trading system, an exchange market maker, an OTC market maker, or
any other broker or dealer that executes orders internally by
trading as principal or crossing orders as agent.'' See 17 CFR
242.600(b)(78). The definition encompasses all entities that may
execute short sale orders. Thus, Rule 201 will apply to any entity
that executes short sale orders.
    \170\ Any such execution or display will also need to be in
compliance with applicable rules regarding minimum pricing
increments. See 17 CFR 242.612. See also infra Section III.A.2.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \198\ See Proposal, 74 FR at 18050-18051.
    \199\ The three joint-industry plans are (1) the Consolidated
Tape Association Plan (``CTA Plan''), which disseminates transaction
information for securities primarily listed on an exchange other
than Nasdaq, (2) the Consolidated Quotation Plan (``CQ Plan''),
which disseminates consolidated quotation information for securities
primarily listed on an exchange other than Nasdaq, and (3) the
Nasdaq UTP Plan, which disseminates consolidated transaction and
quotation information for securities primarily listed on Nasdaq.
    \200\ Rule 603(b) of Regulation NMS provides that every national
securities exchange on which an NMS stock is traded and national
securities association shall act jointly pursuant to one or more
effective national market system plans to disseminate consolidated
information, including a national best bid and national best offer,
for NMS stocks. See 17 CFR 242.603(b).
    \201\ These networks can be categorized as follows: (1) Network
A--securities primarily listed on the NYSE; (2) Network B--
securities listed on exchanges other than the NYSE and Nasdaq; and
(3) Network C--securities primarily listed on Nasdaq.
    \202\ See Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496, 37503 (June 29, 2005) (``Regulation NMS Adopting Release'').
    \203\ See infra Section III.A.7.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \325\ See Rule 201(b)(3); see also infra Section III.A.6. Rule
201(a)(6) provides that ``[t]he term plan processor shall have the
same meaning as in Sec.  242.600(b)(55).'' Rule 600(b)(55) of
Regulation NMS states: ``Plan processor means any self-regulatory
organization or securities information processor acting as an
exclusive processor in connection with the development,
implementation and/or operation of any facility contemplated by an
effective national market system plan.'' The single plan processors
are ``exclusive processors'' as defined under Section 3(a)(22) of
the Exchange Act. 17 CFR 242.600(b)(55). See 15 U.S.C. 78c(a)(22).
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    As set forth in Rule 201(b)(1), we have determined that it is
appropriate to measure the price decline from the covered security's
closing price as determined by the listing market for the covered
security as of the end of regular trading hours on the prior day. In
the proposed circuit breaker rules, we proposed that the decline in a
covered security's price would be measured from the security's last
price as reported in the consolidated system during

