July 17, 2008
After consulting with a senior member of the investing community, it is my opinion that Regulation SHO as written, is wholly ineffectual for these reasons:
1. It fails to place the onus on the broker dealer to assure delivery, by borrowing the shorted shares. Simply accepting the assurance of the hedge fund, and dropping the matter entirely at that point, is useless to prevent Naked Short Selling.
2. Requiring 'fails to deliver' to be bought in on the fail date plus one day.
3. Using foreign exchanges to gain advantage in violation of the Regulation SHO, especially German and Canadian exchanges, must be stopped, as Regulation SHO is then, practically ineffective.
4. Exempting primary dealers results in a giant regulation loophole an honest enforcement of existing regulations is all that is needed.
A primary dealer, is a trader making both bids and offers on a continuous basis. By the nature of his work, a primary dealer will be short, but not for investment purposes. The short in the primary dealer's position will rotate between short and even, possibly short on balance. A primary dealer will then be able to make delivery on the short without borrowing because when bids are hit (and they will be) he moves either to flat (even) or turns the short by purchasing voluntarily or involuntary. If the primary dealer does not maintain a constant two way 'bid and ask' then he is NOT a primary dealer.
Giving the primary dealer 21 days to deliver before 'buy in' is reasonable, but any longer and you are supporting a camouflaged naked short.
5. Naked Short Selling is a long time violation of the present regulations prior to Regulation SHO. Recent attempts to ban Naked Short Selling, by using an emergency on selected financial entities conclusively shows the ineffectual nature of Regulation SHO. It is highly prejudicial, and has the apparent effect of blessing Naked Short Selling against all of the other investment sectors.
Selective application of law is a violation of jurisprudence.
Please revoke Regulation SHO.