On July 28, 2004, the SEC adopted Regulation SHO, Short Sales. Among other things, Regulation SHO provides for a pilot program ("Pilot") under which short sales in specified securities will take place without the "tick" test or any other short sale price test. This Pilot will be in effect for a one-year period commencing on Monday, May 2, 2005, and ending on April 28, 2006, and will suspend short sale price tests with respect to:
The Pilot is to assist the SEC in determining the extent to which a price test is necessary; to enable the SEC to study the effects of relatively unrestricted short selling on market volatility, price efficiency and liquidity; and to help the SEC assess whether a short sale price test should be removed, in part or in whole, for some or all securities, or if retained, should be applied to additional securities.
- all short sales in a list of approximately 1/3 of the stocks from the Russell 3000 Index (see Exhibit 1 for a list of the 20 Amex securities in this category, which we refer to as "Category A Pilot securities");
- short sales in any security that was part of the Russell 1000 Index on June 25, 2004 that are executed between 4:15 p.m. ET and the open of the consolidated tape on the following day (currently 4 a.m. ET) (see Exhibit 2 for a list of the 4 additional Amex securities in this category, which we refer to as "Category B Pilot securities"); and
- short sales in any security not included in paragraphs (1) and (2) above that are executed in the period between the close of the consolidated tape (currently 8 p.m. ET) and the open of the consolidated tape on the following day (currently 4 a.m. ET).
During the Pilot, the anti-fraud and anti-manipulation provisions of the federal securities laws continue to apply to trading activity in the above securities. Trading activity designed to improperly influence the price of a security continues to be prohibited. The SEC, the Amex and the other self-regulatory organizations (SROs) will monitor trading activity during the Pilot and surveil for manipulation including manipulative short selling. The SEC may, by further order, terminate, extend the period of, or modify the Pilot as it determines necessary or appropriate in the public interest or for the protection of investors.
In addition, the Pilot will suspend only the operation of the price test. All other short sale rules, including the order-marking, locate and delivery requirements adopted under Regulation SHO, the rest of the applicable SRO rules, and the provisions of SEC Rule 10a-1 (as modified by Regulation SHO), will remain in effect.
However, pursuant to no-action relief granted by the SEC,1 broker-dealers will be allowed to mark short sales in Pilot securities as "short" rather than "short-exempt" if the broker-dealer seeking to rely on the relief submits the order to a market center that has made programming changes to "mask" the short sale character of the transaction so that it is executed without regard to the applicable price test, and is also compliant with certain other requirements.2 The Amex will be compliant with these requirements. Accordingly, sell short orders in Pilot securities routed to the Amex may be marked either "short" or "short exempt" on or after May 2, 2005 (i.e., they will be executed without the tick test in either case, just as sell short orders in ETFs are executed today). However, under no circumstances, may such sales be marked "long."
Upon commencement of the Pilot and throughout its duration, the Amex will regularly confirm that securities are properly included in the Pilot and will make programming changes to re-institute the tick test, as applicable, for any security if and when it ceases to be included in the Pilot. For reporting purposes, short sales in Pilot securities must be entered on Amex Forms 1-RA and 1-S as "short" rather than "short exempt."
The Amex will make available on its website each day a downloadable file containing the current list of Amex-listed Category A Pilot securities and a similar file for the Amex-listed Category B Pilot securities. Both files will be available by 12:00 midnight ET of the preceding business day under the Trading Data menu item on AmexTrader, which can be accessed at the following Internet address:
The files will also be available via public FTP at the following Internet address:
The Amex will post changes to these lists in a separate downloadable list on its website. Such changes are expected to occur infrequently.
Questions regarding the above may be directed to David Fisch, at 212-306-1450 or to Bill Love at 212-306-1789.
1 See letter dated April 15, 2005 from James A. Brigagliano, Assistant Director, Securities and Exchange Commission Division of Market Regulation to Ira Hammerman, Senior Vice President and General Counsel, Securities Industry Association (available at: http://www.sec.gov/divisions/marketreg/mr-noaction/sia041505.htm).
2 These require the Amex to monitor on a regular basis and re-institute the price test for any security that ceases to be included in the Pilot, as well as to comply with certain record-keeping obligations.