (Sept.
2009); letter from Dialectic Capital (Sept. 2009);
letter from EWT (Sept. 2009); letter from Hudson
River Trading; letter from STA (Sept. 2009); letter
from TD Asset Management.
852 See, e.g., letter from Citadel et al. (Sept. 2009);
letter from Dialectic Capital (Sept. 2009); letter from
Bingham McCutchen; see also letter from GETCO
(June 2009); letter from Charles A. Trzcinka,
Professor of Finance and Chairman of the Finance
Department, Kelly School of Business, Indiana
University, dated May 10, 2009; letter from Prof.
Rosenthal; Autore, Billingsley, and Kovacs, Short
Sale Constraints, Dispersion of Opinion, and
Market Quality: Evidence from the Short Sale Ban
on U.S. Financial Stocks (June 19, 2009).
853 See, e.g., letter from TD Asset Management;
letter from CPIC (Sept. 2009); see also letter from
GETCO (June 2009); letter from Goldman Sachs
(June 2009).
854 See, e.g., letter from Allston Trading (Sept.
2009); letter from Citadel et al. (Sept. 2009); letter
from CPIC (Sept. 2009); letter from Dialectic Capital
(Sept. 2009); letter from EWT (Sept. 2009); letter
from Hudson River Trading; letter from STA (Sept.
2009).
855 See, e.g., letter from Allston Trading (Sept.
2009); letter from Citadel et al. (Sept. 2009); letter
from RBC (Sept. 2009); see also letter from AIMA;
letter from Citadel et al. (June 2009); letter from
Goldman Sachs (June 2009); letter from RBC (June
2009).

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We believe that Rule 201 will have a
limited negative effect on price
discovery and price efficiency. As
discussed above, the Pilot Results 856
found that the Pilot data provided
limited evidence that the former tick
test of Rule 10a–1(a) and former bid test
of NASD, which were permanent,
market-wide short sale price tests,
distorted a security’s price. In addition,
one study concluded that former Rule
10a–1 had little or no effect on price
efficiency.857 Another study found no
evidence that former Rule 10a–1
negatively impacted price discovery.858
Due to differences in the operation of
former Rule 10a–1 and Rule 201, when
it applies, the alternative uptick rule
under Rule 201 will be more restrictive
than former Rule 10a–1 in some
circumstances and less restrictive in
others.859 As discussed above, however,
due to the circuit breaker approach in
Rule 201, the alternative uptick rule of
Rule 201 generally will apply to a
limited number of covered securities 860
and will apply only when the circuit
breaker has been triggered for a covered
security. As such, it will not be triggered
for the majority of covered securities at
any given time and, when triggered, will
remain in effect for a short duration—
that day and the following day.
Considering the empirical studies and
the comments and because of the
limited scope and duration of Rule 201,
we believe that Rule 201 will have little,
if any, negative effect on price discovery
and price efficiency. To the extent that
Rule 201 negatively affects price
discovery and price efficiency, we
believe that such costs are justified by
the benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
856 See Staff’s Summary Pilot Report at 55; Karl
B. Diether, Kuan Hui Lee and Ingrid M. Werner,
2009, It’s SHO Time! Short-Sale Price-Tests and
Market Quality, Journal of Finance 64:37–73;
Gordon J. Alexander and Mark A. Peterson, 2008,
The Effect of Price Tests on Trader Behavior and
Market Quality: An Analysis of Reg. SHO, Journal
of Financial Markets 11:84–111; J. Julie Wu, Uptick
Rule, short selling and price efficiency, Aug. 14,
2006; Lynn Bai, 2008, The Uptick Rule of Short Sale
Regulation—Can it Alleviate Downward Price
Pressure from Negative Earnings Shocks? Rutgers
Business Law Journal 5:1–63.
857 See J. Julie Wu, Uptick Rule, short selling and
price efficiency, Aug. 14, 2006.
858 See Lynn Bai, 2008, The Uptick Rule of Short
Sale Regulation—Can it Alleviate Downward Price
Pressure from Negative Earnings Shocks? Rutgers
Business Law Journal 5:1–63.
859 See, e g., supra note 242 and accompanying
text (discussing automated trade matching systems).
860 See supra notes 305 to 311 and accompanying
text (discussing data reflecting that, on average, a
limited number of covered securities would hit a
10% trigger level each day).

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to exacerbate a declining market in a
security.
A number of commenters discussed
the impact that the alternative uptick
rule might have on execution.861 Several
commenters stated that, under the
alternative uptick rule, short sales
would be ineligible for immediate
execution, causing increased trading
costs and opportunity costs, decreased
liquidity, and widened spreads.862
Commenters also stated that the
alternative uptick rule would increase
the risk of non-execution of a short sale,
which would reduce the speed of price
discovery and increase execution
prices.863 Commenters also noted that
the alternative uptick rule could cause
missed execution opportunities, thereby
causing retail investors to pay
artificially high prices to obtain
execution.864
As we stated in the Re-Opening
Release, because the alternative uptick
rule will only permit short selling at a
price above the current national best
bid, the alternative uptick rule will
generally not allow short sales to get
immediate execution, even in an
advancing market,865 which may slow
the speed of executions and impose
additional costs on market participants,
including buyers.866 We note, however,
that the above comments on the
potential impacts of the alternative
uptick rule on execution were not
specific to a short sale price test in
conjunction with a circuit breaker.867
861 See, e.g., letter from Citadel et al. (Sept. 2009);
letter from Group One Trading (Sept. 2009); letter
from TD Asset Management; letter from CPIC (Sept.
2009); letter from Lime Brokerage (Sept. 2009);
letter from RBC (Sept. 2009); letter from SIFMA
(Sept. 2009); letter from STA (Sept. 2009); letter
from Barclays (Sept. 2009).
862 See, e.g., letter from Citadel et al. (Sept. 2009);
letter from TD Asset Management; letter from CPIC
(Sept. 2009); letter from STA (Sept. 2009). As noted
by some commenters, however, there may be
situations in which a short seller could get
immediate execution, such as where an order is
executed in a facility that provides executions at the
mid-point of the national best bid and offer. See,
e.g., letter from ISE (Sept. 2009); see also letter from
BATS (Sept. 2009).
863 See, e.g., letter from Barclays (Sept. 2009);
letter from STA (Sept. 2009).
864 See, e.g., letter from Allston Trading (Sept.
2009); letter from Citadel et al. (Sept. 2009); letter
from Dialectic Capital (Sept. 2009); see also letter
from Chad Stogel.
865 See Re-Opening Release, 74 FR at 42034; see
also supra note 227 (noting that under some
circumstances a short seller may be able to get
immediate execution).
866 See supra note 52 (discussing returns for listed
Pilot securities and listed control group securities
during the first six months of the Pilot and
referencing Staff’s Summary Pilot Report at 8).
867 See, e.g., letter from Allston Trading (Sept.
2009); letter from Barclays (Sept. 2009); letter from
Citadel et al. (Sept. 2009); letter from Dialectic
Capital (Sept. 2009); letter from TD Asset
Management; letter from CPIC (Sept. 2009); letter
from STA (Sept. 2009).

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Under the circuit breaker approach, the
alternative uptick rule will only be
imposed when a covered security has
experienced an intra-day price decline
of 10% or more and will only apply for
the remainder of the day and the
following day.868 We believe that the
negative impact of Rule 201, if any, on
execution speed and probability will be
limited because of the limited scope and
duration of Rule 201. To the extent that
Rule 201 negatively impacts execution
speed and probability, we believe that
such costs are justified by the benefits
provided by the Rule in preventing
short selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security.
Several commenters suggested that
short sellers who remain in the markets,
as well as other market participants,
might change their trading behavior in
response to a short sale price test
restriction.869 For example, commenters
expressed the belief that other traders
might use computer algorithms to
identify the presence of short sellers
who have sell orders exactly one
increment above the bid and quickly
adjust their bid price downward in
anticipation of the stock price dropping,
which would result in the price of the
security declining even further
overall.870 Similarly, several
commenters stated that short sale limit
orders might be perceived by other
market participants as a negative view
on a covered security, which might have
negative implications on market
efficiency, market liquidity, and bid-ask
spreads and might cause buyers to
withdraw their bids.871 One commenter
noted that displayed short sale limit
orders could be ‘‘subject to the risk that
long sellers would use the information
in the orders to their advantage and
front-run or pick off the orders.’’ 872
Additionally, commenters stated that
short sellers who seek to execute above
the best bid without displaying the offer
would be driven to transact in market
centers that do not display their betterpriced bids as part of the national
868 See supra Section III.A.5. (discussing the
circuit breaker trigger level and duration).
869 See, e.g., letter from STA (May 2009); letter
from Group One Trading (Sept. 2009); letter from
Lime Brokerage (Sept. 2009).
870 See letter from Group One Trading (Sept.
2009); letter from STANY (Sept. 2009).
871 See, e.g., letter from Barclays (Sept. 2009);
letter from MFA (Oct. 2009); see also letter from
STA (Sept. 2009) (stating that because short sale
orders would have to be priced one increment
above the national best bid, and would drop in
price as bids were exhausted, the alternative uptick
rule ‘‘would also prolong and deepen downward
moves by forcing there to be overhanging, passive
supply’’).
872 Letter from Citadel et al. (Sept. 2009).

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market system, such as dark pools, or
through broker-dealers that offer
internalization.873 Commenters noted
that such an increase in volume directed
to non-public markets would decrease
overall market transparency, liquidity,
and pricing efficiency.874
Although we recognize that short
sellers who remain in the markets, as
well as other market participants, might
change their trading behavior in
response to a short sale price test
restriction, we believe any such effect
will be limited by the circuit breaker
approach of Rule 201. Under the circuit
breaker approach, the alternative uptick
rule will only be imposed when a
covered security has experienced an
intra-day price decline of 10% or more
and will only apply for the remainder of
the day and the following day.875 To the
extent that Rule 201 results in changes
in trading behavior, we believe that
such an impact is justified by the
benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
In addition, we note that, as discussed
in Section II.D., above, we reviewed the
empirical analyses that commenters
submitted to us or discussed in their
comments. Consistent with the Pilot
Results, a study of the effect that
rescission of former Rule 10a–1 had on
market quality found that the
elimination had no measurable effect on
market volatility,876 while the results of
other studies on the effect of the lack of
a short sale price test restriction on
volatility were mixed.877 However, we
note that the study showing no
measurable effect on market volatility
only analyzed daily volatility during a
six-week period following the
elimination of former Rule 10a–1 and,
thus, may have limited statistical
significance. In addition, the studies
evidencing an increase in volatility do
not address the extent to which other
factors may have contributed to or
caused the increased volatility.
Studies of other aspects of market
quality suggest little measurable impact
of a short sale price test restriction on
price discovery, market efficiency,
873 See, e.g., letter from EWT (Sept. 2009); letter
from Group One Trading (Sept. 2009); letter from
STANY (Sept. 2009).
874 See id.; see also letter from STA (May 2009).
875 See supra Section III.A.5. (discussing the
circuit breaker trigger level and duration).
876 See Ekkehart Boehmer, Charles M. Jones, and
Xiaoyan Zhang, Unshackling Short Sellers: The
Repeal of the Uptick Rule (Nov. 2008).
877 See, e.g., letter from NAREIT; letter from High
Street Advisors; letter from European Investors
(Sept. 2009).

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liquidity or market quality in general.878
Several commenters cited empirical
evidence showing that restrictions on
short selling, particularly bans on short
selling, may impede liquidity, price
discovery, and market efficiency,879 but
the cited studies do not address the
effects of a short sale price test
restriction in general or Rule 201 in
particular. The empirical analyses that
commenters submitted on whether a
short sale price test restriction dampens
price pressure from short sellers are
mixed, but generally focus on long time
horizons, such as weeks or months, as
opposed to short time horizons, such as
seconds or minutes, which are more
relevant to the impact of a short sale
price test restriction on price
pressure.880
In summary, after considering the
empirical evidence and the comments
that we received in response to the
Proposal and the Re-Opening Release,
we believe that Rule 201 will have a
minimal, if any, negative effect on
market liquidity, price efficiency, and
quote depths.881 In addition, we
recognize that there will be market costs
associated with Rule 201 in terms of the
potential impact of such a short salerelated circuit breaker on execution
speed and probability. Such costs may
increase the costs of legitimate short
selling. To the extent that Rule 201
results in increased costs for short
selling in covered securities, it may
increase the trading costs of legitimate
short selling for these securities and
may result in a reduction in short
878 See, e.g., the Pilot Results; see also supra note
856 and accompanying text. Numerous commenters
also sent analyses on short selling restrictions in
general or on the short selling ban. See, e.g., letter
from AIMA; letter Allston Trading (June 2009);
Autore, Billingsley, and Kovacs, Short Sale
Constraints, Dispersion of Opinion, and Market
Quality: Evidence from the Short Sale Ban on U.S.
Financial Stocks (June 19, 2009); letter from BATS
(May 2009); letter from CBOE (June 2009); letter
from Citadel et al. (June 2009); letter from Credit
Suisse (June 2009), letter from CPIC (June 2009);
letter from GETCO (June 2009); letter from Goldman
Sachs (Sept. 2009); letter from Hudson River
Trading; letter from ICI (June 2009); letter from
NSCP; letter from NYSE Euronext (June 2009); letter
from TD Asset Management; letter from STANY
(June 2009); letter from Wolverine.
879 See supra note 128.
880 See, e.g., J. Julie Wu, Uptick Rule, short selling
and price efficiency, Aug. 14, 2006.
881 See supra note 878 (citing empirical evidence
showing that former Rule 10a–1 did not have an
effect on market liquidity and price efficiency and
that price test restrictions resulted in an increase in
quote depths). We note that, although the
alternative uptick rule is by definition more
restrictive than the proposed modified uptick rule,
differences between the operation of the proposed
uptick rule and the alternative uptick rule mean
that one approach or the other would be more
restrictive in particular circumstances. See, e. g.,
supra note 242 and accompanying text (discussing
automated trade matching systems).

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selling generally. Restricting short
selling may also reduce ‘‘long’’ activity
where the short selling is part of a larger
trading strategy. As discussed above, we
believe that these costs will be limited
because of the circuit breaker approach
of Rule 201.
We believe that the potential costs of
Rule 201 are justified by its design, such
that, when Rule 201 is triggered, it will
allow long sellers, by selling at the bid,
to sell first, ahead of short sellers, in a
declining market for a particular
security. As the Commission has noted
previously in connection with short sale
price test restrictions, a goal of such
restrictions is to allow long sellers to
sell first in a declining market.882 A
short seller that is seeking to profit
quickly from accelerated, downward
market moves may find it advantageous
to be able to short sell at the current
national best bid. In addition, by making
bids accessible only by long sellers
when a security’s price is undergoing
significant downward price pressure,
Rule 201 will help to facilitate and
maintain stability in the markets and
help ensure that they function
efficiently. It will also help restore
investor confidence during times of
substantial uncertainty because, once
the circuit breaker has been triggered for
a particular security, long sellers will
have preferred access to bids for the
security, and the security’s continued
price decline will more likely be due to
long selling and the underlying
fundamentals of the issuer, rather than
to other factors. In addition, combining
the alternative uptick rule with a circuit
breaker strikes the appropriate balance
between our goal of preventing short
selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security and the
need to allow for the continued smooth
functioning of the markets, including
the provision of liquidity and price
efficiency in the markets.
In addition, we believe several of the
provisions contained in paragraph (d) of
Rule 201 will help to mitigate any
potential price distortions or costs
associated with Rule 201. These
provisions are designed to help promote
the workability of Rule 201, while at the
same time furthering our goals for
adopting short sale price test regulation.
As discussed above,883 we are
adopting the seller’s delay in delivery
exception under Rule 201(d)(1) to allow
sale orders of owned but restricted
882 See

supra note 17.
supra Section III.B.2. (discussing the
‘‘short exempt’’ provision for seller’s delay in
delivery).
883 See

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securities to be displayed or executed at
a price that is less than or equal to the
current national best bid, thereby
mitigating the negative impact of Rule
201, if any, on execution speed and
probability and helping to promote the
workability of Rule 201.
Rule 201(d)(2) allows a broker-dealer
to mark a short sale order as ‘‘short
exempt’’ if the broker-dealer has a
reasonable basis to believe that the short
sale order is by a market maker to offset a customer odd-lot order or liquidate
an odd-lot position which changes such
broker-dealer’s position by no more than
a unit of trading.884 We believe that the
odd-lot exception will promote the
workability of Rule 201 and help
mitigate potential price distortions or
costs associated with the Rule, if any,
because it will allow those acting in the
capacity of a ‘‘market maker’’ to off-set
customer odd-lot orders without regard
to whether the sale order is at a price
that is less than or equal to the current
national best bid, thereby facilitating the
liquidity providing function of market
makers.
Rule 201(d)(3) permits a broker-dealer
to mark as ‘‘short exempt’’ short sale
orders associated with certain bona fide
domestic arbitrage transactions.885
Moreover, to facilitate arbitrage
transactions in which a short position is
taken in a security in the U.S. markets,
and which is to be immediately covered
on a foreign market, Rule 201(d)(4)
permits a broker-dealer to mark as ‘‘short
exempt’’ short sale orders associated
with certain international arbitrage
transactions.886 Because domestic
arbitrage and international arbitrage
transactions promote market efficiency
by equalizing prices at an instant in
time in different markets or between
relatively equivalent securities,887 we
believe these provisions will help
mitigate the negative effect of Rule 201,
if any, on market and pricing efficiency
and help to promote the workability of
Rule 201.
Rule 201(d)(5) permits a broker-dealer
to mark as ‘‘short exempt’’ short sale
orders by underwriters or syndicate
members participating in a distribution
in connection with an over-allotment,
and any short sale orders for purposes
884 See supra Section III.B.3. (discussing the
‘‘short exempt’’ provision for odd lot transactions).
885 See supra Section III.B.4. (discussing the
‘‘short exempt’’ provision for domestic arbitrage
transactions).
886 See supra Section III.B.5. (discussing the
‘‘short exempt’’ provision for international arbitrage
transactions).
887 See supra Sections III.B.4. and III.B.5.
(discussing the benefits of bona fide arbitrage
activities to market efficiency because they tend to
reduce pricing disparities between related
securities).

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of lay-off sales by such persons in
connection with a distribution of
securities through a rights or standby
underwriting commitment.888 We are
including a ‘‘short exempt’’ marking
provision for syndicate and lay-off sales
because, as discussed above, we have
historically excepted such activity from
short sale rules.889 In addition, we note
that the public offering process is key to
capital formation. By facilitating price
support during the offering process,
Rule 201(d)(5) will mitigate the negative
effects of Rule 201, if any, on capital
formation.
Rule 201(d)(6) allows a broker-dealer
to mark as ‘‘short exempt’’ short sale
orders where broker-dealers are
facilitating customer buy orders or sell
orders where the customer is net long,
and the broker-dealer is net short but is
effecting the sale as riskless
principal.890 We believe that the riskless
principal exception of Rule 201(d)(6)
will facilitate broker-dealers’ ability to
provide best execution to certain
customer orders, thus mitigating the
negative impact of Rule 201, if any, on
execution speed and probability and
helping to promote the workability of
Rule 201.
Rule 201(d)(7) permits a broker-dealer
to mark as ‘‘short exempt’’ certain short
sale orders executed on a VWAP
basis.891 We believe that the exception
for VWAP short sale transactions will
provide an additional source of liquidity
for investors’ VWAP orders and will
help enable investors to achieve their
objective of obtaining an execution at
the VWAP, thus mitigating the negative
impact of Rule 201, if any, on liquidity
and execution speed and probability
and helping to promote the workability
of Rule 201.
b. Implementation and On-Going
Monitoring and Surveillance Costs
i. Policies and Procedures Requirement
Under Rule 201
Rule 201 requires a trading center to
have written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
888 See supra Section III.B.6. (discussing the
‘‘short exempt’’ provision for over-allotments and
lay-off sales).
889 See id.
890 See supra Section III.B.7. (discussing the
‘‘short exempt’’ provision for riskless principal
transactions).
891 See supra Section III.B.8. (discussing the
‘‘short exempt’’ provision for transactions on a
volume weighted average price basis).

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11297

price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
day.892 In addition, the Rule requires
that the trading center establish,
maintain, and enforce written policies
and procedures reasonably designed to
impose this short sale price test
restriction for the remainder of the day
and the following day when a national
best bid for the covered security is
calculated and disseminated on a
current and continuing basis by a plan
processor pursuant to an effective
national market system plan.893 In
addition, trading centers are required to
regularly surveil to ascertain the
effectiveness of the policies and
procedures required under the Rule and
to take prompt action to remedy
deficiencies in such policies and
procedures.894
As stated previously, we discussed in
the Proposal the anticipated costs of the
proposed short sale price test
restrictions and, in the Proposal and ReOpening Release, we requested
comment on the costs associated with
the proposed amendments.895 In
particular, we requested comment on
the potential costs for any modification
to both computer systems and
surveillance mechanisms and for
information gathering, management, and
recordkeeping systems or procedures.896
A number of commenters expressed
concerns that the costs of implementing
a short sale price test restriction would
be significant.897 However, many of
these comments were not specific to the
alternative uptick rule.898 While some
commenters discussed the potential
implementation costs of the alternative
uptick rule, they did not provide
specific estimates of such costs.899 Most
commenters compared estimated
implementation costs of the alternative
uptick rule to the other proposed
rules.900
892 See

Rule 201(b)(1)(i).
Rule 201(b)(1)(ii).
894 See Rule 201(b)(2).
895 See Proposal, 74 FR at 18090, 18092–18103;
Re-Opening Release, 74 FR at 42037.
896 See Proposal, 74 FR at 18090.
897 See, e.g., letter from NSCP; letter from STANY
(June 2009); letter from RBC (June 2009); letter from
Wolverine; letter from CPIC (Sept. 2009); letter from
EWT (Sept. 2009); letter from RBC (Sept. 2009);
letter from STA (Sept. 2009).
898 See, e.g., letter from NSCP; letter from STANY
(June 2009); letter from RBC (June 2009); letter from
Wolverine.
899 See, e.g., letter from CPIC (Sept. 2009); letter
from EWT (Sept. 2009); letter from RBC (Sept.
2009); letter from STA (Sept. 2009).
900 See, e.g., letter from EWT (Sept. 2009) (stating
that the net savings of the alternative uptick rule to
the broader industry compared to the other
proposals would at best be minimal); letter from
893 See

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As discussed in the PRA section
above, we believe that the
implementation and on-going
monitoring and surveillance costs of the
alternative uptick rule will be lower
than the implementation and on-going
monitoring and surveillance costs that
would be associated with adoption of
the proposed modified uptick rule or
the proposed uptick rule.901 Unlike the
proposed modified uptick rule and the
proposed uptick rule, which would
have required sequencing of the
national best bid or last sale price (i.e.,
whether the current national best bid or
last sale price is above or below the
previous national best bid or last sale
price), the alternative uptick rule
references only the current national best
bid. In addition, we believe that the
implementation and on-going
monitoring and surveillance costs of the
alternative uptick rule are justified by
the benefits provided by preventing
short selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security.
A number of commenters stated that
because the alternative uptick rule
would not require monitoring of the
sequence of bids or last sale prices,
implementing the alternative uptick rule
would be less costly 902 or easier than
implementing the proposed modified
uptick rule or the proposed uptick
rule.903 In addition, several commenters
stated that the alternative uptick rule
would be easier to program into trading
and surveillance systems than the
proposed modified uptick rule or the
proposed uptick rule.904 Another
commenter stated, with respect to the
alternative uptick rule, that ‘‘actual
STA (Sept. 2009); letter from BATS (Sept. 2009);
letter from Goldman Sachs (Sept. 2009); letter from
Wells Fargo (Sept. 2009); letter from SIFMA (Sept.
2009); letter from ICI (Sept. 2009); letter from Credit
Suisse (Sept. 2009).
901 See supra Section IX.E.1. (discussing
estimated burdens on trading centers of the
collection of information requirements in
connection with Rule 201).
902 See, e.g., letter from BATS (May 2009); letter
from BATS (Sept. 2009); letter from GETCO (Sept.
2009); letter from ICI (Sept. 2009); letter from Glen
Shipway (Sept. 2009). In addition, several
commenters acknowledged that implementation of
the alternative uptick rule will likely be less costly,
without referencing the sequencing issue. See, e.g.,
letter from STANY (Sept. 2009).
903 See, e.g., letter from Glen Shipway (Sept.
2009); letter from SIFMA (Sept. 2009); letter from
STA (Sept. 2009); see also letter from Credit Suisse
(June 2009). In addition, one commenter
acknowledged that implementation of the
alternative uptick rule will likely be easier, without
referencing the sequencing issue. See letter from
Allston Trading (Sept. 2009).
904 See, e.g., letter from BATS (May 2009); letter
from Glen Shipway (Sept. 2009); letter from ICI
(Sept. 2009); see also letter from National Stock
Exchange et al.