regular trading hours on the prior day.\326\ After considering the
comments, we believe that the closing price as determined by the
covered security's listing market as of the end of regular trading
hours on the prior day will provide a more accurate price from which to
measure a decline in price than the last price reported in the
consolidated system. We believe that the last price reported in the
consolidated system is more likely to reflect an anomalous trade, e.g.,
a trade that is not consistent with the current market due to, for
example, the 90 second reporting window, or an uncorrected error.
Listing markets generally have in place specific procedures designed to
ensure the accuracy and reliability of their closing prices.\327\ Thus,
we believe it is appropriate to use the more accurate closing price as
determined by the covered security's listing market rather than the
last price reported in the consolidated system.
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    \326\ See Proposal, 74 FR at 18110-18113.
    \327\ See, e.g., NYSE Rule 116.40; NYSE Rule 123C(3).
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    We also believe that the price decline in a covered security under
Rule 201(b)(1)(i) should be measured from the covered security's
closing price reported on the prior day rather than from each day's
opening price for the covered security because the closing price
provides a clearly discernible price and time from which to measure the
decline. The closing price of a covered security will be known by or
shortly after the end of regular trading hours such that the listing
markets will have a price on the following day from which to determine
if a covered security is subject to the short sale price test
restrictions of Rule 201. An opening price, on the other hand, is
established only if there is opening interest for a security, which,
for thinly traded securities, may present issues. In addition, as noted
by one commenter, we believe that measuring the price decline from the
closing price on the prior day is preferable because it should be
easier to implement than a requirement to measure the decline from the
covered security's opening price.\328\ For example, should any
uncertainties in price occur, using the closing price as a measurement
will provide time to resolve any such uncertainties before the
requirements of Rule 201 will potentially apply. If the Rule required
that the decline must be measured from the opening price, any
uncertainties would have to be resolved in real time, so that if a 10%
or more price decline were to occur, the short sale price test
restrictions of Rule 201 could be applied that day in accordance with
the Rule.
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    \328\ See letter from SIFMA (June 2009).
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    As noted above, under Rule 201(b), once the circuit breaker has
been triggered, the price test restriction will remain in place for the
remainder of the day and for the following day. This requirement
differs from the proposed circuit breaker rules that would have applied
a short selling halt or short sale price test restriction for the
remainder of the day only.
    In response to our request for comment on the duration of the
proposed circuit breaker rules, comments were mixed. For example, one
commenter suggested that the Commission should consider extending the
duration of the short selling restriction through the close of trading
on the trading day following the triggering of the circuit breaker to
allow sufficient time to achieve the Commission's intended purpose of
``halting or slowing a price decline in a security.'' \329\ Some
commenters supported the proposed period for the circuit breaker of the
remainder of the trading day \330\ for various reasons, including that
the limited duration would mitigate the potential adverse impact of a
short selling restriction.\331\ In addition, several commenters
supported a circuit breaker with a duration of less than the remainder
of the trading day.\332\
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    \329\ See letter from RBC (June 2009); see also letter from
Credit Suisse (Mar. 2009).
    \330\ See, e.g., letter from Direct Edge (June 2009) (stating
that the circuit breaker should be limited in duration to the end of
the trading day with respect to the proposed circuit breaker halt
rule); letter from AIMA; letter from Goldman Sachs (June 2009).
    \331\ See, e.g., letter from AIMA; see also letter from Direct
Edge (June 2009) (opposing a circuit breaker duration beyond one
trading day specifically with respect to a circuit breaker
triggering a short selling halt); letter from Barclays (June 2009);
letter from Goldman Sachs (June 2009).
    \332\ See letter from Barclays (June 2009); letter from Citadel
et al. (June 2009); letter from SIFMA (June 2009); see also letter
from Jordan & Jordan (providing data regarding the extent to which
securities with an ``on/off'' trigger recovered by the end of
trading).
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    One commenter, however, stated that the circuit breaker should not
be in effect for multiple days, but also that it should not be in
effect for a matter of hours because ``frequent changes in the status
of a security would create more disruption.'' \333\ Several commenters
who supported a circuit breaker with a duration of less than the
remainder of the trading day stated that the circuit breaker should be
lifted if the security's price has recovered and the price decline is
less than 10% before the end of the trading day.\334\ These commenters
stated, among other things, that such a recovery may be a common
occurrence \335\ and that lifting the circuit breaker would take into
account the resilience of the markets.\336\ Another commenter stated
that the circuit breaker should only be in effect long enough to re-
establish equilibrium between buying and selling interests and further
noted that the duration of the circuit breaker should depend on the
time of day when the threshold is triggered.\337\
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    \333\ Letter from Goldman Sachs (June 2009).
    \334\ See letter from Barclays (June 2009); letter from SIFMA
(June 2009).
    \335\ See letter from SIFMA (June 2009).
    \336\ See letter from Barclays (June 2009).
    \337\ See letter from Citadel et al. (June 2009).
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    Some commenters supported the Commission's proposal that a circuit
breaker would not be triggered if the 10% trigger level were reached in
a covered security within thirty minutes of the end of regular trading
hours.\338\ Other commenters, however, stated that the last thirty
minutes of the day has become the most volatile part of the day and
that this is exactly the time that a rule that would slow short selling
and reduce volatility would be most needed.\339\
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    \338\ See letter from Barclays (June 2009); letter from Citadel
et al. (June 2009).
    \339\ See, e.g., letter from Jibralta Merrill, dated May 5,
2009; letter from Arthur Porcari, dated May 11, 2009; letter from
IBC; letter from STA (June 2009).
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    After considering the comments, we believe it is appropriate to
apply the alternative uptick rule, when triggered, for the remainder of
the day and the day following the day on which the circuit breaker is
triggered. We believe that a circuit breaker that is in effect for the
remainder of the day and the following day will have the advantage of
being more effective at preventing short selling from being used as a
tool to exacerbate a security's decline in price. As we, and several
commenters, have noted, because the alternative uptick rule will permit
short selling only at a price above the current national best bid, it
will likely be the most effective of the proposed price tests at
preventing short selling from driving down further a security's price
or from exacerbating a price decline.\340\ A circuit breaker that will
impose a short selling restriction for only the remainder of the
trading day, or as some commenters suggested, for less than the
remainder of the trading day, may not allow sufficient time for the
short selling restriction to have its desired effect. To the extent
that short selling is causing or contributing

