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February 20, 2004 Via Electronic Mail: rule-comments@sec.gov Jonathan G. Katz
Re: File No. S7-23-03 (Short Sales; Proposed Rule) Dear Mr. Katz: The American Stock Exchange LLC ("Amex" or "Exchange") respectfully submits the following comments with respect to File No. S7-23-03 (Short Sales; Proposed Rule)1, in which the Securities and Exchange Commission (the "Commission") proposes new Regulation SHO - Regulation of Short Sales and certain other changes to the rules applicable to short sales under the Securities Exchange Act of 1934 (the "Exchange Act"). 1. The Commission Should Clarify in the Adopting Release that Exchange-Traded Options Are Not Subject to Regulation SHO Proposed Rule 201(b) of Regulation SHO would require all short sales of "any covered security" to be subject to the proposed bid test. Proposed Rule 201(a)(4) defines a "covered security" as "all national market system securities" with the specific exception of Nasdaq Small Cap securities.2 It is our view that exchange-traded options are not national market system securities, as that term is defined in the Exchange Act, because they are not a "reported security" whose transaction reports are collected, processed and made available pursuant to an "effective transaction reporting plan."3 Further, it is clearly not the intent of the Commission to subject exchange-traded options to the bid test under Regulation SHO. The Release states explicitly that, "We are not proposing at this time to extend the uniform bid test to securities not currently covered by a short sale price test . . .,"4 and exchange-traded options are not currently covered by such a test. Consequently, the Amex believes that the adopting release for Regulation SHO should clearly state that exchange-traded options are not subject to Regulation SHO. There is no reason for this intended outcome to be left to the parsing of a linked series of definitions in Exchange Act Rules 11Aa2-1 and 11Aa3-1 whose terms may be open to alternative interpretations. 2. Specialists and Market Makers in Equities, Exchange Traded Funds and Options Should be Exempt from the Rule 201 Bid Test for Hedging Done in Connection With Bona Fide Market Making Activities The Commission has inquired in the Release as to whether a hedging exception should be included in Rule 201 that only applies to a particular group of market participants.5 In response, the Amex believes that the substantial risks that specialists and market makers in stocks, Exchange Traded Funds ("ETFs", as further defined herein) and options assume, based on their responsibilities as market makers (which, under Amex rules, include the maintenance of fair and orderly markets)6, justify a hedging exception for them to proposed Rule 201. In the case of options, for example, the leverage inherent in a sizeable long position in call options clearly illustrates the need for an options specialist or market maker to be able to quickly hedge that position without reference to a bid test. Otherwise that specialist or market maker could incur large losses of capital in a falling market while trying to comply with the bid test. The same principle applies to stock specialists and market makers, whose market making responsibilities may require them to accumulate large unbalanced long stock positions. While ETFs themselves are exempt from short sale regulation7, the underlying stocks are not and we believe that it is necessary to allow ETF specialists and market makers to short the underlying securities for hedging purposes without regard to the proposed Rule 201 bid test. Finally, we believe that any relief granted through such a market making hedging exception should be applicable to both stocks and options on those stocks in order to avoid order flow distortions that may occur if one form of related security is favored over the other. We recognize the possible need for qualifications to the relief for hedging activity that we propose in the foregoing paragraph. First, some consideration of economic equivalence or economic neutrality should come into play. An options specialist who is long 5,000 in-the-money call options as a result of market making activity would clearly be justified in shorting shares of the stock that underlie those options, while another specialist who is long an equal number of options that are far out-of-the-money may not be so justified. Second, the hedge must be entered into in connection with "bona fide market making activities." The Commission has provided a definition of "bona-fide market making activities" in proposed Rule 203(b)(2) relating to a "locate" requirement in proposed Rule 203(b)(1).8 Although we feel that the Commission's proposed definition is much too narrow and inflexible and should be modified, we believe that such a definition could also be utilized in connection with the hedging exception that we advocate. In that regard, we endorse the recommendation for a revised definition of "bona fide market making activities" included in the joint comment letter, dated February 9, 2004 (the "Options Comment Letter"), that