June 19, 2009
Ref: File number S7-08-09
Recent outright bans on short selling have failed to stop further declines in affected equities as documented by Matt Blackman in the Dec. 2008 issue of SFO magazine. So it is hard to imagine the beneficial outcome of re-instating the uptick rule. In fact the majority of RegSHO needs to be revised because it places unfair burdens on smaller investors.
It is necessary to eliminate naked short selling. Rules already exist and must be enforced. As an aid to this end I propose that the clearing houses post in real time the number of shares available for shorting and be displayed on various market depth screens along with the national best bid data. No shorts would be allowed that exceed the volume limit available. This would eliminate the need for out of date easy/hard to borrow lists and failure to deliver (FTD) notices. As a small investor I cannot tell you the number of times I have found short sale opportunities only to be stopped by an out of date easy to borrow list only to find another broker had plenty of shares available. If all market participants would be required to make shares they have available for lending through a central database this could help alleviate these bottlenecks. By the way whatever happened to T+1 trade reporting?
Under normal market conditions the ability to establish short positions at any current price is the fairest for all participants. If an uptick rule exists it may limit the ability of smaller investors to obtain the best price to establish a short especially if prices are moving downward. It also creates asymetrical trading. Why is there no down tick rule for buying long for example?
Presumably this doesn't affect larger players who may still be able to open naked short positions or generate volume weighted average price(VWAP) trades. However if political forces insist on re-instating the uptick rule I would vote for one based on the national best bid rather than the last sale. It is important to point out that larger interests could easily game such a requirement by selling a small number of shares above the current last sale to generate an uptick. They would immediately short a much larger postion and cover the smaller one, thus establishing a short sale within the uptick rules at a price they wanted.
As far as circuit breakers go I would suggest that you confer with your collegues at the CFTC. They have had limit restrictions on futures contracts for years. It is important to note that they also have limits on the daily range a contract can move. Under your proposal there are no such restrictions. So although circuit breakers are in effect for that day, look out for the open the following day
Also the criteria for setting the breakers trigger needs to be fairly wide to prevent undue interference with market forces, for example 1.5 times the average 10 day volatility.That being said if it is deemed desireable at all I would prefer the short sale price test based on the national best bid for the rest of the day if a severe decline occurs.
It would also be helpful if more data was readily available. I have not seen any academic studies that detail price activity during periods of market stress. Specifically are recent declines the result of organised short selling or was panic selling(lack of buying) the majority of volume? A lot of the comments I have seen try to blame dark forces for manipulating the markets through uncontrolled short selling. I don't have an answer to this question. I hope with your resources and market insight you can determine the correct response and maintain a fair and well regulated and efficient market. Thanks for giving this matter your attention.