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implementation costs in terms of time
and capital expenditure would be
negligible when compared to those
involved in implementing either the
uptick rule or modified uptick rule.’’ 905
Several commenters indicated that
implementation of the alternative uptick
rule would not be easier or less costly
than implementation of the proposed
modified uptick rule or the proposed
uptick rule.906 However, we note that
some of these commenters presented
concerns that were not directly related
to the alternative uptick rule 907 or to
implementation costs or difficulties.908
Additionally, one commenter did not
provide the reasoning for its belief that
the alternative uptick rule would not be
easier or less costly to implement.909
Several commenters indicated their
belief that other commenters’ estimates
regarding the difficulty or costs of
implementing and monitoring the
proposed modified uptick rule and the
proposed uptick rule were
exaggerated.910 We recognize that some
commenters’ estimates of the costs of
the proposed modified uptick rule or
the proposed uptick rule may have been
conservative. We also believe that
because the alternative uptick rule does
not include a sequencing requirement,
the implementation and on-going
monitoring and surveillance costs of the
alternative uptick rule will be less than
such costs would be with respect to the
other proposed short sale price test
restrictions.
One commenter stated that the
Commission ‘‘underestimate[s] the time
and expense that will be required for
market participants to comply with the
[alternative uptick] rule (or any other of
the proposed alternatives)’’ and that
such costs ‘‘will include expenses * * *
for the initial implementation of any
restriction.’’ 911 However, this
commenter did not specify why or how
the implementation cost of the
905 Letter

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

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alternative uptick rule may be greater
than we estimated.912
One commenter indicated that
implementation costs would be
approximately $500,000 per firm, for a
total of $191,000,000 for all non-SRO
trading centers subject to Rule 201,913
including costs for ‘‘the purchase of
additional costly data feeds’’ but not
including ‘‘costs associated with
developing appropriate internal
supervisory procedures and compliance
programs.’’ 914 The implementation cost
estimates provided by this commenter,
which are significantly higher than our
estimate of, on average, $68,381 per
non-SRO trading center,915 were not
specific to the alternative uptick rule.
Because the alternative uptick rule
references only the current national best
bid, unlike the proposed modified
uptick rule and the proposed uptick
rule, which would have required
sequencing of the national best bid or
last sale price, we believe that the
alternative uptick rule will be easier and
less costly to implement and monitor
than the proposed modified uptick rule
or the proposed uptick rule.916 In
addition, we note that implementation
of Rule 201 will not require
modifications to how data feeds are
currently received. As discussed above,
Rule 201 does not mandate that the
receipt of the current national best bid
must be from any one particular data
feed; thus, trading centers will be able
to continue using the data feed they
currently use, and for which they
912 In addition, with respect to the commenter’s
concern that we underestimated the time required
for implementation, we note that, as discussed in
Section VII., above, we believe that a six month
implementation period is appropriate. This
implementation period, which is longer than the
implementation periods proposed in the Proposal
and the Re-Opening Release, takes into
consideration commenters’ concerns that
implementation of a price test could be complex.
We do not believe that a longer implementation
time is warranted because, for example, Rule 201
does not require monitoring of the sequence of bids
or last sale prices, unlike other proposed price tests,
and because Rule 201 requires the implementation
of policies and procedures similar to those required
for trading centers under Regulation NMS.
913 See letter from Wolverine. In its letter,
Wolverine multiplied its implementation cost
estimate of $500,000 by 382 non-SRO trading
centers for a total of $191,000,000. See id. As
indicated above, however, we now estimate that
there are 407 non-SRO trading centers. See supra
note 686.
914 Id.
915 See infra note 960 and accompanying text
(discussing our estimated implementation costs for
trading centers).
916 See supra notes 661 to 669 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs).

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currently pay.917 As a result, we believe
this commenter’s estimates of the
implementation costs are higher than
our estimated implementation costs for
Rule 201.
Another commenter conducted a
survey of firms with respect to
implementation cost estimates. Cost
estimates in response to the survey
indicated that a circuit breaker
triggering a short sale price test based on
the national best bid would have
implementation costs that averaged
between $235,000 and $2,000,000 per
firm.918 This estimated implementation
cost range is significantly higher than
our estimated range of, on average,
$68,381 per non-SRO trading center to
$86,880 per SRO trading center for
implementation.919 We note that the
commenter’s survey results covered fifty
firms, categorized as large firms,
regional firms, and clearing firms, rather
than SRO trading centers, non-SRO
trading centers and broker-dealers.
Thus, it is difficult to determine the
implementation costs to trading centers,
including non-SRO trading centers,
from these survey results. In addition,
these cost estimates were based on a
circuit breaker triggering the proposed
modified uptick rule and, as such, were
not specific to the alternative uptick
rule. Because the alternative uptick rule
references only the current national best
bid, unlike the proposed modified
uptick rule and the proposed uptick
rule, which would have required
sequencing of the national best bid or
last sale price, we believe that the
alternative uptick rule will be easier and
less costly to implement and monitor
than the proposed modified uptick rule
or the proposed uptick rule.920
Commenters indicated that
implementation costs would include
costs for modifications to multiple
917 See supra notes 404 to 411 and accompanying
text (discussing the use of various data feeds in
determining the current national best bid).
918 See letter from SIFMA (June 2009). SIFMA did
not categorize estimates of the implementation costs
of a circuit breaker triggering a short sale price test
based on the national best bid by SRO trading
centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms,
with implementation cost estimates that averaged
$2,000,000 per firm, with the highest estimate at
$9,000,000 per firm, regional firms, with estimates
that averaged $235,000 per firm, with the highest
estimate at $500,000 per firm, and clearing firms,
with estimates that averaged $1,200,000 per firm,
with the highest estimate at $1,900,000 per firm.
SIFMA only provided the average and highest cost
estimates per category. See id.
919 See infra note 960 and accompanying text
(discussing our estimated implementation costs for
trading centers).
920 See supra notes 661 to 669 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs).

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systems, including blue sheet, OATS,
and OTS reporting systems, trading
system interfaces, execution
management systems, and order
management systems; modifications to
data feeds; 921 adjustments to data
retention capabilities; revisions to
written policies and procedures; and
personnel training regarding the new
requirements.922 We recognize that
implementation of Rule 201 will impose
surveillance and reprogramming costs
for enforcing, monitoring, and updating
trading, order management, execution
management, surveillance, and
reporting systems under Rule 201,
systems changes to computer software,
adjustments to data retention
capabilities, as well as staff time and
technology resources. These costs are
included in our estimates of the costs of
implementing Rule 201.923
In addition, commenters expressed
concerns that the costs of on-going
monitoring and surveillance of a short
sale price test restriction would be
significant.924 Only one commenter
specifically discussed concerns about
the on-going monitoring and
surveillance costs of the alternative
uptick rule, and this commenter did not
provide specific cost estimates.925 One
commenter stated that the alternative
uptick rule would be easier to surveil
and monitor than the proposed
modified uptick rule or the proposed
uptick rule, and thus would present
lower on-going costs to the industry.926
The alternative uptick rule references
only the current national best bid,
unlike the proposed modified uptick
rule and the proposed uptick rule,
which would have required sequencing
of the national best bid or last sale price.
Thus, we believe that the alternative
uptick rule will be easier and less costly
to implement and monitor than the
proposed modified uptick rule or the
proposed uptick rule.927
921 As discussed above, implementation of Rule
201 will not require modifications to how data
feeds are currently received. See supra notes 404 to
411 and accompanying text (discussing the use of
various data feeds in determining the current
national best bid).
922 See, e.g., letter from NSCP; letter from STANY
(June 2009); letter from RBC (June 2009); letter from
Wolverine; letter from EWT (Sept. 2009).
923 See infra note 960 and accompanying text
(discussing our estimates of the implementation
costs of Rule 201 by trading centers).
924 See, e.g., letter from NSCP; letter from RBC
(June 2009); letter from SIFMA (June 2009); letter
from Wolverine; letter from RBC (Sept. 2009).
925 See letter from RBC (Sept. 2009).
926 See letter from STA (Sept. 2009).
927 See supra notes 661 to 669 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs).

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Another commenter estimated that
on-going system maintenance would
cost $20,000 annually per firm.928 This
estimate is lower than our estimated
total cost of, on average, $121,356
annually per trading center for on-going
monitoring and surveillance.929 This
commenter stated that this estimate
covers the cost ‘‘annually to maintain
the system.’’ It is not clear what specific
on-going monitoring and surveillance
functions are included in the
commenter’s estimate but we believe
that our estimate is more inclusive, in
that it specifically takes into account
costs for the commitment of resources
associated with compliance
administration and oversight, response
to regulatory inquiries and
examinations, response to internal
inquiries, market surveillance, data
retention, testing, training, and
enforcement, with attendant
opportunity costs.930
One commenter conducted a survey
of fifty firms with respect to on-going
monitoring cost estimates. Cost
estimates in response to the survey
indicated that a circuit breaker
triggering a short sale price test based on
the national best bid would have ongoing monitoring costs that averaged
between $45,000 and $175,000 per
firm.931 Although our estimated cost of,
on average, $121,356 per trading center
for on-going monitoring and
surveillance,932 falls within this
commenter’s estimated range of ongoing monitoring cost, we note that the
survey results covered fifty firms,
928 See letter from Wolverine. Wolverine does not
apply this estimate to exchanges and ATSs, but
only to other non-SRO trading centers (such as
market makers), noting that on-going costs for
exchanges and ATSs ‘‘should be minimal because
they would be limited to system testing and
maintenance, not the regulation of hundreds of
members’ systems, procedures and trading activity.’’
Id.
929 See infra notes 961 to 962 and accompanying
text (discussing our estimates of the on-going
monitoring and surveillance costs of Rule 201 by
trading centers).
930 See infra notes 934 and 935 and
accompanying text (discussing the scope of our ongoing monitoring and compliance cost estimates).
931 See letter from SIFMA (June 2009). SIFMA did
not categorize estimates of the on-going monitoring
costs of a circuit breaker triggering a short sale price
test based on the national best bid by SRO trading
centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms,
with on-going monitoring cost estimates that
averaged $130,000 per firm, with the highest
estimate at $1,500,000 per firm, regional firms, with
estimates that averaged $45,000 per firm, with the
highest estimate at $350,000 per firm, and clearing
firms, with estimates that averaged $175,000 per
firm, with the highest estimate at $250,000 per firm.
SIFMA only provided the average and highest cost
estimates per category. See id.
932 See infra notes 961 to 962 and accompanying
text (discussing our estimated on-going monitoring
and surveillance costs for trading centers).

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categorized as large firms, regional
firms, and clearing firms, rather than
SRO trading centers, non-SRO trading
centers and broker-dealers. Thus, it is
difficult to determine the
implementation costs to trading centers,
including non-SRO trading centers,
from these survey results. In addition,
these cost estimates were not specific to
the alternative uptick rule. Because the
alternative uptick rule references only
the current national best bid, unlike the
proposed modified uptick rule and the
proposed uptick rule, which would
have required sequencing of the
national best bid or last sale price, we
believe that the alternative uptick rule
will be easier and less costly to
implement and monitor than the
proposed modified uptick rule or the
proposed uptick rule.933
Commenters indicated that the ongoing costs to trading centers of a short
sale price test restriction would include
surveillance, testing, training,
administration and supervision, data
retention, response to regulatory
inquiries and examinations, and
response to internal inquiries.934 We
agree with these comments and believe
that Rule 201 will require the
commitment of resources associated
with compliance administration and
oversight, response to regulatory
inquiries and examinations, response to
internal inquiries, market surveillance,
data retention, testing, training, and
enforcement, with attendant
opportunity costs. These costs are
included in our estimates of the costs of
on-going monitoring and surveillance of
Rule 201.935
In estimating the costs to trading
centers of implementing Rule 201, we
considered that the policies and
procedures required to be implemented
for purposes of Rule 201 are similar to
those that are required under Regulation
NMS.936 In accordance with Regulation
NMS, trading centers must have in place
written policies and procedures in
connection with that Regulation’s Order
Protection Rule, which could help form
the basis for implementing the policies
933 See supra notes 661 to 669 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs).
934 See, e.g., letter from NSCP; letter from RBC
(June 2009); letter from SIFMA (June 2009); letter
from Wolverine; letter from RBC (Sept. 2009).
935 See infra notes 961 to 962 and accompanying
text (discussing our estimates of the on-going
monitoring and surveillance costs of Rule 201 to
trading centers).
936 See Regulation NMS Adopting Release, 70 FR
37496; see also Proposal, 74 FR at 18087; 17 CFR
242.611.

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and procedures for Rule 201.937 Thus,
we believe trading centers may already
be familiar with establishing,
maintaining, and enforcing tradingrelated policies and procedures,
including programming their trading
systems in accordance with such
policies and procedures. We believe this
familiarity will reduce the
implementation costs of Rule 201 on
trading centers and will make Rule 201
less burdensome to implement.
Moreover, because trading centers have
already developed or modified their
surveillance mechanisms in order to
comply with Regulation NMS’s policies
and procedures requirement, trading
centers may already have retained and
trained the necessary personnel to
ensure compliance with that
Regulation’s policies and procedures
requirements and, therefore, may
already have in place most of the
infrastructure and potential policies and
procedures necessary to comply with
Rule 201.938 Further, we believe that the
implementation and on-going
monitoring and surveillance costs of the
alternative uptick rule are justified by
the benefits provided in preventing
short selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security.
Several commenters indicated that the
Commission overstated the benefit of
previous implementation of Regulation
NMS in mitigating the costs of
implementing a short sale price test
restriction,939 because, for example,
‘‘systems re-written and architected for
Reg NMS * * * did not include any
short sale restrictions,’’ 940 or because
such systems will require modifications
in order to be used in the context of a
short sale price test restriction.941
However, we took into account that
Regulation NMS was implemented after
elimination of the prior short sale price
tests when considering the impact of
previous experience with the policies
and procedures requirement of
Regulation NMS’s Order Protection
Rule. And, although we recognize that
systems and processes will have to be
modified for implementation of Rule
201, we continue to believe that because
937 See Regulation NMS Adopting Release, 70 FR
37496; see also 17 CFR 242.611.
938 We also believe some trading centers may
have retained personnel familiar with the former
SRO bid tests, which may make Rule 201 even less
burdensome to implement. See, Proposal, 74 FR at
18095, n.393 and 18053, n.125.
939 See, e.g., letter from FIF (June 2009); letter
from NSCP; letter from RBC (June 2009).
940 Letter from FIF (June 2009); see also letter
from RBC (June 2009).
941 See letter from NSCP; letter from RBC (June
2009).

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most trading centers already have in
place systems and written policies and
procedures in order to comply with
Regulation NMS’s Order Protection
Rule, most trading centers will already
be familiar with establishing,
maintaining, and enforcing tradingrelated policies and procedures, which
will mitigate the burden of
implementation of the policies and
procedures requirement under Rule 201.
Several commenters agreed, stating
that previous experience with the
policies and procedures required under
Regulation NMS might reduce the
implementation and on-going
monitoring and compliance burdens on
trading centers.942 One commenter
stated that implementation of a circuit
breaker approach combined with the
alternative uptick rule would be easier
to implement than the other proposed
short sale price tests or proposed circuit
breaker rules, ‘‘provided that the
Commission permits firms to leverage
the numerous systems changes made to
facilitate compliance with Regulation
NMS (including the use of internal
market data rather than consolidated
data supplied by the industry
plans).’’ 943 And one commenter stated
that prior implementation of Regulation
NMS could ease implementation of a
short sale price test restriction,
‘‘provided that broker-dealers’
implementations of Regulation NMS
was sufficiently modular and
extensible.’’ 944 We believe that Rule 201
is structured so that trading centers will
be able to leverage their existing systems
and experience with implementing the
policies and procedures required by
Regulation NMS’s Order Protection
Rule. For example, Rule 201 does not
mandate that the receipt of the current
national best bid must be from any one
particular data feed; thus, trading
centers will be able to use internal
market data if they choose.945 Thus, as
stated above, we believe that familiarity
with trading-related policies and
procedures under Regulation NMS will
mitigate the burden of implementation
of the policies and procedures
requirement under Rule 201.
Moreover, the written policies and
procedures requirement of Rule 201 is
designed to provide trading centers with
significant flexibility in determining
how to comply with the requirements of
942 See, e.g., letter from EWT (Sept. 2009); letter
from Goldman Sachs (Sept. 2009); letter from MFA
(Oct. 2009).
943 Letter from Goldman Sachs (Sept. 2009); see
also letter from MFA (Oct. 2009).
944 Letter from EWT (Sept. 2009).
945 See supra notes 404 to 411 and accompanying
text (discussing the use of various data feeds in
determining the current national best bid).

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the Rule. For example, Rule 201 is
designed to provide trading centers and
their customers with flexibility in
determining how to handle orders that
are not immediately executable or
displayable by the trading center
because the order is impermissibly
priced. Thus, if an order were
impermissibly priced, the trading center
could, in accordance with policies and
procedures reasonably designed to
prevent the execution or display of a
short sale at a price that is less than or
equal to the current national best bid,
re-price the order upwards to the lowest
permissible price and hold it for later
execution at its new price or better.946
As quoted prices change, Rule 201
allows a trading center to repeatedly reprice and display an order at the lowest
permissible price down to the order’s
original limit order price (or, if a market
order, until the order is filled). Because
a trading center could re-price and
display a previously impermissibly
priced short sale order, Rule 201 may
allow for the more efficient functioning
of the markets because trading centers
do not have to reject or cancel
impermissibly priced orders unless
instructed to do so by the trading
center’s customer submitting the short
sale order. We note that a number of
commenters expressed support for a
policies and procedures approach to any
short sale price test restriction, in part,
because it would add flexibility to the
Rule’s requirements.947
Moreover, while latencies in
obtaining data regarding the national
best bid from consolidated market data
feeds, as discussed in detail above, may
impact implementation costs associated
with Rule 201, a trading center could
have policies and procedures that
would provide for a snapshot of the
applicable national best bid of the
security. We note that some commenters
expressed concerns regarding latencies
in obtaining data regarding the national
best bid disseminated by proprietary
data feeds and/or by SIPs.948 We believe
that a policies and procedures approach
that provides for a snapshot of the
946 For example, if a trading center receives a
short sale order priced at $47.00 when the current
national best bid in the security is $47.00, the
trading center could re-price the order at the
permissible offer price of $47.01, and display the
order for execution at this new limit price.
947 See, e.g., letter from T. Rowe Price (June 2009);
letter from AIMA; letter from RBC (June 2009);
letter from Citadel et al. (Sept. 2009).
948 See, e.g., letter from Glen Shipway (Sept.
2009); see also letter from Credit Suisse (June 2009);
letter from FIF (June 2009); letter from Lime
Brokerage (June 2009); letter from RBC (June 2009);
letter from SIFMA (June 2009); letter from Direct
Edge (June 2009); letter from BATS (Sept. 2009);
letter from Credit Suisse (Sept. 2009); letter from
Lime Brokerage (Sept. 2009).

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applicable current national best bid will
aid trading centers in dealing with time
lags in receiving data regarding the
national best bid from different data
sources, as well as lead to reduced
initial and on-going costs associated
with Rule 201 for trading centers by
facilitating verification of whether a
short sale order was executed or
displayed at a permissible price.
We considered whether our estimates
of the costs to trading centers for
implementation and on-going
monitoring and surveillance of the
proposed modified uptick rule included
in the Proposal 949 would change under
the circuit breaker approach of Rule
201, but concluded, as discussed below,
that these estimates continue to
represent reasonable estimates under
the circuit breaker approach.
Despite some commenters’ concerns
regarding the implementation costs of a
circuit breaker rule,950 we believe that
the circuit breaker approach will result
in largely the same implementation
costs as we estimated would be incurred
if we adopted a permanent, market-wide
short sale price test restriction.951 As
one commenter stated, ‘‘[o]nce the price
test is in place, there is minimal
incremental effort required to add a
Circuit Breaker that controls the
application of the price test.’’ 952
Similarly, another commenter stated
that ‘‘[t]he additional coding required to
implement a circuit breaker is minimal
* * *’’ 953 We believe that there will be
only minimal, if any, implementation
costs for a circuit breaker approach in
addition to the costs that we estimated
previously for the implementation of a
permanent, market-wide short sale price
test rule because trading centers will
need to establish written policies and
procedures to implement the short sale
price test restriction regardless of
whether the short sale price test
restriction is adopted on a permanent,
market-wide basis or, in the case of Rule
201, adopted in conjunction with a
circuit breaker. Several other
commenters agreed, stating that the
costs of the circuit breaker approach
would be similar to, or only
incrementally higher than, the costs of
a permanent, market-wide approach.954
In addition, with respect to on-going
monitoring and surveillance costs of the
circuit breaker approach, we recognize,
as noted by one commenter,955 that
949 See

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

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trading centers will need to
continuously monitor whether a
security is subject to the provisions of
Rule 201 and that there will be costs
associated with such monitoring.
However, we believe that these costs
will be offset because, under the circuit
breaker approach, the alternative uptick
rule will be time limited and will only
apply on a stock-by-stock basis, which
will reduce our previously estimated
costs for on-going monitoring and
surveillance. This is because trading
centers will only need to monitor and
surveil for compliance with the
alternative uptick rule during the
limited period of time that the circuit
breaker is in effect with respect to a
specific security. As such, the circuit
breaker approach will allow regulatory,
supervisory and compliance resources
to focus on, and to address, those
situations where a specific security is
experiencing significant downward
price pressure.956 Further, although,
under the circuit breaker approach,
market participants will need to monitor
whether a stock is subject to Rule 201
or not, we believe that familiarity with
a circuit breaker approach may help
mitigate such compliance costs.957
On balance, we believe that the
estimates of the costs to trading centers
for implementation and on-going
monitoring and surveillance of the
proposed modified uptick rule included
in the Proposal 958 are appropriate with
respect to Rule 201. Thus, our estimates
have not changed from the Proposal,
except to the extent that total burden
estimates have changed because we
have updated the estimated number of
trading centers.959 As detailed in PRA
Section IX.E.1., above, we realize that
the exact nature and extent of the
policies and procedures that a trading
center is required to establish likely will
vary depending upon the type, size, and
nature of the trading center (e.g., SRO
vs. non-SRO, full service broker-dealer
vs. market maker). Thus, our estimates
take into account different types of
trading centers and we realize that these
estimates may be on the low-end for
some trading centers while they may be
on the high-end for other trading
centers.
956 See, e.g., letter from Nasdaq OMX Group (Oct.
2009); letter from SIFMA (Sept. 2009).
957 See supra notes 292 and 684 and
accompanying text (discussing stock exchanges’
and FINRA’s rules or policies to implement
coordinated circuit breaker halts and SRO rules or
polices to coordinate individual security trading
halts corresponding to significant news events).
958 See Proposal, 74 FR at 18093.
959 See supra note 686 (discussing the change in
the estimated number of trading centers).

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As detailed in PRA Section IX.E.1.,
above, we estimate a total one-time
initial cost of $28,699,867 960 for all
trading centers subject to Rule 201 to
establish the written policies and
procedures reasonably designed to
prevent the execution or display of short
sale orders at a price that is less than or
equal to the current national best bid.
Once a trading center has established
written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order at a price that is less than or equal
to the current national best bid, we
estimate a total annual on-going cost of
$7,751,196 961 for all trading centers
subject to Rule 201 to ensure that their
written policies and procedures are upto-date and remain in compliance with
Rule 201. In addition, with regard to ongoing monitoring for and enforcement of
trading in compliance with Rule 201, as
detailed in PRA Section IX.E.1., above,
we believe that, once the tools necessary
to carry out on-going monitoring have
been put in place, a trading center will
be able to incorporate on-going
monitoring and enforcement within the
scope of its existing surveillance and
enforcement policies and procedures
without a substantial additional burden.
We recognize, however, that this ongoing compliance will not be cost-free,
and that trading centers will incur some
960 This figure was calculated by adding
$20,359,867 and $8,340,000 (for outsourced legal
work). The $20,359,867 figure was calculated as
follows: (70 legal hours × $305) + (105 compliance
hours × $313) + (20 information technology hours
× $292) + (25 business operation hours × $273) =
$66,880 per SRO × 10 SROs = $668,800 total cost
for SROs; (37 legal hours × $305) + (77 compliance
hours × $313) + (23 information technology hours
× $292) + (23 business operation hours × $273) =
$48,381 per broker-dealer × 407 broker-dealers =
$19,691,067 total cost for broker-dealers; $668,800
+ $19,691,067 = $20,359,867. The $8,340,000 figure
for outsourced legal work was calculated as follows:
(50 legal hours × $400 × 10 SROs) + (50 legal hours
× $400 × 407 broker-dealers) = $8,340,000.
Based on industry sources, we estimate that the
average hourly rate for outsourced legal services in
the securities industry is $400. For in-house legal
services, we estimate that the average hourly rate
for an attorney in the securities industry is
approximately $305 per hour. The $305/hour figure
for an attorney is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead. In
addition, we estimate that the average hourly rate
for an assistant compliance director, a senior
computer programmer, and a senior operations
manager in the securities industry is approximately
$313, $292, and $273 per hour, respectively. These
figures are from SIFMA’s Management &
Professional Earnings in the Securities Industry
2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
961 This figure was calculated as follows: (2 legal
hours × 12 months × $305) × (10 + 407) + (3
compliance hours × 12 months × $313) × (10 + 407)
= $7,751,196.