to downward price pressure, a longer duration will provide additional
time during which the security will be subject to reduced downward
price pressure from short selling. In addition, we note that the
circuit breaker could be triggered at any point during regular trading
hours. Further, as noted by one commenter, we are concerned that if the
circuit breaker is triggered late in the day, such that it would be in
effect for only a short period of time, this would in fact create more
disruption rather than achieving our goals with respect to short sale
price test restrictions for that security.\341\ By applying the short
sale price test restriction for the day following the day on which it
is triggered, the time period will help ensure that there is not
unnecessary disruption caused by the triggering of the circuit breaker.
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    \340\ See letter from Wells Fargo (Sept. 2009); letter from STA
(Sept. 2009); letter from Glen Shipway (Sept. 2009); letter from
BATS (Sept. 2009).
    \341\ See supra note 333 and accompanying text.
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    As discussed above, the Commission has previously noted that
circuit breakers may benefit the market by allowing participants an
opportunity to re-evaluate circumstances and respond to
volatility.\342\ We believe that imposing a short selling restriction
for the remainder of the day and the following day will help ensure
that market participants have a reasonable opportunity to become aware
of, and respond to, a significant decline in a security's price, and
will provide sufficient time to re-establish market efficiency in the
individual security. Although, for the reasons discussed above, we
believe it is necessary to impose the short sale price test restriction
of Rule 201 for longer than the remainder of the day, we do not believe
it is appropriate to extend the duration beyond the time period
specified in Rule 201 because we believe that the duration specified in
Rule 201 strikes the appropriate balance between achieving our goals in
adopting Rule 201 and not causing unnecessary market disruption.
---------------------------------------------------------------------------

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

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

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

    Consistent with the Proposal, we have determined to apply the price
test restriction, if triggered, during periods when the national best
bid is calculated and disseminated on a current and continuing basis by
a plan processor.\344\ As discussed above and as we discussed in the
Proposal,\345\ market information for quotes in covered securities is
disseminated pursuant to two different national market system plans,
the CQ Plan and Nasdaq UTP Plan.\346\ Quotation information is made
available pursuant to the CQ Plan between 9 a.m. and 6:30 p.m. ET,
while one or more participants is open for trading. In addition,
quotation information is made available pursuant to the CQ Plan during
any other period in which any one or more participants wish to furnish
quotation information to the Plan.\347\ Quotation information is made
available by the Nasdaq UTP Plan between 9:30 a.m. and 4 p.m. ET. The
Nasdaq UTP Plan also collects, processes, and disseminates quotation
information between 4 a.m. and 9:30 a.m. ET, and after 4 p.m. when any
participant is open for trading, until 8 p.m. ET.\348\ During the time
periods in which these Plans do not operate, real-time quote
information is not collected, calculated and disseminated.
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    \344\ See Rule 201(b).
    \345\ See Proposal, 74 FR at 18060, 18064-18065.
    \346\ See supra note 199 and accompanying text. See also 17 CFR
242.603(b). Rule 603 of Regulation NMS requires that every national
securities exchange on which an NMS stock is traded and national
securities association shall act jointly pursuant to one or more
effective national market system plans to disseminate consolidated
information, including a national best bid and national best offer,
on quotations for and transactions in NMS stocks.
    \347\ See http://www.nyxdata.com/cta.
    \348\ See http://www.utpdata.com/docs/UTP_PlanAmendment.pdf.
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    In response to our request for comment,\349\ one commenter stated
that any price test restriction should be applied during regular
trading hours only because the period when the current national best
bid is calculated, collected and disseminated ``can vary depending on
whether a participant in the particular national market system
governing quote consolidation for a security decides to pay the
consolidator to extend the hours of the calculation of the bid.'' \350\
In contrast, other commenters stated that the proposed price test
restrictions should apply at all times during after-hours trading.\351\
Because the short sale price test restrictions of Rule 201 are based on
the current national best bid, we believe that the restrictions should
apply at all times when the current national best bid is collected,
calculated and disseminated even though this period can vary depending
on whether a participant in the particular national market system
governing quote consolidation for a security decides to pay the
consolidator to extend the hours of the calculation of the bid.\352\
Thus, the price test restrictions of Rule 201 will apply at times when
quotation information and, therefore, the national best bid, is
collected, processed, and disseminated pursuant to a national market
system plan. We note, however, that at a later time we may reconsider
whether any changes to Rule 201 would be necessary to also apply the
Rule to short selling during times when the national best bid is not
collected, calculated and disseminated, in light of any new information
on short selling activity during these times.
---------------------------------------------------------------------------