has been filed with the Commission in connection with the Release by the Amex, the Options Clearing Corporation, and four other options market centers. That recommendation is to adopt a broad definition of the term so that any activities of specialists and market makers that are entered into in fulfillment of their market responsibilities are excluded from the locate requirement. The model for that definition is Rule 440C.10 of the New York Stock Exchange ("NYSE").9 The Options Comment Letter further recommends that, at the very least, the Commission should modify the definition to be consistent with that contained in the rules of the National Association of Securities Dealers ("NASD"), which defines bona fide market making to exclude "activity that is related to speculative selling strategies of the member or investment decisions of the firm and is disproportionate to the usual market making patterns or practices of the member in that security."10 We call the Commission's attention to the fact that Footnote 49 of the Release seems to suggest that the Commission intended to propose a definition of "bona fide market making activities" that is very close to the aforementioned NASD standard. The footnote states, "The exemption for bona-fide market making activities would exclude activity that is related to speculative selling strategies or investment decisions of the broker-dealer or associated person and is disproportionate to the usual market making patterns or practices of the broker-dealer in that security" (emphasis added). However, the formulation in proposed Rule 203(b)(2) uses the conjunction "or" instead of "and" to join the two prongs of the standard, resulting in a much more restrictive definition. Specifically, proposed Rule 203(b)(2) states, "Bona-fide market making activities shall not include activity that is related to speculative selling strategies or investment purposes of the broker or dealer or is disproportionate to the usual market making patterns or practices of the broker or dealer in that security" (emphasis added). This inconsistency needs to be clarified if the Commission chooses to adhere to the two-prong formulation. We note that there are a number of situations where the Commission has previously granted and/or proposes to grant relief from short sale pricing test restrictions, if there are deemed to be positive market benefits in combination with offsetting, economically neutral securities positions. For example, bona fide domestic arbitrage transactions are currently exempt from the "tick" test of Exchange Act Rule 10a-1 because of the Commission's belief that these transactions benefit the markets by reducing price disparities between securities. The Release proposes the retention of this exemption with respect to the new consolidated bid test in Regulation SHO.11 In addition, under Exchange Act Rule 10a-1(e)(13), a broker-dealer is allowed, while acting in the role of a block positioner, to effectively disregard for purposes of the current "tick" test certain proprietary short positions created in the course of bona fide arbitrage, risk arbitrage or bona fide hedging activity. The dual rationale is again economic neutrality and the positive benefits to the markets of the liquidity provided by block positioning. The Release proposes a continuation of this exception in Regulation SHO.12 Finally, the Release proposes codifying in Regulation SHO prior no-action relief by creating yet another exception to the "tick" test for the unwinding of index arbitrage positions involving long baskets of stock offset by short index futures or standardized options contracts. A combination of economic neutrality and market benefit from the reduction of pricing disparities is again deemed to justify an exception to the short sale price test.13 Given the foregoing examples of short sale pricing test relief granted by the Commission in situations involving offsetting, economically neutral securities positions in combination with positive benefits of the related activity for the marketplace, the Amex strongly urges the Commission to approve an exemption for stock, ETF and option specialists and market makers from the Rule 201 bid test for hedging done in connection with bona fide market making activities. Certainly the contributions of specialists and market makers in bringing liquidity and price efficiency to the marketplace are no less valuable than the contributions of arbitrageurs and block positioners. 3. The Commission Should Allow Specialists and Market Makers to Use the Alternative Bid Test Described in the Release The Amex believes that the Commission should allow specialists and market makers to use the alternative bid test proposed in the Release. The alternative test, as described in the Release, would allow short selling "at a price equal to or above the consolidated best bid if the current best bid is above the previous bid (i.e., an upbid)."14 In this alternative, "short selling would be restricted to a price at least one cent above the consolidated best bid (not equal to the best bid) if the current best bid is below the previous bid (i.e., a downbid)."15 We believe that this would allow somewhat more flexibility for specialists and market makers to carry out their functions of providing liquidity and price efficiency to the markets in a rising bid situation. As advocated in the previous section of this comment letter with respect to the bid test in proposed Rule 201(b), the Amex also believes that specialists and market makers should be exempt from the alternative bid test for hedging done in connection with bona fide market making activities. 