February 12, 2003
William W. Uchimoto, Esq.
Re: Rule 10a-1; Exemptive Relief under Short Sale Rule
Dear Mr. Uchimoto:
In your letter dated February 12, 2003, as supplemented by telephone conversations with the staff, you request exemptive relief regarding Rule 10a-1 under the Securities Exchange Act of 1934 (Exchange Act) for customers of Vie Institutional Services (Vie) that seek to execute short sale transactions in a pre-opening, volume-weighted average price match (VWAP Match). This response is attached to the enclosed photocopy of your letter. By doing this, we avoid having to recite or summarize the facts set forth in your letter. Each defined term in this response has the same meaning as defined in your letter, unless otherwise noted.
Rule 3b-3 under the Exchange Act defines the term "short sale," and Rule 10a-1 governs short sales generally. Paragraph (a) of Rule 10a-1 applies to short sales of any exchange-listed security, if transactions in such security are reported pursuant to an "effective transaction reporting plan" (Listed Security). A short sale of a Listed Security 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 an exemption, short sales of Listed Securities effected by Vie's customers on a VWAP basis must comply with paragraph (a)(1) of Rule 10a-1. The final execution price of such VWAP short sale transactions by Vie's customers may be on a minus tick or a zero-minus tick with respect to the last sale in the consolidated transaction reporting system. Transactions under such circumstances in exchange-listed securities would not comply with Rule 10a-1. You state that due to the passive nature of the Vie VWAP Match and the manner in which the VWAP will be determined, the types of abuses the short sale rule is intended to address (i.e., destabilizing and manipulative activity) would not be present with respect to Vie's VWAP Match. You further state that all short sale orders would be appropriately marked. You also note that the orders in the Vie VWAP Match would be matched in the pre-opening period, and the execution price of the matched orders would not be determined until after the close of regular trading when the VWAP is calculated. In this regard, the short sale orders affected by Vie's customers in the VWAP Match would not participate in the determination of the VWAP. You also state that the trades that would be used in calculating the VWAP would be subject to Rule 10a-1.
Based upon your representations and the facts presented, but without necessarily concurring in your analysis, the Commission hereby grants an exemption from paragraph (a)(1) of Rule 10a-1 to permit short sales affected by Vie's customers in the pre-opening VWAP Match without complying with the "tick" provisions of the rule, subject to the following conditions:
The foregoing exemption from Rule 10a-1 is based solely on your representations and the facts you have presented to the staff, and is strictly limited to the application of this rule to transactions under the circumstances 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 or representations. The exemption granted herein is subject to modification or revocation if at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. 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 other applicable provisions of the federal or state securities laws must rest with Vie and with participants effecting transactions in the VWAP Match. The Division expresses no view with respect to other questions that the proposed transactions may raise, including, but not limited to, the applicability of other federal and state laws to the proposed transactions.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority,
1 For purposes of this exemption, actively-traded securities must have an average daily trading volume (ADTV) value of at least $1 million and be issued by an issuer with a public float value of at least $150 million. For purposes of this letter, the ADTV shall be calculated in reference to the date on which the proposed VWAP Match is to take place.
Incoming LetterThe incoming letter is attached in PDF format.