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additional annual costs associated with
on-going compliance, including
compliance costs of reviewing
transactions. We estimate that each
trading center will incur an average
annual on-going compliance cost of
$102,768, for a total annual cost of
$42,854,256 for all trading centers.962
To summarize, we estimate an average
one-time initial cost of $86,880 per SRO
trading center and $68,381 per non-SRO
trading center for a total one-time initial
cost of $28,699,867 963 for all trading
centers subject to Rule 201 to establish
the written policies and procedures
reasonably designed to prevent the
execution or display of short sale orders
at a price that is less than or equal to
the current national best bid. We
estimate an average annual on-going
cost of $18,588 per trading center for a
total annual on-going cost of
$7,751,196 964 for all trading centers
subject to Rule 201 to ensure that their
written policies and procedures are upto-date and remain in compliance with
Rule 201. In addition, we estimate an
average annual cost of $102,768 per
trading center for a total annual cost of
$42,854,256 for all trading centers for
on-going monitoring for and
enforcement of trading in compliance
with Rule 201.965
ii. Policies and Procedures Requirement
Under the Broker-Dealer and Riskless
Principal Provisions
A broker-dealer marking an order
‘‘short exempt’’ under Rule 201(c) must
962 We estimate that each trading center will incur
an average annual on-going compliance cost of
$102,768 for a total annual cost of $42,854,256 for
all trading centers. This figure was calculated as
follows: (16 compliance hours × $313) + (8
information technology hours × $292) + (4 legal
hours × $305) × 12 months = $102,768 per trading
center × 417 trading centers = $42,854,256. As
discussed above, we base our burden hour estimates
on the estimates used for Regulation NMS because
it requires similar on-going monitoring and
surveillance for and enforcement of trading in
compliance with that regulation’s policies and
procedures requirement.
For in-house legal services, we estimate that the
average hourly rate for an attorney in the securities
industry is approximately $305 per hour. The $305/
hour figure for an attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, modified to account for an
1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits
and overhead. In addition, we estimate that the
average hourly rate for an assistant compliance
director, a senior computer programmer, and a
senior operations manager in the securities industry
is approximately $313, $292, and $273 per hour,
respectively. These figures are from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, modified to account for an
1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits
and overhead.
963 See supra note 960.
964 See supra note 961.
965 See supra note 962.

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identify the order as being at a price
above the current national best bid at
the time of submission to the trading
center 966 and must establish, maintain,
and enforce written policies and
procedures reasonably designed to
prevent the incorrect identification of
orders as being priced in accordance
with the requirements of Rule 201(c).967
Rule 201(d)(6) allows a broker-dealer
to mark short sale orders of a covered
security ‘‘short exempt’’ where a brokerdealer is facilitating customer buy
orders or sell orders where the customer
is net long, and the broker-dealer is net
short but is effecting the sale as riskless
principal, provided certain conditions
are satisfied.968 A broker-dealer marking
an order ‘‘short exempt’’ under this
provision is required to have written
policies and procedures in place to
assure that, at a minimum: (i) The
customer order was received prior to the
offsetting transaction; (ii) the offsetting
transaction is allocated to a riskless
principal or customer account within 60
seconds of execution; and (iii) that it has
supervisory systems in place to produce
records that enable the broker-dealer to
accurately and readily reconstruct, in a
time-sequenced manner, all orders on
which the broker-dealer relies pursuant
to this provision.969
As stated previously, we discussed in
the Proposal the anticipated costs of the
proposed short sale price test
restrictions and we requested comment,
in the Proposal and Re-Opening Release,
on the costs associated with the
proposed amendments.970 In particular,
we requested comment on the potential
costs for any modification to both
computer systems and surveillance
mechanisms and for information
gathering, management, and
recordkeeping systems or procedures.971
966 See Rule 201(c). As a result, a trading center’s
policies and procedures will need to be reasonably
designed to permit the execution or display of such
orders without regard to whether the order is at a
price that is less than or equal to the current
national best bid. See Rule 201(b)(1)(iii).
967 See Rule 201(c)(1). As part of its written
policies and procedures, a broker-dealer also is
required to regularly surveil to ascertain the
effectiveness of its policies and procedures and take
prompt remedial steps. See Rule 201(c)(2). This
provision is intended to reinforce the on-going
maintenance and enforcement requirements of the
provision contained in Rule 201(c)(1) by explicitly
assigning an affirmative responsibility to brokerdealers to surveil to ascertain the effectiveness of
their policies and procedures. See id.
968 See Rule 201(d)(6). As a result, a trading
center’s policies and procedures must be reasonably
designed to permit the execution or display of such
orders without regard to whether the order is at a
price that is less than or equal to the current
national best bid. See Rule 201(b)(1)(iii).
969 See Rule 201(d)(6).
970 See Proposal, 74 FR at 18090, 18092–18103;
Re-Opening Release, 74 FR at 42037.
971 See Proposal, 74 FR at 18090.

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In response to our request for comment,
commenters that specifically addressed
the riskless principal provision of Rule
201(d)(6) supported its inclusion.972
Several commenters expressed
concerns with respect to the costs of the
broker-dealer provision of Rule 201(c),
but did not provide a specific estimate
of such costs.973 Several commenters
stated that the broker-dealer provision
would place responsibility for ensuring
order compliance with Rule 201 on
broker-dealers, rather than exchanges,
and noted that this is a significant
difference from former Rule 10a–1 and
NASD’s former bid test.974 Similarly,
one commenter stated that the brokerdealer provision would significantly
expand the implementation cost of Rule
201, without providing a specific
estimate of such cost.975 Although we
agree that implementation of the brokerdealer provision of Rule 201(c) will
impose costs on broker-dealers who
choose to rely on this provision, we note
that Rule 201(c) is not a requirement of
the Rule, but rather provides that a
broker-dealer may mark a sell order for
a security that has triggered the circuit
breaker as ‘‘short exempt,’’ provided that
the broker-dealer identifies the order as
being at a price above the current
national best bid at the time of
submission to the trading center and
otherwise complies with the
requirements of the provision.
In addition, as discussed throughout
this adopting release, the alternative
uptick rule references only the current
national best bid, unlike the proposed
modified uptick rule and the proposed
uptick rule, which would have required
sequencing of the national best bid or
last sale price. In order to rely on the
broker-dealer provision, a broker-dealer
must establish, maintain, and enforce
written policies and procedures
reasonably designed to prevent the
incorrect identification of orders as
being at a price above the current
national best bid at the time of
submission of the order to the trading
center. Because the alternative uptick
rule does not require sequencing of the
national best bid, we believe that the
policies and procedures required in
order to rely on the broker-dealer
provision under the alternative uptick
972 See, e.g., letter from BATS (May 2009); letter
from SIFMA (June 2009); letter from Credit Suisse
(June 2009); letter from NYSE Euronext (Sept.
2009).
973 See, e.g., letter from Credit Suisse (June 2009);
letter from STANY (June 2009); letter from FIF
(June 2009); letter from Lime Brokerage (June 2009);
letter from NSCP; letter from Direct Edge (June
2009).
974 See, e.g., letter from Credit Suisse (June 2009);
letter from STANY (June 2009).
975 See letter from Lime Brokerage (June 2009).

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rule will be easier and less costly to
implement and monitor than would be
the case under the proposed modified
uptick rule or the proposed uptick
rule.976 We note that one of the
commenters that expressed concerns
about the implementation cost of the
broker-dealer provision also
acknowledged that a rule ‘‘that would
not require data centralization and
sequencing would be significantly less
complex and faster to implement.’’ 977
We disagree with several commenters
who stated that, although
implementation and on-going
monitoring and surveillance of the
alternative uptick rule might be easier
and/or less costly for trading centers,
this would not hold true for brokerdealers.978 One of these commenters
stated that ‘‘in order to avoid rejection
of short sale orders under an alternative
uptick rule, programming would need to
be implemented to anticipate changes in
the national best bid between the time
a short sale order is entered and the
time it reaches the relevant market
center.’’ 979 However, the broker-dealer
provision of Rule 201(c) is designed
specifically to help avoid this result.
Under the broker-dealer provision, a
broker-dealer may, in accordance with
the policies and procedures required by
the provision, identify the order as not
being at a price that is less than or equal
to the current national best bid at the
time the order is submitted to the
trading center and mark the order ‘‘short
exempt.’’ Trading centers are required to
have written policies and procedures in
place to permit the execution or display
of a short sale order of a covered
security marked ‘‘short exempt’’ without
regard to whether the order is at a price
that is less than or equal to the current
national best bid.980
Commenters also expressed concerns
about the competitive pressure of the
broker-dealer provision, stating either
that broker-dealers would feel
compelled to undertake implementation
of the provision, despite the high
cost,981 which would be particularly
burdensome for smaller firms,982 or that
976 See supra notes 709 to 715 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs).
977 Letter from Credit Suisse (June 2009).
978 See, e.g., letter from Citadel et al. (Sept. 2009);
letter from EWT (Sept. 2009); letter Lime Brokerage
(Sept. 2009).
979 Letter from Citadel et al. (Sept. 2009).
980 See Rule 201(b)(1)(iii).
981 See, e.g., letter from STANY (June 2009); letter
from FIF (June 2009); letter from Lime Brokerage
(June 2009).
982 See, e.g., letter from T.D. Pro Ex; letter from
Taurus Compliance; letter from Credit Suisse (June
2009).

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11303

smaller firms would find the costs
prohibitive, placing them at a
competitive disadvantage.983 We
recognize that broker-dealers are faced
with competitive concerns and that
such concerns may influence their
decision whether or not to rely on the
broker-dealer provision of Rule 201(c).
With respect to the cost, as stated above,
although we recognize that the brokerdealer provision will impose
implementation costs on broker-dealers
who choose to rely on this provision, we
believe that this cost will not be as great
as stated by some commenters because
the alternative uptick rule does not
require sequencing of the national best
bid, unlike the proposed modified
uptick rule and the proposed uptick
rule, which would have required
sequencing of the national best bid or
last sale price.984 We believe that,
without a sequencing requirement, the
policies and procedures required in
order to rely on the broker-dealer
provision under the alternative uptick
rule will be easier and less costly to
implement and monitor, for all brokerdealers including smaller brokerdealers, than would be the case under
the proposed modified uptick rule or
the proposed uptick rule.985
Further, we believe that the
implementation and on-going
monitoring and compliance costs for
broker-dealers who choose to rely on the
broker-dealer provision are justified by
the benefits of providing broker-dealers
with the option to manage their order
flow, rather than having to always rely
on their trading centers to manage their
order flow on their behalf.
One commenter stated that the brokerdealer provision would impose
significant on-going costs in the form of
data storage, surveillance, and review,
but did not provide a specific estimate
983 See, e.g., letter from Credit Suisse (June 2009);
letter from NSCP.
984 We also note that it is possible that some
smaller broker-dealers that determine to rely on the
broker-dealer provision may determine that it is
cost-effective for them to outsource certain
functions necessary to comply with Rule 201(c) to
larger broker-dealers, rather than performing such
functions in house, to remain competitive in the
market. This may help mitigate costs associated
with implementing and complying with Rule
201(c). Additionally, they may decide to purchase
order management software from technology firms.
Order management software providers may
integrate changes imposed by Rules 200(g) and 201
into their products, thereby providing another costeffective way for smaller broker-dealers to comply
with the requirement of Rule 201(c).
985 See supra notes 709 to 715 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs to brokerdealers).

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of such cost.986 We agree that brokerdealers who choose to rely on the
broker-dealer provision of Rule 201(c)
will face on-going costs for data storage,
surveillance and review. However, we
believe that broker-dealers’ on-going
monitoring and surveillance costs under
Rule 201(c) will be mitigated by the
alternative uptick rule, as compared to
the proposed modified uptick rule or
the proposed uptick rule, because the
alternative uptick rule will reference
only the current national best bid in
determining permissible short sales.987
In order to rely on the broker-dealer
provision, a broker-dealer must
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the incorrect
identification of orders as being at a
price above the current national best bid
at the time of submission of the order to
the trading center. Under the alternative
uptick rule, broker-dealers who choose
to rely on Rule 201(c) will need to
monitor the current national best bid,
but will not be required to monitor the
sequence of bids or last sale prices, as
would have been required under the
proposed modified uptick rule or the
proposed uptick rule, respectively.
Several commenters noted that the lack
of a sequencing requirement would
make the alternative uptick rule, in
comparison to the other proposed short
sale price tests, less costly 988 or easier
to monitor on an on-going basis.989 One
commenter stated that the alternative
uptick rule would reduce the data
retention requirements of a new short
sale price test restriction.990
Another commenter stated that the
‘‘Commission’s cost estimates seem to
underestimate the cost to large, full
service broker-dealers, since the volume
of orders handled by these firms are
likely to lead to significantly greater
technology and storage costs alone as
well as more frequent reviews’’ but did
not provide a specific cost estimate.991
As we stated in the Proposal,992 we
recognize that the exact nature and
986 See letter from NSCP; see also letter from
Credit Suisse (June 2009).
987 See supra notes 709 to 715 and accompanying
text (discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs to brokerdealers).
988 See supra note 661.
989 See, e.g., letter from Glen Shipway (Sept.
2009); letter from SIFMA (Sept. 2009); letter from
STA (Sept. 2009); see also letter from Credit Suisse
(June 2009). In addition, one commenter
acknowledged that monitoring of the alternative
uptick rule will likely be easier, without referencing
the sequencing issue. See letter from Allston
Trading (Sept. 2009).
990 See letter from STA (Sept. 2009).
991 Letter from NSCP.
992 See Proposal, 74 FR at 18093.

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extent of the required policies and
procedures, and thus the costs
associated with such policies and
procedures, that a broker-dealer is
required to establish under the brokerdealer provision in Rule 201(c) likely
will vary depending upon the nature of
the broker-dealer, and we have taken
this into account in our cost
estimates.993
The following discussion of
comments on the costs to broker-dealers
includes comments that were discussed
above with respect to the costs to
trading centers 994 because, in some
cases, commenters provided comments
and estimates on the costs of
establishing and monitoring policies
and procedures under the proposed
short sale price tests without
distinguishing between costs that would
be applicable to trading centers as
opposed to broker-dealers. One
commenter provided a dollar estimate of
broker-dealer implementation costs at
approximately $500,000 per brokerdealer, for a total of $2,780,500,000 for
all broker-dealers subject to Rule 201,995
including costs for ‘‘the purchase of
additional costly data feeds’’ but not
including ‘‘costs associated with
developing appropriate internal
supervisory procedures and compliance
programs.’’ 996 However, we note that
this implementation cost estimate for
the broker-dealer provision, which is
significantly higher than our estimate of,
on average, $68,381 per brokerdealer,997 was not specific to the
alternative uptick rule. As discussed
above, we believe that the alternative
uptick rule will be easier and less costly
to monitor than the proposed modified
uptick rule or the proposed uptick rule
because under the alternative uptick
rule, broker-dealers who choose to rely
on Rule 201(c) will need to monitor the
current national best bid, but will not be
required to monitor the sequence of bids
993 See

infra notes 1022 to 1024 and
accompanying text (discussing our estimates of
implementation and on-going monitoring and
surveillance costs to broker-dealers).
994 See supra Section X.B.1.b.i. (discussing costs
to trading centers).
995 See letter from Wolverine. Wolverine provided
an estimate of $500,000 per firm for implementation
costs, which it applied to both non-SRO trading
centers and other registered broker-dealers. In its
letter, Wolverine multiplied its implementation cost
estimate of $500,000 by 5,561 for a total of
$2,780,500,000. See id. As indicated above, the
Commission now estimates the number of brokerdealers at 5,178 based on a review of 2008 FOCUS
Report filings reflecting registered broker-dealers,
including introducing broker-dealers. This number
does not include broker-dealers that are delinquent
on FOCUS Report filings. See supra note 652.
996 Letter from Wolverine.
997 See infra note 1022 and accompanying text
(discussing our estimated implementation costs for
broker-dealers).

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or last sale prices, as would have been
required under the proposed modified
uptick rule or the proposed uptick rule,
respectively.998 In addition, we note
that implementation of Rule 201 will
not require modifications to how data
feeds are currently received. As
discussed above, Rule 201 does not
mandate that the receipt of the current
national best bid must be from any one
particular data feed; thus, broker-dealers
will be able to continue using the data
feed they currently use and for which
they currently pay.999
Another commenter conducted a
survey of fifty firms with respect to
implementation and on-going
monitoring cost estimates. Cost
estimates in response to the survey
indicated that a circuit breaker
triggering a short sale price test based on
the national best bid would have
implementation costs that averaged
between $235,000 and $2,000,000 per
firm.1000 This estimated implementation
cost range is significantly higher than
our cost estimate of, on average, $68,381
per broker-dealer for
implementation.1001 In addition, cost
estimates in response to the survey
indicated that a circuit breaker
triggering a short sale price test based on
the national best bid would have ongoing monitoring costs that averaged
between $45,000 and $175,000 per
firm.1002 Our estimated cost of $121,356
per broker-dealer for on-going
monitoring and surveillance 1003 falls
within this commenter’s estimated
range of on-going monitoring cost. We
note that the estimated costs were
categorized by large firms, regional
firms, and clearing firms, rather than by
SRO trading centers, non-SRO trading
centers and broker-dealers. As a result,
it is difficult to determine the
applicability of these cost estimates to
the expected implementation and on998 See supra notes 709 to 715 and accompanying
text and notes 978 to 980 and accompanying text
(discussing comments on the impact of the
alternative uptick rule on implementation and ongoing monitoring and compliance costs).
999 See supra notes 404 to 411 and accompanying
text (discussing the use of various data feeds in
determining the current national best bid).
1000 See supra note 918 (discussing the results of
SIFMA’s cost estimate survey with respect to the
costs of implementing a circuit breaker triggering a
short sale price test based on the national best bid);
see also letter from Wolverine.
1001 See infra note 1022 and accompanying text
(discussing our estimated implementation costs for
broker-dealers).
1002 See supra note 931 (discussing the results of
SIFMA’s cost estimate survey with respect to the
on-going monitoring costs of a circuit breaker
triggering a short sale price test based on the
national best bid).
1003 See infra note 1022 and accompanying text
(discussing our estimated implementation costs for
broker-dealers).

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going monitoring and compliance costs
of Rule 201 to broker-dealers. In
addition, this commenter’s cost
estimates were not specific to the
alternative uptick rule. As discussed
above, because the alternative uptick
rule references only the current national
best bid, unlike the proposed modified
uptick rule and the proposed uptick
rule, which would have required
sequencing of the national best bid or
last sale price, we believe that the
alternative uptick rule will be easier and
less costly to implement and monitor
than the proposed modified uptick rule
or the proposed uptick rule.1004
We considered these comments in
evaluating the costs of implementation
and on-going monitoring and
surveillance of the broker-dealer
provision of Rule 201(c) and the riskless
principal provision of Rule 201(d)(6).
We note that the policies and
procedures that must be implemented
under the broker-dealer provision are
similar to those that are required under
the Order Protection Rule of Regulation
NMS.1005 Thus, we believe brokerdealers will already be familiar with
establishing, maintaining, and enforcing
trading-related policies and procedures,
including programming their trading
systems in accordance with such
policies and procedures.
Although, as discussed above with
respect to trading centers, several
commenters stated that previous
implementation of Regulation NMS
would not mitigate the costs to brokerdealers of implementing a short sale
price test restriction,1006 we considered
these comments, as well as comments
stating that previous implementation of
Regulation NMS could ease
implementation provided that brokerdealers could leverage existing systems
in implementing Rule 201,1007 and
continue to believe that familiarity with
Regulation NMS policies and
procedures will reduce the
implementation costs of the brokerdealer provision under Rule 201(c) on
broker-dealers. Moreover, because
broker-dealers may have already
developed or modified their
surveillance mechanisms in order to
comply with the policies and
procedures requirement of the Order
1004 See supra notes 709 to 715 and
accompanying text and notes 978 to 980 and
accompanying text (discussing comments on the
impact of the alternative uptick rule on
implementation and on-going monitoring and
compliance costs).
1005 See Regulation NMS Adopting Release, 70 FR
37496; see also 17 CFR 242.611.
1006 See, e.g., letter from FIF (June 2009); letter
from RBC (June 2009).
1007 See, e.g., letter from MFA (Oct. 2009).

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Protection Rule under Regulation NMS,
broker-dealers may already have
retained and trained the necessary
personnel to ensure compliance with
that Regulation’s policies and
procedures requirements and, therefore,
may already have in place most of the
infrastructure and potential policies and
procedures necessary to comply with
the broker-dealer provision of Rule
201(c). In addition, one commenter
supported using a policies and
procedures approach to any short sale
price test restriction because it would
ease implementation for brokerdealers.1008
Moreover, while latencies in
obtaining data regarding the national
best bid from consolidated market data
feeds, as discussed in detail above, may
impact implementation costs associated
with Rule 201, a broker-dealer could
have policies and procedures that
would provide for a snapshot of the
applicable national best bid of the
security. Several commenters expressed
concerns that implementing ‘‘snapshot’’
capability to preserve an auditable
record of the current national best bid
would be difficult and costly for brokerdealers,1009 particularly because this is
not a capability currently supported by
many broker-dealers.1010 Commenters
also noted that ‘‘snapshot’’ capability
would require increased data
storage.1011
Although we recognize commenters’
concerns that implementing ‘‘snapshot’’
capability could be costly for some
broker-dealers, we note that most
broker-dealers may already have
developed ‘‘snapshot’’ capability in
connection with Regulation NMS’s
Order Protection Rule. We also agree
that ‘‘snapshot’’ capability will require
data storage by broker-dealers; however,
as noted by one commenter,1012 because
the alternative uptick rule does not
require sequencing of the national best
bid, the data storage requirements under
the alternative uptick rule are lower
than they would be under the proposed
modified uptick rule or the proposed
uptick rule. In addition, we believe that
the costs of a policies and procedures
approach that provides for a snapshot of
the applicable current national best bid
of the security are justified because
1008 See,

e.g., letter from GE.
e.g., letter from Credit Suisse (June
2009); letter from STANY (June 2009); letter from
FIF (June 2009); letter from Lime Brokerage (June
2009); letter from NSCP.
1010 See, e.g., letter from STANY (June 2009);
letter from FIF (June 2009).
1011 See, e.g., letter from STANY (June 2009);
letter from FIF (June 2009); letter from NSCP; letter
from Direct Edge (June 2009).
1012 See letter from STA (Sept. 2009).
1009 See,

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11305

snapshot capability will aid brokerdealers in dealing with time lags in
receiving data regarding the national
best bid from different data sources and
facilitate verification of whether a short
sale order was executed or displayed at
a permissible price.
We considered whether our estimates
of the costs to broker-dealers for
implementation and on-going
monitoring and surveillance of the
proposed modified uptick rule included
in the Proposal 1013 would change under
the circuit breaker approach of Rule
201, but, as discussed below, concluded
that these estimates continue to
represent reasonable estimates under
the circuit breaker approach combined
with the alternative uptick rule.
As discussed previously,1014 despite
some commenters’ concerns regarding
the implementation costs of a circuit
breaker rule,1015 we believe that the
circuit breaker approach will result in
largely the same implementation costs
as we estimated would be incurred if we
adopted a permanent, market-wide short
sale price test restriction.1016 We believe
that that there will be only minimal, if
any, implementation costs for a circuit
breaker approach in addition to the
costs we estimated previously for the
implementation of a permanent, marketwide short sale price test rule because
broker-dealers relying on Rule 201(c) or
Rule 201(d)(6) are required to establish
written policies and procedures
required to comply with those
provisions regardless of whether the
short sale price test restriction is
adopted on a permanent, market-wide
basis or, in the case of Rule 201,
adopted in conjunction with a circuit
breaker. Several other commenters
agreed, stating that the costs of the
circuit breaker approach would be
similar to, or only incrementally higher
than, the costs of a permanent, marketwide approach.1017
In addition, with respect to on-going
monitoring and surveillance costs of the
circuit breaker approach, we recognize,
as noted by one commenter,1018 that
broker-dealers relying on Rule 201(c) or
Rule 201(d)(6) will need to continuously
monitor whether a security is subject to
the provisions of Rule 201 and that
there will be costs associated with such
1013 See

Proposal, 74 FR at 18093–18094.
supra Section IX.E.1. (discussing
estimated burdens of the collection of information
requirements applicable to trading centers under
Rule 201).
1015 See supra note 676.
1016 See Proposal, 74 FR at 18093–18094.
1017 See, e.g., letter from Nasdaq OMX Group
(Oct. 2009); letter from Credit Suisse (Sept. 2009);
letter from STA (June 2009).
1018 See letter from Glen Shipway (June 2009).
1014 See

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monitoring. However, we believe that
these costs will be offset because, under
the circuit breaker approach, the
alternative uptick rule will be time
limited and will only apply on a stock
by stock basis, which will reduce our
previously estimated costs for on-going
monitoring and surveillance. This is
because broker-dealers relying on Rule
201(c) will only need to monitor and
surveil for compliance with the
alternative uptick rule, and brokerdealers relying on Rule 201(d)(6) will
only need to monitor for compliance
with the requirements of that provision,
during the limited period of time that
the circuit breaker is in effect with
respect to a specific security. As such,
the circuit breaker approach will allow
regulatory, supervisory and compliance
resources to focus on, and to address,
those situations where a specific
security is experiencing significant
downward price pressure.1019
On balance, we believe that the
estimates of the costs to broker-dealers
for implementation and on-going
monitoring and surveillance of the
proposed modified uptick rule included
in the Proposal 1020 are appropriate with
respect to the broker-dealer provision of
Rule 201(c) and the riskless principal
provision of Rule 201(d)(6). Thus, our
estimates have not changed from the
Proposal, except to the extent that total
cost estimates have changed because we
have updated the estimated number of
broker-dealers.1021 Our estimates of the
implementation costs to broker-dealers
include the costs of surveillance and
reprogramming costs for enforcing,
monitoring, and updating trading,
execution management, and
surveillance systems under Rule 201,
systems changes to computer software,
as well as staff time and technology
resources. Our estimates of the on-going
monitoring and surveillance costs
include the commitment of resources
associated with compliance oversight,
market surveillance, data storage and
enforcement, with attendant
opportunity costs.
As detailed in PRA Section IX.E.2.,
above, we realize that the exact nature
and extent of the required policies and
procedures that a broker-dealer is
required to establish under the brokerdealer provision in Rule 201(c), as well
as under the riskless principal provision
in Rule 201(d)(6), likely will vary
depending upon the type, size and
nature of the broker-dealer (e.g., full
1019 See, e.g., letter from Nasdaq OMX Group
(Oct. 2009); letter from SIFMA (Sept. 2009).
1020 See Proposal, 74 FR at 18093–18094.
1021 See supra note 729 (discussing the change in
the estimated number of broker-dealers).

