August 3, 2010
This letter is submitted in response to the Commission's call for comments on certain aspects of the Dodd -Frank reform bill.In particular it addresses the need for real time short sale reporting and the continued study of short sale abuses.While the SEC recently enacted a modified version of the so-called “uptick rule,” I believe that the SEC should do more to protect investors and issuers from abusive market manipulation. I am particularly concerned about naked short selling and large and persistent fail-to-deliver positions which continue to harm issuers, investors and market integrity. When the Commission directed an SEC working group to study how to improve the audit trail of short sale executions, it recognized that the revised uptick rule by itself is not enough. As the Chairman noted, improving the audit trail would establish the expedient tracking of short sale executions to origination.
I urge the SEC to adopt rules that require the exchanges and all trading platforms to report total short and long volume through the Consolidated Tape in real time as a simple and inexpensive means to promote needed transparency in the markets.
This simple requirement would help the SEC to regulate by bringing sunlight to a dark area. As the commission knows, aggregate volume is already reported in real time. Prompt reporting of aggregate long and short trading volume by security will accomplish the following:
Importantly, this requirement would not reveal or compromise individual traders’ positions and strategies. This request can be accomplished without new legislation through the SEC’s existing authority by amending SEC Regulation NMS to require that all trades printed to the Tape be marked “short”, “market maker short”, “buy” or “buy-to-cover.” It is critical that this requirement apply to trades on all exchanges.
The cost to implement real time reporting on the Tape is minimal because currently SEC Regulation SHO requires that all trades be reported short/long, so this information is already collected by the exchanges at time of execution. As Michael Gitlin of T. Rowe Price told the SEC short selling roundtable last year:
The real time tagging and display of short sale executions on the consolidated Tape would provide market participants with a more in-depth understanding of trading activities in any given security on any given day. By marking short sale executions as short on the consolidated Tape, we are creating an equal and fair marketplace whereby long sales would necessarily be recognized as having been sold long . . . We believe the benefits of the Consolidated Tape reporting for short sales outweigh any additional costs.
Given the severity of the economic crisis that resulted from the emergence and manipulation of exotic and opaque trading practices, there should not be serious objections to more transparency and information for investors, issuers, regulators, Congress and academics. Options activity, both puts and calls, is already disclosed to the market at the time of trade. Retail trades (short/long) are known to brokerage firms at time of execution. Real time tagging and disclosure of short and long sales by ticker would level the playing field for all investors. Additionally, short and long sale disclosure by ticker is less onerous than short sale disclosure by firm (or client), a rule the SEC is currently weighing.
While some argue that opponents of abusive short selling wish to treat short selling differently than long buying, that is not my purpose. In fact, it is just the opposite. I advocate short reporting be done the same as long reporting. The SEC should require full transparency for both, especially in volatile or crash markets. The recent flash crash is troubling not only because of its size, but more importantly because neither regulators nor investors understand it. The possibility that short selling could have played a part in the flash crash requires the full and real-time transparency for which I am advocating.
Issuers who were severely impacted should know the dynamics of long and short selling. Investors should know whether large amounts of aggressive short selling are legitimate or abusive. The disclosure I am advocating would allow the private sector to join with the regulators in their enforcement efforts. It may also allow private sector issuers to alert the SEC to unusual patterns, including naked short selling coupled with rumor mongering. Those closest to a stock may be able to spot subtle trading pattern differences and inform regulators and/or initiate civil action. The Wall Street Journal reported on June 4th at page C1 the testimony of certain veteran traders at the recent SEC roundtable on high speed trading:
“Some fast-moving computer-driven investment firms are getting an edge by trading on market data before it gets to other investors, according to market players and researchers who have studied the trading. The firms gain that advantage by buying data from stock exchanges and feeding it into supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers. That lets these traders shave pennies per share from trades, which when multiplied by thousands of trades can earn the firms big profits.” See also <http://abcnews.go.com/business/wirestory?id=10808036>.
Some of these veteran traders went so far as to test and prove their theories by various bait and trap initiatives with counter parties. Clearly, the private sector can be helpful when it has information about suspicious trading patterns.
I therefore ask the Commission to initiate promptly a rulemaking proceeding to require real time reporting by the exchanges and all trading platforms of short and long sales through the Consolidated Tape. I also take this occasion to renew my request that the Commission seek public comment on a pre-borrow rule that will insure against naked shorting. Germany has moved in this direction and the U.S. should at least study the possibility. http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704898504575342342243117362.html The Commission should also take this opportunity to reiterate its position that the locate requirement applies to intraday short sales. Finally the Commission should finally explain whether abusive short selling had anything to do with the fall of Bear Stearns and Lehman. Enough time has passed and enough false innuendo has flowed that the Commission should speak to the issue decisively. Its failure to do so allows others to interpret its silence for their own benefit.
Thank you for your consideration and your continuing efforts to address abusive short selling.