[Federal Register: March 10, 2010 (Volume 75, Number 46)]
[Rules and Regulations]
[Page 11231-11325]
[DOCID:fr10mr10-10]

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

Part II

Securities and Exchange Commission

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

17 CFR Part 242

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

Amendments to Regulation SHO; Final Rule

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

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

Amendments to Regulation SHO

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

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

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

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

Table of Contents

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

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.
---------------------------------------------------------------------------

    \1\ See infra note 41 and accompanying text.
    \2\ NASD is now known as the Financial Industry Regulatory
Authority, Inc. (``FINRA'').
    \3\ See infra note 43 and accompanying text.
---------------------------------------------------------------------------

    The Commission took a number of steps as part of that process,
including seeking extensive public comment and conducting a
comprehensive staff study to assess whether then-current short sale
price test restrictions were appropriate. For example, beginning in
1999, the Commission published a concept release in which it sought
comment regarding short sale price test regulation, including comment
on whether to eliminate such regulation.\4\ In 2004, the Commission
initiated a year-long pilot (``Pilot'') to study the removal of short
sale price tests for approximately one-third of the largest stocks.\5\
Short sale data was made publicly available during this Pilot to allow
the public and Commission staff (the ``Staff'') to study the effects of
eliminating short sale price test restrictions. The findings of third
party researchers were presented and discussed in a public Roundtable
in September 2006.\6\ In addition, the results of the Staff study of
the Pilot data were made publicly available in draft form in September
2006 and in final form in February 2007.\7\
---------------------------------------------------------------------------

    \4\ See Exchange Act Release No. 42037 (Oct. 20, 1999), 64 FR
57996 (Oct. 28, 1999) (``1999 Concept Release'').
    \5\ See Exchange Act Release No. 50104 (July 28, 2004), 69 FR
48032 (Aug. 6, 2004) (``Pilot Release'').
    \6\ See http://www.sec.gov/about/economic/
shopilottrans091506.pdf (the ``Regulation SHO 2006 Roundtable'').
    \7\ See http://www.sec.gov/about/economic/shopilot091506/draft_
reg_sho_pilot_report.pdf and http://www.sec.gov/news/studies/
2007/regshopilot020607.pdf. See also infra notes 48 to 62 and
accompanying text (discussing findings of the Staff study).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \8\ See Exchange Act Release No. 59748 (Apr. 10, 2009), 74 FR
18042, 18043 (Apr. 20, 2009) (the ``Proposal'').
    \9\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \10\ See Proposal, 74 FR 18042.
---------------------------------------------------------------------------

    With respect to the permanent, market-wide approach, we proposed
two alternative price tests. The first alternative price test, in many
ways similar to NASD's former bid test, would be based on the national
best bid (the ``proposed modified uptick rule''). The second
alternative price test, similar to former Rule 10a-1, would be based on
the last sale price (the ``proposed uptick rule'').
    With respect to the proposed circuit breaker approach, we proposed
two basic alternatives. First, we proposed a circuit breaker rule that,
when triggered by a significant price decline in a particular security,
would temporarily prohibit any person from selling short that security,
subject to certain exceptions (``proposed circuit breaker halt rule'').
Second, we proposed a circuit breaker rule that, when triggered by a
significant price decline in a particular security, would trigger a
temporary short sale price test for that security. In connection with
this alternative, we proposed two short sale price tests. One was the
modified uptick rule--that is, we proposed a circuit breaker rule that,
when triggered by a significant price decline in a particular security,
would temporarily impose the proposed modified uptick rule for that
security (``proposed circuit breaker modified uptick rule''). The other
was the uptick rule--that is, we proposed a circuit breaker rule that,
when triggered by a significant market decline in a particular
security, would temporarily impose the proposed uptick rule for that
security (``proposed circuit breaker uptick rule'').
    In addition, in the Proposal we inquired whether a short sale price
test restriction that would permit short selling at a price above the
current national best bid (the ``alternative uptick rule''), would be
preferable to the proposed modified uptick rule and the proposed uptick
rule.\11\ We sought comment regarding the application of the
alternative uptick rule as a market-wide permanent short sale price
test restriction or in conjunction with a circuit breaker.\12\ As a
supplement to our request for comment in the Proposal and to help
ensure the public had a full opportunity to comment on, among other
things, the alternative uptick rule, on August 20, 2009 we re-opened
the comment period to the Proposal.\13\ In addition, on May 5, 2009, we
held a Roundtable to Examine Short Sale Price Test and Circuit Breaker
Restrictions (the ``May 2009 Roundtable'').\14\ Panelists included
representatives of public issuers, investors, financial services firms,
SROs and the academic community.\15\
---------------------------------------------------------------------------

