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`17 CFR PART 242
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`Release No. 34-61595; File No. S7-08-09
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`RIN 3235-AK35
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`Amendments to Regulation SHO
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`AGENCY: Securities and Exchange Commission.
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`ACTION: Final rule.
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`SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting
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`amendments to Regulation SHO under the Securities Exchange Act of 1934 (“Exchange Act”).
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`We are adopting a short sale-related circuit breaker that, if triggered, will impose a restriction on
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`the prices at which securities may be sold short (“short sale price test” or “short sale price test
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`restriction”). Specifically, the Rule requires that a trading center establish, maintain, and enforce
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`written policies and procedures reasonably designed to prevent the execution or display of a
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`short sale order of a covered security at a price that is less than or equal to the current national
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`best bid if the price of that covered security decreases by 10% or more from the covered
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`security’s closing price as determined by the listing market for the covered security as of the end
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`of regular trading hours on the prior day. In addition, the Rule requires that the trading center
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`establish, maintain, and enforce written policies and procedures reasonably designed to impose
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`this short sale price test restriction for the remainder of the day and the following day when a
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`national best bid for the covered security is calculated and disseminated on a current and
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`continuing basis by a plan processor pursuant to an effective national market system plan. We
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`believe it is appropriate at this time to adopt a short sale-related circuit breaker because, when
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`triggered, it will prevent short selling, including potentially manipulative or abusive short selling,
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`Coalition for Affordable Drugs IV LLC - Exhibit 1034
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`from driving down further the price of a security that has already experienced a significant intra-
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`day price decline, and will facilitate the ability of long sellers to sell first upon such a decline.
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`This approach establishes a narrowly-tailored Rule that will target only those securities that are
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`experiencing significant intra-day price declines. We believe that addressing short selling in
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`connection with such declines in individual securities will help address erosion of investor
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`confidence in our markets generally.
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`In addition, we are amending Regulation SHO to provide that a broker-dealer may mark
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`certain qualifying sell orders “short exempt.” In particular, if the broker-dealer chooses to rely
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`on its own determination that it is submitting the short sale order to the trading center at a price
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`that is above the current national best bid at the time of submission or to rely on an exception
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`specified in the Rule, it must mark the order as “short exempt.” This “short exempt” marking
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`requirement will aid surveillance by self-regulatory organizations (“SROs”) and the Commission
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`for compliance with the provisions of Rule 201 of Regulation SHO.
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`DATES: Effective Date: May 10, 2010
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`Compliance Date: November 10, 2010
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`FOR FURTHER INFORMATION CONTACT: Josephine J. Tao, Assistant Director;
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`Victoria Crane, Branch Chief; Katrina Wilson, Staff Attorney; and Angela Moudy, Staff
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`Attorney, Division of Trading and Markets, at (202) 551-5720, at the Commission, 100 F Street,
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`NE, Washington, DC 20549-6628.
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`SUPPLEMENTARY INFORMATION: The Commission is amending Rules 200(g) and 201
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`of Regulation SHO [17 CFR 242.200(g) and 17 CFR 242.201] under the Exchange Act.
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`Table of Contents
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`I.
`II.
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`Executive Summary
`Background on Short Sale Restrictions
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`2
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`Coalition for Affordable Drugs IV LLC - Exhibit 1034
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`A.
`B.
`C.
`D.
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`III.
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`7.
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`B.
`1.
`2.
`3.
`4.
`5.
`6.
`7.
`8.
`9.
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`Short Selling and its Market Impact
`History of Short Sale Price Test Restrictions in the U.S.
`Proposal to Adopt a Short Sale Price Test Restriction or Circuit Breaker
`Empirical Data Regarding Potential Market Impact of Short Sale Price Test
`Restrictions Submitted in Response to the Proposal and Re-Opening Release
`Discussion of Rule 201 of Regulation SHO
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`A.
`Operation of the Circuit Breaker Plus Alternative Uptick Rule
`1.
`Covered Securities
`2.
`Pricing Increment
`3.
`Alternative Uptick Rule
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`Circuit Breaker Approach Generally
`4.
`5.
