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Thursday, July 15, 2010

UTP Vendor Alert #2010 - 9
UTP SIP Will Introduce New Reg SHO Circuit Breaker Message Format In Fourth Quarter 2010

Markets Impacted:

  • UTP/SIP

Data Feeds Impacted:

  • UTP Quotation Data Feed (UQDF)
  • UTP Trade Data Feed (UTDF)
  • OTC Montage Data Feed (OMDF)

Contact Information:

What you need to know:

  • The Securities and Exchange Commission (SEC) recently adopted amendments to Regulation SHO (Reg SHO). Under the amended Rule 201, the SEC is establishing a short sale-related circuit breaker that, if triggered, will impose a restriction on the prices at which securities may be sold short.
  • In response to the SEC rule change, the UTP SIP will soon create new Reg SHO Short Sale Price Test Restricted Indicator message formats (the “Reg SHO Price Test Indicator") to denote when the SEC short sale price test restriction is triggered.
    • The Reg SHO Price Test Indicator message will be disseminated for a security if its price declines by 10% or more from the prior closing value during normal market hours.
    • The Reg SHO Price Test Indicator message will also be disseminated at the start of the subsequent trading day to indicate that the Reg SHO short sale price test restriction remains in effect.
  • The Reg SHO Price Test Indicator message formats will be implemented on the UTP data feeds on or before November 10, 2010.
  • Updated 11/4/2010: As announced in ETU #2010-23, the SEC has postponed the implementation of the Reg SHO changes. The new compliance / release date is now February 28, 2011.

What is changing in Reg SHO?

In May 2010, the SEC adopted amendments to Reg SHO under the Securities Exchange Act of 1934. As outlined in Release Number 34-61595, the SEC is establishing a short sale-related circuit breaker that, if triggered, will impose a restriction on the prices at which securities may be sold short (“short sale price test” or “short sale price test restriction”).

Under the amended rule, the SEC requires that the U.S. exchanges establish procedures to prevent the execution or display of a short sale order of a covered security at a price that is less than or equal to the current national best bid when the price of that security decreases by 10% or more from the prior day’s adjusted closing price.

Once the price test restriction has been triggered, Rule 201 (also known as the Alternative Uptick Rule) would apply to short sale orders in that security for the remainder of the day as well as the following day.

How will the UTP SIP indicate when the SEC short sale-related circuit breaker has been triggered in a NASDAQ-listed security?

The UTP SIP will introduce a new Reg SHO Short Sale Price Test Restricted Indicator administrative message format on the UTP data feeds to indicate that an issue has breached the SEC Rule 201 short sale price test threshold. The new message will be identified as Message Category "A", Message Type "V" in the UTP data feed message header.

In addition to the real-time messages, the UTP SIP, in coordination with the NASDAQ® primary listing market, plans to support a spin of Reg SHO Price Test Indicator messages as part of the pre-opening processes on the UTP data feeds.

How will the new Reg SHO Price Test Indicator message format work?

The Reg SHO Price Test Indicator message will include Issue Symbol and Reg SHO Action. The defined values for the Reg SHO Action field will be as follows:

Reg SHO Action Value Definition
0 No Reg SHO Short Sale Price Test Restriction
1 Reg SHO Short Sale Price Test Restriction is in effect due to an intra-day price drop in security
2 Reg SHO Short Sale Price Test Restriction remains in effect

If the last price for a security falls by 10% or more from the adjusted prior day’s NASDAQ Official Closing Price (NOCP) value, NASDAQ, as the primary market, will submit a Reg SHO Price Test Indicator message with a Reg SHO Action value of “1” (Short Sale Price Test Restriction In Effect Due to Intra-day Price Drop). Once disseminated, UTP participants will be prohibited by rule from executing or displaying any short sale orders priced less than or equal to the prevailing national best bid price. Under Rule 201, the short sale price test restriction will remain in effect for the remainder of the current trading day and for the next trading day.

NASDAQ reserves the right to reverse the Reg SHO Price Test Indicator if it determines that the original trigger was based on a trade transaction that was subsequently ruled to be clearly erroneous or on an improperly adjusted prior day’s closing value. If NASDAQ is reversing the short sale price test restriction for an issue, it will generate a Reg SHO Action message with the Reg SHO Action value of “0” (No Reg SHO Short Sale Price Test Restriction) or “2” (Reg SHO Short Sale Price Test Remains In Effect) depending on the Reg SHO status of the NASDAQ-listed issue prior to the error.

Given that the short sale price test restriction spans multiple days, NASDAQ will disseminate Reg SHO Price Test Indicator messages for all NASDAQ-listed issues as part of its pre-opening processes on the UTP data feeds. In the spin, NASDAQ will indicate whether or not the issue is subject to the SEC Rule 201 short sale price test based on the prior day’s trading activity. For those issues for which the Rule 201 restriction remains in effect, the Reg SHO Action value will be “2”. For all other issues, the Reg SHO Action value will be “0”.

Please refer to the UTP data feed specification documents for additional processing information:

When will the Reg SHO Price Test Indicator message be implemented?

The SEC amendments to Rule 201 of Reg SHO go into effect on November 10, 2010. The UTP SIP expects to release the code for the new Reg SHO Price Test Indicator messages in advance of the SEC rule date. The UTP SIP is working with the NASDAQ listing market to determine the testing and implementation schedule for the new message and will post a UTP Vendor Alert once dates are confirmed.

Where can I find additional information?