4. Regulation SHO Should Codify the Relief from Short Sale Regulation Previously Granted to Exchange Traded Funds in No-Action Letters In response to the Commission's specific questions in the release regarding Exchange Traded Funds ("ETFs"), the Amex believes strongly that the Commission should provide relief from proposed Rule 201 of Regulation SHO for transactions in ETFs and that the relief should be codified as an exception to proposed Rule 201. The Commission has previously concluded, correctly in our view, that, in light of the composite and derivative nature of ETFs, their trading would not be susceptible to the practices that current Exchange Act Rule 10a-1 is designed to prevent.16 Consequently, the Commission has granted an exemption from Rule 10a-1 for transactions in ETFs, and no problems have arisen during the time the exemption has been in effect that would justify its non-continuation. The conditions for relief listed in the Release, being the ones specified in the class no-action letter on ETFs dated August 17, 2001 (the "Class Letter")17, continue to be appropriate and should also be codified, with one clarification. In connection with the Class Letter, the letter of inquiry from the Amex proposed that these conditions for relief be satisfied "as of the date of the initial creation of the fund or trust prior to commencement of secondary market trading."18 However, the relief granted in the Class Letter does not specify the point(s) in time that the conditions must be applicable, an ambiguity that may assume significance if the number of component stocks in an ETF should decline over time due to corporate events. The Amex believes that the ambiguity should be clarified in the exception to proposed Rule 201 so that it will be clear at all times whether an ETF qualifies for the exception. The Commission should also consider that the currently specified conditions, based on experience to date, may be overly restrictive (e.g., minimum of 20 component stocks in an ETF) and should be adjusted accordingly so that, for example, an ETF with a minimum of 10 component stocks would qualify for the exception. In addition, the Amex believes that it is essential, because of confusion in the marketplace over which securities are ETFs and which are not, to specify in Regulation SHO (or in the adopting release) the definition of ETFs utilized in the Class Letter. Specifically, ETFs consist of all Portfolio Depositary Receipts and Index Fund Shares.19 In the absence of a specific definition of ETFs, the specified conditions for relief referenced in the prior paragraph could be applied to other securities that are superficially similar but for which a different set of conditions may be more appropriate.20 Finally, the Amex believes that an exception to the locate and delivery requirements of Regulation SHO should also be codified for ETFs. ETFs are not currently subject to such requirements due to the unique characteristics of the securities, which provide the capability for the shares to be continuously created and redeemed in-kind. "Fails," consequently, can be closed-out through the creation of ETFs and the delivery of the securities to the clearing corporation. 5. Specialists and Market Makers in Both Stocks and Options Should be Exempt from the Additional Delivery Requirements of Proposed Rule 203(b)(3) in Connection With Bona Fide Market Making Activities The Amex supports proposed Rule 203(b)(2)'s exception from the locate requirement for specialists and market makers in connection with bona fide market making activities. We agree with the view expressed by the Commission in the Release that such an exception is necessary because specialists and market makers "may need to facilitate customer orders in a fast moving market without possible delays associated with complying with the proposed `locate' rule."21 The Amex further believes that it is critical that short sales effected by specialists and market makers in both stocks and options in connection with bona fide market making activities be exempted from the proposed additional delivery requirements for short sales, which are targeted at securities in which there are significant failures to deliver.22 The lack of such an exemption for specialists and market makers could seriously impair their ability to make markets in stocks and/or options in thinly traded securities. The result may be illiquid, inefficiently priced securities, and stocks that are more susceptible to disorderly markets and short squeezes. In some cases, options trading in certain thinly traded securities might completely cease if