    \349\ See, e.g., Proposal, 74 FR at 18060.
    \350\ Letter from Credit Suisse (Sept. 2009); see also letter
from SIFMA (June 2009); letter from Goldman Sachs (June 2009);
letter from T. Rowe Price (June 2009).
    \351\ See, e.g., letter from Michael Sigmon, Chairman, Sigmon
Wealth Management, dated Apr. 14, 2009; letter from IBC.
    \352\ We note that currently, the period during which the
current national best bid is collected, calculated and disseminated
can vary depending on whether a participant in the particular
national market system governing quote consolidation for a security
has decided to pay the consolidator to extend the hours of the
calculation of the bid.
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6. Determination Regarding Securities Subject to Rule 201 and
Dissemination of Such Information
    In the Proposal, we requested comment regarding who should be
responsible for monitoring the price declines of individual securities
to determine if they trigger the short selling circuit breaker, such as
broker-dealers or SROs, how such information should be disseminated to
the market, and who should be responsible for disseminating the
information.\353\ In response to our request for comment, some
commenters stated that if we were to adopt a circuit breaker rule,
securities subject to the Rule should be tracked and disseminated by
the SIP for the covered security in question, noting that SIPs
currently track and disseminate

percentage moves \354\ and that such a role would be consistent with
the responsibilities of a SIP to collect, process, distribute and
publish information with respect to transactions in, or quotations for,
any security for which it acts as a SIP on a current and continuing
basis.\355\ One commenter stated that it would be inappropriate to
allow each market to perform its own calculation or to impose the
responsibility on a particular market due to the importance of ensuring
that triggering of a circuit breaker is communicated to all markets and
market participants on a fair, impartial and timely basis.\356\ Other
commenters stated that the listing market for a covered security should
communicate the triggering of the circuit breaker to the SIP for the
covered security, which would then redistribute such information to the
market.\357\ Another commenter stated that the exchanges should be
required to develop and maintain ``a centralized real-time list of all
securities subject to the circuit breaker price test.'' \358\ This
commenter stated that it believes this centralization ``would ensure
consistent treatment of orders and help reduce the costs of compliance
for market participants.'' \359\ One commenter stated that as an
alternative to the listing market notifying the SIP for a covered
security when the circuit breaker has been triggered, trading centers
could arrange to receive this information directly from the listing
market.\360\
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    \353\ See Proposal, 74 FR at 18078.
    \354\ See, e.g., letter from Virtu Financial (also stating that
the SIPs would add a flag to their data feeds that would announce
when the circuit breaker is in effect).
    \355\ See letter from NYSE Euronext (Sept. 2009); see also
letter from SIFMA (June 2009) (stating that some of its member firms
``believe that exchange-controlled SIPs should monitor prices and
disseminate information flags when a security is in short sale mode
* * *'').
    \356\ See letter from NYSE Euronext (Sept. 2009).
    \357\ See, e.g., letter from Direct Edge (June 2009); letter
from Liquidnet; letter from FIF (June 2009); letter from Manisha
Kimmel, Executive Director, Financial Information Forum, dated Sept.
23, 2009 (``FIF (Sept. 2009)'').
    \358\ Letter from RBC (June 2009).
    \359\ Id.
    \360\ See letter from Liquidnet.
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    After considering the comments, we have determined that the listing
market for each covered security must determine whether that covered
security is subject to Rule 201.\361\ Rule 201(a)(3) defines the term
``listing market'' to have the same meaning as the term ``listing
market'' as defined in the effective transaction reporting plan for the
covered security.\362\ Because the definition of ``listing market'' is
a currently-used definition, we believe users of the Rule will not have
difficulty identifying for a security which entity is its listing
market.
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    \361\ See Rule 201(b)(3).
    \362\ Rule 201(a)(2). Rule 201(a)(2) provides that ``[t]he term
effective transaction reporting plan for a covered security shall
have the same meaning as in Sec.  242.600(b)(22).'' Rule 201(a)(2).
---------------------------------------------------------------------------

    Currently, there are two effective transaction reporting plans, the
CTA Plan, which disseminates transaction information for securities
primarily listed on an exchange other than Nasdaq, and the Nasdaq UTP
Plan, which disseminates consolidated transaction and quotation
information for securities primarily listed on Nasdaq.\363\ Each of
these Plans includes a definition of ``listing market,'' which
definitions we are incorporating by reference into Rule 201. We have
determined to incorporate by reference into Rule 201 the definition of
``listing market,'' as that term is defined in the CTA Plan and the
Nasdaq UTP Plan,\364\ to provide the markets with uniformity with
respect to decisions regarding trading restrictions for individual NMS
stocks because the listing markets are already familiar with making
determinations regarding, and imposing trading restrictions on,
individual NMS stocks. For example, listing markets already have rules
or policies in place to coordinate trading suspensions or halts in
individual NMS stocks.\365\
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    \363\ See supra note 199 (discussing the joint-industry plans).