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service broker-dealer vs. market maker).
Thus, our estimates take into account
different types of broker-dealers and we
realize that these estimates may be on
the low-end for some broker-dealers
while they may be on the high-end for
other broker-dealers.
As detailed in PRA Section IX.E.2.,
above, we estimate a total one-time
initial cost of $354,076,818 for all
broker-dealers relying on the brokerdealer provision in Rule 201(c) and the
riskless principal provision in Rule
201(d)(6) to establish written policies
and procedures reasonably designed to
prevent the incorrect identification of
orders as being priced in accordance
with the broker-dealer provision or, in
the case of the riskless principal
provision, to assure that, at a minimum:
(i) The customer order was received
prior to the offsetting transaction; (ii)
the offsetting transaction is allocated to
a riskless principal or customer account
within 60 seconds of execution; and (iii)
that it has supervisory systems in place
to produce records that enable the
broker-dealer to accurately and readily
reconstruct, in a time-sequenced
manner, all orders on which the brokerdealer relies pursuant to this
provision.1022
Once a broker-dealer has established
written policies and procedures so that
it may rely on the broker-dealer
provision in Rule 201(c) and the riskless
principal provision in Rule 201(d)(6),
we estimate a total annual on-going cost
of $96,248,664 for all broker-dealers
relying on either of these provisions to
ensure that their written policies and
procedures are up-to-date and remain in
compliance with Rule 201.1023 In
1022 This figure was calculated by adding
$250,516,818 and $103,560,000 (for outsourced
legal work). The $250,516,818 figure was calculated
as follows: (37 legal hours × $305) + (77 compliance
hours × $313) + (23 information technology hours
× $292) + (23 business operation hours × $273) =
$48,381 per broker-dealer × 5,178 broker-dealers =
$250,516,818 total cost for broker-dealers. The
$103,560,000 figure was calculated as follows: (50
legal hours × $400 × 5,178) = $103,560,000.
Based on industry sources, we estimate that the
average hourly rate for outsourced legal services in
the securities industry is $400. For in-house legal
services, we estimate that the average hourly rate
for an attorney in the securities industry is
approximately $305 per hour. In addition, we
estimate that the average hourly rate for an assistant
compliance director, a senior computer
programmer, and a senior operations manager in the
securities industry is approximately $313, $292,
and $273 per hour, respectively. The estimates for
in-house legal services, assistant compliance
director, senior computer programmer, and senior
operations manager are from SIFMA’s Management
& Professional Earnings in the Securities Industry
2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
1023 This figure was calculated as follows: (2 legal
hours × 12 months x $305) × 5,178 + (3 compliance
hours × 12 months × $313) × 5,178 = $96,248,664.

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addition, with regard to on-going
monitoring for and enforcement of
trading in compliance with the brokerdealer provision in Rule 201(c) and the
riskless principal provision in Rule
201(d)(6), as detailed in PRA Section
IX.E.2., above, we believe that, once the
tools necessary to carry out on-going
monitoring have been put in place, a
broker-dealer will be able to incorporate
on-going monitoring and enforcement
within the scope of its existing
surveillance and enforcement policies
and procedures without a substantial
additional burden. We recognize,
however, that this on-going compliance
will not be cost-free, and that brokerdealers will incur some additional
annual costs associated with on-going
compliance, including compliance costs
of reviewing transactions. We estimate
that each broker-dealer will incur an
average annual on-going compliance
cost of $102,768, for a total annual cost
of $532,132,704 for all brokerdealers.1024
To summarize, we estimate an average
one-time initial cost of $68,381 per
broker-dealer for a total one-time initial
cost of $354,076,818 for all brokerdealers relying on the broker-dealer
provision in Rule 201(c) and the riskless
principal provision in Rule 201(d)(6) to
establish the written policies and
procedures required to rely on the
broker-dealer provision or the riskless
principal provision.1025 We estimate an
average annual on-going cost of $18,588
per broker-dealer for a total annual ongoing cost of $96,248,664 for all brokerdealers relying on either of these
provisions to ensure that their written
policies and procedures are up-to-date
and remain in compliance with Rule
201.1026 In addition, we estimate an
average annual cost of $102,768 per
1024 This figure was calculated as follows: (16
compliance hours × $313) + (8 information
technology hours × $292) + (4 legal hours × $305)
x 12 months = $102,768 per broker-dealer × 5,178
broker-dealers = $532,132,704. As discussed above,
we base our estimate of burden hours on the
estimates used for Regulation NMS because it
requires similar on-going monitoring and
surveillance for and enforcement of trading in
compliance with that regulation’s policies and
procedures requirement.
For in-house legal services, we estimate that the
average hourly rate for an attorney in the securities
industry is approximately $305 per hour. In
addition, we estimate that the average hourly rate
for an assistant compliance director and a senior
computer programmer in the securities industry is
approximately $313 and $292 per hour,
respectively. These figures are from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, modified to account for an
1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits
and overhead.
1025 See supra note 1022.
1026 See supra note 1023.

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broker-dealer for a total annual cost of
$532,132,704 for all broker-dealers for
on-going monitoring for and
enforcement of trading in compliance
with the broker-dealer provision in Rule
201(c) and the riskless principal
provision in Rule 201(d)(6).1027
2. Circuit Breaker Approach
Under the circuit breaker approach,
the alterative uptick rule will apply only
if the price of a covered security has
declined by 10% or more from the
covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day.1028 In
addition, this short sale price test
restriction will apply for the remainder
of the day and the following day when
a national best bid for the covered
security is calculated and disseminated
on a current and continuing basis by a
plan processor pursuant to an effective
national market system plan.1029
a. Impact on Market Quality
As stated above, in the Proposal and
Re-Opening Release, we requested
comment on the costs of a circuit
breaker rule,1030 and specifically on the
extent to which the proposed
amendments to Regulation SHO,
including the proposed circuit breaker
rules, could impact or lessen some of
the benefits of legitimate short selling or
could lead to a decrease in market
efficiency, price discovery, or
liquidity.1031
As we stated in the Proposal, we
understand that there are concerns
about a potential ‘‘magnet effect’’ that
could arise as an unintended
consequence of a circuit breaker that
imposes a short selling price test
restriction.1032 This ‘‘magnet effect’’
could result in short sellers driving
down the price of an equity security in
a rush to execute short sales before the
circuit breaker is triggered. We are also
concerned about short selling demand
building until the circuit breaker is
lifted.
In response to our requests for
comments, several commenters stated
that a short sale circuit breaker could
exacerbate downward pressure on
stocks as their value reached the
threshold level.1033 Commenters also
1027 See

supra note 1024.
Rule 201(b)(i).
1029 See Rule 201(b)(ii).
1030 See Proposal, 74 FR at 18090, 18100; ReOpening Release, 74 FR at 42037.
1031 See Proposal, 74 FR at 18090.
1032 See Proposal, 74 FR at 18067.
1033 See, e.g., letter from Matlock Capital (May
2009); letter from Schwab; letter from Lime
Brokerage (June 2009); letter from STA (June 2009);

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discussed the possibility that short
selling demand could be built up until
the short selling restriction is lifted.1034
Other commenters, however, discounted
the possibility or impact of a ‘‘magnet
effect,’’ 1035 including some commenters
who cited empirical studies that
question whether a circuit breaker
would result in artificial pressure on the
price of individual securities.1036
After considering the comments,
including studies cited by commenters,
we do not believe that the evidence is
clear regarding a ‘‘magnet effect.’’ 1037 In
fact, many academic studies that have
analyzed circuit breakers in other
contexts found no evidence of such
trading patterns.1038 We recognize,
however, that some of these studies
were conducted in markets dissimilar
from the highly automated markets
currently existing in the United States
and, therefore, that limits their utility in
this context. Overall, however, the most
relevant studies fail to demonstrate a
magnet effect and we believe that
adopting the circuit breaker approach
best serves our goals.
Commenters also stated that a circuit
breaker could have a stigmatizing effect
on affected securities by creating the
impression that a stock is ‘‘down so
significantly that the trading rules must
change.’’ 1039 Other commenters
expressed concerns that the circuit
breaker could have a negative effect on
affected securities because ‘‘if a security
has suffered a significant decline,
additional constraints that affect the
ability of market makers to provide
high-quality markets may actually
hasten the decline, as decreased size
and wider spreads will further
undermine the already battered investor
confidence in the security.’’ 1040 Another
commenter noted that a circuit breaker
letter from Glen Shipway (June 2009); letter NYSE
Euronext (June 2009); letter from Wolverine; letter
from Direct Edge (June 2009); letter from Amer.
Bankers Assoc.; letter from NYSE Euronext (Sept.
2009); see also letter from SIFMA (June 2009)
(indicating that an ‘‘on/off’’ circuit breaker trigger
could dampen any magnet effect); letter from Direct
Edge (Mar. 2009).
1034 See letter from STA (June 2009); letter from
Wolverine.
1035 See letter from BATS (May 2009); letter from
Credit Suisse (June 2009); letter from Credit Suisse
(Sept. 2009); letter from Hudson River Trading;
letter from Virtu Financial; see also letter from
Credit Suisse (Mar. 2009).
1036 See letter from Credit Suisse (June 2009);
letter from Credit Suisse (Sept. 2009); see also letter
from Credit Suisse (Mar. 2009); letter from Nasdaq
OMX Group (Oct. 2009).
1037 See supra notes 280 to 285 and
accompanying text (discussing comments on the
‘‘magnet effect’’ and our response).
1038 See supra note 285.
1039 Letter from Schwab; see also letter from
Amer. Bankers Assoc.
1040 Letter from EWT (June 2009).

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11307

‘‘may exacerbate market dislocations by
suddenly and unexpectedly altering the
regulatory regime and liquidity
characteristics of a particular security,
precisely when it is under duress.’’ 1041
We recognize that the circuit breaker
approach of Rule 201 could result in
some perception of stigmatization of
stocks that trigger the short sale price
test restriction of Rule 201. As discussed
above in Section X.B.1.a., we also
recognize that imposing a short sale
price test restriction may negatively
impact market quality with respect to a
covered security that has triggered the
circuit breaker. In addition, although we
agree that a circuit breaker combined
with a halt on short selling could cause
or exacerbate market dislocations, we do
not believe that the circuit breaker
approach of Rule 201 will have the same
impact because it will continue to allow
short selling at a price above the
national best bid, even when the short
sale price test restriction is in effect.
Further, to the extent that the circuit
breaker approach results in
stigmatization, market dislocations, or
other negative impacts on market
quality, we believe any such costs are
justified by the benefits provided by the
Rule.
As discussed in detail in Section
III.A.5., above, commenters’ estimates
and the Staff’s analysis show that a 10%
circuit breaker threshold generally
should affect only a limited percentage
of covered securities, thus will not
interfere with the smooth functioning of
the markets for the majority of covered
securities most of the time. And,
although a permanent market-wide
approach that would apply to all
covered securities all the time may, as
one commenter stated, provide an
element of predictability,1042 we believe
that the circuit breaker approach of Rule
201 is appropriate because it provides a
balance between achieving our goals for
adopting a short sale price test
restriction and limiting impediments to
the normal operations of the market. As
discussed above, due to the changes in
market conditions and erosion of
investor confidence that occurred
recently, investors have become
increasingly concerned about sudden
and excessive declines in prices that
appear to be unrelated to issuer
fundamentals.1043 We believe that a
time-limited circuit breaker that is
triggered by a significant intra-day
decline in price of an individual
1041 Letter from EWT (June 2009); see also letter
from Matlock Capital (May 2009).
1042 See letter from NYSE Euronext (Sept. 2009).
1043 See supra Section II.C. (discussing investor
confidence); see also Proposal, 74 FR at 18046–
18049.

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security is a targeted response to
address these concerns.
Commenters also expressed concerns
that, during periods of volatility, ‘‘circuit
breakers could potentially impact far too
many stocks on any given day and
damage the benefits of short selling.’’1044
Similarly, a number of commenters
expressed concerns that, if the trigger
level for a circuit breaker were set too
low, the circuit breaker would impose a
short sale price test restriction that
would impair trading in a stock not only
due to a price decline that might
indicate abusive or abnormal trading
activity, but also during normal market
conditions, thus impairing normal
trading activity, further limiting the
provision of market benefits such as
liquidity and price efficiency, and
causing disruptions to investors and
markets.1045
When the markets experience periods
of extreme volatility, we expect that the
circuit breaker will be triggered for more
securities than during periods of low
volatility. We believe this is an
appropriate result of Rule 201 because
it is designed to impose restrictions on
short selling when individual securities
are undergoing significant intra-day
price declines. In addition, we recognize
that a 10% trigger level may capture
some ‘‘normal’’ trading activity.
However, as discussed in detail in
Section III.A.5., above, commenters’
estimates and the Staff’s analysis show
that a 10% circuit breaker threshold
generally should affect only a limited
percentage of covered securities. This
supports the conclusion that Rule 201
provides a tailored approach that
reaches a limited subset of covered
securities that are experiencing a
significant intra-day price decline,
while generally not restricting short
selling in the majority of covered
securities. To the extent that Rule 201
impairs normal trading activity, we
believe that such costs are justified by
the benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
Several commenters expressed
concerns that a circuit breaker approach
‘‘does not adequately address the
1044 Letter from Atherton Lane; see also letter
from Citadel et al. (June 2009); letter from Goldman
Sachs (June 2009); letter from ISE (June 2009); letter
from MFA (June 2009); letter from SIFMA (June
2009); letter from Wells Fargo (June 2009); letter
from SIFMA (Sept. 2009).
1045 See, e.g., letter from Citadel et al. (June 2009);
letter from Goldman Sachs (June 2009); letter from
MFA (June 2009); letter from SIFMA (June 2009);
letter from SIFMA (Sept. 2009).

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negative implications of unregulated
short selling’’ because it would permit
relatively unrestricted, and potentially
manipulative, short selling up to the
trigger point.1046 One commenter stated
that a circuit breaker would not be
effective to address manipulative short
selling because ‘‘predatory short selling
is not a one-day event, but the
culmination of a series of events.’’ 1047
While it is true that, under a circuit
breaker approach, the short sale price
test restriction of Rule 201 will not
apply to short selling in a security
before the 10% intra-day decline trigger
is reached, or after the duration of the
restriction has passed, we believe that
the circuit breaker approach is designed
to strike the appropriate balance
between our goal of preventing potential
short sale abuse and the need to limit
impediments to the normal operations
of the market. As we stated in the
Proposal, in discussing a short selling
circuit breaker, one commenter noted
that such a measure could address the
issue of ‘‘bear raids’’ while limiting the
market impact that may arise from other
forms of short sale price test
restrictions.1048 As discussed above,
short selling is an important tool in
price discovery and the provision of
liquidity to the market, and we
recognize that imposition of a short
selling circuit breaker that when
triggered imposes the alternative uptick
rule could restrict otherwise legitimate
short selling activity during periods of
significant volatility. To the extent that
Rule 201 permits relatively unrestricted,
and potentially manipulative, short
selling during times when the circuit
breaker has not been triggered for a
particular security, we believe that such
costs are justified by the benefits
provided by the circuit breaker
approach in not interfering with the
provision of market benefits such as
liquidity and price efficiency for the
majority of covered securities most of
the time.
After considering the comments, as
discussed above, that we received with
respect to the potential market impacts
of a circuit breaker approach, we believe
that such potential market impacts do
not undermine our goals of preventing
potential short sale abuse and
addressing investor confidence, while
balancing these goals with the need to
limit impediments to the normal
1046 Letter from T. Rowe Price (June 2009); see
also letter from Atherton Lane; letter from Chlebina
(Apr. 2009); letter from Equity Insight; letter from
Wells Fargo (June 2009); letter from Glen Shipway
(Sept. 2009).
1047 Letter from Equity Insight.
1048 See Proposal, 74 FR at 18067, n.252 (noting
a letter from Peter Brown, dated Dec. 12, 2008).

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operations of the market. The
Commission has long held the view that
circuit breakers may help restore
investor confidence during times of
substantial uncertainty.1049 We believe
that the requirements of Rule 201 will
produce such benefits. By imposing the
alternative uptick rule once a security’s
price is experiencing a significant price
decline, the short selling circuit breaker
rule in Rule 201(b) is designed to target
only those securities that experience
significant intra-day price declines and,
therefore, will help to prevent short
selling from being used as a tool to
exacerbate the decline in the price of
those securities. This approach
establishes a narrowly-tailored Rule that
will target only those securities
experiencing such a decline. We believe
that addressing short selling in
connection with such declines in
individual securities will help restore
investor confidence in the markets
generally.
Further, as discussed above, short
selling is an important tool in price
discovery and the provision of liquidity
to the market, and we recognize that
imposition of a short selling circuit
breaker that when triggered imposes the
alternative uptick rule could restrict
otherwise legitimate short selling
activity during periods of significant
volatility. Under the circuit breaker
approach, the alternative uptick rule
will only be imposed when a covered
security has experienced an intra-day
price decline of 10% or more and will
only apply for the remainder of the day
and the following day. We believe that
the negative impact of Rule 201, if any,
on the market will be limited because of
the limited scope and duration of Rule
201. Further, to the extent that Rule 201
negatively impacts market quality, we
believe that such costs are justified by
the benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
b. Implementation and On-Going
Monitoring and Surveillance Costs
We discussed in the Proposal and the
Re-Opening Release the anticipated
costs of the proposed circuit breaker
rules 1050 and we requested comment on
the costs associated with the proposed
circuit breaker rules.1051 In particular,
we requested comment on the potential
1049 See, e.g., 1998 Release, 63 FR 18477; see also
Proposal, 74 FR at 18067.
1050 See Proposal, 74 FR at 18097–18100; ReOpening Release, 74 FR at 42035.
1051 See Proposal, 74 FR at 18101–18103; ReOpening Release, 74 FR at 42037.

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costs for any modification to both
computer systems and surveillance
mechanisms and for information
gathering, management, and
recordkeeping systems or
procedures.1052
Several commenters expressed
concerns regarding the implementation
costs of a circuit breaker approach in
comparison to the costs of
implementing a permanent, marketwide test, but did not provide specific
cost estimates.1053 One commenter
stated that ‘‘the circuit breaker proposal
would be the least cost effective’’ but did
not provide a specific cost estimate with
respect to a circuit breaker rule.1054
One commenter conducted a survey
of fifty firms with respect to
implementation cost and on-going
monitoring costs estimates of a new
short sale price test restriction.1055 Cost
estimates in response to the survey
indicated that a permanent, marketwide short sale price test based on the
national best bid would have
implementation costs that averaged
between $200,000 and $1,100,000 per
firm,1056 while a circuit breaker
triggering a short sale price test based on
the national best bid would have
implementation costs that averaged
between $235,000 and $2,000,000 per
firm.1057 This represents an estimated
increase in implementation costs for a
circuit breaker approach, as compared
to a permanent, market-wide approach,
of $35,000 to $900,000 per firm.
However, we note that these cost
estimates were based on a circuit
breaker triggering the proposed
modified uptick rule and, as such, were
not specific to the alternative uptick
rule.1058 As discussed throughout this
1052 See

Proposal, 74 FR at 18090.
supra note 676.
1054 Letter from T. Rowe Price (June 2009).
1055 See letter from SIFMA (June 2009).
1056 See letter from SIFMA (June 2009). SIFMA
did not categorize estimates of the implementation
costs of a permanent, market-wide short sale price
test based on the national best bid by SRO trading
centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms,
with implementation cost estimates that averaged
$1,000,000 per firm, with the highest estimate at
$7,000,000 per firm, regional firms with estimates
that averaged $200,000 per firm, with the highest
estimate at $500,000 per firm, and clearing firms,
with estimates that averaged $1,100,000 per firm,
with the highest estimate at $1,900,000 per firm.
SIFMA provided cost estimates in terms of the
average estimated cost and the highest estimated
cost. See id.
1057 See supra note 918 (discussing SIFMA’s
survey of cost estimates with respect to the
implementation costs of a circuit breaker triggering
a short sale price test based on the national best
bid).
1058 We also note that the commenter’s survey
results covered fifty firms, categorized as large
firms, regional firms, and clearing firms, rather than
SRO trading centers, non-SRO trading centers and

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adopting release, because the alternative
uptick rule does not require sequencing
of the national best bid, unlike the
proposed modified uptick rule and the
proposed uptick rule, which would
have required sequencing of the
national best bid or last sale price, we
believe that the policies and procedures
required under the alternative uptick
rule will be easier and less costly to
implement and monitor than would be
the case under the proposed modified
uptick rule or the proposed uptick rule.
We recognize that imposing a short
sale-related circuit breaker rule when,
currently, there is an absence of a short
sale-related circuit breaker may result in
costs in terms of modifications to
systems and surveillance mechanisms,
as well as changes to processes and
procedures.1059 Such costs will include
implementation costs for market
participants associated with
reprogramming trading and surveillance
systems to account for the requirements
of the short sale related circuit breaker.
We also recognize that the circuit
breaker approach may impose costs on
market participants related to systems
changes to computer software,
reprogramming costs, and surveillance
and compliance costs, as well as staff
time and technology resources,
associated with monitoring compliance
with the short sale related circuit
breaker. Moreover, imposing a short sale
related circuit breaker rule when there
are currently no short sale related
circuit breakers in place also may mean
that staff (compliance personnel,
associated persons, etc.) may need to be
trained or re-trained regarding rules
related to the circuit breaker
requirements.
As discussed previously,1060 despite
some commenters’ concerns regarding
broker-dealers. Thus, it is difficult to determine
costs of a circuit breaker approach to trading centers
as opposed to broker-dealers from the survey
results.
1059 Although under the circuit breaker approach,
a price test will not be in place all the time or for
all securities, trading centers, and broker-dealers
relying on Rule 201(c) or Rule 201(d)(6), will need
to establish reasonable policies and procedures in
advance to ensure compliance whenever the circuit
breaker is triggered. We note that it would not be
reasonable for a trading center, or a broker-dealer
relying on Rule 201(c) or Rule 201(d)(6) to wait
until the circuit breaker is triggered to begin
establishing reasonable policies and procedures to
prevent the execution or display of the particular
covered security at a price that is less than or equal
to the current national best bid. Thus, we recognize
that the circuit breaker approach will result in
immediate upfront costs to trading centers and to
broker-dealers intending to rely on Rule 201(c) or
Rule 201(d)(6). See supra Section X.B.1. (discussing
costs of the alternative uptick rule).
1060 See supra notes 676 to 684 and 723 to 727
and accompanying text (discussing the impact of
the circuit breaker approach on implementation and

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the implementation costs of a circuit
breaker rule, we believe that the circuit
breaker approach will result in largely
the same implementation costs as we
estimated would be incurred if we
adopted a permanent, market-wide short
sale price test restriction.1061 We believe
that there will be only minimal, if any,
implementation costs for a circuit
breaker approach in addition to the
costs we estimated previously for the
implementation of a permanent, marketwide short sale price test rule.1062
In addition, with respect to on-going
monitoring and surveillance costs of the
circuit breaker approach, we recognize,
as noted by one commenter,1063 that
market participants will need to
continuously monitor whether a
security is subject to the provisions of
Rule 201 and that there will be costs
associated with such monitoring.
However, we believe that these costs
will be offset because, under the limited
scope and duration of the circuit breaker
approach, market participants will only
need to monitor and surveil for
compliance with the alternative uptick
rule during the limited period of time
that the circuit breaker is in effect with
respect to a specific security. This will
reduce our previously estimated costs
for on-going monitoring and
surveillance.1064
In addition, although, under the
circuit breaker approach, market
participants will need to monitor
whether a stock is subject to Rule 201
or not, we believe that familiarity with
a circuit breaker approach may help
mitigate such compliance costs. As
discussed in the Proposal, currently, all
stock exchanges and FINRA have rules
or policies to implement coordinated
circuit breaker halts.1065 Moreover,
SROs have rules or policies in place to
coordinate individual security trading
halts corresponding to significant news
events.1066
on-going monitoring and surveillance costs to
trading centers and broker-dealers).
1061 See Proposal, 74 FR 18093–18094.
1062 Several commenters agreed, stating that the
costs of the circuit breaker approach would be
similar to, or only incrementally higher than, the
costs of a permanent, market-wide approach. See,
e.g., letter from Nasdaq OMX Group (Oct. 2009);
letter from Credit Suisse (Sept. 2009); letter from
STA (June 2009).
1063 See letter from Glen Shipway (June 2009).
1064 Commenters noted that the circuit breaker
approach will allow regulatory, supervisory and
compliance resources to focus on, and to address,
those situations where a specific security is
experiencing significant downward price pressure.
See, e.g., letter from Nasdaq OMX Group (Oct.
2009); letter from SIFMA (Sept. 2009).
1065 See supra note 292.
1066 See, e.g., FINRA Rule 6120; see also Proposal,
74 FR at 18065–18066 (discussing the background
on circuit breakers).