such an exemption is not granted, due to the higher level of risk that specialists and market makers would be forced to assume in continuing to provide liquidity for the securities for which they are responsible without the ability to hedge exposure arising from their market making activities. Any such exemption for specialists must, of course, be within the limitations of the corresponding exchange rules, such as approval by the proper exchange officials for delivery deferrals. (See related discussion below.) The basis for the Commission's decision not to propose an exemption from these requirements is its belief "that extended fails to deliver appear characteristic of an investment or trading strategy, rather than one related to market making."23 However, to reply to another specific question posed by the Commission in the Release,24 there are circumstances, especially in thinly traded securities, in which a specialist or market maker may need to maintain a fail to deliver on a short sale longer than two days past the settlement date in the course of bona fide market making activities. The first responsibility of a specialist is "the maintenance, insofar as reasonably practicable, of a fair and orderly market" in the stocks in which he is so acting;25 the obligation to deliver is secondary. A conflict arises if it is not possible to "buy-in" a thinly traded security in a manner consistent with a fair and orderly market (i.e., at a price reasonably related to the market for the security). Indeed, in some securities, the specialist may be the only seller of that security. Existing SRO rules reflect the proper balance between these obligations when they are in conflict. Amex Rule 783(b), for example, allows a Floor Official to defer the execution of a buy-in because, in the opinion of that Floor Official, "a fair market in which to close the contract does not exist." The corresponding New York Stock Exchange ("NYSE") rule, Rule 284, also allows deferral of a buy-in by a Floor Official if that Floor Official believes that "a fair market in which to close the contract is not available." Twenty-one business days after a failure to deliver on the Amex, a mandatory buy-in becomes operative under Amex Rule 784, but that buy-in may also be temporarily suspended if, in the opinion of the Amex, "unusual circumstances exist whereby securities cannot be borrowed."26 The corresponding NYSE Rule 282, requiring a mandatory buy-in thirty-one calendar days after a failure to deliver, is even more explicit, allowing a Floor Governor, Senior Floor Official, or Executive Floor Official to defer its execution "because a fair market in which to close the contract is not available . . . ."27 Of course, the party defaulting on delivery on both the Amex and the NYSE "shall be liable for any damages which may accrue thereby."28 Consequently, the Amex believes that circumstances may sometimes require specialists and market makers engaging in bona fide market making activities to maintain extended fail positions. We would particularly emphasize that the ultimate purpose of the foregoing rules aimed at maintaining fair and orderly markets is to protect investors by insuring that securities trade at prices that reflect their inherent value. We have previously discussed herein our view of the proper definition in Regulation SHO of "bona fide market making activities." That definition is certainly broad enough to encompass the responsibilities of specialists and market makers to maintain fair and orderly markets (as required by Amex rules, for example).29 In the event that the Commission should determine not to provide the exemption for specialists and market makers from the additional delivery requirements of Regulation SHO that we advocate, we would suggest that the Commission consider amending the provisions of proposed Rule 203(b)(3) to substantially increase the relatively low level of fails proposed at the clearing agency (10,000 shares or more and at least one-half of one percent of the issue's total shares outstanding) that is applicable to them so that the delivery requirements would be triggered in only the most egregious situations. This might at least serve to limit the number of stocks whose liquidity and price efficiency would be impaired because of the impact on specialists' and market makers' market making ability in inactive securities. For example, recent summary statistics on failed deliveries of common stocks provided to the Amex by the Commission indicate that approximately 5% of Amex-listed common stocks would be impacted if the above numerical screening criteria are used. Those same statistics reveal that, among those companies at the Amex whose fails violate the screen, the average number of shares involved per company is of the order of one million shares - a number that is two orders of magnitude higher than the 10,000 share trigger. Consequently, it would seem that there is quite a bit of room to increase the numerical screening criteria so that the focus would be more on that smaller fraction of listed companies with a very large number of undelivered shares. In