April 21, 2009
I believe that the removal of the uptick rule has had the unintended affect of driving down stock prices and severely damaging the ability of companies to raise capital. I believe the SEC Pilot program that supported the decision was flawed and the results observed were not interpreted correctly but were interpreted to support a predetermined answer. The effects on large cap, high volume stocks were much different that the destruction on small cap, low volume stocks. The narrow spread and appearance of improved liquidity were illusionary and only 100 shares deep.
It would be foolish to design and apply a rule that depended on monitoring and litigation for conformance. I think any rule selected should be simple, easy to implement and completely transparent. The greatest ally to the SEC and markets is complete visibility into the workings. Secrecy and delayed disclosure is the cloak that spawns abuse.
This Regulation SHO amendment is intended to throttle the unfettered, abusive shorting of stocks. The two approaches are intended to control shorting. The uptick rule describes a constant control that is affected by the sale by sale action of the stock. The circuit breaker alternatives would only be applied after much damage had been done and then would either stop the shorting or apply some form of tick test.
I believe that a constant trading control like an uptick be used to throttle short selling rather than a emergency trigger, circuit breaker type control.
Whatever mechanism is finally designed and approved should primarily protect the investor and companies from abuse. A holder of shares wanting to sell should have priority over a short seller wanting to take a new short position. Short selling shares in competition with the current share holder wanting to dispose is unfair and gives the short seller a great advantage. A short seller can force the share holder into a market order sale to complete a sale.
A variation of the proposal alternatives might be to simply impose a volume percentage limit to the number of shares that could be shorted. If the shorting of shares was simply limited to say 10% of the total shares traded for that stock on that particular exchange (or thought any individual channel) and identified as a short sale, this would allow flexible shorting but apply a constant braking to the process. If the transactions were labeled as short sales, a violation would be easy to detect and become mechanical to enforce.
Thank you for applying additional restrictions to the naked shorting problem and especially for removing the options market maker exemption.