SEC Reopens Comment Period on Alternative Uptick Rule

The SEC has reopened the comment period on potential amendments to Regulation SHO to seek additional feedback on an alternative price test that would allow short selling only at a price above the current national best bid (Rel. No. 34-60509, August 17, 2009). The SEC sought comment on the alternative uptick rule in a proposal published for comment on April 20, but it was not one of proposed approaches on which the proposal focused. The SEC noted that the alternative uptick rule would be easier to monitor and to implement so it may cost less than the other proposals. The new comment period is open for 30 days.

In the April 20 proposal, the SEC outlined two approaches to restrictions on short selling. One would apply on a market-wide and permanent basis and the other would apply only to a particular security during a severe market decline in the price of that security. The SEC also asked whether the alternative uptick rule, by permitting short selling at a price above the current national best bid, would be preferable to those approaches. The SEC now wishes to further consider whether the adoption of the alternative uptick rule would achieve its objectives.

The alternative uptick rule would be similar to the previously proposed modified uptick rule since both would use the current national best bid as a reference point for short sale orders. However, the alternative uptick rule would not allow short selling at the current national best bid or last sale price as the earlier proposal would. In an advancing or declining market, the alternative uptick rule would only permit short selling at an increment above the current national best bid unless an applicable exemption applies.

The alternative uptick rule would restrict short selling to a greater extent than the earlier proposals. Since it would not require the monitoring of the sequence of bids or the last sale prices, it could be implemented more quickly than the other approaches and potentially at a lower cost. A number of commenters said it would be easier to program into trading and surveillance systems since it would not require bid sequencing.

On the other hand, since the alternative uptick rule would restrict short selling to a greater extent than the other two approaches, it could lessen some of the benefits of legitimate short selling, including market liquidity and pricing efficiency. It could impose costs with respect to quote depths, spread widths, market liquidity, execution and pricing efficiencies.

The alternative uptick rule could be implemented through a policies and procedures approach, through a straight prohibition approach or through some combination of the two, according to the release. It could also be implemented in combination with a short selling circuit breaker, in which the rule would be triggered by an intraday decline in the price of an individual equity security by a set percentage from the prior day's closing price.

The SEC believes that, since the alternative uptick rule is similar to the proposed modified uptick rule, the rationale discussed in the April 20 proposal for the short exempt marking provisions would be applicable. The alternative uptick rule could also include short exempt provisions or exceptions for a seller's delay in delivery, odd lots, international arbitrage, over-allotments and lay-off sales, transactions on a VWAP basis and riskless principal transactions as discussed in the April 20 proposal.

The SEC has renewed its request for comment on the importance of a market maker exception, the scope of such an exception and any conditions that should be imposed to ensure that it is only used for bona fide market making. Commenters are asked to provide empirical data to support their views. The SEC noted that a number of commenters have said that their first preference is that the SEC not adopt any of the short sale rules outlined in the proposal. This option, along with all of the other options discussed in the proposal, are still under active consideration, according to the SEC.