    \11\ See Proposal, 74 FR at 18072, 18081, 18082.
    \12\ See id.
    \13\ See Exchange Act Release No. 60509 (Aug. 17, 2009), 74 FR
42033 (Aug. 20, 2009) (the ``Re-Opening Release'').
    \14\ See Exchange Act Release No. 59855 (May 1, 2009); Press
Release No. 2009-101 (agenda and panelists included); Press Release
No. 2009-88 (preliminary agenda included).
    \15\ See http://www.sec.gov/spotlight/shortsales/
roundtable050509/shortsalesroundtable050509-transcript.txt
(unofficial transcript of May 2009 Roundtable).
---------------------------------------------------------------------------

    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.\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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    By not allowing short sellers to sell at or below the current
national best bid while the circuit breaker is in effect, the short
sale price test restriction in Rule 201 will allow long sellers, who
will be able to sell at the bid, to sell first in a declining market
for a particular security. As the Commission has noted previously in
connection with short sale price test restrictions, a goal of such
restrictions is to allow long sellers to sell first in a declining
market.\17\ A short seller that is seeking to profit quickly from
accelerated, downward market moves may find it advantageous to be able
to short sell at the current national best bid. In addition, by making
such bids accessible only by long sellers when a security's price is
undergoing significant downward price pressure, Rule 201 will help to
facilitate and maintain stability in the markets and help ensure that
they function efficiently. It will also help restore investor
confidence during times of substantial uncertainty because, once the
circuit breaker has been triggered for a particular security, long
sellers will have preferred access to bids for the security, and the
security's continued price decline will more likely be due to long
selling and the underlying fundamentals of the issuer, rather than to
other factors.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    At the same time, however, we recognize the benefits to the market
of legitimate short selling, such as the provision of liquidity and
price efficiency. Thus, by imposing a short sale price test restriction
only when an individual security is undergoing significant downward
price pressure, the short sale price test restrictions of Rule 201 will
apply to a limited number of securities, rather than to all securities
all the time. As discussed in more detail below,\20\ in response to our
request for comment on an appropriate threshold at which to trigger the
proposed circuit breaker short sale price test restrictions, commenters
submitted estimates of the number of securities that would trigger a
circuit breaker rule at a 10% threshold.\21\ While commenters' analyses
(including the facts and assumptions used) and their resulting
estimates varied,\22\ commenters' estimates reflect that a 10% circuit
breaker threshold, on average, should affect a limited percentage of
covered securities.\23\ Given the variations in the facts and
assumptions underlying the estimates submitted by commenters, the Staff
also looked at trading data to confirm the reasonableness of those
estimates. The Staff found that, during the period covering April 9,
2001 to September 30, 2009,\24\ the price test restrictions of Rule 201
would have been triggered, on an average day, for approximately 4% of
covered securities.\25\ The Staff also found that for a low volatility
period, covering January 1, 2004 to December 31, 2006, the 10% trigger
level of Rule 201 would have, on an average day, been triggered for
approximately 1.3% of covered securities.\26\
---------------------------------------------------------------------------

    \20\ See infra Section III.A.5. (discussing the circuit breaker
trigger level).
    \21\ See, e.g., letter from Mary Lou Von Kaenel, Managing
Director, Management Consulting, Jordan & Jordan, dated June 19,
2009 (``Jordan & Jordan''); letter from John C. Nagel, Managing
Director and Deputy General Counsel, Citadel Investment Group, John
Liftin, Managing Director and General Counsel, The D.E. Shaw Group,
and Mark Silber, Executive Vice President, Renaissance Technologies,
dated June 19, 2009 (``Citadel et al. (June 2009)''); letter from
Stuart J. Kaswell, Executive Vice President, Managing Director and
General Counsel, Managed Funds Association, dated June 22, 2009
(``MFA (June 2009)''); letter from Ira D. Hammerman, Senior Managing
Director and General Counsel, Securities Industry and Financial
Markets Association, dated June 19, 2009 (``SIFMA (June 2009)'');
letter from Daniel Mathisson, Managing Director, Credit Suisse
Securities (USA), LLC, dated Sept. 21, 2009 (``Credit Suisse (Sept.
2009)'').
    \22\ See infra note 306.
    \23\ See infra note 307.
    \24\ See infra note 309.
    \25\ See infra note 310.
    \26\ See infra note 311.
---------------------------------------------------------------------------

