SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report DRAFT 9/14/2006
initial approval, the bid test has been re-approved annually as a temporary rule. 31 The bid test
was in effect when Regulation SHO became effective in January 2005. When Nasdaq began
operating as an exchange in August 2006, NASD Rule 3350 was replaced by Nasdaq Rule 3350
and NASD Rule 5100. 32
The Commission re-opened the discussion on Rule 10a-1 in a concept release dated
October 20, 1999. 33 In this release, the Commission requested comment on numerous issues
surrounding the tick test, including:
• whether the tick test should be suspended when the daily stock return is above a
threshold level;
• whether actively traded securities should be exempted from the tick test;
• whether the restrictions should apply only around certain market events such as at the
open and close, around mergers and acquisitions, or at option expirations;
• whether hedging transactions be exempt from the tick test;
• whether the tick test should be revised in response to expanded after-hours trading or
decimalization;
• whether the tick test should be extended to non-exchange-listed stocks; and,
• whether the tick test should be eliminated.
In October 2003, the Commission proposed a rule that would create a uniform bid test
that would apply to both Listed and Nasdaq NM Stocks, with various exemptions. 34 In addition,
the Commission proposed a pilot program that would suspend the tick test for actively-traded
securities for two years. 35 As stated in the proposing release, “[t]he temporary suspension would
allow the Commission to study the effects of relatively unrestricted short selling on market
volatility, price efficiency, and liquidity.” 36
31 Most recently, see SEC Release No. 34-53093, January 10, 2006.
32 Nasdaq NM stocks are currently trading under an exemption from Rule 10a-1 in order to maintain the status quo
until the conclusion of the Pilot or any further rulemaking by the Commission.
33 See SEC Release No. 34-42037, October 20, 1999.
34 See SEC Release No. 34-48709, October 28, 2003.
35 See SEC Release No. 34-48709, October 28, 2003.
36 See SEC Release No. 34-48709, October 28, 2003.
Prepared by the Office of Economic Analysis 15
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