Subject: File No. S7-0
From: Robert D McGregor, BScASIA
Affiliation: CEO

July 14, 2008

SHORT SELLING BUBBLE NEEDS TO BE PRICKED TO BALANCE STOCK PRICES.

Scrip borrowed and naked short selling SS, without observance of the up-tick rule, has help destroy world wide markets ever since the USA SEC removed the up-tick rule early July 2007. It's more than coincidence that the majority of World Exchange Indexes were sold off in 2 major down waves shortly thereafter namely July to August 07 and Oct/Nov07 to present date. The excuse the SEC gave for removing it was a study done over the prior 3 years from which they concluded it would not deleteriously affect the USA markets if removed. It had been in place since 1938 because a study following the 1929/1933 crash concluded the extent and speed of the fall was directly related to the fact an up-tick rule was not in use within USA stock markets. It was further concluded, correctly, that the introduction of an up-tick rule would create a fairer and more transparent environment in which to trade stocks. Such was the case until it was withdrawn early July last year.

Of course the SEC study on which their recent conclusion was based was FLAWED, as it was carried out during a major worldwide bull market. No doubt greedy brokers and very sophisticated traders such as hedge funds - were agitating the SEC to have it removed as they realised trading NIRVANA would be at hand should they succeed. One only has to observe the carnage since its removal to realise the SEC made a MAJOR mistake.

This was particularly so in Australia where scrip borrowed short selling was not "subject" to the up-tick rule even though naked short selling was. In reality, legal opinion surrounding scrip borrowed SS concluded it did not have to be reported, as that opinion suggested that upon borrowing stock, legal title passed from the lender to the borrower. Consequently the stock could then be sold anyway the NEW owner deemed and certainly not by observing the up-tick rule, as their prime intention was to destroy the price and possibly the company as well.

If ALL short selling was made transparent reported daily and observed the up-tick rule, the TRUE EXTENT OF SHORT SELLING WOULD BE known. It is grossly understated in the major Anglo Saxon markets and caused the extent of the falls in Australian financial stocks.

What makes the whole SS exercise highly desirable in Australia is fact that profits from scrip borrowed short selling were not subjected to TAX, as an anomaly exists in the Australian Tax Act, when altered in 1987, to help offset the delay in delivering scrip when the Australian system changed from a paper to an electronic settlement - using a new system called CHESS. This coincided with the introduction of screen trading in 1987 end of floor trading. It has not been revisited since, with cataclysmic consequences for Australia as overseas HFs decimated the stock market over the past year.

A further variation on the SS theme is pairing where quant analysts determine the strength or weakness of stocks and elect to buy the strong, simultaneously SS weak stocks to various designated formulas. It can be instituted for a very low cost around 50 basis points to borrow the weak stocks - and the sale proceeds of the SS leg are used to buy the strong stocks. Such pairing saw financial stocks being SS while Resource based stocks were purchased all for a cost of 50 basis points. Spreading false rumours was also part of the game to maximise profits. This creates massive gearing and is the next major bubble to be pricked. Consequently, a SS cap of say15% per company stock should also be put in place otherwise massive dislocations could result in the markets.

Indeed, trading NIRVANA has existed since the SEC removed the SS up-tick rule, which had served world markets effectively for the past 69 years. It should be reintroduced immediately, accompanied by daily reporting of all short positions current in each stock. Transparency must be demanded of all participants and a SS cap created to limit the short interest in designated stocks to say 15%. The World SS BUBBLE would be pricked and stock prices would return to realistic levels