June 12, 2009
Mrs. Elizabeth Murphy
Secretary, Securities and Exchange Commission
100 F Street, NE
Washington DC, 20549-1090
Ref. File No: S7-08-09
Dear Mrs. Murphy,
I would like to take the opportunity to discuss the newly proposed changes to the up-tick rule. Adequate market regulation is appropriate in order to maintain an orderly marketplace, and to prevent potential market manipulation my short sellers. However, I do not believe that any of the proposed rule changes would lead to a more orderly marketplace nor would they prevent market manipulation by short sellers.
I believe that the SEC should instead focus its attention on basic regulation to the credit default swap market. Even if a very stringent up-tick rule is established, it would not prevent a short seller from establishing a short equity position, and later purchasing large quantities of credit default swaps in order to give the appearance of potential problems at a company. An increase in the price of a credit default swap has real impact on a company’s ability to borrow in the open market, and may actually cause a bankruptcy (http://www.ft.com/cms/s/0/5c62b3b2-2adf-11de-8415-00144feabdc0.html)
In my experience as a trader for the past eight years, I have found that news about a companies credit default swaps leads to a move in their equity. During 2008 news about Lehman Brothers, and Bear Stearns credit default swaps increasing in price quickly lead to dramatic price drops in their equity. A restrictive up-tick rule would not have prevented these dramatic price swings.
If the SEC chooses to address the equity up-tick rule without first adequately regulating the credit default swap market, the SEC will leave a gaping hole in the regulatory netting. Instituting a restrictive up-tick rule will reduce liquidity in the marketplace, and the market will be no less susceptible to manipulation by hedge funds or other participants that try to spread false rumors about the demise of a company. I am in full support of the SEC’s desire to create a fair an orderly marketplace for all participants, and I applaud your desire to look into this manner, however I do not believe that applying a restrictive up-tick rule will lead to a more liquid, fair, and orderly market.
Sincerely,
James Hochleutner, CFA