balancing the need to deal with the problem of failed deliveries at the clearing agency against the need to provide liquidity and price efficiency for inactively traded stocks, the Amex wishes to note that we are not aware of any investor harm that has occurred or is likely to occur as a result of such failed deliveries in transactions at the Amex, given that delivery ultimately occurs through the clearing corporation and the remedy of damages is available to the party on the other side of the trade. However, investors would undoubtedly suffer harm if a failure to exempt specialists and market makers from the proposed additional delivery requirements of Regulation SHO should harm their ability to provide liquidity at prices reasonably related to the market and narrow quote spreads with respect to issuers whose stock is difficult to borrow. Commission action to change the long-standing rules of the Amex and the NYSE regarding fails to deliver and buy-ins may create disorderly markets to the detriment of investors without any offsetting reduction in the manipulative practices that the rule is intended to address. 6. Adjustments to the Uniform Bid Test Will be Necessary to Address Problems With Bid Flickering in the Current Decimal Environment In the brief interim period between the identification of a consolidated best bid price on which to base a short sale and the execution of that sale at $.01 above the selected bid price, the consolidated best bid price of an active security may fluctuate multiple times. There is a high probability that a better bid may be posted during these few seconds that could equal or exceed the execution price of the short sale. Unless adjustments are made to the proposed uniform bid test, a significant number of invalid short sales are likely to occur, introducing a great deal of uncertainty into the process. There are several possible approaches to dealing with the problem. A specialist on the Amex, for example, could be allowed to base his/her short sale on a specific bid identified by that specialist in a manner specified by the Amex, if such short sale were executed within X seconds. Alternatively, the short sale might be deemed valid if the execution price were at least $.01 above any consolidated best bid that occurred within Y seconds prior to the time of execution of the short sale. Yet another possibility might be to deem a short sale valid if the execution price equaled or fell no more than Z cents below the consolidated best bid at the time of execution, as long as a valid bid at least $.01 below the execution price existed within Y seconds prior to the time of execution. The Amex is not proposing a specific solution in the immediately foregoing paragraph. Our purpose is simply to call attention to what will be a major difficulty in the implementation of the uniform bid test and to begin thinking about ways to address it. Given that (a) the current bid test was developed at a time when the minimum trading variation was 12.5 cents, (b) trades currently occur in penny increments or less, (c) there may be many more quote changes than actual trades and (d) the purpose of the rule is to prevent manipulative short selling from driving down the price of securities, we believe there should be some flexibility in determining compliance with the proposed bid test. In any case, once a practical solution is identified, we believe that judgments on whether a given sale met the requirements of the uniform bid test should be the responsibility of the individual SROs, subject to Commission oversight. 7. There is a Problem With Respect to Identifying a Broker-Dealer Who Initiates a Locked or Crossed Market In its proposed exception from the uniform bid test that would permit a short sale to be effected at the consolidated best offer if the market is locked or crossed, the Commission also has proposed to deny the use of this exception to a broker-dealer who initiated the locked or crossed market. This is an excellent suggestion in principle that would be problematic in practice. The Amex, for example, does not currently have the capability to determine, on a "real time" basis, which market center initiated the locked or crossed market. If this difficulty cannot be surmounted, the proposed exception from the uniform bid test might be susceptible to abuse. This suggests a need to consider other possible ways of dealing with the problem of locked and crossed markets.30 8. The Commission Needs to Provide Clarification Concerning How Short Sales at the Opening of the Market Will be Handled Under the Uniform Bid Test In its discussion of after hours trades in the Release, the Commission states its belief that the uniform bid test should apply to such trades in all covered securities in order to extend the goals of short sale regulation to the after hours markets. In that regard, the Commission states, "After the time the consolidated best bid ceases to be calculated and disseminated, the proposed rule would prevent short selling at a price at or below the last published consolidated best bid."31 Since Amex and NYSE traded stocks customarily open on a