`Circuit Breaker Trigger Level and Duration
`6.
`Determination Regarding Securities Subject to Rule 201 and Dissemination of
`Such Information
`Policies and Procedures Approach
`“Short Exempt” Provisions of Rule 201
`Broker-Dealer Provision
`Seller’s Delay in Delivery
`Odd Lot Transactions
`Domestic Arbitrage
`International Arbitrage
`Over-Allotments and Lay-Off Sales
`Riskless Principal Transactions
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`Transactions on a Volume-Weighted Average Price Basis
`Decision Not to Adopt a Provision that a Broker-Dealer may Mark an Order
`“Short Exempt” in Connection with Bona Fide Market Making Activity
` Order Marking
`IV.
` Exemptive Procedures
`V.
` Overseas Transactions
`VI.
`VII. Rule 201 Implementation Period
`VIII. Decision Not to Implement Rule 201 on a Pilot Basis
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`IX.
` Paperwork Reduction Act
`Background
`A.
`B.
`Summary
`1.
`Policies and Procedures Requirement under Rule 201
`2.
`Policies and Procedures Requirement under the Broker-Dealer and Riskless
`Principal Provisions
`Marking Requirements
`Use of Information
`Policies and Procedures Requirement under Rule 201
`Policies and Procedures Requirement under the Broker-Dealer and Riskless
`Principal Provisions
`Marking Requirements
`Respondents
`Policies and Procedures Requirement under Rule 201
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`3.
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`C.
`1.
`2.
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`3.
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`D.
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`1.
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`3
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`2.
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`3.
`E.
`1.
`2.
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`Policies and Procedures Requirement under the Broker-Dealer and Riskless
`Principal Provisions
`Marking Requirements
`Total Annual Reporting and Recordkeeping Burdens
`Policies and Procedures Requirement under Rule 201
`Policies and Procedures Requirement under the Broker-Dealer and Riskless
`Principal Provisions
`Marking Requirements
`3.
`Collection of Information Is Mandatory
`F.
`Policies and Procedures Requirements
`1.
`Marking Requirements
`2.
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`Confidentiality
`G.
`Policies and Procedures Requirements
`1.
`Marking Requirements
`2.
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`Record Retention Period
`H.
`Policies and Procedures Requirements
`1.
`Marking Requirements
`2.
` Cost-Benefit Analysis
`A.
` Benefits
`1.
` Alternative Uptick Rule
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`Circuit Breaker Approach
`2.
`3.
` Marking Requirements
`B.
` Costs
`1.
` Alternative Uptick Rule
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`Impact on Market Quality
`a.
`b.
`Implementation and On-going Monitoring and Surveillance Costs
`i.
`Policies and Procedures Requirement under Rule 201
`ii.
`Policies and Procedures Requirement under the Broker-Dealer and Riskless
`Principal Provisions
`Circuit Breaker Approach
`2.
`Impact on Market Quality
`a.
`Implementation and On-going Monitoring and Surveillance Costs
`b.
` Implementation Period
`3.
` Marking Requirements
`4.
`Consideration of Burden on Competition and Promotion of Efficiency, Competition, and
`Capital Formation
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`A.
`Competition
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`1.
`Market Structure for Trading Centers and Broker-Dealers
`2.
`Discussion of Impacts of Rules 200(g) and 201 on Competition
`B.
`Capital Formation
`C.
`Efficiency
` Final Regulatory Flexibility Analysis
`Need for and Objectives of the Rule
`A.
`B.
`Significant Issues Raised by Public Comment
`C.
`Small Entities Affected by the Rule
`D.
`Projected Reporting, Recordkeeping and Other Compliance Requirements
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`4
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`X.
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`XI.
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`XII.
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`Agency Action to Minimize Effect on Small Entities
`E.
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` Significant Alternatives
`F.
`XIII. Statutory Authority
`XIV. Text of the Amendments to Regulation SHO
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`I.