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We also note that one commenter
conducted a survey of firms with
respect to on-going monitoring costs
estimates of a new short sale price test
restriction.1067 Cost estimates in
response to the survey indicated that a
permanent, market-wide short sale price
test based on the national best bid
would have on-going monitoring costs
that averaged between $50,000 and
$175,000 per firm,1068 while a circuit
breaker triggering a short sale price test
based on the national best bid would
have on-going monitoring costs that
averaged between $45,000 and $175,000
per firm.1069 This seems to support our
view that the on-going monitoring costs
of a circuit breaker approach, as
compared to a permanent, market-wide
approach, would be largely the same.
After considering the comments, we
believe that the implementation, ongoing monitoring and surveillance costs
of a circuit breaker triggering a short
sale price test restriction will be similar
to the implementation, on-going
monitoring and surveillance costs of the
same short sale price test restriction on
a permanent, market-wide basis. Thus,
we believe that our estimates of the
implementation and on-going
monitoring and surveillance costs of
Rule 201 for trading centers and brokerdealers, as reflected in Sections X.B.1.b.i
and X.B.1.b.ii., discussing the
implementation and on-going
monitoring and compliance costs of the
alternative uptick rule, are appropriate
after taking into consideration the
circuit breaker approach of Rule 201.
Further, we believe that such costs are
justified by the benefits provided by the
Rule in preventing short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security.
Under the circuit breaker approach of
Rule 201, the listing market for each
covered security must determine
whether that covered security is subject
1067 See

letter from SIFMA (June 2009).
letter from SIFMA (June 2009). SIFMA
did not categorize estimates of the on-going costs
of a permanent, market-wide short sale price test
based on the national best bid by SRO trading
centers, non-SRO trading centers, and other brokerdealers, but categorized responses by larger firms,
with on-going monitoring cost estimates that
averaged $100,000 per firm, with the highest
estimate at $1,500,000 per firm, regional firms with
estimates that averaged $50,000 per firm, with the
highest estimate at $450,000 per firm, and clearing
firms, with estimates that averaged $175,000 per
firm, with the highest estimate at $250,000 per firm.
SIFMA only provided the average and highest cost
estimates per category. See id.
1069 See supra note 931 (discussing SIFMA’s
survey of cost estimates with respect to the on-going
monitoring costs of a circuit breaker triggering a
short sale price test based on the national best bid).

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1068 See

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to Rule 201.1070 Once the listing market
has determined that a security has
become subject to the requirements of
Rule 201, the listing market shall
immediately notify the single plan
processor responsible for consolidation
of information for the covered security
in accordance with Rule 603(b) of
Regulation NMS 1071 of this fact. The
plan processor must then disseminate
this information.1072 We recognize that
these requirements will require changes
by the listing markets and single plan
processors to systems currently
supported by each.1073 We note that,
because listing markets and single plan
processors will require time in which to
reprogram and test their systems and
procedures to comply with Rule 201,
the systems and programming costs
associated with Rule 201 might be
higher without a sufficient
implementation period.1074 We believe
that the six month implementation
period will provide listing markets and
single plan processors with time to
make required changes in a measured
fashion, which will help alleviate some
of the potential disruptions that may be
associated with implementing Rule
201.1075
While we recognize that listing
markets will incur initial up-front costs
associated with having to update their
systems, including systems changes to
computer software, as well as staff time
and technology resources to update
their systems and surveillance
mechanisms to ensure compliance with
the Rule’s requirements,1076 familiarity
with a circuit breaker approach may
help mitigate the implementation and
compliance costs. In addition, we
believe that listing markets may be able
to leverage some of their existing
1070 See

Rule 201(b)(3).
supra note 368 (discussing the single
plan processors for NMS stocks).
1072 See Rule 201(b)(3); 17 CFR 242.603(b).
1073 See letter from FIF (June 2009); see also supra
Section III.A.6. (discussing the determination
regarding securities subject to Rule 201 and
dissemination of such information).
1074 For example, commenters indicated that a
circuit breaker rule triggering the alternative uptick
rule would require an implementation period of
between three and twelve months. See letter from
NSCP; letter from NYSE Euronext (June 2009); letter
from RBC (June 2009); letter from STA (June 2009);
letter from FIF (Sept. 2009); letter from Citadel et
al. (Sept. 2009); letter from Credit Suisse (Sept.
2009); letter from Direct Edge (Sept. 2009); letter
from EWT (Sept. 2009); letter from RBC (Sept.
2009); letter from SIFMA (Sept. 2009); letter from
MFA (Oct. 2009); see also letter from Amer. Bankers
Assoc.; letter from NYSE Euronext (Sept. 2009);
letter from Goldman Sachs (Sept. 2009).
1075 See supra Section VII. (discussing the
implementation period for Rule 201); see also supra
Section III.A.6.
1076 See supra Section X.B.1. (discussing costs of
the alternative uptick rule).
1071 See

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procedures to ease the implementation
of Rule 201’s requirements. For
example, as discussed in the Proposal,
currently, all stock exchanges and
FINRA have rules or policies to
implement coordinated circuit breaker
halts 1077 and listing markets also
already send information to single plan
processors regarding Regulatory Halts as
defined in those plans. Moreover, SROs
have rules or policies in place to
coordinate individual security trading
halts corresponding to significant news
events.1078 In addition, we note that
listing markets are familiar with making
determinations regarding, and imposing
trading restrictions on, individual NMS
stocks.1079 Similarly, in connection with
such activities, listing markets currently
monitor price changes in covered
securities relative to the closing price as
of the end of regular trading hours on
the prior day.
Further, we note that listing markets
are also trading centers, as defined by
Rule 201,1080 and as such, will have
costs in connection with systems
changes to implement the policies and
procedures requirements of Rule 201
applicable to trading centers.1081 We
believe that the costs to listing markets
associated with having to update their
systems to ensure compliance with the
Rule’s requirements applicable to listing
markets will be an incremental addition
to the costs associated with the
implementation of the policies and
procedures requirements applicable to
trading centers.1082 We believe that the
implementation and compliance costs
for listing markets are justified by the
benefits provided by requiring the
listing market for a covered security to
determine whether the security has
become subject to the short sale price
test restrictions of Rule 201 because this
will help to ensure consistency for each
covered security with respect to such
determinations.
We recognize that single plan
processors will also incur initial upfront costs associated with having to
update their systems, including systems
changes to computer software, as well as
staff time and technology resources to
update their systems and surveillance
mechanisms in order to ensure
1077 See

supra note 292.
supra note 684.
1079 For example, listing markets already have
rules or policies in place to coordinate trading
suspensions or halts in individual NMS stocks. See,
e.g., Nasdaq Rule 4120 (relating to trading halts in
Nasdaq-listed securities); NYSE Rule 123D (relating
to delayed openings and trading halts in NYSElisted securities).
1080 See Rule 201(a)(9).
1081 See supra Section IX.E.1. (discussing
implementation costs to trading centers).
1082 See id.
1078 See

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compliance with the circuit breaker
requirements.1083 We believe, however,
that the single plan processors’ current
familiarity with receiving and
disseminating information regarding
individual NMS stocks will help
mitigate these implementation and
compliance costs. For example, the
single plan processors currently receive
information from listing markets
regarding trading restrictions, such as
Regulatory Halts as defined in those
plans, on individual securities and
disseminate such information. As a
result, the requirements of Rule
201(b)(3) are similar to existing
obligations on plan processors pursuant
to the requirements of Regulation NMS,
the CTA and CQ Plans and the Nasdaq
UTP Plan. Two commenters agreed that
dissemination of information regarding
the triggering of Rule 201 would be a
function similar to other functions
currently performed by the plan
processors.1084 Further, we believe that
the implementation and compliance
costs for single plan processors are
justified by the benefits provided by
requiring the single plan processors to
disseminate information on whether a
security has become subject to the short
sale price test restrictions of Rule 201
because the similarity of this function to
current functions performed by the
single plan processors will help to
ensure the workability and smooth
functioning of the Rule.
3. Implementation Period
We believe that a six month
implementation period will provide
trading centers, broker-dealers, listing
markets, the single plan processors and
other market participants with a
sufficient amount of time in which to
modify their systems and procedures in
order to comply with the requirements
of Rule 201.1085 The six month
implementation period will provide
market participants with time to make
required changes in a measured fashion,
which will help alleviate some of the
potential disruptions that may be
associated with implementing Rule 201.
Because trading centers, listing markets,
the single plan processors and other
market participants will require time in
which to reprogram and test their
systems and procedures to comply with
Rule 201, the systems and programming
costs associated with Rule 201 might be
higher without a sufficient
implementation period. For example,
1083 See supra Section X.B.1. (discussing costs of
the alternative uptick rule).
1084 See letter from NYSE Euronext (Sept. 2009);
letter from Virtu Financial.
1085 See supra Section VII. (discussing the
implementation period).

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commenters indicated that a circuit
breaker rule triggering the alternative
uptick rule would require an
implementation period of between three
and twelve months.1086
The six month implementation
period, which is longer than the
implementation periods proposed in the
Proposal and the Re-Opening Release,
takes into consideration commenters’
concerns that implementation of a short
sale price test could be complex.1087 We
do not believe that an implementation
period longer than 6 months is
warranted because Rule 201 does not
require monitoring of the sequence of
bids or last sale prices, unlike other
proposed short sale price tests,1088 and
because Rule 201 requires the
implementation of policies and
procedures similar to those required for
trading centers under Regulation
NMS.1089 In addition, as discussed
1086 See letter from NSCP; letter from NYSE
Euronext (June 2009); letter from RBC (June 2009);
letter from STA (June 2009); letter from FIF (Sept.
2009); letter from Citadel et al. (Sept. 2009); letter
from Credit Suisse (Sept. 2009); letter from Direct
Edge (Sept. 2009); letter from EWT (Sept. 2009);
letter from RBC (Sept. 2009); letter from SIFMA
(Sept. 2009); letter from MFA (Oct. 2009); see also
letter from Amer. Bankers Assoc.; letter from NYSE
Euronext (Sept. 2009); letter from Goldman Sachs
(Sept. 2009).
1087 See, e.g., letter from NSCP; letter from RBC
(June 2009); letter from SIFMA (June 2009); letter
from RBC (Sept. 2009); see also letter from Direct
Edge (Sept. 2009) (stating that adoption of a circuit
breaker approach will add approximately four to six
weeks to the implementation time of the alternative
uptick rule); letter from NYSE Euronext (Sept. 2009)
(stating that ‘‘a circuit breaker approach raises
significant implementation complexities’’). But cf.
letter from Credit Suisse (Sept. 2009) (stating that
a circuit breaker approach will not significantly
increase implementation time); letter from Nasdaq
OMX Group (Oct. 2009) (stating that ‘‘[o]nce the
price test is in place, there is minimal incremental
effort required to add a Circuit Breaker that controls
the application of the price test’’).
1088 Several commenters noted that because the
alternative uptick rule, unlike the other proposed
price tests, does not require sequencing of bids or
last sale prices, the alternative uptick rule could be
implemented more quickly than the other proposed
price tests, in three to six months. See, e.g., letter
from Credit Suisse (June 2009); letter from STA
(June 2009); letter from Credit Suisse (Sept. 2009);
letter from FIF (Sept. 2009). But cf. letter from
Citadel et al. (Sept. 2009); letter from NYSE
Euronext (Sept. 2009); letter from RBC (Sept. 2009);
letter from SIFMA (Sept. 2009).
1089 One commenter stated that implementation
concerns with respect to a short sale price test
restriction could be mitigated, provided that trading
centers ‘‘could leverage existing architecture
developed to comply with the order protection rule
in Reg NMS (Rule 611).’’ Letter from MFA (Oct.
2009). Another commenter stated that
implementation of a circuit breaker triggering the
alternative uptick rule would be easier to
implement, ‘‘provided that the Commission permits
firms to leverage the numerous systems changes
made to facilitate compliance with Regulation NMS
(including the use of internal market data rather
than consolidated data supplied by the industry
plans).’’ Letter from Goldman Sachs (Sept. 2009).
But cf. letter from FIF (June 2009); letter from NSCP;
letter from RBC (June 2009).

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11311

above, market participants will be able
to leverage the numerous systems
changes made and current architecture
developed to facilitate compliance with
Regulation NMS. These factors should
reduce implementation time.
4. Marking Requirements
While the current marking
requirements in Rule 200(g) of
Regulation SHO, which require brokerdealers to mark all sell orders of any
equity security as either ‘‘long’’ or
‘‘short,’’ 1090 will remain in effect, the
amendments to Rule 200(g) will add a
new marking requirement of ‘‘short
exempt.’’ 1091 In particular, if the brokerdealer chooses to rely on its own
determination that it is submitting the
short sale order to the trading center at
a price that is above the current national
best bid at the time of submission or to
rely on an exception specified in the
Rule, it must mark the order as ‘‘short
exempt.’’ 1092 We discussed in the
Proposal the anticipated costs of the
proposed amendments 1093 and, in the
Proposal and Re-Opening Release, we
requested comment on the costs
associated with the proposed
amendments.1094
Several commenters expressed
concerns regarding the implementation
costs of the ‘‘short exempt’’ marking
requirements.1095 Several commenters
noted that the ‘‘short exempt’’ marking
requirements would require
modifications to multiple systems,
including modifications to blue sheet,
OATS and OTS reporting systems.1096
One commenter noted that such
modifications would be in addition to
changes to order entry and routing
applications.1097 Another commenter
noted that one of its primary
implementation concerns was related to
‘‘re-implementation of ‘Short Sale
Exempt’ order types in interfaces
between [the commenter] and [its]
Customers as well as the venues that
support such exempt order types.’’ 1098
In contrast, one commenter, in
supporting adoption of the ‘‘short
1090 17

CFR 242.200(g).
Rule 200(g); see also supra Section IV.
(discussing the amendments to Rule 200(g)).
1092 See Rule 200(g)(2).
1093 See Proposal, 74 FR at 18100.
1094 See Proposal, 74 FR at 18103; Re-Opening
Release, 74 FR at 42037.
1095 See, e.g., letter from FIF (June 2009); letter
from NSCP; letter from RBC (June 2009); letter from
Lime Brokerage (Sept. 2009); letter from FIF (Sept.
2009).
1096 See, e.g., letter from NSCP; letter from RBC
(June 2009); letter from FIF (June 2009); letter from
FIF (Sept. 2009).
1097 See letter from FIF (June 2009); letter from
FIF (Sept. 2009).
1098 Letter from Lime Brokerage (Sept. 2009).
1091 See

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

exempt’’ marking requirements (in the
event that the Commission decided to
adopt a short sale price test restriction),
stated that ‘‘[t]he costs of marking the
orders appropriately will be worth the
benefits gained.’’ 1099
We recognize commenters’ concerns
with respect to the costs of the ‘‘short
exempt’’ marking requirement and we
considered these comments in
evaluating the costs of the ‘‘short
exempt’’ marking requirement. Such
costs will include one-time costs for
broker-dealers for reprogramming and
systems changes, including
modifications to reporting systems,
order entry and routing applications. In
addition, the costs of the ‘‘short exempt’’
marking requirement will include ongoing monitoring and surveillance costs
for broker-dealers. However, we believe
that such costs will be limited because
broker-dealers already have established
systems, processes, and procedures in
place to comply with the current
marking requirements of Rule 200(g) of
Regulation SHO with respect to marking
a sell order either ‘‘long’’ or ‘‘short’’ and,
therefore, will likely leverage such
systems, processes and procedures to
comply with the ‘‘short exempt’’
marking requirements in Rules 200(g)
and 200(g)(2). Further, we believe that
the implementation and compliance
costs of the ‘‘short exempt’’ marking
requirements are justified by the
benefits provided by the requirements
in aiding surveillance by SROs and the
Commission for compliance with the
provisions of Rule 201 and providing an
indication to a trading center regarding
when it must execute or display a short
sale order without regard to whether the
order is at a price that is less than or
equal to the current national best bid.
We also considered whether our
estimates of the implementation and ongoing monitoring and compliance costs
associated with the ‘‘short exempt’’
marking requirements under the
amendments to Rule 200(g), as proposed
in conjunction with the proposed
modified uptick rule 1100 would change
under the circuit breaker approach of
Rule 201, but concluded, as discussed
below, that these estimates continue to
represent reasonable estimates under
the circuit breaker approach.
We believe that the ‘‘short exempt’’
marking requirements of Rule 200(g), in
conjunction with a circuit breaker
approach, will result in largely the same
implementation costs as we estimated
would be incurred if the ‘‘short exempt’’
marking requirements were combined
with a market-wide short sale price test
1099 Letter
1100 See

from STA (June 2009).
Proposal, 74 FR at 18089.

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restriction.1101 This is because brokerdealers relying on the provisions of Rule
201(c) or Rule 201(d) will need to make
systems changes to implement the
‘‘short exempt’’ marking requirements
regardless of whether the short sale
price test restriction is adopted on a
permanent, market-wide basis or, in the
case of Rule 201, adopted in
conjunction with a circuit breaker.
In addition, with respect to on-going
monitoring and surveillance costs of the
‘‘short exempt’’ marking requirements in
conjunction with a circuit breaker
approach, we recognize, as noted by one
commenter,1102 that market participants
will need to continuously monitor
whether a security is subject to the
provisions of Rule 201 and that there
will be costs associated with such
monitoring. However, we believe that
these costs will be offset because, under
the circuit breaker approach, use of the
‘‘short exempt’’ provisions of Rule 201(c)
and Rule 201(d) and the related marking
requirements will be time limited and
will only apply on a stock by stock
basis. As a result, broker-dealers who
choose to rely on Rule 201(c) or Rule
201(d) will only need to monitor and
surveil for compliance with the
requirements of those provisions and
will only need to mark qualifying orders
‘‘short exempt’’ during the limited
period of time that the circuit breaker is
in effect with respect to a specific
security. The circuit breaker approach
will allow regulatory, supervisory and
compliance resources to focus on, and
to address, those situations where a
specific security is experiencing
significant downward price
pressure.1103
On balance, we believe our proposed
estimates of the costs associated with
the ‘‘short exempt’’ marking
requirement 1104 are appropriate with
respect to Rule 200(g) as adopted. Thus,
our estimates have not changed from the
Proposal, except to the extent that total
burden estimates have changed because
we have updated the estimated number
of broker-dealers.1105
We believe that the implementation
cost of the ‘‘short exempt’’ marking
requirement will likely be similar to the
implementation cost of the order
marking requirements of Rule 200(g) of
Regulation SHO, which had originally
included the category of ‘‘short exempt.’’
Industry sources at that time estimated
initial implementation costs for the
1101 See

Proposal, 74 FR at 18100.
letter from Glen Shipway (June 2009).
1103 See, e.g., letter from Nasdaq OMX Group
(Oct. 2009); letter from SIFMA (Sept. 2009).
1104 See Proposal, 74 FR at 18089.
1105 See supra note 729.
1102 See

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former ‘‘short exempt’’ marking
requirement to be approximately
$100,000 to $125,000.1106 Based on
these estimates, as adjusted for inflation,
we estimate that the initial
implementation cost of the ‘‘short
exempt’’ marking requirement will be
approximately $115,000 to $145,000 per
broker-dealer 1107 for a total initial
implementation cost of approximately
$595,470,000 to $750,810,000 for all
broker-dealers.1108
We recognize that there will be an ongoing paperwork burden cost associated
with adding the ‘‘short exempt’’ marking
requirements. For example, as detailed
in PRA Section IX.E.3., above, we
estimate that the total annual cost for
each broker-dealer subject to the ‘‘short
exempt’’ marking requirements will be
$93,420 1109 for a total annual on-going
cost of $483,728,760 for all brokerdealers subject to the ‘‘short exempt’’
marking requirements.1110
To provide market participants with
the time needed to make the changes
required to comply with Rule 200(g), we
are adopting an implementation period
under which market participants will
have to comply with these requirements
six months following the effective date
of the adoption of these amendments. In
the Proposal, we proposed a three
month implementation period for the
‘‘short exempt’’ marking requirements
under Rule 200(g). In response to our
request for comment, several
commenters stated that the ‘‘short
exempt’’ marking requirement would
require systems changes.1111 Another
commenter stated that the ‘‘short
exempt’’ marking requirement would
require coding for new fields in order
1106 See 2004 Regulation SHO Adopting Release,
69 FR at 48023.
1107 The adjustment for inflation was calculated
using information in the Consumer Price Index,
U.S. Department of Labor, Bureau of Labor
Statistics.
1108 These figures were calculated as follows:
($115,000 × 5,178) = $595,470,000 and ($145,000 ×
5,178) = $750,810,000.
1109 This figure was calculated as follows: (346
hours × $270) = $93,420 per broker-dealer. The 346
hour estimate was calculated as follows: 12.9
billion ‘‘short exempt’’ orders/5,178 broker-dealers =
2,491,309 annual responses by each broker-dealer.
Each response of marking sell orders ‘‘short exempt’’
will take approximately .000139 hours (.5 seconds)
to complete. (2,491,309 responses × 0.000139 hours)
= 346 burden hours.
Based on industry sources, we estimate that the
average hourly rate for compliance attorneys is
$270. The $270/hour figure for compliance
attorneys is from SIFMA’s Management &
Professional Earnings in the Securities Industry
2008, modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
1110 This figure was calculated as follows:
($93,420 × 5,178) = $483,728,760.
1111 See, e.g., letter from RBC (June 2009); letter
from NSCP; letter from FIF (June 2009).

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records, which should be accomplished
in approximately three months.1112
We are sensitive to commenters’
concerns that implementation of the
‘‘short exempt’’ marking requirement
could be complex, and believe that a six
month implementation period, which is
longer than the 3 month implementation
period proposed in the Proposal, will
afford market participants sufficient
time to make the necessary
modifications to their systems and
procedures. In addition, we believe that
because it will provide broker-dealers
with time to make required changes in
a measured fashion, the six month
implementation period will help
alleviate some of the potential
disruptions that may be associated with
implementing the ‘‘short exempt’’
marking requirements.
XI. Consideration of Burden on
Competition and Promotion of
Efficiency, Competition, and Capital
Formation
Section 3(f) of the Exchange Act
requires the Commission, whenever it
engages in rulemaking and is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action would promote efficiency,
competition, and capital formation.1113
In addition, Section 23(a)(2) of the
Exchange Act requires the Commission,
when adopting rules under the
Exchange Act, to consider the impact
such rules would have on
competition.1114 Exchange Act Section
23(a)(2) prohibits the Commission from
adopting any rule that would impose a
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
A number of commenters noted
concerns about the impact of a short
sale price test restriction on efficiency,
competition and capital formation.1115
One commenter stated that ‘‘the
empirical evidence from the many
academic and Commission studies and
experiences of [the commenters] * * *
raise a substantial question about
whether the proposed short sale
restrictions can satisfy these
standards.’’ 1116 Another commenter

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1112 See

letter from STA (June 2009).
1113 15 U.S.C. 78c(f).
1114 15 U.S.C. 78w(a)(2).
1115 See, e.g., letter from Joseph A. Dear, Chief
Investment Officer, California Public Employees’
Retirement System, dated June 19, 2009; letter from
Citadel et al. (June 2009); letter from Pershing
Square; letter from Vanguard (June 2009); letter
from Amer. Bar Assoc. (July 2009); letter from
Amer. Bar Assoc. (Sept. 2009); letter from MFA
(Oct. 2009).
1116 Letter from Citadel et al. (June 2009).

