New SEC Short-Selling Price Test Same As March Exchange Proposal
Traders Magazine Online News, August 17, 2009
Call it a win for the exchanges. The Securities and Exchange Commission this morning proposed a new "alternative uptick rule" that's the same as what NYSE Euronext, Nasdaq OMX Group, BATS Exchange and the National Stock Exchange proposed in March.
The rule would allow short selling "only at an increment above the national best bid," according to the SEC's release. That's what the three exchanges recommended a week before the SEC put forward five proposals to restrict short selling in early April. Those proposals received more than 4,000 comment letters over the ensuing four months.
The Commission said its new proposal is "an alternative approach to short selling price test restrictions that may be more effective and easier to implement than previously proposed price test restrictions currently under consideration." The SEC has reopened its comment period for another 30 days to allow the public to respond to this new proposal.
In March, Nasdaq, NYSE Euronext, BATS and the NSX wrote to the SEC: "Under our [proposed] Modified Uptick Rule, short selling can only be initiated at a price above the highest prevailing national bid by posting a quote for a short sale order priced above the national bid. As such, the execution of a short sale would occur only at a higher price than the prevailing market at the time of initiation, and only on a passive basis (i.e., short sales cannot hit bids)."
The exchanges noted that this proposal was a "simple, effective and more prohibitive Short Sale restriction that takes into account how equity trading has changed over the past several years since the original Uptick Rule [on the New York Stock Exchange] was eliminated."
The SEC's new proposal is similar to a bid test the SEC proposed in April. However, that bid test required a comparison of the current national best bid to the previous national best bid before a short sale could be placed. The new test simply requires short sales to be placed at an increment above the current national best bid. This is considered a more conservative approach than the SEC's earlier proposal because the short sale must always be entered at a higher price than the current national best bid.
The SEC recommended this new proposal in part because it would be easier to implement for the trading industry. "Unlike proposals in April, the alternative uptick rule would not require monitoring of the sequence of bids (that is, whether the current national best bid is above or below the previous national best bid), and as a result the alternative uptick rule would be easier to monitor," the SEC announcement said. "It also may be possible to implement this approach more quickly and with less cost than the prior proposals."
The SEC requested comments on the "alternative uptick rule as a permanent market-wide approach, as well as whether the alternative uptick rule should be combined with a circuit breaker approach." The exchanges in March recommended that this version of the uptick rule be implemented with a circuit breaker. The circuit breaker trigger they suggested was a 10 percent decline in a stock from the previous day's closing price.
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