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`Executive Summary
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`In July 2007, the Commission eliminated all short sale price test restrictions. Prior to that
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`time, short sale price test restrictions included Rule 10a-1 under the Exchange Act, also known
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`as the “uptick rule” or “tick test” (“former Rule 10a-1”), that applied to exchange-listed
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`securities,1 and the National Association of Securities Dealers, Inc.’s (“NASD”)2 bid test, Rule
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`3350 (“NASD’s former bid test”), that applied to certain Nasdaq securities.3 The Commission’s
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`removal of short sale price test restrictions followed a careful, deliberative rulemaking process,
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`carried out in multiple stages from 1999 through 2006, and was open to the public at every stage.
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`The Commission took a number of steps as part of that process, including seeking
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`extensive public comment and conducting a comprehensive staff study to assess whether then-
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`current short sale price test restrictions were appropriate. For example, beginning in 1999, the
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`Commission published a concept release in which it sought comment regarding short sale price
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`test regulation, including comment on whether to eliminate such regulation.4 In 2004, the
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`Commission initiated a year-long pilot (“Pilot”) to study the removal of short sale price tests for
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`approximately one-third of the largest stocks.5 Short sale data was made publicly available
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`during this Pilot to allow the public and Commission staff (the “Staff”) to study the effects of
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`eliminating short sale price test restrictions. The findings of third party researchers were
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`1
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` See infra note 41 and accompanying text.
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`2 NASD is now known as the Financial Industry Regulatory Authority, Inc. (“FINRA”).
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` See infra note 43 and accompanying text.
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` See Exchange Act Release No. 42037 (Oct. 20, 1999), 64 FR 57996 (Oct. 28, 1999) (“1999 Concept Release”).
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`3
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`4
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`5
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` See Exchange Act Release No. 50104 (July 28, 2004), 69 FR 48032 (Aug. 6, 2004) (“Pilot Release”).
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`5
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`presented and discussed in a public Roundtable in September 2006.6 In addition, the results of
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`the Staff study of the Pilot data were made publicly available in draft form in September 2006
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` and in final form in February 2007.7
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`Since then, there has been significant market turmoil. Concurrent with the development
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`of the subprime mortgage crisis and credit crisis in 2007, market volatility, including steep price
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`declines, particularly in the stocks of certain financial services companies, increased markedly in
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`the U.S. and in every major stock market around the world (including markets that continued to
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`operate under short sale price test restrictions).8 As market conditions continued to worsen,
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`investor confidence eroded, and the Commission received many requests from the public to
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`consider imposing restrictions with respect to short selling, based in part on the belief that such
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` action would help restore investor confidence.9
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`We determined that it was appropriate to re-examine the appropriateness of short sale
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`price test restrictions and seek comment on whether to restore any such restrictions. Thus, in
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`April 2009 we proposed two approaches to restrictions on short selling, one that would apply on
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`a permanent, market-wide basis and another that would apply to a particular security upon a
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`significant decline in the price of that security (the “proposed circuit breaker approach” or
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` “proposed circuit breaker rules”).10
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`6
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` See http://www.sec.gov/about/economic/shopilottrans091506.pdf (the “Regulation SHO 2006 Roundtable”).
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` See http://www.sec.gov/about/economic/shopilot091506/draft_reg_sho_pilot_report.pdf and
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`http://www.sec.gov/news/studies/2007/regshopilot020607.pdf. See also infra notes 48 to 62 and accompanying
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`text (discussing findings of the Staff study).
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` See Exchange Act Release No. 59748 (Apr. 10, 2009), 74 FR 18042, 18043 (Apr. 20, 2009) (the “Proposal”).
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`7
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`8
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`9
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` See id.
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`10 See Proposal, 74 FR 18042.
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`With respect to the permanent, market-wide approach, we proposed two alternative price
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`tests. The first alternative price test, in many ways similar to NASD’s former bid test, would be
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`based on the national best bid (the “proposed modified uptick rule”). The second alternative
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`price test, similar to former Rule 10a-1, would be based on the last sale price (the “proposed
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`uptick rule”).
