April 22, 2005
Anitra T. Cassas, Esq.
Re: Rule 10a-1; Exemptive Relief under Short Sale Rule
Dear Ms. Cassas:
In your letter dated April 22, 2005, as supplemented by telephone conversations with the staff of the Division of Market Regulation ("Division"), you requested on behalf of ITG, Inc. ("ITG"), a registered broker-dealer, an exemption from Rule 10a-1 under the Securities Exchange Act of 1934, as amended ("Exchange Act"), for transactions executed through ITG's Portfolio System for Institutional Trading ("POSIT") during regular trading hours (between 9:30 a.m. and 4:00 p.m. (ET)) that are priced at the midpoint of the best bid-asked quotation for the security.1 Since 1994, ITG has operated POSIT pursuant to an exemption granted by the Commission from the short sale tick test of Rule 10a-1 of the Exchange Act.2 Most recently, the Commission modified and granted until April 23, 2005 an exemption from Rule 10a-1 concerning transactions executed during twelve POSIT match times during regular trading hours, subject to a number of conditions.3 ITG currently requests relief from Rule 10a-1 in order to conduct matches, without regard to the tick test, at any of the following seventeen match times: 9:45 a.m., 10:00 a.m., 10:15 a.m., 10:30 a.m., 10:45 a.m., 11:00 a.m., 11:15 a.m., 11:30 a.m., 12:00 p.m., 12:30 p.m., 1:00 p.m., 1:30 p.m., 2:00 p.m., 2:30 p.m., 3:00 p.m., 3:30 p.m., and 3:45 p.m. ("Modified Regular Matches"). The Modified Regular Matches will be conducted within one-minute windows during regular trading hours.
A copy of your letter is attached to this response. By including a copy of your correspondence, we avoid having to repeat or summarize the facts you presented. The defined terms in this letter have the same meaning as in your letter, unless otherwise noted.
In your letter you make the following representations, among others:
In view of these representations, you have requested that the Commission grant ITG an exemption from the tick test of Rule 10a-1 until April 23, 2006, to permit short sales effected during POSIT Modified Regular Matches, without complying with the tick provisions of the rule, subject to the conditions listed below.
Rule 200 of Regulation SHO defines the term "short sale," and Rule 10a-1 governs short sales generally. Paragraph (a) of Rule 10a-1 covers transactions in any security registered on a national securities exchange, if trades in such security are reported pursuant to an "effective transaction reporting plan" ("Reported Securities"). A short sale of a Reported Security listed on a national securities exchange may not be effected at a price either: (1) below the last reported price of a transaction reported in the consolidated transaction reporting system ("minus tick"); or (2) at the last reported price if that price is lower than the last reported different price ("zero-minus tick").
Absent relief, trades effected in POSIT involving short sales of exchange-listed Reported Securities would have to comply with the "tick test" of paragraph (a) of Rule 10a-1. As described above, POSIT matches occur at the midpoint of the best bid-asked quotation for a security during one-minute windows throughout the regular trading day. Based on your representations, in particular, that: (i) POSIT matches will occur at an externally derived price and above the current best bid; (ii) there is no price discovery within POSIT because orders are not displayed and all trades occur in accordance with a predetermined algorithm; (iii) matches will occur by virtue of an entirely automated and random matching mechanism within each window so no participant will know precisely when a match would occur, and no participant will be assured of receiving a match; and (iv) ITG has systems in place to monitor for signs of manipulation and report suspicious activity to the NASD as necessary, the Division is of the view that POSIT trades would not appear to involve the types of abuses that Rule 10a-1 was designed to address.
Accordingly, on the basis of your representations and the facts presented, the Commission hereby grants an exemption from Rule 10a-1 until April 23, 2006, to permit short sales effected during POSIT Modified Regular Matches without complying with the "tick" provisions of the rule, subject to the following conditions:
The foregoing exemption from Rule 10a-1(a) is based solely on your representations and the facts presented, and is strictly limited to the application of this rule to the proposed transactions and the operation of the POSIT system as described above. Such transactions should be discontinued, pending presentation of the facts for our consideration, in the event that any material change occurs with respect to any of those facts and representations. The exemption granted herein is subject to modification or revocation if at any time the Commission or the Division determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. This exemption supersedes any prior Rule 10a-1 exemption granted to POSIT, and does not apply to transactions effected in the POSIT system prior to the date of this exemption.
In addition, your attention is directed to the anti-fraud and anti-manipulation provisions of the Exchange Act, particularly Sections 9(a) and 10(b), and Rule 10b-5 thereunder. Responsibility for compliance with these and any other applicable provisions of the federal securities laws must rest with ITG, Inc. and with participants effecting transactions on POSIT. This Division expresses no view with respect to any other questions that the proposed transactions may raise, including, but not limited to, the adequacy of the disclosure concerning, and the applicability of any federal or state laws to, the proposed transactions.
For the Commission, by the Division of Market
James A. Brigagliano
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