Erik Sirri, director of the Securities and Exchange Commission’s Division of Trading and Markets, said yesterday the SEC is considering bringing back the uptick rule for short sales along with other options designed to place some constraints around short-selling. He didn’t say when this might happen.
“We’ve [had] a lot of calls to bring it back,” Sirri said. “It’s something we have talked about and it may be something that we in fact do.” He spoke yesterday morning at an Investment Company Institute conference in New York.
However, Sirri reminded the crowd, the SEC had conducted several studies evaluating the impact of the uptick rule over several years before eliminating that rule in July 2007. The studies concluded that getting rid of the uptick rule wouldn’t negatively impact the quality of the markets.
Sirri also noted that the recent downward trajectory of stock markets around the world have followed a similar path to the U.S. market, and that only the U.S. had repealed its uptick rule. The U.K., France and Germany, he said, didn’t repeal their equivalent rules. That makes it harder, Sirri observed, to attribute the U.S. market declines to the disappearance of the uptick rule.
Richard Ketchum, chief executive of NYSE Regulation, said the uptick rule may not be as effective as some people assume in a decimal environment where trading venues may have frequent upticks even in a declining market. “I can’t say a tick test would be my first choice,” he said. Speaking on the same conference panel as Sirri, he added that restricting shorts through trading rules or a circuit breaker “in times of great stress” could make sense. “Some predictability in the market rather than emergency actions is worth thinking about for everybody and trying to get right,” Ketchum said.
The SEC imposed a temporary ban on short-selling financial stocks on September 19. The ban is due to lapse at the end of Wednesday.
Sirri said the SEC “issued this ban under pressured times” to combat abusive short-selling and minimize naked short-selling. “It was a difficult decision to make,” Sirri admitted. “It was made with the full knowledge that [much]–in fact, the vast majority of–short selling is legitimate.” Other regulatory jurisdictions, he added, adopted similar approaches. In the “exigencies of the moment, it was necessary,” Sirri said.
Around the time of the ban, the SEC also imposed other restrictions intended to combat naked short-selling. On September 18, a day before the ban was issued, the SEC introduced Rule 204T, which levied a penalty on firms that failed to deliver shares to settle short sales by 9:30 a.m. on the day following the settlement date, which is three days after the trade date. This is “a considerable tightening of the normal rules,” Sirri said.
The new penalty, which applies to all securities, requires the broker-dealer that executed the trade that failed, and its customers, to pre-borrow shares for all subsequent short sales in the name that failed until the shares bought to close out the earlier fail clear and settle, which normally takes three days. Aspects of this rule were loosened a bit in SEC guidance issued on September 22.
The emergency 204T rule expires on October 17. But the SEC said on October 1 that the Commission “intends that the order will continue in effect beyond that date without interruption in the form of an interim final rule.” The SEC will seek comments on that rulemaking.
At the ICI conference, Sirri reiterated the SEC’s interest in avoiding failures to deliver shares for short sales. “I suspect the Commission will continue on this path,” Sirri said about the Rule 204T penalty. He added that the SEC could adjust some of the requirements associated with the rule over time. But the goal, he stressed, is “to get delivery of shares when promises are made.”