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`With respect to the proposed circuit breaker approach, we proposed two basic
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`alternatives. First, we proposed a circuit breaker rule that, when triggered by a significant price
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`decline in a particular security, would temporarily prohibit any person from selling short that
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`security, subject to certain exceptions (“proposed circuit breaker halt rule”). Second, we
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`proposed a circuit breaker rule that, when triggered by a significant price decline in a particular
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`security, would trigger a temporary short sale price test for that security. In connection with this
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`alternative, we proposed two short sale price tests. One was the modified uptick rule – that is,
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`we proposed a circuit breaker rule that, when triggered by a significant price decline in a
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`particular security, would temporarily impose the proposed modified uptick rule for that security
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`(“proposed circuit breaker modified uptick rule”). The other was the uptick rule – that is, we
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`proposed a circuit breaker rule that, when triggered by a significant market decline in a particular
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`security, would temporarily impose the proposed uptick rule for that security (“proposed circuit
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`breaker uptick rule”).
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`In addition, in the Proposal we inquired whether a short sale price test restriction that
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`would permit short selling at a price above the current national best bid (the “alternative uptick
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`rule”), would be preferable to the proposed modified uptick rule and the proposed uptick rule.11
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`We sought comment regarding the application of the alternative uptick rule as a market-wide
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` 11 See Proposal, 74 FR at 18072, 18081, 18082.
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`permanent short sale price test restriction or in conjunction with a circuit breaker.12 As a
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`supplement to our request for comment in the Proposal and to help ensure the public had a full
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`opportunity to comment on, among other things, the alternative uptick rule, on August 20, 2009
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`we re-opened the comment period to the Proposal.13 In addition, on May 5, 2009, we held a
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`Roundtable to Examine Short Sale Price Test and Circuit Breaker Restrictions (the “May 2009
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`Roundtable”).14 Panelists included representatives of public issuers, investors, financial services
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` firms, SROs and the academic community.15
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`Although in recent months there has been an increase in stability in the securities
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`markets, we remain concerned that excessive downward price pressure on individual securities
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`accompanied by the fear of unconstrained short selling can undermine investor confidence in our
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`markets generally.16 In addition, we are concerned about potential future market turmoil,
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`including significant increases in market volatility and steep price declines. Thus, as discussed
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`in more detail below, after considering the comments, we have determined that it is appropriate
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`at this time to adopt in Rule 201 a targeted short sale price test restriction that will apply the
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`alternative uptick rule for the remainder of the day and the following day if the price of an
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` 12 See id.
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` 13 See Exchange Act Release No. 60509 (Aug. 17, 2009), 74 FR 42033 (Aug. 20, 2009) (the “Re-Opening
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`Release”).
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` 14 See Exchange Act Release No. 59855 (May 1, 2009); Press Release No. 2009-101 (agenda and panelists
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`included); Press Release No. 2009-88 (preliminary agenda included).
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` 15 See http://www.sec.gov/spotlight/shortsales/roundtable050509/shortsalesroundtable050509-transcript.txt
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` (unofficial transcript of May 2009 Roundtable).
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`16 We note that investor confidence may include a number of different elements, such as investor perceptions
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`about fundamental market risk, investor optimism about the economy, or investor trust in the fairness of
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`financial markets as influenced by applicable regulatory protections. Although the latter can be directly
`influenced by Commission actions, the Commission does not have control over fundamental market risk and
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`economic optimism. Thus, as used here, the term “investor confidence” refers to investor trust in the fairness of
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`financial markets.
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`individual security declines intra-day by 10% or more from the prior day’s closing price for that
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`security as determined by the covered security’s listing market.
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`By not allowing short sellers to sell at or below the current national best bid while the
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`circuit breaker is in effect, the short sale price test restriction in Rule 201 will allow long sellers,
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`who will be able to sell at the bid, to sell first in a declining market for a particular security. As
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`the Commission has noted previously in connection with short sale price test restrictions, a goal
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`of such restrictions is to allow long sellers to sell first in a declining market.17 A short seller that
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`is seeking to profit quickly from accelerated, downward market moves may find it advantageous
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`to be able to short sell at the current national best bid. In addition, by making such bids
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`accessible only by long sellers when a security’s price is undergoing significant downward price
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`pressure, Rule 201 will help to facilitate and maintain stability in the markets and help ensure
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`that they function efficiently. It will also help restore investor confidence during times of
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`substantial uncertainty because, once the circuit breaker has been triggered for a particular
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`security, long sellers will have preferred access to bids for the security, and the security’s
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`continued price decline will more likely be due to long selling and the underlying fundamentals
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`of the issuer, rather than to other factors.