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noted the beneficial impact of short
selling on efficiency and competition,
quoting the Commission’s statements
that short selling provides the market
with liquidity and pricing
efficiency.1117 As discussed below, we
considered these concerns, and took
them into account in formulating Rules
200(g) and 201, as adopted, to address,
to the extent possible, these concerns.
A. Competition
We begin our consideration of
potential competitive impacts with
observations of the current structure of
the markets with respect to trading
centers and broker-dealers, mindful of
the statutory requirements regarding
competition. Based on our experience in
regulating the securities markets,
including reviewing information
provided by trading centers and brokerdealers in their registrations and filings
with us, and approving such registration
applications, we discuss below the basic
framework of the markets they
comprise.
1. Market Structure for Trading Centers
and Broker-Dealers
Trading centers include national
securities exchanges or national
securities associations that operate an
SRO trading facility, ATSs,1118
exchange market makers and OTC
market makers, and any other brokerdealer that executes orders internally,
whether as agent or principal.1119 All of
these entities will be required to alter
their trading mechanisms to comply
with Rule 200(g) and Rule 201.
The equity trading industry is a
competitive one, with reasonably low
barriers to entry. The intensity of
competition across trading platforms in
this industry has increased in the past
decade as a result of a number of factors,
including market reforms and
technological advances. This increase in
competition has resulted in decreases in
market concentration, more competition
among trading centers, a proliferation of
trading platforms competing for order
flow, and decreases in trading fees.
The reasonably low barriers to entry
for trading centers are evidenced, in
part, by the fact that new entities,
1117 See letter from Pershing Square (citing 2006
Price Test Elimination Proposing Release, 71 FR at
75069–75070).
1118 Under Regulation ATS, any entity that falls
within the definition of a securities exchange must
apply to be a securities exchange or must register
as an ATS, subject to certain exceptions. See 17
CFR 242.300, 301; see also 15 U.S.C. 78c(a)(1); 17
CFR 240.3b–16.
1119 See 17 CFR 242.600(b)(78). Currently, no
national securities association is a trading center, as
that term is defined in Rule 600(b)(78) of Regulation
NMS.

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11313

primarily ATSs, continue to enter the
market.1120 For example, currently there
are approximately 50 registered ATSs
that trade covered securities. In
addition, the Commission within the
past few years has approved
applications by two entities—BATS and
Nasdaq—to become registered as
national securities exchanges for trading
equities, and approved proposed rule
changes by two existing exchanges—ISE
and CBOE—to add equity trading
facilities to their existing options
business. We believe that competition
among trading centers has been
facilitated by Rule 611 of Regulation
NMS,1121 which encourages quote-based
competition between trading centers;
Rule 605 of Regulation NMS,1122 which
empowers investors and broker-dealers
to compare execution quality statistics
across trading centers; and Rule 606 of
Regulation NMS,1123 which enables
customers to monitor order routing
practices.
Broker-dealers are required to register
with the Commission and at least one
SRO. The broker-dealer industry,
including market makers, is a
competitive industry, with most trading
activity concentrated among several
dozen larger participants and with
thousands of smaller participants
competing for niche or regional
segments of the market.
There are 5,178 registered brokerdealers, of which 890 are small brokerdealers.1124 Larger broker-dealers often
enjoy economies of scale over smaller
broker-dealers and compete with each
other to service the smaller brokerdealers, who are both their competitors
and customers. The reasonably low
barriers to entry for broker-dealers are
evidenced, for example, by the fact that
the average number of new brokerdealers entering the market each year
between 2001 and 2008 was 389.1125
1120 See Exchange Act Release No. 60997 (Nov.
13, 2009), 74 FR 61208, 61234 (Nov. 23, 2009)
(discussing the reasonably low barriers to entry for
ATSs and that these reasonably low barriers to
entry have generally helped to promote competition
and efficiency).
1121 17 CFR 242.611.
1122 17 CFR 242.605.
1123 17 CFR 242.606.
1124 These numbers are based on a review of 2007
and 2008 FOCUS Report filings reflecting registered
broker-dealers, and discussions with SRO staff. The
number does not include broker-dealers that are
delinquent on FOCUS Report filings. We discuss
the impact of Rule 201 on small broker-dealers in
Section XII.B., below.
1125 This number is based on a review of FOCUS
Report filings reflecting registered broker-dealers
from 2001 through 2008. The number does not
include broker-dealers that are delinquent on
FOCUS Report filings. New registered brokerdealers for each year during the period from 2001
through 2008 were identified by comparing the

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2. Discussion of Impacts of Rules 200(g)
and 201 on Competition
We believe that the estimated costs
associated with implementing and
complying with Rules 200(g) and 201
are not so large as to raise significant
barriers to entry, or otherwise
significantly alter the competitive
landscape of the industries involved. In
industries characterized by reasonably
low barriers to entry and intense
competition, the viability of some of the
less successful competitors may be
sensitive to regulatory costs.
Nonetheless, given the reasonably low
barriers to entry into the market for
execution services, we believe that the
trading center and broker-dealer
industries will remain competitive,
despite the costs associated with
implementing and complying with
Rules 200(g) and 201, even if those costs
influence to some degree the entry or
exit decisions of individual trading
centers or broker-dealers at the margin.
Several commenters expressed
concerns about the impact of a short
sale price test restriction on competition
among broker-dealers.1126 For example,
one commenter noted concerns with
respect to decreased competition and
increased broker-dealer
‘‘internalization.’’ 1127 Specifically, this
commenter stated that, as a result of
short sale price test restrictions, ‘‘a
widening of bid/offer spreads and
decrease in liquidity provided by
professional market makers could
reverse the consolidation of liquidity in
the public markets, permitting some
brokers once again to take advantage of
decreased competition in price
discovery and offer substantially
inferior (but still technically legal)
internalization prices to their
customers.’’ 1128 Although we
considered this commenter’s concerns,
we note that, as discussed above, due to
the circuit breaker approach of Rule
201, as well as findings by the Pilot
Results regarding the market impact of
former Rule 10a–1, we believe that the
short sale price test restrictions of Rule
201 will have a limited, if any, negative
market impact, such as widening of bid/
offer spreads or decreased liquidity.1129
Thus, we do not believe that Rule 201
unique registration number of each broker-dealer
filed for the relevant year to the registration
numbers filed for each year between 1995 and the
relevant year.
1126 See, e.g., letter from Credit Suisse (June
2009); letter from EWT (June 2009); letter from FIF
(June 2009); letter from NSCP.
1127 Letter from EWT (June 2009).
1128 Id.
1129 See supra Section X.B.1.a. (discussing the
impact of Rule 201 on liquidity, market volume,
bid-ask spreads, price discovery and volatility).

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will result in decreased competition in
price discovery or increased
internalization.
Another commenter stated that ‘‘while
it will not be mandated that firms avail
themselves of the [broker-dealer
provision], competitive pressure is
likely to mean that broker dealers will
need to invest resources and time in
building this functionality.’’ 1130 We
recognize that broker-dealers are faced
with competitive concerns and that
such concerns may influence their
decision whether or not to rely on the
broker-dealer provision of Rule 201(c).
We also recognize that if a broker-dealer
chooses to rely on the broker-dealer
provision it will impose costs on such
broker-dealers, and we considered these
costs in determining to adopt in Rule
201 the alternative uptick rule rather
than a rule that requires sequencing of
the national best bid.1131 Although
commenters expressed concerns with
respect to the costs of the broker-dealer
provision of Rule 201(c) and the
resulting impact on competition, many
of these comments were not specific to
the alternative uptick rule.1132 Without
a sequencing requirement under the
alternative uptick rule, we believe that
the policies and procedures required to
rely on the broker-dealer provision
under Rule 201(c) will be easier and less
costly to implement and monitor than
the cost concerns and estimates
provided by some commenters.
Other commenters noted concerns
regarding reduced competition among
market makers in the absence of a bona
fide market making exception.1133 We
believe, however, that due to the
approach of Rule 201, that is, the
combination of a circuit breaker with
the alternative uptick rule, the lack of
such a bona fide market maker
1130 Letter from FIF (June 2009). In addition, some
commenters raised concerns with respect to
competitive pressure on smaller broker-dealers, in
particular, in connection with a short sale price test
restriction. As noted above, we discuss the impact
of Rule 201 on small broker-dealers in Section
XII.B., below.
1131 See supra Section IX.E.2. (discussing the
implementation and on-going monitoring and
compliance costs of the broker-dealer provision).
1132 See, e.g., letter from STANY (June 2009);
letter from FIF (June 2009); letter from Lime
Brokerage (June 2009); letter from T.D. Pro Ex; letter
from Taurus Compliance; letter from Credit Suisse
(June 2009); letter from NSCP.
1133 See, e.g., letter from EWT (June 2009); letter
from EWT (Sept. 2009); letter from GETCO (June
2009); letter from Goldman Sachs (June 2009); but
cf. letter from Dr. Jim DeCosta (noting that there are
currently few barriers to entry for market makers
and abuse can arise from small market makers, who
are in need of business, being willing to misuse a
bona fide market making exemption in exchange for
order flow). See also supra Section III.B.9.
(discussing the decision not to include an
exemption for bona fide market making).

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exception will have minimal, if any,
impact on competition among market
makers. This is because, as noted by
some commenters, equity market
makers for the most part sell at their
offer quote.1134 Thus, the short sale
price test restriction of Rule 201, which
requires short selling at a price above
the national best bid and only if the
circuit breaker has been triggered, is
consistent with equity market making
strategies because these market makers
generally sell at prices above the
national best bid.1135 This is
particularly true where a security’s price
is declining, as market makers often
provide liquidity on the opposite side of
price moves to help reduce volatility.
Thus, even during times when a covered
security is undergoing significant
downward price pressure, market
makers are generally required to provide
liquidity in that security.1136
Weighing against the competitive
concerns for the trading center and
broker-dealer industries, Rule 201 will
advance the purposes of the Exchange
Act in a number of significant ways. It
will help benefit the market for a
particular security by allowing market
participants, when a security is
undergoing a significant intra-day price
decline, an opportunity to re-evaluate
circumstances and respond to volatility
in that security. It will also help restore
investor confidence during times of
substantial uncertainty because, once
the circuit breaker has been triggered for
a particular security, long sellers will
have preferred access to bids for the
security, and the security’s continued
price decline will more likely be due to
long selling and the underlying
fundamentals of the issuer, rather than
to other factors. We also believe that a
circuit breaker will better target short
selling that may be related to potential
1134 See,

e.g., letter from CBOE (June 2009).
letter from Direct Edge (Sept. 2009); see
also supra note 532 (discussing a 1997 study
indicating that during a sample month in 1997,
market maker short sales at or below the inside bid
accounted for only 2.41% of their total share
volume).
1136 See, e.g., NYSE Rule 104(f) (stating that ‘‘it is
commonly desirable that a member acting as [a
designated market maker] engage to a reasonable
degree under existing circumstances in dealings for
the [designated market maker’s] own account when
lack of price continuity, lack of depth, or disparity
between supply and demand exists or is reasonably
to be anticipated’’); CBOE Rule 53.23(a)(1) (stating
that ‘‘[w]ith respect to each security for which it
holds an Appointment, a CBSX Remote Market
Maker has a continuous obligation to engage, to a
reasonable degree under the existing circumstances,
in dealings for its own account when there exists,
or it is reasonably anticipated that there will exist,
a lack of price continuity, or a temporary disparity
between the supply of and demand for a particular
security’’).
1135 See

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bear raids 1137 and other forms of
manipulation that may be used to
exacerbate a price decline in a covered
security.
At the same time, however, we
recognize the benefits to the market of
legitimate short selling, such as the
provision of liquidity and price
efficiency, and considered these benefits
in adopting the circuit breaker approach
of Rule 201. Under the circuit breaker
approach, the alternative uptick rule
will only be imposed when a covered
security has experienced an intra-day
price decline of 10% or more and will
only apply for the remainder of the day
and the following day. We believe that
because of the limited scope and
duration of Rule 201, it will not
interfere with the smooth functioning of
the markets for the majority of
securities, including when prices in
such securities are undergoing minimal
downward price pressure or are stable
or rising. To the extent that Rule 201
impacts the benefits of legitimate short
selling, such as the provision of
liquidity and price efficiency, we
believe that such costs are justified by
the benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
After due consideration of all these
factors and the comments we have
received, we have determined that any
burden on competition that Rules 200(g)
and 201 may impose is necessary or
appropriate in the furtherance of the
purposes of the Exchange Act noted
above.
B. Capital Formation
A purpose of Rule 201 is to strengthen
investor confidence in the markets we
regulate which should help make
investors more willing to invest,
resulting in the promotion of capital
formation. Fair and robust secondary
markets, in which legitimate short
selling can play a positive role, supports
the public offerings by which issuers
raise capital and, as a result, investors
who provided private capital realize
profits and obtain liquidity. In addition,
long holdings are integral to capital
formation. By placing long holders
ahead of short sellers in the execution
queue under certain limited
circumstances, Rule 201 promotes
capital formation, since investors
should be more willing to hold long
positions if they know they may have a
preferred position over short sellers
when they wish to sell in the market for
1137 See

supra note 36 and accompanying text.

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that security during a significant price
decline in that security.
In addition, paragraphs (c) and (d) of
Rule 201 include provisions that are
designed to limit any adverse effects on
the public offering process, which is
necessary to capital formation, while at
the same time not undermining the
goals of Rule 201.1138 In particular, Rule
201(d)(5) is designed to facilitate price
support during the offering process by
allowing broker-dealers to mark short
sale orders ‘‘short exempt’’ if the short
sale is by an underwriter or syndicate
member participating in a distribution
in connection with an over-allotment or
if the short sale order is by an
underwriter or syndicate member for
purposes of a lay-off sale in connection
with a distribution of securities through
a rights or standby underwriting
commitment.1139
We note that short sales can facilitate
convertible securities offerings, and, as
stated by some commenters,1140 we
recognize that hedges for this subset of
offerings may become more expensive
under Rule 201 due to the absence of an
exception from Rule 201 for short
selling in connection with convertible
instruments. In this regard, however, we
note that as adopted, as opposed to
some of our alternative proposals, Rule
201 will not prohibit short selling to
hedge a position, although it could
marginally increase the cost of adjusting
a hedge after a significant market
decline. Even if these indirect costs
could, at the margin, reduce the
attractiveness and, therefore, the volume
of certain types of offerings, we do not
believe that any such reduction will be
significant because short sellers will be
able to sell at a price above the national
best bid even during the limited time
the circuit breaker is in effect. Moreover,
as described above, Rule 201 includes
an exception for short selling in
connection with certain types of capitalraising structures. Thus, while there
may be a change in the total mix of
offering types, we have no reason to
believe that, in light of the anticipated
positive effect of Rule 201 on investor
1138 See supra Section III.B. (discussing ‘‘short
exempt’’ provisions to Rule 201). Under these
provisions, if a broker-dealer chooses to rely on its
own determination that it is submitting the short
sale order to the trading center at a price that is
above the current national best bid at the time of
submission or to rely on an exception specified in
the Rule, it must mark the order as ‘‘short exempt.’’
1139 See Rule 201(d)(5).
1140 See supra notes 425 to 426 and
accompanying text (noting requests by commenters
for exceptions for short sales in connection with the
facilitation of capital raising transactions through
convertible instruments by issuers and selling
shareholders, and to allow investors purchasing a
convertible instrument to hedge their long
exposure).

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11315

confidence, particularly confidence in
long holdings, that there will be any
overall negative effect on capital
formation as a result of our adoption of
this Rule.
We believe, and commenters agreed,
that by helping to prevent short selling,
including manipulative or abusive short
selling, from driving down further the
price of a security that has already
experienced a significant intra-day price
decline, Rule 201 will help restore and
maintain investor confidence in the
securities markets.1141 Bolstering
investor confidence in the markets will
help to encourage investors to be more
willing to invest in the markets,
including during times of substantial
uncertainty, thereby adding depth and
liquidity to the markets and promoting
capital formation.
C. Efficiency
Rule 201 is designed to achieve the
appropriate balance between our goal of
preventing short selling, including
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security and the
need to allow for the continued smooth
functioning of the markets, including
the provision of liquidity and price
efficiency in the markets. By not
allowing short sellers to sell at or below
the current national best bid while the
circuit breaker is in effect, the short sale
price test restriction in Rule 201 will
allow long sellers in certain limited
circumstances, by selling at the bid, to
sell first in a declining market for a
particular security. As the Commission
has noted previously in connection with
short sale price test restrictions, a goal
of such restrictions is to allow long
sellers to sell first in a declining
market.1142
The term ‘‘price efficiency’’ has a
technical meaning in financial
economics, which is not the only way
the term can be interpreted in the
1141 See supra Section II.C. (discussing restoring
investor confidence); see also letter from Edward C.
Springer, dated May 3, 2009; letter from Richard
Anderson, dated May 5, 2009; letter from Mike
Pascale, dated May 11, 2009; letter from Sigmon
Wealth Management (June 2009); form letter type C,
a petition drafted by Jim Cramer, William Furber,
Eric Oberg, and Scott Rothbort and signed by 5,605
investors. Another commenter stated that adoption
of the alternative uptick rule would have a
beneficial impact on capital formation, stating that
‘‘[t]he most important function of the capital
markets is to raise capital for American
corporations,’’ and that ‘‘by adopting the alternative
uptick rule, the Commission will have chosen the
best approach to deal with the loss of confidence
by Congress and most importantly the investing
public.’’ Letter from Glen Shipway (Sept. 2009). We
note, however, that this commenter did not support
adoption of the alternative uptick rule in
conjunction with a circuit breaker.
1142 See supra note 17.

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Exchange Act.1143 We have,
nonetheless, considered the effect of
Rule 201 on price efficiency in terms of
financial economic theory.1144
We have structured Rule 201 to
mitigate its impact on price efficiency.
In response to the Proposal and ReOpening Release, several commenters
cited empirical evidence showing that
short selling contributes to price
efficiency and that restrictions on short
selling, particularly bans on short
selling, may negatively impact price
efficiency.1145 We note, however, that
empirical evidence on former Rule 10a–
1 suggests that the former rule, which
applied to all short selling all the time
unless an exception or exemption
applied, had minimal effect on price
efficiency.1146 Due to differences in the
operation of former Rule 10a–1 and Rule
201, when it applies, the alternative
uptick rule under Rule 201 will be more
restrictive than former Rule 10a–1 in
some circumstances and less restrictive
in others.1147 As discussed above,
however, due to the circuit breaker
approach in Rule 201, the alternative
uptick rule of Rule 201 generally will
apply to a limited number of covered
securities 1148 and will apply only to a
particular security for a limited period
of time when the circuit breaker has
been triggered for a covered security. As
such, it will not be triggered for the
majority of covered securities at any
given time and, when triggered, will
remain in effect for a short duration—
that day and the following day. Thus,
consistent with the empirical evidence
on former Rule 10a–1, we expect that
the alternative uptick rule will have a
minimal impact on price efficiency.
Moreover, paragraphs (c) and (d) of
Rule 201 include provisions designed to
limit any adverse effects on price
efficiency and liquidity, while at the
same time not undermining the goals of
1143 See supra note 18 (defining the term ‘‘price
efficiency’’).
1144 See, e.g., Edward M. Miller, 1977, Risk,
uncertainty, and divergence of opinion, Journal of
Finance 32, 1151–1168; Douglas W. Diamond and
Robert E. Verrecchia, 1987, Constraints on shortselling and asset price adjustment to private
information, Journal of Financial Economics 18,
277–311.
1145 See, e.g., letter from Pershing Square (citing
2006 Price Test Elimination Proposing Release, 71
FR at 75069–75070); letter from CPIC (June 2009)
(citing Pedro A. C. Saffi and Kari Sigurdson, Price
Efficiency and Short Selling, lESE Business School
Working Paper No. 748 (Apr. 2008); letter from
Citadel et al. (June 2009).
1146 See, e.g., supra Section II.B. (discussing the
Pilot Results).
1147 See, e g., supra note 242 and accompanying
text (discussing automated trade matching systems).
1148 See supra notes 305 to 311 and
accompanying text (discussing data reflecting that,
on average, a limited number of covered securities
would hit a 10% trigger level each day).

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Rule 201.1149 In particular, paragraphs
(d)(3) and (d)(4) of Rule 201 are
designed to facilitate pricing efficiency
through certain domestic and
international arbitrage transactions. As
stated above, allowing arbitrage at a
price that is less than or equal to the
current national best bid will potentially
promote market efficiency. In addition,
paragraph (d)(6) of Rule 201, which
relates to riskless principal transactions,
is designed to facilitate liquidity.
XII. Final Regulatory Flexibility
Analysis
The Commission has prepared a Final
Regulatory Flexibility Analysis
(‘‘FRFA’’), in accordance with the
provisions of the Regulatory Flexibility
Act.1150 This FRFA relates to the
amendments to Rules 200(g) and 201 of
Regulation SHO under the Exchange
Act. Rule 201 of Regulation SHO
implements a short sale-related circuit
breaker that, if triggered, will impose a
short sale price test restriction.
Specifically, Rule 201 requires that a
trading center establish, maintain, and
enforce written policies and procedures
reasonably designed to prevent the
execution or display of a short sale
order of a covered security at a price
that is less than or equal to the current
national best bid if the price of that
covered security decreases by 10% or
more from the covered security’s closing
price as determined by the listing
market for the covered security as of the
end of regular trading hours on the prior
day. In addition, the Rule requires that
the trading center establish, maintain,
and enforce written policies and
procedures reasonably designed to
impose this short sale price test
restriction for the remainder of the day
and the following day when a national
best bid for the covered security is
calculated and disseminated on a
current and continuing basis by a plan
processor pursuant to an effective
national market system plan.1151 In
addition, Rule 201 provides that the
listing market for each covered security
must determine whether that covered
security is subject to Rule 201.1152 Once
the listing market has determined that a
security has become subject to the
requirements of Rule 201, the listing
market shall immediately notify the
single plan processor responsible for
consolidation of information for the
1149 See supra Section III.B. (discussing ‘‘short
exempt’’ provisions to Rule 201); see also supra
note 1138.
1150 5 U.S.C. 604.
1151 See Rule 201(b); see also supra Section
III.A.7. (discussing the policies and procedures
approach).
1152 See Rule 201(b)(3).

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covered security in accordance with
Rule 603(b) of Regulation NMS 1153 of
the fact that a covered security has
become subject to the short sale price
test restriction of Rule 201. The plan
processor must then disseminate this
information.1154 The amendments to
Rule 200(g) of Regulation SHO add a
new marking requirement of ‘‘short
exempt.’’ 1155 In particular, if the brokerdealer chooses to rely on its own
determination that it is submitting the
short sale order to the trading center at
a price that is above the current national
best bid at the time of submission or to
rely on an exception specified in the
Rule, it must mark the order as ‘‘short
exempt.’’ 1156
A. Need for and Objectives of the Rule
We believe it is appropriate to adopt
a circuit breaker in combination with
the alternative uptick rule because,
when triggered, it will prevent short
selling, including potentially
manipulative or abusive short selling,
from being used as a tool to exacerbate
a declining market in a security and will
facilitate the ability of long sellers to sell
first upon such decline. This approach
establishes a narrowly-tailored Rule that
will target only those securities that are
experiencing significant intra-day price
declines. We believe that addressing
short selling in connection with such
declines in individual securities will
help address erosion of investor
confidence in our markets generally. We
are also adopting amendments to Rule
200(g) of Regulation SHO in order to aid
surveillance by SROs and the
Commission for compliance with the
provisions of Rule 201.
As discussed above, following
changes in market conditions since the
elimination of former Rule 10a–1,
including marked increases in market
volatility in the U.S. and in every major
stock market around the world, we
proposed to re-examine and seek
comment on whether to impose short
sale price test restrictions or circuit
breaker restrictions on short selling.1157
1153 Rule 603(b) of Regulation NMS provides that
‘‘[e]very national securities exchange on which an
NMS stock is traded and national securities
association shall act jointly pursuant to one or more
effective national market system plans to
disseminate consolidated information, including a
national best bid and national best offer, on
quotations for and transactions in NMS stocks.
Such plan or plans shall provide for the
dissemination of all consolidated information for an
individual NMS stock through a single plan
processor.’’ 17 CFR 242.603(b).
1154 See Rule 201(b)(3); 17 CFR 242.603(b).
1155 See Rule 200(g); see also supra Section IV.
(discussing the amendments to Rule 200(g)).
1156 See Rule 200(g)(2).
1157 See Proposal, 74 FR at 18043, 18046; see also
supra Section II.C. (discussing the Proposal).