    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

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

A. Short Selling and Its Market Impact

    Short selling provides the market with important benefits,
including market liquidity and pricing efficiency.\30\ Market liquidity
is often provided through short selling by market professionals, such
as market makers (including specialists) and block positioners, who
offset temporary imbalances in the buying and selling interest for
securities. Short sales effected in the market add to the selling
interest of stock available to purchasers and reduce the risk that the
price paid by investors is artificially high because of a temporary
imbalance between buying and selling interest. Short sellers covering
their sales also may add to the buying interest of stock available to
sellers.\31\
---------------------------------------------------------------------------

    \30\ See id.; see also Exchange Act Release No. 29278 (June 7,
1991), 56 FR 27280 (June 13, 1991); Exchange Act Release No. 50103
(July 28, 2004), 69 FR 48008, 48009 n.6 (Aug. 6, 2004) (``2004
Regulation SHO Adopting Release''); Ekkehart Boehmer and J. Julie
Wu, Short Selling and the Informational Efficiency of Prices,
Working Paper, Jan. 8, 2009.
    \31\ See, e.g., 2006 Price Test Elimination Proposing Release,
71 FR at 75069; 2003 Regulation SHO Proposing Release, 68 FR at
62974.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Although short selling serves useful market purposes, it also may
be used to drive down the price of a security or as a tool to
accelerate a declining market in a security.\34\ In addition, short
selling may be used to illegally manipulate stock prices.\35\ One
example is the ``bear raid'' where an equity security is sold short in
an effort to drive down the price of the security by creating an
imbalance of sell-side interest.\36\ This unrestricted short selling
could exacerbate a declining market in a security by increasing
pressure from the sell-side, eliminating bids, and causing a further
reduction in the price of a security by creating an appearance that the
security's price is falling for fundamental reasons, when the decline,
or the speed of the decline, is being driven by other factors.\37\
---------------------------------------------------------------------------

    \34\ See, e.g., Proposal, 74 FR at 18065 (noting that a short
selling circuit breaker rule would be designed to target only those
securities that experience rapid severe intra-day price declines
and, therefore, might help to prevent short selling from being used
to drive the price of a security down or to accelerate the decline
in the price of those securities).
    \35\ See, e.g., U.S. v. Russo, 74 F.3d 1383, 1392 (2d Cir. 1996)
(short sales were sufficiently connected to the manipulation scheme
as to constitute a violation of Exchange Act Section 10(b) and Rule
10b-5); S.E.C. v. Gardiner, 48 S.E.C. Docket 811, No. 91 Civ. 2091
(S.D.N.Y. Mar. 27, 1991) (alleged manipulation by sales
representative by directing or inducing customers to sell stock
short in order to depress its price).
    \36\ Many people blamed ``bear raids'' for the 1929 stock market
crash and the market's prolonged inability to recover from the
crash. See, e.g., Steve Thel, $850,000 in Six Minutes--The Mechanics
of Securities Manipulation, 79 Cornell L. Rev. 219, 295-296 (1994);
Jonathan R. Macey, Mark Mitchell & Jeffry Netter, Restrictions on
Short Sales: An Analysis of the Uptick Rule and its Role in View of
the October 1987 Stock Market Crash, 74 Cornell L. Rev. 799, 801-802
(1989).
    \37\ See 2006 Price Test Elimination Proposing Release, 71 FR at
75070; 2003 Regulation SHO Proposing Release, 68 FR at 62974.
---------------------------------------------------------------------------

B. History of Short Sale Price Test Restrictions in the U.S.

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

    \38\ 15 U.S.C. 78j(a).
    \39\ See id.; see also 2006 Price Test Elimination Proposing
Release, 71 FR at 75068; 2003 Regulation SHO Proposing Release, 68
FR at 62973.
    \40\ The study covered two weekly periods, that of September 7-
13, 1937, and that of October 18-23, 1937. See Exchange Act Release
No. 1548 (Jan. 24, 1938), 3 FR 213 (Jan. 26, 1938) (``Former Rule
10a-1 Adopting Release'').
    \41\ See id. Former Rule 10a-1 provided that, subject to certain
exceptions, a listed security could be sold short (i) at a price
above the price at which the immediately preceding sale was effected
(plus tick), or (ii) at the last sale price if it was higher than
the last different price (zero plus tick).
---------------------------------------------------------------------------