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`In addition, combining the alternative uptick rule with a circuit breaker will strike the
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`appropriate balance between our goal of preventing short selling, including potentially
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`manipulative or abusive short selling, from being used as a tool to exacerbate a declining market
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`in a security and the need to allow for the continued smooth functioning of the markets,
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` 17 See Exchange Act Release No. 48709 (Oct. 28, 2003), 68 FR 62972, 62989 (Nov. 6, 2003) (“2003 Regulation
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`SHO Proposing Release”); see also Exchange Act Release No. 30772 (June 3, 1992), 57 FR 24415, 24416 (June
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`9, 1992) (stating that former Rule 10a-1 was “designed to limit short selling of a security in a declining market,
`by requiring, in effect, that each successive lower price be established by a long seller”).
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`including the provision of liquidity and price efficiency in the markets.18 The circuit breaker
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`approach of Rule 201 will help benefit the market for a particular security by allowing
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`participants, when a security is undergoing a significant intra-day price decline, an opportunity to
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`re-evaluate circumstances and respond to volatility in that security. We also believe that a circuit
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`breaker will better target short selling that may be related to potential bear raids19 and other
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`forms of manipulation that may be used to exacerbate a price decline in a covered security.
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`At the same time, however, we recognize the benefits to the market of legitimate short
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`selling, such as the provision of liquidity and price efficiency. Thus, by imposing a short sale
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`price test restriction only when an individual security is undergoing significant downward price
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`pressure, the short sale price test restrictions of Rule 201 will apply to a limited number of
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`securities, rather than to all securities all the time. As discussed in more detail below,20 in
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`response to our request for comment on an appropriate threshold at which to trigger the proposed
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`circuit breaker short sale price test restrictions, commenters submitted estimates of the number of
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`securities that would trigger a circuit breaker rule at a 10% threshold.21 While commenters’
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` 18 Where we use the terms “market efficiency” and “price efficiency” in this adopting release we are using terms
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` of art as used in the economic literature proceeding under the “efficient markets hypothesis,” under which
` financial prices are assumed to reflect all available information and accordingly adjust quickly to reflect new
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`information. See, e.g., Eugene F. Fama, 1991, Efficient capital markets: II, Journal of Finance; 46: 1575-1617;
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`Eugene F. Fama and Kenneth R. French, 1992, The Cross-Section of Expected Stock Returns, Journal of
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`Finance, 47: 427-465. It should be noted that economic efficiency and price efficiency are not identical with the
`ordinary sense of the word “efficiency.”
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` 19 See infra note 36 and accompanying text.
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` 20 See infra Section III.A.5. (discussing the circuit breaker trigger level).
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` 21 See, e.g., letter from Mary Lou Von Kaenel, Managing Director, Management Consulting, Jordan & Jordan,
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` dated June 19, 2009 (“Jordan & Jordan”); letter from John C. Nagel, Managing Director and Deputy General
` Counsel, Citadel Investment Group, John Liftin, Managing Director and General Counsel, The D.E. Shaw
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` Group, and Mark Silber, Executive Vice President, Renaissance Technologies, dated June 19, 2009 (“Citadel et
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`al. (June 2009)”); letter from Stuart J. Kaswell, Executive Vice President, Managing Director and General
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`Counsel, Managed Funds Association, dated June 22, 2009 (“MFA (June 2009)”); letter from Ira D.
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`Hammerman, Senior Managing Director and General Counsel, Securities Industry and Financial Markets
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`Association, dated June 19, 2009 (“SIFMA (June 2009)”); letter from Daniel Mathisson, Managing Director,
`Credit Suisse Securities (USA), LLC, dated Sept. 21, 2009 (“Credit Suisse (Sept. 2009)”).
