April 8, 2009
Dear Sir or Madame,
I am writing from the standpoint of a full time high school teacher and investor.
While the restoration of the short sale rule is likely to be an inconvenience, I agree that it is incidental to attempts to restore confidence in the publics' belief in the markets' integrity.
It is , however, neither a necessay nor a sufficient cause to restoring confidence. It is incidental..
While I believe the causes of the current financial crisis are myriad, the root cause lies with an ill informed voting polity of the past 3 decades. One cause necessary but not sufficient for the current crisis to occur was the SEC failure to extract penalties from institutional violations of the short sale rule. Investors cannot short stocks when there is not inventory. Period. Brokerage firms, sometimes referred to as the house will not expose themselves to fines by shorting stock which they cannot borrow.
May I refer you to the SEC announcement regarding the end of the short sale rule. It clearly said that the powers that be were giving daily exemptions to institutions in violation of the up tick rule and it was unfair to the individual investor to not have a level playing field. It is clear in hindsight, that institutional money was regularly shorting unborrowed stock and was not being fined under the law.
Legal short selling helps price discovery. Illegal short selling is criminal; but when did anyone last go to jail?
While I commend the SEC in its mission to restore public confidence, I believe that vigilant monitoring of institutions would do more to restore confidence. News reports of big fines and jail sentences for those who doctor their trade books would do more to restore confidence.
Lastly, the circuit breaker rule does not make sense. It sounds to me as if it is a technical rule that sounds good but some how favors the house. My suspicion is increased because I know from personal witness that the big move up or down occurs on small volume. The end of day big volume number does not reveal that most of the session occured on big volume in a narrow price range. I have seen it over and over.
The circuit breaker concept/limit rule came out of the 1930s investigation of the Cotton Exchange. The rule works well in unstable market environments. That is when soybeans, lumber, equity indices are in panic. It does not apply to individual equities. In fact, an examination of individual companies that have been the victims of bear raids suggests that the selling is incremental over a period of time.
The way to bring transparency is to fine and jail those who unintentionally or intentionally short stock which is not borrowed. He who sells stock which isn't his'n, goes to prison. It's that simple.
Sincerely
Thomas H. Wyllie, Jr.