June 19, 2009
Dear Chairman Shapiro,
As a well-established market-maker in US equity index options, Blue Capital Group LLC appreciates this opportunity to offer our views on this important matter. We applaud the recent strengthening of rules against naked short-selling and fully support current option market-maker delivery requirements. Because we rely on short selling in order to continuously provide options to the investing public at the best possible prices, we strongly urge the Commission to exempt bona fide option market-makers from any of the proposed restrictions against short selling.
If a new restriction is put into place, we believe circuit-breaker activation of a modified uptick rule (bid test) will be least deleterious to price-discovery. Further, we strongly request that ETFs be exempted from short-selling restrictions as they were in the past.
Many investors are unaware that option market makers routinely execute short sales in order to provide efficiently priced protective puts. Considering that the extreme market declines of 2008 predicated this very contemplation of short sale restrictions, it would be sadly ironic for such restrictions to artificially increase the price and/or decrease the liquidity of such protection to investors.
We are sensitive to concerns being voiced with respect to the so-called transference effect of exempting option-market makers, i.e., its purported facilitation of short-selling by buying puts from (or selling calls to) market-makers, but are unaware of any compelling evidence that such a risk is more than theoretical.
We thank the Commission for its past recognition of the unique role of the option market maker with respect to short selling, and trust that such recognition will remain evident going forward.
Most respectfully,
John Favia
Blue Capital Group LLC