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` analyses (including the facts and assumptions used) and their resulting estimates varied,22
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`commenters’ estimates reflect that a 10% circuit breaker threshold, on average, should affect a
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`limited percentage of covered securities.23 Given the variations in the facts and assumptions
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`underlying the estimates submitted by commenters, the Staff also looked at trading data to
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`confirm the reasonableness of those estimates. The Staff found that, during the period covering
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`April 9, 2001 to September 30, 2009,24 the price test restrictions of Rule 201 would have been
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`triggered, on an average day, for approximately 4% of covered securities.25 The Staff also found
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`that for a low volatility period, covering January 1, 2004 to December 31, 2006, the 10% trigger
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`level of Rule 201 would have, on an average day, been triggered for approximately 1.3% of
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`covered securities.26
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`Thus, Rule 201 is structured so that the circuit breaker generally will not be triggered for
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`the majority of covered securities at any given time and, thereby, will not interfere with the
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`smooth functioning of the markets for those securities, including when prices in such securities
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`are undergoing minimal downward price pressure or are stable or rising. If the short sale price
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`test restrictions of Rule 201 apply to a covered security it will be because and when that security
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`is undergoing significant downward price pressure.
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`In addition, to help ensure the Rule’s workability, we are amending Rule 200(g) of
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`Regulation SHO, substantially as proposed, to provide that, once the circuit breaker has been
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`triggered for a covered security, if a broker-dealer chooses to rely on its own determination that
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` 22 See infra note 306.
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` 23 See infra note 307.
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` 24 See infra note 309.
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` 25 See infra note 310.
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` 26 See infra note 311.
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`it is submitting a short sale order to a trading center at a price that is above the current national
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`best bid at the time of submission or to rely on an exception specified in the Rule, it must mark
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`the order “short exempt.”27 The short sale price test restrictions of Rule 201 generally will apply
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`to a small number of securities for a limited duration, and will continue to permit short selling
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`rather than, for example, halting short selling when the restrictions are in place. As such, we
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`believe that the circumstances under which a broker-dealer may need to mark a short sale order
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`“short exempt” under Rule 201 are limited.
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`II.
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`
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`Background on Short Sale Restrictions
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`Short selling involves a sale of a security that the seller does not own or a sale that is
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`consummated by the delivery of a security borrowed by, or for the account of, the seller.28 In
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`order to deliver the security to the purchaser, the short seller will borrow the security, usually
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`from a broker-dealer or an institutional investor. Typically, the short seller later closes out the
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`position by purchasing equivalent securities on the open market and returning the security to the
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`lender. In general, short selling is used to profit from an expected downward price movement, to
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`provide liquidity in response to unanticipated demand, or to hedge the risk of an economic long
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`position in the same security or in a related security.29
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` 27 We note that, as discussed in more detail below, unless a sale order is marked “short exempt,” a trading center’s
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` policies and procedures must be reasonably designed to prevent the execution or display of the order at a price
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` that is less than or equal to the current national best bid.
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`28 See 17 CFR 242.200(a).
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` 29 See, e.g., Exchange Act Release No. 54891 (Dec. 7, 2006), 71 FR 75068, 75069 (Dec. 13, 2006) (“2006 Price
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` Test Elimination Proposing Release”); 2003 Regulation SHO Proposing Release, 68 FR at 62974. In this
` adopting release, we use the terms “liquidity provider” and “liquidity taker,” and correlative terms, in their
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`technical sense in the literature of market microstructure. See, e.g., Larry Harris, Trading and Exchanges:
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`Market Microstructure for Practitioners, at 70 (2003) (an introductory textbook to the economics of market
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`microstructure). As used therein, a liquidity taker is a buyer or seller (including a short seller) who submits an
`order designed for immediate execution, such as a market order or a marketable limit order, while a liquidity
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`provider is a more patient buyer or seller (including a short seller) who submits orders that may or may not be
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`executed, and thus provides depth to the market. This usage differs from the usage of the term “liquidity
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`provider” to refer to a bank, central bank, or other financial institution or investor who provides cash financing
`or otherwise increases the money supply.
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`12
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`Coalition for Affordable Drugs IV LLC - Exhibit 1034
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`
`A.