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

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

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

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

    \44\ 17 CFR 242.202T.
    \45\ See 17 CFR 242.202T; see also 2004 Regulation SHO Adopting
Release, 69 FR at 48012-48013.
    \46\ See Pilot Release, 69 FR 48032.
    \47\ See id. In the 2004 Regulation SHO Adopting Release, we
noted that ``the purpose of the [P]ilot is to assist the Commission
in considering alternatives, such as: (1) Eliminating a Commission-
mandated price test for an appropriate group of securities, which
may be all securities; (2) adopting a uniform bid test, and any
exceptions, with the possibility of extending a uniform bid test to
securities for which there is currently no price test; or (3)
leaving in place the current price tests.'' 2004 Regulation SHO
Adopting Release, 69 FR at 48010.
---------------------------------------------------------------------------

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

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

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

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

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

    \52\ On the day the Pilot went into effect, listed Pilot
securities underperformed listed control group securities by
approximately 24 basis points. The Pilot and control group
securities, however, had similar returns over the first six months
of the Pilot. See Staff's Summary Pilot Report at 8.
    \53\ See Staff's Summary Pilot Report at 55.
    \54\ This conclusion is based on the result that changes in
effective spreads were not economically significant (less than a
basis point) and that the changes in the bid and ask depth appear
not to affect the transaction costs paid by investors. Arguably, the
changes in bid and ask depth appeared to affect the intra-day
volatility. However, the Staff concluded that overall, the Pilot
data did not suggest a deleterious impact on market quality or
liquidity. See Staff's Summary Pilot Report at 40-42, 55.
    \55\ See Staff's Summary Pilot Report at 35.
    \56\ See id.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \117\ See Exchange Act Release No. 56212 (Aug. 7, 2007), 72 FR
45544 (Aug. 14, 2007) (eliminating the ``grandfather'' exception to
Regulation SHO's close-out requirement); September Emergency Order,
73 FR 54875 (eliminating the options market maker exception to
Regulation SHO's close-out requirement). Following the issuance of
the September Emergency Order, we adopted amendments making
permanent the elimination of the options market maker exception. See
Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690 (Oct.
17, 2008) (``Options Market Maker Elimination Release'').
    \118\ See Exchange Act Release No. 58774 (Oct. 14, 2008), 73 FR
61666 (Oct. 17, 2008); September Emergency Order, 73 FR 54875;
Exchange Act Release No. 57511 (Mar. 17, 2008), 73 FR 15376 (Mar.
21, 2008).
    \119\ See Memorandum from the Staff Re: Impact of Recent SHO
Rule Changes on Fails to Deliver, Nov. 4, 2009 at http://
www.sec.gov/spotlight/shortsales/oeamemo110409.pdf (stating, among
other things, that the average daily number of aggregate fails to
deliver for all securities decreased from 2.21 billion to 0.25
billion for a total decline of 88.5% when comparing a pre-Rule to
post-Rule period); Memorandum from the Staff Re: Impact of Recent
SHO Rule Changes on Fails to Deliver, Nov. 26, 2008 at http://
www.sec.gov/comments/s7-30-08/s73008-37.pdf; Memorandum from the
Staff Re: Impact of Recent SHO Rule Changes on Fails to Deliver,
Mar. 20, 2009 at http://www.sec.gov/comments/s7-30-08/s73008-
107.pdf.
    \120\ See Exchange Act Release No. 60388 (July 27, 2009), 74 FR
38266 (July 31, 2009) (``Rule 204 Adopting Release''). Rule 204
contained some modifications to address commenters' concerns. See
id.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    We also note that some other commenters submitted surveys showing

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

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

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

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

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

III. Discussion of Rule 201 of Regulation SHO

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

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

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

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

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

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

A. Operation of the Circuit Breaker Plus Alternative Uptick Rule

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

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

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

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

    \169\ Consistent with the Proposal, Rule 201(a)(9) states that
the term ``trading center'' shall have the same meaning as in Rule
600(b)(78). Rule 600(b)(78) of Regulation NMS defines a ``trading
center'' as ``a national securities exchange or national securities
association that operates an SRO trading facility, an alternative