Subject: File No. 4-627
From: Iwao Yagami

June 12, 2011

Anyone involved in the market today would like to have more. More timely, more accurate, more complete, and generally more voluminous information. But there are limits of practical collection and assimilation and the market today does not differ significantly from the market of a century ago, despite the relative glut of information today. If anything, a further glut of highly detailed information would benefit only those who have a staff dedicated to private analysis (as distinct from the average market analyst) and not those who have a job other than stock speculation. Long-term general market trends do not turn on the specific knowledge that a specific person did or did not take a short or long position on a specific stock. In my opinion, Q1 is the wrong question to ask.

Existing regulations render potential market maker abuses safe. In other words, there is nothing legal today that could be considered abusive. Any loser in the market wants to blame someone other than himself for losses, and the theory of the sharky market maker suits this use well. In the current political climate rumors of imagined abuses sell well, but we must guard against becoming England in 1730 -- the reactionary over-regulation of the market there at the end of the South-Sea affair retarded every attempt at a truly solid national recovery just when the public in that country had finally learned its lesson about rabid speculation. Today's market quirks are not unique to today, they have happened before. Regulation on the short side not matched by regulation on the long side is unwarranted and fundamentally prevents the formation of a balanced market. Lack of balance to the market -- meaning permission to play fair on the bull or bear side of things, respecting that we have a profit/loss system as opposed to a false profit/profit system -- will create unnaturally slow boom and unbearably catastrophic bust cycles (just consider Europe's troubles today).

"Bear raids" are a farce. Simply taking a short position cannot force a stock down without placing the raider in an unacceptably risky position. Simply put, the risks inherent in attempting a bear raid are perfectly in line with the unreasonableness of the attempt, which is why nobody actually attempts a bear raid. Stocks do decline in value once oversold, particularly after the insiders have unloaded their own baggage. Quite frequently speculators take such insider unloading as a sign that a bull run on a stock has exhausted its utility to those insiders, and accordingly take short positions on such stock. This is not bear raiding, this is simply reasonable speculation based on close observation of insider trades. The subsequent decline in the stock value, however, is unsettling to the losers who bought what insiders had to sell during their unloading, and to satisfy the emotional need for a scapegoat blog and media personalities will promote the idea that a bear raid must be on, having observed that the short interest in the stock has increased. This idea is subsequently strengthened when the insiders who already unloaded will make statements to the effect that they have no idea why the stock is declining because "good things are in the works". This "bear raid" myth can be promoted with particular strength in the internet era when the loudest bloggers tend to be holding the stock in question themselves and need a place to vent their emotions. Of course, thinking members of this category also realize they have a strongly vested interest (being current holders of declining stock) to spin a tale of a bear raid which can be defeating by doubling down on the declining stock to cause a short run. Of course, such bloggers are only themselves looking for a place to unload their bad investment and promoting good spin on said stock is their only available tool to try inducing a short run with. The myth of the bear raid is attractive to every side in a position to make a public statement about a stock's prospects and so this myth has continued to exist since the dawn of public trading in joint-stock companies.

More regulation will not avoid this and cannot change the fact that the only safe short play is a confident position of speculation based on market conditions and fundamentals. There is nothing wrong or abusive about short selling or about speculating on the prospect of an upcoming bear market. If anything, the silence kept by insiders throughout a stock's unwarranted rise is the abusive part in this situation -- but nobody complains about a stock's rise, whether warranted or completely false and flimsy. It would be unpatriotic or at odds with other social norms to complain that a stock's rise is unreasonable -- everybody loves a winner. The emotional component of this is simply too tricky to attempt to regulate further than already existing disclosure rules do. Any attempt to place special regulation on short selling by speculators is absolutely misplaced and overcomplicates the market (not to mention being a(nother) waste of government effort to no gain).

Real time or more readily available "prompt" short position information would perhaps make day-trading more exciting, but would not change the fundamental principles of the game. So long as this type of information could be made available without any burden whatsoever to the short-selling trader, it would be acceptable. But to force a regulatory situation where short selling is treated any different than buying long is completely unacceptable and tantamount to entertaining the idea that stocks can forever increase in value regardless of merit without ever facing any consequences. Through introducing more red-tape on buying or selling, regardless the position of the trader, the regulators will be taking a de facto stance for or against a specific trading practice, and this is unbalanced and dangerous. This sort of thinking is what is leading to the Ponzification of the entire Chinese economy. The American economy simply cannot and should not ever suffer such stupidity -- at least not if America is intent on being the only economy healthy and flexible enough to withstand any change of wind or tide by harnessing the economic energies of its brilliant, unregulated individuals.