trade, there generally is no consolidated bid price available for an exchange listed stock just prior to its opening the next day. The question, thus, arises as to whether the after hours standard (based on the previous day's last published consolidated best bid) is still the relevant measure to determine whether a stock may or may not be sold short on the opening. If so, that standard could be completely unrealistic in terms of where the market is at the time of the opening, based on events that may have transpired overnight. We believe that the Commission should address this problem in the final rules that are adopted. The Amex further believes that the conditional relief from short sale price test provisions previously granted by the Commission to allow requesting exchanges and broker-dealers to execute short sales in after-hours crossing sessions should be codified as an exception to proposed rule 201 of Regulation SHO.32 Examples are the Amex's After-Hours Trading Facility (as defined in Amex Rule 1300) and the NYSE's Off-Hours Trading Facility (as defined in NYSE Rule 900). 9. The Commission Must Allow Adequate Time for Market Centers to Make System Changes Necessary to Implement the New Requirements of Regulation SHO, Including Those to Assure Adequate Compliance and Surveillance Amex believes that it will require substantially more time and money for the Exchange to comply with proposed Regulation SHO than the $100,000 and one or two months mentioned in the Release by two unnamed parties as their costs to comply.33 Amex operations staff estimates that it will require approximately four to six weeks just to accurately identify all the required steps involved in coding, testing and implementation of the operational changes and to determine the associated time and cost requirements to modify the Exchange's order processing and execution systems to comply with Regulation SHO. On the compliance and surveillance side, we have identified at least ten reports that would need to be modified to implement Regulation SHO and several new reports that would need to be created. With the proviso that these are very preliminary numbers and subject to change, our best estimate is that about 3.5 months would be required to implement the changes to the surveillance systems at a cost of perhaps $125,000. Based on the foregoing preliminary assessment, we urge the Commission, in determining an implementation date for Regulation SHO, to survey the various market centers once the final requirements of Regulation SHO are known and to allow adequate time for those centers to implement the necessary system changes, including those to assure adequate compliance and surveillance. 10. Conclusions We request the Commission to undertake the following actions with respect to the Regulation SHO proposal: The Commission should clarify in the adopting release that exchange traded options are not subject to Regulation SHO. This would be consistent with the intent of the Commission not to extend the uniform bid test to securities not currently covered by a short sale price test. The Commission should provide an exemption from the Rule 201 bid test for specialists and market makers in stocks, ETFs and options for hedging done in connection with bona fide market making activities. An exemption is justified by the need to ameliorate the substantial risks that specialists and market makers assume based on their responsibilities (which, under Amex rules, include the maintenance of fair and orderly markets). Such an exemption would also be consistent with relief previously granted and/or proposed to be granted to certain other market participants (e.g., arbitrageurs and block positioners) where economic neutrality exists due to offsetting securities positions and positive benefits accrue to the marketplace as a result of the participants' activities. The Commission should broaden what we feel is a narrow and inflexible definition of "bona fide market making activities" in proposed Rule 203(b)(2) to include all activities of specialists and market makers that are entered into in fulfillment of their market responsibilities, consistent with NYSE Rule 440C.10. At the very least, the Commission should modify the definition of the term to be consistent with NASD IM-3350(a)(3), which defines bona fide market making to exclude "activity that is related to speculative selling strategies of the member or investment decisions of the firm and is disproportionate to the usual market making patterns or practices of the member in that security" (emphasis added). The narrow definition in proposed Rule 203(b)(2) (generally tracking the language of NASD IM-3350(a)(3) but using an "or" conjunction rather than "and") is not necessary to limit the ability of specialists and market makers to engage in truly speculative activity, and it could discourage legitimate market making activities in certain situations. For example, heavy demand for the stock or options of a company subject to major corporate news could well require a specialist or market maker to engage in transactions, as a consequence of providing liquidity and