Speech by SEC Chairman:
Opening Statement on Eliminating the Short Sale 'Tick Test'
Chairman Christopher Cox
U.S. Securities and Exchange Commission
December 4, 2006
The final item on our agenda today is elimination of the short sale price test - colloquially known as the "tick test."
Historically, the Commission and self-regulatory organizations have sought to balance the competing views of short selling -- whether it is primarily good or bad -- by permitting short sales in advancing markets, and preventing short sales at successively lower prices.
The Commission first imposed restrictions on the execution prices of short sales almost seventy years ago, when we adopted the "tick test" of Rule 10a-1 in 1938. The tick test permits short sales only at a price above the last sale price, or alternatively, at the last sale price -- if that is higher than the previous price.
The core provisions of Rule 10a-1 have remained virtually unchanged since the 1930s. But a great deal else has changed in the marketplace over that very long time. Over the years, decimalization and changes in trading strategies have undermined the effectiveness of the price test. And at the same time, increased transparency and better means of surveillance appear to have lessened the need for the price test.
When the Commission adopted Regulation SHO in 2004, there were concerns expressed at that time regarding the effectiveness of the price test. As a result, in June 2004 the Commission authorized a pilot program to test the premises of the short sale price restrictions.
The Regulation SHO pilot program began in May 2005. It suspended all short sale price tests for a select group of over 1,000 equity securities.
Through the pilot program, we sought to understand the effect of this particular regulation on our markets. The evidence gathered from the pilot suggests little empirical justification for maintaining short sale price test restrictions, at least for the exchange-traded stocks in the pilot.
In light of the results of the pilot program and the market developments that have occurred in the securities industry since Rule 10a-1 was first adopted, we will today consider proposals to remove the tick test of Rule 10a-1, and to prohibit the SROs from maintaining their existing price tests or adopting any new ones. Along with the proposed repeal of the tick test, we will also consider a proposal to make conforming changes to the order-marking requirements of Regulation SHO.
Although the proposed amendments are aimed at removing obsolete price restrictions on short selling, we believe that other controls are still needed to address abuses connected with short selling. That belief is borne out by our action today to revise Rule 105, and our proposal to eliminate the grandfathering and options market maker exceptions under Regulation SHO.
Once these proposals are published, the public and industry will have the opportunity to comment on both the repeal of the short sale tick test, and the changes to Rule 105. During that comment process, we will also welcome any alternative approaches. And we will consider all of the comments and any accompanying data that we receive in determining whether modifications to the proposals are necessary.
I would like to thank the Division of Market Regulation -- in particular Erik Sirri, Bob Colby, James Brigagliano, Josephine Tao, Elizabeth Sandoe, Victoria Crane, and Marlon Paz -- for their commendable work on both proposals. I'd also like to thank their colleagues in the Division of Market Regulation; in the offices of the General Counsel, Economic Analysis, and Compliance, Inspections and Examinations, and in the Divisions of Enforcement, Corporation Finance, and Investment Management, for their contributions and collaborative efforts.
I will now turn it back over to Erik Sirri, to hear a more detailed description of the proposal.