Short Sale Rule - Rule 5100
Staff grants exemption from the Short Sale Rule for certain transactions executed through a member's passively-priced trading system.
April 3, 2007
Mr. Louis J. Karcher
Principal & Chief Compliance Officer
Pipeline Trading Systems LLC
60 East 42nd Street, Suite 624
New York, NY 10165-0006
Re: NASD Rule 5100: Request for Exemptive Relief
Dear Mr. Karcher:
This is in response to your February 16, 2007 letter, on behalf of Pipeline Trading Systems LLC ("Pipeline"), in which you request that NASD grant an exemption from the short sale rule set forth in Rule 5100 for certain short sale transactions in NASDAQ Global Market (NGM) securities executed through Pipeline's matching system as described in your letter and discussed below.1
Pursuant to paragraph (j) of Rule 5100, NASD staff may exempt, unconditionally or on specified terms and conditions, any transaction (or class of transactions) from the provisions of the rule. For the reasons set forth below, NASD staff grants your request for an exemption, subject to the conditions set forth below.
In your letter and our subsequent telephone conversations, you have made the following representations, among others, regarding Pipeline and the operation of its matching system:
Rule 5100 governs short sales in NGM securities.2 Rule 5100 generally provides that, with respect to trades reported to the Alternative Display Facility (ADF) or a Trade Reporting Facility (TRF), no member shall effect a short sale in an NGM security otherwise than on an exchange at or below the current national best (inside) bid when the current national best (inside) bid is below the preceding national best (inside) bid. IM-5100(b) further provides that, to effect a "legal" short sale when the current best bid is lower than the preceding best bid, the short sale must be executed at a price of at least $0.01 above the current inside bid when the current inside spread is $0.01 or greater.
All short sales in NGM securities effected otherwise than on an exchange must comply with Rule 5100 or qualify for an exception to or exemption from the rule. Accordingly, absent the requested relief, orders involving short sales executed in Pipeline for NGM securities would violate Rule 5100 if a match price of orders occurs on a down bid at less than $0.01 above the best bid.
Based on the facts and representations made in your letter, without necessarily concurring with your analysis, the staff is granting a temporary exemption3 from the requirements in Rule 5100 for short sale transactions executed through Pipeline's matching system. Consistent with the exemptive relief granted by the SEC, this exemption is subject to each of the following terms and conditions:
This letter responds only to the issue you have raised based on the facts as you have described them, and does not address any other rule or interpretation of NASD, or all the possible regulatory and legal issues involved. Any changes in the facts or representations as you have described them will require further consideration and may cause us to reach a different conclusion. You should contact NASD immediately if there is a change in any of the facts or representations contained in your letter. In addition, this exemption is subject to modification or revocation if at any time NASD determines that such action is necessary or appropriate for the protection of investors.
If there are any questions concerning this exemption, please contact me at (202) 728-8156.
Andrea D. Orr
Assistant General Counsel
cc: Stephanie M. Dumont (NASD)
Richard Wallace (NASD)
Gene Lopez (Fenwick Consulting)
1 In your letter, you note that Pipeline has requested and received similar relief from the Securities and Exchange Commission ("SEC") relating to Rule 10a-1 under the Securities Exchange Act of 1934 ("Exchange Act") for NYSE and Amex-listed securities in its matching system. NASD notes that the SEC granted such exemption to Pipeline, subject to certain conditions. See letter from James A. Brigagliano, SEC, to Louis J. Karcher, Pipeline Trading Systems LLC, dated February 2, 2007.
2 For purposes of Rule 5100, the term "short sale" has the same meaning as contained in Rule 200 of Regulation SHO under the Exchange Act. See 17 CFR 242.200. See also NASD Rule 5100(k)(1).
3 Unless otherwise extended, this exemption will expire on February 2, 2008, which coincides with the expiration date of the SEC's relief from Rule 10a-1 under the Exchange Act for short sales in NYSE and Amex-listed securities effected through Pipeline's trading system. See letter from James A. Brigagliano, SEC, to Louis J. Karcher, Pipeline Trading Systems LLC, dated February 2, 2007.
4 See 17 CFR 242.200.
5 You indicate that when an order is entered close to the current market prices, Pipeline activates a "heat map" for that stock to try to attract additional liquidity that is looking to trade inside the spread. You further indicate that once both a buyer and seller are present, the trade executes if both parties' limit prices are satisfied by the current midpoint. Moreover, you indicate that when the heat map is activated that no information about the order is revealed, including price, size, side, and order sender.
6 See 17 CFR 242.101(c)(1).