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
Although in recent months there has
been an increase in stability in the
securities markets, we remain
concerned that excessive downward
price pressure on individual securities
accompanied by the fear of
unconstrained short selling can
undermine investor confidence in our
markets generally. In addition, we are
concerned about potential future market
turmoil, including significant increases
in market volatility and steep price
declines. Thus, as discussed in more
detail throughout this adopting release,
after considering the comments, we
have determined that it is appropriate to
adopt in Rule 201 a targeted short sale
price test restriction that will apply the
alternative uptick rule for the remainder
of the day and the following day if the
price of an individual security declines
intra-day by 10% or more from the prior
day’s closing price for that security as
determined by the covered security’s
listing market.
By not allowing short sellers to sell at
or below the current national best bid
while the circuit breaker is in effect, the
short sale price test restriction in Rule
201 will allow long sellers, by selling at
the bid, to sell first in a declining
market for a particular security. As the
Commission has noted previously in
connection with short sale price test
restrictions, a goal of such restrictions is
to allow long sellers to sell first in a
declining market.1158 A short seller that
is seeking to profit quickly from
accelerated, downward market moves
may find it advantageous to be able to
short sell at the current national best
bid. In addition, by making bids
accessible only by long sellers when a
security’s price is undergoing significant
downward price pressure, Rule 201 will
help to facilitate and maintain stability
in the markets and help ensure that they
function efficiently. It will also help
restore investor confidence during times
of substantial uncertainty because, once
the circuit breaker has been triggered for
a particular security, long sellers will
have preferred access to bids for the
security, and the security’s continued
price decline will more likely be due to
long selling and the underlying
fundamentals of the issuer, rather than
to other factors.
In addition, combining the alternative
uptick rule with a circuit breaker strikes
the appropriate balance between our
goal of preventing short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security and the need to allow for
the continued smooth functioning of the

markets, including the provision of
liquidity and price efficiency in the
markets. The circuit breaker approach of
Rule 201 will help benefit the market for
a particular security by allowing
participants, when a security is
undergoing a significant intra-day price
decline, an opportunity to re-evaluate
circumstances and respond to volatility
in that security. We also believe that a
circuit breaker will better target short
selling that may be related to potential
bear raids1159 and other forms of
manipulation that may be used as a tool
to exacerbate a price decline in a
covered security.
At the same time, however, we
recognize the benefits to the market of
legitimate short selling, such as the
provision of liquidity and price
efficiency. Thus, by imposing a short
sale price test restriction only when an
individual security is undergoing
significant price pressure, rather than on
all securities all the time, the short sale
price test restrictions of Rule 201 will
apply to a limited number of securities
and for a limited duration.1160 Rule 201
is structured so that generally it will not
be triggered for the majority of covered
securities at any given time and,
thereby, will not interfere with the
smooth functioning of the markets for
those securities, including when prices
in such securities are undergoing
minimal downward price pressure or
are stable or rising. If the short sale price
test restrictions of Rule 201 apply to a
covered security it will be because and
when that security is undergoing
significant downward price pressure. To
the extent that Rule 201 negatively
affects the benefits of legitimate short
selling, such as the provision of
liquidity and price efficiency, we
believe that such costs are justified by
the benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
In addition, to help ensure the Rule’s
workability, we are amending Rule
200(g) of Regulation SHO, as proposed,
to provide that, once the circuit breaker
has been triggered for a covered
security, if a broker-dealer chooses to
rely on its own determination that it is
submitting a short sale order to a trading
center at a price that is above the
current national best bid at the time of
submission or to rely on an exception
specified in the Rule, it must mark the
order ‘‘short exempt.’’ The short sale
supra note 36 and accompanying text.
supra Section III.A.5. (discussing the
circuit breaker trigger level).
1160 See

1158 See

supra note 17.

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price test restriction of Rule 201
generally will apply to a small number
of securities for a limited duration, and
will continue to permit short selling
rather than, for example, halting short
selling when the restriction is in place.
As such, we believe that the
circumstances under which a brokerdealer may need to mark a short sale
order ‘‘short exempt’’ under Rule 201 are
limited.
B. Significant Issues Raised by Public
Comment
In the Initial Regulatory Flexibility
Analysis included in the Proposal, we
requested comment on the number of
small entities that would be affected by
the proposed amendments and on the
impact the proposed amendments
would have on small entities and how
to quantify the impact.1161 The
Commission did not receive any
comment letters addressing the number
of small entities that would be affected
by the proposed amendments.
Several commenters stated that the
costs of implementing and complying
with the broker-dealer provision of Rule
201(c) could be particularly burdensome
for smaller broker-dealers, but did not
provide a cost estimate of such
burdens.1162 One commenter stated that
this burden would ‘‘adversely affect the
ability of smaller broker-dealers to
compete or the level of service that they
can provide to their customers,’’ 1163
while another stated that a short sale
price test would ‘‘disproportionately
burden smaller broker-dealers, who
would likely be forced to route their
flow through a handful of larger brokers,
impeding competition and adding to
systemic risk as flow is consolidated
among fewer players.’’ 1164
Although we agree that
implementation of the broker-dealer
provision of Rule 201(c) will impose
costs on broker-dealers who choose to
rely on this provision, we note that Rule
201(c) is not a requirement of the Rule,
but rather provides that a broker-dealer
may mark a sell order for a security that
has triggered the circuit breaker as
‘‘short exempt,’’ provided that the
broker-dealer identifies the order as
being at a price above the current
national best bid at the time of
submission to the trading center and
otherwise complies with the
requirements of the provision.
In addition, as discussed throughout
this adopting release, the alternative
1161 See

Proposal, 74 FR at 18107.
e.g., letter from Credit Suisse (June
2009); letter from NSCP; letter from T.D. Pro Ex.
1163 Letter from NSCP.
1164 Letter from Credit Suisse (June 2009).
1162 See,

1159 See

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uptick rule references only the current
national best bid, unlike the proposed
modified uptick rule and the proposed
uptick rule, which would have required
sequencing of the national best bid or
last sale price. Although commenters
expressed concerns with respect to the
costs of the broker-dealer provision of
Rule 201(c), these comments were not
specific to the alternative uptick
rule.1165 In order to rely on the brokerdealer provision, a broker-dealer must
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the incorrect
identification of orders as being at a
price above the current national best bid
at the time of submission of the order to
the trading center. Without a sequencing
requirement under the alternative
uptick rule, we believe that the policies
and procedures required to rely on the
broker-dealer provision under Rule
201(c) will be easier and less costly to
implement and monitor than would be
the case under the proposed modified
uptick rule or the proposed uptick
rule,1166 and, therefore, lower than the
cost concerns and estimates provided by
commenters. We note that one of the
commenters that expressed concerns
about the implementation cost of the
broker-dealer provision acknowledged
that a rule ‘‘that would not require data
centralization and sequencing would be
significantly less complex and faster to
implement.’’1167
We disagree with several commenters
who stated that, although
implementation and on-going
monitoring and surveillance of the
alternative uptick rule might be easier
and/or less costly for trading centers,
this would not hold true for brokerdealers.1168 One of these commenters
stated that ‘‘in order to avoid rejection
of short sale orders under an alternative
uptick rule, programming would need to
be implemented to anticipate changes in
the national best bid between the time
a short sale order is entered and the
time it reaches the relevant market
center.’’ 1169 However, the broker-dealer
provision of Rule 201(c) is designed
specifically to avoid this result. Under
the broker-dealer provision, a brokerdealer may, in accordance with the
policies and procedures required by the

provision, identify the order as being at
a price above the current national best
bid at the time the order is submitted to
the trading center and mark the order
‘‘short exempt.’’ Trading centers are
required to have written policies and
procedures in place to permit the
execution or display of a short sale
order of a covered security marked
‘‘short exempt’’ without regard to
whether the order is at a price that is
less than or equal to the current national
best bid.1170
Commenters also expressed concerns
about the competitive pressure of the
broker-dealer provision, stating either
that broker-dealers would feel
compelled to undertake implementation
of the provision, despite the high
cost,1171 which would be particularly
burdensome for smaller firms,1172 or
that smaller firms would find the costs
prohibitive, placing them at a
competitive disadvantage.1173 We
recognize that broker-dealers are faced
with competitive concerns and that
such concerns may influence their
decision whether or not to rely on the
broker-dealer provision of Rule 201(c).
However, with respect to the cost,
although we recognize that the brokerdealer provision will impose
implementation costs on broker-dealers
who choose to rely on this provision, we
believe that this cost will not be as great
as stated by some commenters because
the alternative uptick rule does not
require sequencing of the national best
bid, unlike the proposed modified
uptick rule and the proposed uptick
rule, which would have required
sequencing of the national best bid or
last sale price.1174 We believe that,
without a sequencing requirement, the
policies and procedures required in
order to rely on the broker-dealer
provision under the alternative uptick
rule will be easier and less costly to
implement and monitor than would be
the case under the proposed modified
uptick rule or the proposed uptick rule.
In addition, we note that it is possible
that some smaller broker-dealers that
determine to rely on the broker-dealer
provision may determine that it is costeffective for them to outsource certain
functions necessary to comply with
1170 See

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1165 See,

e.g., letter from Credit Suisse (June
2009); letter from NSCP; letter from T.D. Pro Ex.
1166 See supra notes 709 to 715 and
accompanying text (discussing comments on the
impact of the alternative uptick rule on
implementation and on-going monitoring and
compliance costs).
1167 Letter from Credit Suisse (June 2009).
1168 See, e.g., letter from Citadel et al. (Sept.
2009); letter from EWT (Sept. 2009); letter Lime
Brokerage (Sept. 2009).
1169 Letter from Citadel et al. (Sept. 2009).

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Rule 201(b)(1)(iii).
e.g., letter from STANY (June 2009);
letter from FIF (June 2009); letter from Lime
Brokerage (June 2009).
1172 See, e.g., letter from T.D. Pro Ex; letter from
Taurus Compliance; letter from Credit Suisse (June
2009).
1173 See, e.g., letter from Credit Suisse (June
2009); letter from NSCP.
1174 See supra note 1165 and accompanying text
(discussing impact of the alternative uptick rule on
commenters’ cost concerns with respect to the
broker-dealer provision of Rule 201(c)).
1171 See,

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Rule 201(c) to larger broker-dealers,
rather than performing such functions
in house, to remain competitive in the
market. This may help mitigate costs
associated with implementing and
complying with Rule 201(c).
Additionally, they may decide to
purchase order management software
from technology firms. Order
management software providers may
integrate changes imposed by Rules
200(g) and 201 into their products,
thereby providing another cost-effective
way for smaller broker-dealers to
comply with the requirements of Rule
201(c).
Although we agree that the brokerdealer provision will impose costs for
implementation and on-going
monitoring and surveillance, we note
that the policies and procedures that are
required to be implemented under the
broker-dealer provision are similar to
those that are required under the Order
Protection Rule of Regulation NMS.1175
In order to rely on the broker-dealer
provision, a broker-dealer must
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the incorrect
identification of orders as being at a
price above the current national best bid
at the time of submission of the order to
the trading center. Because some brokerdealers, including small broker-dealers,
may have already developed or
modified their surveillance mechanisms
in order to comply with the policies and
procedures requirement of the Order
Protection Rule under Regulation NMS,
broker-dealers may already have
retained and trained the necessary
personnel to ensure compliance with
that Regulation’s policies and
procedures requirements and, therefore,
may already have in place most of the
infrastructure and potential policies and
procedures necessary to comply with
the broker-dealer provision of Rule
201(c). In addition, one commenter
supported using a policies and
procedures approach to any short sale
price test restriction because it would
ease implementation for brokerdealers.1176 Thus, we believe brokerdealers will already be familiar with
establishing, maintaining, and enforcing
trading-related policies and procedures,
including programming their trading
systems in accordance with such
policies and procedures.
Although several commenters stated
that previous implementation of
Regulation NMS would not mitigate the
costs to broker-dealers of implementing
1175 See Regulation NMS Adopting Release, 70 FR
37496; see also 17 CFR 242.611.
1176 See, e.g., letter from GE.

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Federal Register / Vol. 75, No. 46 / Wednesday, March 10, 2010 / Rules and Regulations
a short sale price test restriction,1177 we
considered these comments, as well as
comments stating that previous
implementation of Regulation NMS
could ease implementation provided
that broker-dealers could leverage
existing systems in implementing Rule
201,1178 and continue to believe that
familiarity with Regulation NMS
policies and procedures will reduce the
implementation costs of the brokerdealer provision under Rule 201(c) on
broker-dealers.1179
Further, we believe that the
implementation and on-going
monitoring and compliance costs for
broker-dealers who choose to rely on the
broker-dealer provision are justified by
the benefits of providing broker-dealers
with the option to manage their order
flow, rather than having to always rely
on their trading centers to manage their
order flow on their behalf.
C. Small Entities Affected by the Rule

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Rule 201 requires that a trading center
establish, maintain, and enforce written
policies and procedures reasonably
designed to prevent the execution or
display of a short sale order of a covered
security at a price that is less than or
equal to the current national best bid if
the price of that covered security
decreases by 10% or more from the
covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day. In
addition, the Rule requires that the
trading center establish, maintain, and
enforce written policies and procedures
reasonably designed to impose this
short sale price test restriction for the
remainder of the day and the following
day when a national best bid for the
covered security is calculated and
disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.1180 Rule 201(a)(9) states
that the term ‘‘trading center’’ shall have
the same meaning as in Rule 600(b)(78)
of Regulation NMS, which defines a
‘‘trading center’’ as ‘‘a national securities
exchange or national securities
association that operates an SRO trading
facility, an alternative trading system,
an exchange market maker, an OTC
market maker, or any other broker or
dealer that executes orders internally by
1177 See, e.g., letter from FIF (June 2009); letter
from RBC (June 2009).
1178 See, e.g., letter from MFA (Oct. 2009).
1179 See supra Section X.B.1.b.ii. (discussing
implementation and on-going monitoring and
surveillance costs to broker-dealers under Rule
201(c) and Rule 201(d)(6)).
1180 See Rule 201(b)(1).

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trading as principal or crossing orders as
agent.’’ 1181
Rule 0–10(e) under the Exchange Act
provides that the term ‘‘small business’’
or ‘‘small organization,’’ when referring
to an exchange, means any exchange
that: (i) Has been exempted from the
reporting requirements of Rule 601
under the Exchange Act; 1182 and (ii) is
not affiliated with any person (other
than a natural person) that is not a small
business or small organization, as
defined by Rule 0–10.1183 No national
securities exchanges are small entities
because none meets these criteria. Thus,
the current national securities
exchanges that are subject to Rule 201
are not ‘‘small entities’’ for purposes of
the Regulatory Flexibility Act.
The remaining non-SRO trading
centers that are subject to Rule 201 are
registered broker-dealers. The
Commission has determined that there
are approximately 407 broker-dealers
registered with the Commission that
may meet the definition of a trading
center,1184 which includes brokerdealers operating as equity ATSs,
broker-dealers registered as market
makers or specialists in covered
securities, and any broker-dealer that is
in the business of executing orders
internally in covered securities.
Pursuant to Rule 0–10(c) under the
Exchange Act, a broker-dealer is defined
as a small entity for purposes of the
Exchange Act and the Regulatory
Flexibility Act if the broker-dealer had
a total capital (net worth plus
subordinated liabilities) of less than
$500,000 on the date in the prior fiscal
year as of which its audited financial
statements were prepared, and it is not
affiliated with any person (other than a
natural person) that is not a small
entity.1185 Of these 407 non-SRO trading
centers, only five 1186 are ‘‘small
entities’’ for purposes of the Regulatory
Flexibility Act.
In addition, the broker-dealer
provision of Rule 201(c) and the riskless
principal provision of Rule 201(d)(6)
include policies and procedures
requirements to help prevent incorrect
identification of orders by brokerdealers for purposes of the provisions.
The entities covered by the brokerdealer provision of Rule 201(c), the
1181 See Rule 201(a)(9); see also 17 CFR
242.600(b)(78).
1182 See 17 CFR 242.601.
1183 See 17 CFR 240.0–10(e); 13 CFR 121.201
(setting size standards to define small business
concerns).
1184 See supra note 651.
1185 See 17 CFR 240.0–10(c)(1).
1186 This number was derived from a review of
2008 FOCUS Report filings and discussion with
SRO staff.

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11319

riskless principal provision of Rule
201(d)(6) and the marking requirements
of Rule 200(g) include small brokerdealers. Paragraph (c)(1) of Rule 0–10
under the Exchange Act, as mentioned
above, states that the term ‘‘small
business’’ or ‘‘small organization,’’ when
referring to a broker-dealer, means a
broker-dealer that had total capital (net
worth plus subordinated liabilities) of
less than $500,000 on the date in the
prior fiscal year as of which its audited
financial statements were prepared, and
is not affiliated with any person (other
than a natural person) that is not a small
entity.1187 We estimate that as of 2008
there were approximately 890 brokerdealers that are ‘‘small entities’’ for
purposes of the Regulatory Flexibility
Act.1188
In addition, Rule 201(b)(3) provides
that the listing market for each covered
security must determine whether that
covered security is subject to Rule 201
and must notify the single plan
processor responsible for that covered
security that the covered security has
become subject to the short sale price
test restriction of Rule 201. The plan
processor must then disseminate this
information.1189 As discussed below,
the entities covered by the
determination and dissemination
requirements of Rule 201(b)(3) do not
include small entities.
Rule 201(a)(3) defines the term
‘‘listing market’’ to have the same
meaning as defined in the effective
transaction reporting plan for the
covered security.1190 Under the
definitions of ‘‘listing market’’ of the two
effective transaction reporting plans, the
CTA Plan and the Nasdaq UTP Plan,
‘‘listing markets’’ are national securities
exchanges.1191 Rule 0–10(e) under the
Exchange Act provides that the term
‘‘small business’’ or ‘‘small organization,’’
when referring to an exchange, means
any exchange that: (i) Has been
exempted from the reporting
requirements of Rule 601 under the
Exchange Act; 1192 and (ii) is not
affiliated with any person (other than a
natural person) that is not a small
1187 17

CFR 240.0–10(c)(1).
numbers are based on a review of 2008
FOCUS Report filings reflecting registered brokerdealers, including introducing broker-dealers. This
number does not include broker-dealers that are
delinquent on FOCUS Report filings.
1189 See Rule 201(b)(3).
1190 See Rule 201(a)(3). Rule 201(a)(2) provides
that ‘‘[t]he term effective transaction reporting plan
for a covered security shall have the same meaning
as in § 242.600(b)(22).’’ Rule 201(a)(2); 17 CFR
600(b)(22).
1191 See supra note 364 (discussing the definition
of ‘‘listing market’’ in the CTA Plan and the Nasdaq
UTP Plan).
1192 See 17 CFR 242.601.
1188 These

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business or small organization, as
defined by Rule 0–10.1193 No national
securities exchanges are small entities
because none meets these criteria. Thus,
the listing markets that are subject to
Rule 201 are not ‘‘small entities’’ for
purposes of the Regulatory Flexibility
Act.
There are two effective transaction
reporting plans, the CTA Plan and the
Nasdaq UTP Plan. In accordance with
Rule 603(b) of Regulation NMS,1194
these plans, together with the CQ Plan,
provide for the dissemination of all
consolidated information for individual
NMS stocks through a single plan
processor. The plan processor for the
CTA Plan is SIAC and the plan
processor for the Nasdaq UTP Plan is
Nasdaq. Rule 201(a)(6) defines the term
‘‘plan processor’’ to have the same
meaning as in Rule 600(b)(55) of
Regulation NMS.1195 Under Rule
600(b)(55), the term ‘‘plan processor’’
means ‘‘any self-regulatory organization
or securities information processor
acting as an exclusive processor in
connection with the development,
implementation and/or operation of any
facility contemplated by an effective
national market system plan.’’ 1196
Paragraph (g) of Rule 0–10 defines the
term ‘‘small business’’ or ‘‘small
organization,’’ when referring to a
securities information processor, to
mean a securities information processor
that had gross revenues of less than $10
million during the preceding fiscal year;
provided service to fewer than 100
interrogation devices or moving tickers
at all times during the preceding fiscal
year; and is not affiliated with any
person (other than a natural person) that
is not a small business or small
organization.1197 Neither SIAC nor
Nasdaq meet these criteria. Thus, the
plan processors that are subject to Rule
201 are not ‘‘small entities’’ for purposes
of the Regulatory Flexibility Act.
D. Projected Reporting, Recordkeeping
and Other Compliance Requirements
Rule 201 imposes some new or
additional reporting, recordkeeping, or
compliance costs on trading centers and
other broker-dealers that are small
entities. Rule 201 focuses on a trading
center’s written policies and procedures
as the mechanism through which to
help prevent the execution or display of
short sale orders at a price that is less
than or equal to the current national
best bid, unless an exception applies. In
1193 See

17 CFR 240.0–10(e); 13 CFR 121.201.
17 CFR 242.603(b).
1195 See Rule 201(a)(6); 17 CFR 242.600(b)(55).
1196 17 CFR 242.600(b)(55).
1197 See 17 CFR 240.0–10(g).
1194 See

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addition, the broker-dealer provision of
Rule 201(c) and the riskless principal
provision of Rule 201(d)(6) include
policies and procedures requirements to
help prevent incorrect identification of
orders by broker-dealers for purposes of
those provisions.
In regard to implementation and ongoing monitoring and surveillance costs
of Rule 201 on trading centers that are
small entities,1198 we considered
commenters’ concerns that the cost and
time required for trading centers’
implementation and on-going
monitoring and surveillance of a short
sale price test restriction could be
high.1199 However, we note that the
alternative uptick rule references only
the current national best bid, unlike the
proposed modified uptick rule and the
proposed uptick rule, which would
have required sequencing of the
national best bid or last sale price. Thus,
we believe that the alternative uptick
rule will be easier and less costly to
implement and monitor for trading
centers that are small entities than the
proposed modified uptick rule or the
proposed uptick rule.1200
In addition, we note that the policies
and procedures required to be
implemented for purposes of Rule 201
are similar to those that trading centers
are required to have in place under the
Order Protection Rule of Regulation
NMS.1201 Thus, we believe trading
centers that are small entities may
already be familiar with establishing,
maintaining, and enforcing tradingrelated policies and procedures,
including programming their trading
systems in accordance with such
policies and procedures.
Although, as discussed above, several
commenters stated that previous
implementation of Regulation NMS
would not mitigate the costs of
implementing a short sale price test
1198 As discussed above, there are no SRO trading
centers that are ‘‘small entities’’ for purposes of the
Regulatory Flexibility Act. Of the estimated 407
non-SRO trading centers (which include brokerdealers operating as equity ATSs, broker-dealers
registered as market makers or specialists in
covered securities, and any broker-dealer that is in
the business of executing orders internally in
covered securities) we estimate that there are only
5 non-SRO trading centers that are ‘‘small entities’’
for purposes of the Regulatory Flexibility Act. See
supra Section XII.C.
1199 See supra Section X.B.1.b.i. (discussing
comments on the implementation and on-going
monitoring and compliance costs of the policies
and procedures requirement of Rule 201).
1200 See supra notes 661 to 669 and
accompanying text (discussing comments on the
effect of the alternative uptick rule on
implementation and on-going monitoring and
surveillance costs).
1201 See Regulation NMS Adopting Release, 70 FR
37496; see also Proposal, 74 FR at 18087; 17 CFR
242.611.

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restriction,1202 we considered these
comments, as well as comments stating
that previous implementation of
Regulation NMS could ease
implementation provided that trading
centers could use existing systems in
implementing Rule 201,1203 and
continue to believe that familiarity with
Regulation NMS policies and
procedures will reduce the
implementation costs for trading centers
of the policies and procedures
requirement under Rule 201.
Further, we believe that the
implementation and on-going
monitoring and compliance costs for
trading centers are justified by the
benefits provided by the Rule in
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security.
In regard to implementation and ongoing monitoring and surveillance costs
of the broker-dealer provision of Rule
201(c) or the riskless principal provision
of Rule 201(d)(6) on small brokerdealers,1204 as discussed in Section
XII.B., above, several commenters stated
that the costs of implementing and
complying with the broker-dealer
provision of Rule 201(c) could be
particularly burdensome for smaller
broker-dealers.1205 Commenters also
expressed concerns about the
competitive pressure of the brokerdealer provision, stating either that
broker-dealers would feel compelled to
undertake implementation of the
provision, despite the high cost,1206
which would be particularly
burdensome for smaller firms,1207 or
that smaller firms would find the costs
prohibitive, placing them at a
competitive disadvantage.1208
1202 See supra notes 939 to 941 and
accompanying text (discussing comments that prior
implementation of Regulation NMS would not
mitigate the costs of implementing a short sale price
test restriction).
1203 See supra notes 942 to 945 and
accompanying text (discussing comments that prior
implementation of Regulation NMS could mitigate
the costs of implementing a short sale price test
restriction).
1204 As discussed above, we estimate that as of
2008 there were approximately 890 broker-dealers
that are ‘‘small entities’’ for purposes of the
Regulatory Flexibility Act. See supra Section XII.C.
1205 See supra notes 1162 to 1173 and
accompanying text (discussing comments on the
costs of the broker-dealer provision of Rule 201(c)
for smaller broker-dealers).
1206 See, e.g., letter from STANY (June 2009);
letter from FIF (June 2009); letter from Lime
Brokerage (June 2009).
1207 See, e.g., letter from T.D. Pro Ex; letter from
Taurus Compliance; letter from Credit Suisse (June
2009).
1208 See, e.g., letter from Credit Suisse (June
2009); letter from NSCP.