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`Short Selling and its Market Impact
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`Short selling provides the market with important benefits, including market liquidity and
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`pricing efficiency.30 Market liquidity is often provided through short selling by market
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`professionals, such as market makers (including specialists) and block positioners, who offset
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`temporary imbalances in the buying and selling interest for securities. Short sales effected in the
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`market add to the selling interest of stock available to purchasers and reduce the risk that the
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`price paid by investors is artificially high because of a temporary imbalance between buying and
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`selling interest. Short sellers covering their sales also may add to the buying interest of stock
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`available to sellers.31
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`Short selling also can contribute to the pricing efficiency of the equities markets.32 When
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`a short seller speculates or hedges against a downward movement in a security, his transaction is
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`a mirror image of the person who purchases the security in anticipation that the security’s price
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`will rise or to hedge against such an increase. Both the purchaser and the short seller hope to
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`profit, or hedge against loss, by buying the security at one price and selling at a higher price.
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`The strategies primarily differ in the sequence of transactions. Market participants who believe a
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`stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence
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`of prices from true economic values. Such short sellers add to stock pricing efficiency because
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` 30 See id.; see also Exchange Act Release No. 29278 (June 7, 1991), 56 FR 27280 (June 13, 1991); Exchange Act
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` Release No. 50103 (July 28, 2004), 69 FR 48008, 48009 n.6 (Aug. 6, 2004) (“2004 Regulation SHO Adopting
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` Release”); Ekkehart Boehmer and J. Julie Wu, Short Selling and the Informational Efficiency of Prices,
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`Working Paper, Jan. 8, 2009.
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` 31 See, e.g., 2006 Price Test Elimination Proposing Release, 71 FR at 75069; 2003 Regulation SHO Proposing
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`Release, 68 FR at 62974.
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` 32 See id.
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`13
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`Coalition for Affordable Drugs IV LLC - Exhibit 1034
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`
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`their transactions inform the market of their evaluation of future stock price performance. This
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`evaluation is reflected in the resulting market price of the security.33
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`Although short selling serves useful market purposes, it also may be used to drive down
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`the price of a security or as a tool to accelerate a declining market in a security.34 In addition,
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`short selling may be used to illegally manipulate stock prices.35 One example is the “bear raid”
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`where an equity security is sold short in an effort to drive down the price of the security by
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`creating an imbalance of sell-side interest.36 This unrestricted short selling could exacerbate a
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`declining market in a security by increasing pressure from the sell-side, eliminating bids, and
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`causing a further reduction in the price of a security by creating an appearance that the security’s
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`price is falling for fundamental reasons, when the decline, or the speed of the decline, is being
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` driven by other factors.37
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` 33 See 2006 Price Test Elimination Proposing Release, 71 FR at 75069 – 75070; 2003 Regulation SHO Proposing
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`
`
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` Reelease, 68 FR at 62974. Arbitrageurs also contribute to pricing efficiency by utilizing short sales to profit
` from price disparities between a stock and a derivative security, such as a convertible security or an option on
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`that stock. For example, an arbitrageur may purchase a convertible security and sell the underlying stock short
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`to profit from a current price differential between two economically similar positions. See id.
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` 34 See, e.g., Proposal, 74 FR at 18065 (noting that a short selling circuit breaker rule would be designed to target
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` only those securities that experience rapid severe intra-day price declines and, therefore, might help to prevent
` short selling from being used to drive the price of a security down or to accelerate the decline in the price of
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`those securities).
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` 35 See, e.g., U.S. v. Russo, 74 F.3d 1383, 1392 (2d Cir. 1996) (short sales were sufficiently connected to the
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` manipulation scheme as to constitute a violation of Exchange Act Section 10(b) and Rule 10b-5); S.E.C. v.
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`Gardiner, 48 S.E.C. Docket 811, No. 91 Civ. 2091 (S.D.N.Y. Mar. 27, 1991) (alleged manipulation by sales
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`representative by directing or inducing customers to sell stock short in order to depress its price).
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`36 Many people blamed “bear raids” for the 1929 stock market crash and the market’s prolonged inability to
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`recover from the crash. See, e.g., Steve Thel, $850,000 in Six Minutes – The Mechanics of Securities
`M