Short data and long data must be treated the same by regulators, because it will be treated the same by traders. To think they are any different is ridiculous. If short sales must be reported in a special way, then long buys must be as well -- and suddenly the process every trader must go through to execute a trade is the same that an insider must go through to report his transactions on a Form 4. What is the point in that? More importantly, why was "insider" made a specific definition in 1933/34 and why were "outsiders" exempted from such reporting regulations? The answers to Q5, and the entire question of short position reporting, can be had by simply reviewing the debates of 1933. To imagine that the markets are somehow different today than a century ago is wrong and dangerous.

Short selling is not abusive. People who lose in the market wish to perceive themselves as injured, and hence the myth of abusive short selling. If they are injured at all, they are injured by insiders who don't let on that an unreasonable rise in a stock's price is unwarranted but obviously there is no way to make a rule against silence, so this will continue. Blaming the subsequent decline after an unreasonable rise on bear raiding is a lovely cop-out for everyone involved and what's more, it is a self-fulfilling prophecy. (see my response to Q3) Regulation will never fix the emotional problems of market losers -- so we should avoid trying. The remedy to this is for individual investors to check their own buying habits against that of the insiders -- did you buy into a stock that has already experienced a rise and at a point after the insiders had already cashed in on the rise? Why? Blaming a subsequent decline on a "bear raid" is simply unfounded under such circumstances -- and these are nearly the only circumstances to be found.

No effect would be had at all. The burden of extra reporting itself may have an effect, however, as fewer people would enter the market in the first place due to new regulatory barriers to freely engaging in legal trading. Once again, this is wrong minded and not the place of government.

Current definitions have worked well for quite some time. The only use of regulated definitions is to assist in the imposition of new regulations. This is the wrong direction to move in.

Discussing positions in number of shares without referencing what percentage of a concern's equity that represents or what percentage of outstanding stock of whatever type it represents is useless. Once again, this is asking the wrong question.

Reporting only to regulators and not the public is a dangerous business and should not be entertained. Regulators do not "benefit" from the market unless they themselves are abusing it -- and creating a new category of inside information is all this would effect. This is dangerous for many reasons and would ultimately create temptations strong enough that they would distract the regulatory body from its real duties, as it would have to double up on self-regulation in addition to trying to accomplish its actual mandate. This is bad.

In the modern day this is almost purely a technology question. What follows, however, is that a mandate that all brokerages adhere to an arbitrary timeline for short position reporting will act as a technological barrier to entry for new brokerage companies -- and will also likely create a monopoly position for whoever patents the "approved" technology first. No good will come of this. Such new barriers will eventually act as barriers to innovation in the finantional trade itself, and this is historically a very bad thing. Imagine if existing regulation had ruled electronic trading out by being too short-sightedly strict -- a large percentage of the capital necessary to drive the tech boom of the late 1990's would have been inaccessible to the market. How can we predict today that a new and arbitrary regulation on short position reporting will not eventually come into conflict with a technology of great potential power to financial market participants in the future? Further, how can be guarantee that short position reporting regulations will not take on a life of their own (as it is likely to do) and become stifling in other ways?

This line of reasoning can wind up in only one place: a further tech burden to market players -- and ultimately this will be a burden on the average market participant. This is a poor question -- it seeks technical validation for the concept of short position reporting before the legal and moral debate on the issue is decided.

This is an unreasonably broad question at this time.

A threshold different from that required for insiders would necessarily only capture the trends anticipated by traders. The idea that anything different would happen is based on the beautiful lie that regulation can prevent ignorant participants from losing money in thoughtless market speculation.

A case which has not been thoroughly studied yet, because it is ongoing currently, is the current damage the European economies are suffering despite tighter restrictions and regulations on stock transactions which predate current global economic conditions. This would be an argument against emulating such practices.

European and Asian stock markets are fundamentally different in nature from the American stock market, because European and Asian companies raise funds primarily through government backed loans and not through public sales of stock. In populist political areas such as Europe and Asia this always forces the formation and subsequent governemnt support for "national champion" companies whose stock positions must be protected to help ensure public confidence in the public credit system and their own governments. Attempting to compare the American system to such international systems which have not been thoroughly tested in situations outside of the Cold War and current immediate post-Cold War period is short sighted (perhaps the current problems being experience in Asia and Europe are the first test, and it seems it is one those systems are failing). The situations do not fit and should not be used as examples for American regulators because the economic foundations of those economies is fundamentally different from the American example.

Q16 - Q23
Similar in nature to Q12 and Q13. Answers to such questions cannot be reasonably produced at this time because they seek insight that can only be had after a pilot test has been conducted. Additionally, asking such questions before the legal and moral debate is concluded can be interpreted as an attempt to validate the concept before appropriate debate itself has been concluded -- and railroading potentially oppressive reporting regulations through is dangerous and should not be entertained by anyone concerned with the future health of the markets.