Subject: File No. S7-08-09
From: Fred Smith
Affiliation: Business professor

May 8, 2009

Short sale rules should not be imposed. Such rules increase rather than reduce volatility, as the market is less sure of the true value of securities in the market. Short sale restriction rules also make the market less efficient.

If market participants feel that a particular security is overvalued, and they are able to short it, they should be able to do so. By doing so, if they are correct in their assumptions, the price of the stock will decline to its correct valuation level more rapidly than if short selling were not curtailed, and they will make money. If the short selling investors are incorrect, the investor will lose money. Capital will rapidly go to the most successful investors and the most successful enterprises.

The analogous position exists for a purchase of a security, in that a correct assumption by bullish buyers will enable these investors to reap rewards, and an incorrect assumption will result in a loss.

Buyers and short sellers should be given equal freedom to make their investments. Discriminating against short sellers will mean delays in the correct pricing of stocks and overall, a less efficient market and allocation of capital.