“On a down day, as much as 36% of publicly traded stocks in US markets would have been restricted from short sellers if the circuit breaker had been in effect,” says Mary Lou Von Kaenel, a managing director at Jordan & Jordan, a professional services firm focused on the financial community, in a company release. Jordan & Jordan submitted data and comments to the Securities and Exchange Commission in response to the reintroduction of short sale restrictions proposed as Amendments to Reg SHO.
Leveraging the post-trade analytical capabilities of its Execution Analytics and Compliance Solution (ECS) and NYSE Euronext TAQ (Historical Daily Trade and Quote) data, Jordan & Jordan provided statistics in its comment letter to the SEC to support decisions regarding short-sale rule alternatives currently under consideration. Jordan & Jordan’s trade analytics used by clients today to monitor compliance with Reg NMS will be expanded to enable firms to track their adherence to short sale rules, once amendments to Reg SHO are finalized by the SEC.
The SEC’s request for comments published as File Number S7-08-09, Amendments to Regulation SHO, outlines proposals that include reinstating the former “uptick rule” which places last sale price conditions on short sale orders. The alternative proposal for a “modified uptick” rule is based on the consolidated national best bid (NBB) rather than the last sale price. While the NBB is generally preferred over the last sale approach, both alternatives present challenges as the introduction of decimalization and Reg NMS have drastically increased trade and quote volume and the frequency of tick changes since the original uptick rule was repealed in July 2007.
Under pressure to rebuild investor confidence after short sellers were blamed for the severe downturn in US stock prices in 2008, the SEC is considering alternatives to the uptick rule including options to impose short selling restrictions only after a “circuit breaker” has been triggered. Various thresholds were examined by Jordan & Jordan that would trigger a circuit breaker on stocks with significant price declines in the course of a day. For example, assuming restrictions on short selling would take effect with a 10% decline in a stock’s price from the market open; on September 29, one of the worst performing trading days for the S&P 500 in 2008, as many as 3000 stocks (35.9%) would have been affected. The circuit breakers would have been triggered on 24% of US stocks had the threshold been set for a 15% price decline; and only 18% of US stocks would have been impacted if the circuit breaker was triggered by a 20% price decline.
Jordan & Jordan’s letter to the SEC also included comments on the use of exemptions from short sale restrictions, highlighting the importance of certain short-selling trading strategies in mitigating risk and enhancing liquidity. Short sale strategies are key to the options markets, and are often used to hedge convertible bonds and other equity-linked derivatives. Noting that heavy use of exemptions will undermine the intent of any restricted short sale alternatives, Jordan & Jordan suggested that post-trade compliance analysis such as its ECS service will ensure that a firm’s policies and procedures are aligned with the SEC’s goals and in compliance with future Reg SHO amendments. Jordan & Jordan’s analysis of orders submitted with exemptions under Reg NMS’ order protection rule reveals that on average, 47% are marked as exempt from an Intermarket Sweep for protected orders (ISOs).
The Jordan & Jordan comment letter extended an open offer to the SEC to request additional analysis of historical data to further support its rulemaking efforts and impact assessment. The SEC’s comment period closed on June 19, 2009.