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We considered these comments in
evaluating the costs of implementation
and on-going monitoring and
surveillance of the broker-dealer
provision of Rule 201(c) on small
broker-dealers. Although we agree that
implementation of the broker-dealer
provision of Rule 201(c) will impose
costs on broker-dealers who choose to
rely on this provision, we note that Rule
201(c) is not a requirement of the Rule,
but rather provides that a broker-dealer
may mark a sell order for a security that
has triggered the circuit breaker as
‘‘short exempt,’’ provided that the
broker-dealer identifies the order as
being at a price above the current
national best bid at the time of
submission to the trading center and
otherwise complies with the
requirements of the provision. We
recognize, however, that broker-dealers
are faced with competitive concerns and
that such concerns may influence their
decision whether or not to rely on the
broker-dealer provision of Rule 201(c).
With respect to the cost, although we
recognize that the broker-dealer
provision will impose implementation
costs on broker-dealers who choose to
rely on this provision, we believe that
this cost will not be as great as stated
by some commenters because the
alternative uptick rule does not require
sequencing of the national best bid,
unlike the proposed modified uptick
rule and the proposed uptick rule,
which would have required sequencing
of the national best bid or last sale
price.1209 We believe that, without a
sequencing requirement, the policies
and procedures required in order to rely
on the broker-dealer provision under the
alternative uptick rule will be easier and
less costly to implement and monitor
than would be the case under the
proposed modified uptick rule or the
proposed uptick rule.1210
In addition, we note that it is possible
that some smaller broker-dealers that
determine to rely on the broker-dealer
provision may determine that it is costeffective for them to outsource certain
functions necessary to comply with
Rule 201(c) to larger broker-dealers,
rather than performing such functions
in house, to remain competitive in the
market. This may help mitigate costs
associated with implementing and
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1209 See

supra notes 1165 to 1167 and
accompanying text (discussing impact of the
alternative uptick rule on commenters’ cost
concerns with respect to the broker-dealer provision
of Rule 201(c)).
1210 See supra notes 709 to 715 and
accompanying text (discussing comments on the
effect of the alternative uptick rule on
implementation and on-going monitoring and
surveillance costs).

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complying with Rule 201(c).
Additionally, they may decide to
purchase order management software
from technology firms. Order
management software providers may
integrate changes imposed by Rules
200(g) and 201 into their products,
thereby providing another cost-effective
way for smaller broker-dealers to
comply with the requirement of Rule
201(c).
In addition, we note that the policies
and procedures that are required to be
implemented under the broker-dealer
provision are similar to those that are
required under the Order Protection
Rule of Regulation NMS.1211 Thus, we
believe broker-dealers will already be
familiar with establishing, maintaining,
and enforcing trading-related policies
and procedures, including programming
their trading systems in accordance with
such policies and procedures.
Although several commenters stated
that previous implementation of
Regulation NMS would not mitigate the
costs to broker-dealers of implementing
a short sale price test restriction,1212 we
considered these comments, as well as
comments stating that previous
implementation of Regulation NMS
could ease implementation provided
that broker-dealers could leverage
existing systems in implementing Rule
201,1213 and continue to believe that
familiarity with Regulation NMS
policies and procedures will reduce the
implementation costs of the brokerdealer provision under Rule 201(c) on
broker-dealers.
Further, we believe that the
implementation and on-going
monitoring and compliance costs for
broker-dealers who choose to rely on the
broker-dealer provision are justified by
the benefits of providing broker-dealers
with the option to manage their order
flow, rather than having to always rely
on their trading centers to manage their
order flow on their behalf.
The amendments to Rule 200(g), to
add a new marking requirement of
‘‘short exempt’’ 1214 and to provide that
a broker-dealer may mark a sell order
‘‘short exempt’’ only if the provisions in
paragraph (c) or (d) of Rule 201 are
met,1215 may impose some new or
additional reporting, recordkeeping, or
compliance costs on broker-dealers that
are small entities. We recognize
commenters’ concerns with respect to
1211 See Regulation NMS Adopting Release, 70 FR
37496; see also 17 CFR 242.611.
1212 See, e.g., letter from FIF (June 2009); letter
from RBC (June 2009).
1213 See, e.g., letter from MFA (Oct. 2009).
1214 See Rule 200(g); see also supra Section IV.
(discussing the amendments to Rule 200(g)).
1215 See Rule 200(g)(2).

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11321

the costs of the ‘‘short exempt’’ marking
requirement and we considered these
comments in evaluating the costs of the
‘‘short exempt’’ marking
requirement.1216 However, we believe
that such costs will be limited because
small broker-dealers already have
established systems, processes, and
procedures in place to comply with the
current marking requirements of Rule
200(g) of Regulation SHO with respect
to marking a sell order either ‘‘long’’ or
‘‘short’’ and, therefore, will likely
leverage such systems, processes and
procedures to comply with the ‘‘short
exempt’’ marking requirements in Rules
200(g) and 200(g)(2).1217 Further, we
believe that the implementation and
compliance costs of the ‘‘short exempt’’
marking requirements are justified by
the benefits provided by the
requirements in aiding surveillance by
SROs and the Commission for
compliance with the provisions of Rule
201 and providing an indication to a
trading center regarding when it must
execute or display a short sale order
without regard to whether the order is
at a price that is less than or equal to
the current national best bid.
In addition, to provide market
participants with the time needed to
make the changes required to comply
with Rule 200(g), we are adopting an
implementation period under which
market participants will have to comply
with these requirements six months
following the effective date of the
adoption of these amendments. We are
sensitive to commenter’s concerns that
implementation of the ‘‘short exempt’’
marking requirement could be
complex,1218 and believe that a six
month implementation period, which is
longer than the 3 month implementation
period proposed in the Proposal, will
afford market participants sufficient
time to make the necessary
modifications to their systems and
procedures. In addition, we believe the
six month implementation period will
help alleviate some of the potential
disruptions that may be associated with
implementing the ‘‘short exempt’’
marking requirements.
1216 See supra notes 582 to 588 (discussing
comments on the costs of the ‘‘short exempt’’
marking requirement).
1217 See supra notes 747 to 752 (discussing
estimated costs of the amendment to Rule
200(g)(2)).
1218 See supra notes 582 to 588 and
accompanying text (discussing comments on the
implementation time for the ‘‘short exempt’’
marking requirement).

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E. Agency Action to Minimize Effect on
Small Entities
As required by the Regulatory
Flexibility Act, we have considered
alternatives that would accomplish our
stated objectives, while minimizing any
significant adverse impact on small
entities. As noted above, Rule 201
imposes some new or additional
reporting, recordkeeping, or compliance
costs on trading centers and other
broker-dealers that are small entities.
However, we expect the impact of the
new or additional reporting,
recordkeeping, or compliance costs will
be limited by the similarity of the
policies and procedures requirements of
Rule 201 to the policies and procedures
requirement of the Order Protection
Rule under Regulation NMS. Although,
as discussed above, several commenters
stated that previous implementation of
Regulation NMS would not mitigate the
costs of implementing a short sale price
test restriction,1219 we considered these
comments, as well as comments stating
that previous implementation of
Regulation NMS could ease
implementation provided that firms
could use existing systems in
implementing Rule 201,1220 and
continue to believe that familiarity with
Regulation NMS policies and
procedures will reduce the
implementation costs of the brokerdealer provision under Rule 201(c) on
broker-dealers.
Thus, the five non-SRO trading
centers that qualify as small entities and
the approximately 890 broker-dealers
that qualify as small entities should
already have in place most of the
infrastructure necessary to comply with
Rule 201. The marking requirements of
the amendments to Rule 200(g) are not
expected to adversely affect small
entities because they impose minimal
reporting, recordkeeping, or compliance
requirements. Rule 200(g) currently
requires that broker-dealers mark all sell
orders of any equity security as either
‘‘long’’ or ‘‘short.’’ 1221 Broker-dealers that
are small entities should already be
familiar with the current marking
requirements and should already have
in place mechanisms that could be used
to comply with the new ‘‘short exempt’’
marking requirement of Rule 200(g).
1219 See supra notes 939 to 941 and
accompanying text (discussing comments that prior
implementation of Regulation NMS would not
mitigate the costs of implementing a short sale price
test restriction).
1220 See supra notes 942 to 944 and
accompanying text (discussing comments that prior
implementation of Regulation NMS could mitigate
the costs of implementing a short sale price test
restriction).
1221 See 17 CFR 242.200(g).

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Moreover, it is not appropriate to
develop separate requirements for small
entities under either Rule 201 or Rule
200(g) because we believe that to
accomplish the Commission’s goals, as
well as to avoid the possibility of
regulatory arbitrage that would
undermine the Commission’s goals, all
trading centers and broker-dealers,
regardless of size, should be subject to
the same circuit breaker short sale price
test restrictions and all broker-dealers,
regardless of size, should be subject to
the same order marking requirements.
F. Significant Alternatives
The Regulatory Flexibility Act directs
us to consider significant alternatives
that would accomplish our stated
objective, while minimizing any
significant adverse impact on small
entities.1222 In connection with Rules
201 and 200(g), we considered the
following alternatives: (i) Establishing
different compliance or reporting
requirements or timetables that take into
account the resources available to small
entities; (ii) clarifying, consolidating, or
simplifying compliance and reporting
requirements under the Rule for small
entities; (iii) using performance rather
than design standards; and (iv)
exempting small entities from coverage
of the Rule, or any part of the Rule.
First, we note that Rule 201 as adopted
and the amendments to Rule 200(g) use
performance standards, which we
believe will help to minimize any
significant adverse impact on small
entities.
A primary goal of the short salerelated circuit breaker under Rule 201 is
to help restore investor confidence by
not allowing sellers to sell short at or
below the current national best bid if
the price of that covered security
decreases by 10% or more from the
covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day, unless
an exception applies. Rule 201 will
allow long sellers, by selling at the bid,
to sell first in a declining market for a
particular security. As the Commission
has noted previously in connection with
short sale price test restrictions, a goal
of such restrictions is to allow long
sellers to sell first in a declining
market.1223 A short seller that is seeking
to profit quickly from accelerated,
downward market moves may find it
advantageous to be able to short sell at
the current national best bid. In
addition, by making bids accessible only
by long sellers when a security’s price
1222 See
1223 See

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is undergoing significant downward
price pressure, Rule 201 will help to
facilitate and maintain stability in the
markets and help ensure that they
function efficiently. It will also help
restore investor confidence during times
of substantial uncertainty because, once
the circuit breaker has been triggered for
a particular security, long sellers will
have preferred access to bids for the
security, and the security’s continued
price decline will more likely be due to
long selling and the underlying
fundamentals of the issuer, rather than
to other factors.
In addition, combining the alternative
uptick rule with a circuit breaker strikes
the appropriate balance between our
goal of preventing short selling,
including potentially manipulative or
abusive short selling, from being used as
a tool to exacerbate a declining market
in a security and the need to allow for
the continued smooth functioning of the
markets, including the provision of
liquidity and price efficiency in the
markets. The circuit breaker approach of
Rule 201 will help benefit the market for
a particular security by allowing
participants, when a security is
undergoing a significant intra-day price
decline, an opportunity to re-evaluate
circumstances and respond to volatility
in that security. We also believe that a
circuit breaker will better target short
selling that may be related to potential
bear raids 1224 and other forms of
manipulation that may be used as a tool
to exacerbate a price decline in a
covered security.
As discussed throughout this
adopting release, we have designed Rule
201 to accomplish its objectives with
lower costs to trading centers and
broker-dealers than some of the
alternatives we proposed and
considered. We believe the alternative
uptick rule will require less time and
less costs for implementation because it
does not require sequencing of bids or
last sale prices.1225 In addition, we
believe that the circuit breaker
approach, which limits the short sale
price test restriction for an individual
security to a two-day period following a
significant intra-day decline in share
price in that security, will also limit
compliance costs for all participants.1226
The costs of compliance with Rules
201 and 200(g) are likely to vary among
individual trading centers and brokerdealer firms. As detailed in PRA Section
IX.E.1., above, we realize that the
1224 See

supra note 36 and accompanying text.
supra Section X.B.1. (discussing the costs
of the alternative uptick rule).
1226 See supra Section III.A.4. (discussing the
circuit breaker approach).
1225 See

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policies and procedures that a trading
center is required to establish will
likewise vary depending upon the type,
size, and nature of the trading center. In
addition, as detailed in PRA Section
IX.E.2., above, we note that the nature
and extent of policies and procedures
that a broker-dealer must establish
under Rule 201(c) or 201(d)(6), if it
determines to rely on either provision to
mark an order ‘‘short exempt,’’ likely
will vary based upon the type, size, and
nature of the broker-dealer.1227 Our
estimates take into account different
types of trading centers and brokerdealers (including large versus small),
and we realize that the applicable
estimates may be on the low-end for
some trading centers and broker-dealers
while they may be on the high-end for
others.
Although we recognize that the costs
of the Rules may vary based upon the
type, size, and nature of the trading
center or broker-dealer, we believe that
uniform application of Rules 201 and
200(g) to all trading centers and brokerdealers is necessary to prevent
damaging opportunities for regulatory
arbitrage and to avoid confusion in the
markets. In addition, different
application of the Rules’ requirements
for small entities could undermine the
goals of the short sale related circuit
breaker by potentially providing an
avenue for short sellers to evade the
requirements of Rule 201. Further, in
relation to the already-mentioned
concerns, we believe that our goal of
restoring investor confidence could be
undermined by actual or perceived
regulatory arbitrage, market confusion,
and/or evasion of Rule 201’s
requirements as a result of different
requirements for different market
participants in Rules 201 and 200(g).
Due to these concerns, we have
concluded that in order for Rules 201
and 200(g) to be effective in helping to
restore investor confidence by
preventing short selling, including
potentially manipulative or abusive
short selling, from being used as a tool
to exacerbate a declining market in a
security, the Rules’ requirements must
apply uniformly to all trading centers
and broker-dealers. Thus, we have
determined not to adopt different
compliance requirements or a different
timetable for compliance requirements
for small entities. In addition, and for
1227 We

note that one commenter stated that the
‘‘Commission’s cost estimates seem to
underestimate the cost to large, full service brokerdealers, since the volume of orders handled by
these firms are likely to lead to significantly greater
technology and storage costs alone as well as more
frequent reviews’’ but did not provide a specific cost
estimate. See letter from NSCP.

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the same reasons, we have determined
not to clarify, consolidate, simplify, or
otherwise modify Rules 201 and 200(g)
for small entities. Finally, we believe
that it is inconsistent with the purposes
of the Exchange Act and the goals of
adopting Rules 201 and 200(g) to except
small entities from having to comply
with Rules 201 and 200(g).
XIII. Statutory Authority
Pursuant to the Exchange Act and,
particularly, Sections 2, 3(b), 6, 9(h), 10,
11A, 15, 15A, 17, 19, 23(a), and 36
thereof, 15 U.S.C. 78b, 78c(b), 78(f),
78i(h), 78j, 78k–1, 78o, 78o–3, 78q, 78s,
78w(a), and 78mm, the Commission is
amending §§ 242.200 and 242.201 of
Regulation SHO.
XIV. Text of the Amendments to
Regulation SHO
List of Subjects in 17 CFR Part 242
Brokers, Fraud, Reporting and
recordkeeping requirements, Securities.
■ For the reasons set out in the
preamble, Title 17, Chapter II, Part 242,
of the Code of Federal Regulations is
amended as follows.
PART 242—REGULATIONS M, SHO,
ATS, AC, AND NMS AND CUSTOMER
MARGIN REQUIREMENTS FOR
SECURITY FUTURES
1. The authority citation for part 242
continues to read as follows:

■

Authority: 15 U.S.C. 77g, 77q(a), 77s(a),
78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–l(c), 78l,
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a),
78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a–
23, 80a–29, and 80a–37.

2. Section 242.200 is amended by
revising paragraph (g) introductory text
and adding paragraph (g)(2) to read as
follows:

■

§ 242.200 Definition of ‘‘short sale’’ and
marking requirements.

*

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

Circuit breaker.

(a) Definitions. For the purposes of
this section:
(1) The term covered security shall
mean any NMS stock as defined in
§ 242.600(b)(47).
(2) The term effective transaction
reporting plan for a covered security

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11323

shall have the same meaning as in
§ 242.600(b)(22).
(3) The term listing market shall have
the same meaning as the term ‘‘listing
market’’ as defined in the effective
transaction reporting plan for the
covered security.
(4) The term national best bid shall
have the same meaning as in
§ 242.600(b)(42).
(5) The term odd lot shall have the
same meaning as in § 242.600(b)(49).
(6) The term plan processor shall have
the same meaning as in § 242.600(b)(55).
(7) The term regular trading hours
shall have the same meaning as in
§ 242.600(b)(64).
(8) The term riskless principal shall
mean a transaction in which a broker or
dealer, after having received an order to
buy a security, purchases the security as
principal at the same price to satisfy the
order to buy, exclusive of any explicitly
disclosed markup or markdown,
commission equivalent, or other fee, or,
after having received an order to sell,
sells the security as principal at the
same price to satisfy the order to sell,
exclusive of any explicitly disclosed
markup or markdown, commission
equivalent, or other fee.
(9) The term trading center shall have
the same meaning as in § 242.600(b)(78).
(b)(1) A trading center shall establish,
maintain, and enforce written policies
and procedures reasonably designed to:
(i) Prevent the execution or display of
a short sale order of a covered security
at a price that is less than or equal to
the current national best bid if the price
of that covered security decreases by
10% or more from the covered security’s
closing price as determined by the
listing market for the covered security as
of the end of regular trading hours on
the prior day; and
(ii) Impose the requirements of
paragraph (b)(1)(i) of this section for the
remainder of the day and the following
day when a national best bid for the
covered security is calculated and
disseminated on a current and
continuing basis by a plan processor
pursuant to an effective national market
system plan.
(iii) Provided, however, that the
policies and procedures must be
reasonably designed to permit:
(A) The execution of a displayed short
sale order of a covered security by a
trading center if, at the time of initial
display of the short sale order, the order
was at a price above the current national
best bid; and
(B) The execution or display of a short
sale order of a covered security marked
‘‘short exempt’’ without regard to
whether the order is at a price that is

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less than or equal to the current national
best bid.
(2) A trading center shall regularly
surveil to ascertain the effectiveness of
the policies and procedures required by
paragraph (b)(1) of this section and shall
take prompt action to remedy
deficiencies in such policies and
procedures.
(3) The determination regarding
whether the price of a covered security
has decreased by 10% or more from the
covered security’s closing price as
determined by the listing market for the
covered security as of the end of regular
trading hours on the prior day shall be
made by the listing market for the
covered security and, if such decrease
has occurred, the listing market shall
immediately notify the single plan
processor responsible for consolidation
of information for the covered security
pursuant to § 242.603(b). The single
plan processor must then disseminate
this information.
(c) Following any determination and
notification pursuant to paragraph (b)(3)
of this section with respect to a covered
security, a broker or dealer submitting a
short sale order of the covered security
in question to a trading center may mark
the order ‘‘short exempt’’ if the broker or
dealer identifies the order as being at a
price above the current national best bid
at the time of submission; provided,
however:
(1) The broker or dealer that identifies
a short sale order of a covered security
as ‘‘short exempt’’ in accordance with
this paragraph (c) must establish,
maintain, and enforce written policies
and procedures reasonably designed to
prevent incorrect identification of
orders for purposes of this paragraph;
and
(2) The broker or dealer shall
regularly surveil to ascertain the
effectiveness of the policies and
procedures required by paragraph (c)(1)
of this section and shall take prompt
action to remedy deficiencies in such
policies and procedures.
(d) Following any determination and
notification pursuant to paragraph (b)(3)
of this section with respect to a covered
security, a broker or dealer may mark a
short sale order of a covered security
‘‘short exempt’’ if the broker or dealer
has a reasonable basis to believe that:
(1) The short sale order of a covered
security is by a person that is deemed
to own the covered security pursuant to
§ 242.200, provided that the person
intends to deliver the security as soon
as all restrictions on delivery have been
removed.
(2) The short sale order of a covered
security is by a market maker to offset
customer odd-lot orders or to liquidate

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an odd-lot position that changes such
broker’s or dealer’s position by no more
than a unit of trading.
(3) The short sale order of a covered
security is for a good faith account of a
person who then owns another security
by virtue of which he is, or presently
will be, entitled to acquire an equivalent
number of securities of the same class
as the securities sold; provided such
sale, or the purchase which such sale
offsets, is effected for the bona fide
purpose of profiting from a current
difference between the price of the
security sold and the security owned
and that such right of acquisition was
originally attached to or represented by
another security or was issued to all the
holders of any such securities of the
issuer.
(4) The short sale order of a covered
security is for a good faith account and
submitted to profit from a current price
difference between a security on a
foreign securities market and a security
on a securities market subject to the
jurisdiction of the United States,
provided that the short seller has an
offer to buy on a foreign market that
allows the seller to immediately cover
the short sale at the time it was made.
For the purposes of this paragraph
(d)(4), a depository receipt of a security
shall be deemed to be the same security
as the security represented by such
receipt.
(5)(i) The short sale order of a covered
security is by an underwriter or member
of a syndicate or group participating in
the distribution of a security in
connection with an over-allotment of
securities; or
(ii) The short sale order of a covered
security is for purposes of a lay-off sale
by an underwriter or member of a
syndicate or group in connection with a
distribution of securities through a
rights or standby underwriting
commitment.
(6) The short sale order of a covered
security is by a broker or dealer effecting
the execution of a customer purchase or
the execution of a customer ‘‘long’’ sale
on a riskless principal basis. In addition,
for purposes of this paragraph (d)(6), a
broker or dealer must have written
policies and procedures in place to
assure that, at a minimum:
(i) The customer order was received
prior to the offsetting transaction;
(ii) The offsetting transaction is
allocated to a riskless principal or
customer account within 60 seconds of
execution; and
(iii) The broker or dealer has
supervisory systems in place to produce
records that enable the broker or dealer
to accurately and readily reconstruct, in
a time-sequenced manner, all orders on

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which a broker or dealer relies pursuant
to this exception.
(7) The short sale order is for the sale
of a covered security at the volume
weighted average price (VWAP) that
meets the following criteria:
(i) The VWAP for the covered security
is calculated by:
(A) Calculating the values for every
regular way trade reported in the
consolidated system for the security
during the regular trading session, by
multiplying each such price by the total
number of shares traded at that price;
(B) Compiling an aggregate sum of all
values; and
(C) Dividing the aggregate sum by the
total number of reported shares for that
day in the security.
(ii) The transactions are reported
using a special VWAP trade modifier.
(iii) The VWAP matched security:
(A) Qualifies as an ‘‘actively-traded
security’’ pursuant to § 242.101 and
§ 242.102; or
(B) The proposed short sale
transaction is being conducted as part of
a basket transaction of twenty or more
securities in which the subject security
does not comprise more than 5% of the
value of the basket traded.
(iv) The transaction is not effected for
the purpose of creating actual, or
apparent, active trading in or otherwise
affecting the price of any security.
(v) A broker or dealer shall be
permitted to act as principal on the
contra-side to fill customer short sale
orders only if the broker’s or dealer’s
position in the covered security, as
committed by the broker or dealer
during the pre-opening period of a
trading day and aggregated across all of
its customers who propose to sell short
the same security on a VWAP basis,
does not exceed 10% of the covered
security’s relevant average daily trading
volume.
(e) No self-regulatory organization
shall have any rule that is not in
conformity with, or conflicts with, this
section.
(f) Upon written application or upon
its own motion, the Commission may
grant an exemption from the provisions
of this section, either unconditionally or
on specified terms and conditions, to
any person or class of persons, to any
transaction or class of transactions, or to
any security or class of securities to the
extent that such exemption is necessary
or appropriate, in the public interest,
and is consistent with the protection of
investors.
Dated: February 26, 2010.

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By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–4409 Filed 3–9–10; 8:45 am]

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Fmt 4701

Sfmt 9990

E:\FR\FM\10MRR2.SGM

10MRR2

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