SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Reg SHO Pilot Report 2/12/2007
II History of Price Restrictions
This section briefly summarizes the historical background of the price restriction rules. 17
After the market crash of 1929, a popular view emerged that short sellers exacerbated the
crash. 18 Public concerns about short selling became particularly acute in the aftermath of the
international currency crisis of September 21-22, 1931, prompting Senator Arthur Capper of
Kansas to introduce several bills aimed at restricting and taxing short selling. It was in this
environment, on October 6, 1931, that the NYSE required that all sell orders must be marked
long or short. 19 According to Meeker (1932, p. 147), this effectively acted as a rule against
shorting on a downtick, as such trades were viewed as violations of the Exchange’s rule against
“demoralizing” trades. 20
Shortly after its creation in 1934, the Commission recommended sixteen rules that all
national securities exchanges should adopt. Among them was a recommendation for an explicit
rule against shorting on a downtick:
No member shall use any facility of time exchange to effect on the exchange a short sale
of any security in the unit of trading at a price below the last sale price of such security
on the exchange. 21
Exceptions were specified for odd-lot trading and to allow regional exchanges to bring their
prices in line with the primary exchange. Sixteen exchanges adopted this rule in 1935. 22
17
See also Meeker (1932), SEC, Report of the Special Study of the Securities Markets, reprinted in H.R. Doc. No.
95, 88th Cong., 1st Sess. (1963 “Special Study”), Macey, Mitchell, and Netter (1989), SEC Release No. 34-42037,
October 20, 1999.
18
See Frederick (1932).
19
New York Stock Exchange, Notice Concerning Distinction Between Long and Short Account Selling Orders,
October 5, 1931, reprinted in Appendix A of Meeker (1932).
20
Constitution of the New York Stock Exchange (August 11, 1927) Article XVII, Section 4.
21
SEC, First Annual Report of the Securities and Exchange Commission (1935), available from the Securities and
Exchange Commission Historical Society.
22
SEC, Report of the Special Study of the Securities Markets, reprinted in H.R. Doc. No. 95, 88th Cong., 1st Sess.
(1963), p. 251.
Prepared by the Office of Economic Analysis 12