satisfying customer demand, that are "disproportionate to the usual market making patterns or practices of the broker or dealer in that security." The Commission should allow specialists and market makers to use the alternative bid test described in the Release, which would allow short selling at a price equal to or above the consolidated best bid if the current best bid is above the previous bid (i.e., an upbid). The Commission should codify the relief from short sale regulation previously granted to ETFs in no-action letters. The Commission's previous conclusion, that trading of ETFs is not susceptible to the practices that short sale regulation is designed to prevent, is still valid. Regulation SHO should clearly provide that the relief granted includes exemption from the proposed short sale locate and delivery requirements as well as the bid test, all of which are consistent with the existing situation. The conditions for relief listed in the release, being the ones specified in the Class Letter, should also be codified, except that (a) the Commission should specify the point(s) in time that the conditions must be applicable so that it will be clear at all times whether an ETF qualifies for the exception (particularly since the number of component stocks in an ETF may decline over time due to corporate events) and (b) consideration should be given to easing some of these conditions which, based on experience to date, may be overly restrictive (e.g., minimum of 20 component stocks in an ETF) and should be adjusted accordingly so that, for example, an ETF with a minimum of 10 component stocks would qualify for the exception. Finally, the Commission should specify in Regulation SHO (or in the adopting release) the definition of ETFs utilized in the Class Letter (which the Release did not do) because of confusion in the marketplace over which products are ETFs and which are not. Otherwise, the specified conditions for relief listed in the Release could be inappropriately applied to non-ETF securities. The Commission should provide an exemption from the additional delivery requirements of proposed Rule 203(b)(3) for short sales effected by stock and option specialists and market makers in connection with bona fide market making activities. The lack of such an exemption for specialists and market makers could seriously impair their ability to make markets in thinly traded securities, which could result in illiquid, inefficiently priced securities and stocks that are susceptible to disorderly markets and short squeezes. In some cases, options trading in certain thinly traded securities might completely cease due to the inability of specialists and market makers to hedge their risk. Any such exemption for specialists must, of course, be within the limitations of the corresponding exchange rules, such as approval by the proper exchange officials for delivery deferrals. In the event that the Commission should determine not to provide such an exemption for specialists and market makers, it should substantially increase the relatively low level of fails at the clearing agency that is applicable to them so that the additional delivery requirements would be triggered in only the most egregious situations. Recent summary statistics on failed deliveries of common stocks provided to the Amex by the Commission seem to indicate that such an upward adjustment in the numerical screening criteria is justified. The Commission should consider ways to address "bid flickering" (i.e., very rapid changes in the consolidated best bid that is the basis of the proposed Rule 201 price test), which will be a very real and practical problem with the implementation of the uniform bid test in the current decimal environment. The Commission should consider alternative ways of dealing with the problem of locked and crossed markets that do not rely on instantaneous identification of the broker-dealer who initiated the locked or crossed market (which may not be possible with current technology). The Commission should clarify how the uniform bid test will be applied to short sales at the market opening in situations where there is no consolidated best bid available at the time of the opening. Specifically, will the after hours standard apply, using the previous day's last published best bid (which may be stale), or will another solution be provided? The Commission should codify, as an exception to proposed Rule 201 of Regulation SHO, the conditional relief from short sale price test provisions previously granted by the Commission to allow requesting exchanges and broker-dealers to execute short sales in after-hours crossing sessions. The Commission must allow adequate time for market centers to make the necessary system changes to implement the new requirements of Regulation SHO, including those needed to assure adequate compliance and surveillance. We appreciate the opportunity to comment on the Regulation SHO proposal and would be pleased to provide further information regarding our views if requested.
cc: The Hon. William Donaldson, Chairman
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