April 15, 2009
To Whom it May Concern,
Thank you for the opportunity to provide feedback on your uptick rule proposal. I expect you have an abundence of feedback to get through, so I'll try to keep this as concise as possible.
Short Selling in general is not a problem.
I believe that there is no inherent problem with short selling in a marketplace, period. Short sellers pay a use fee to those who lend their securities, then turn around and provide liquidity to those who wish to buy when no natural sellers exist, as they take on risk themselves. The net effect of short sellers is increased market participation, which leads to increased liquidity, and decreased bid/ask spreads. Unfettered short selling can certainly accelerate the decline in a security when adverse conditions set in, but this should not be seen as a bad thing. If the market's consensus of value is at some price below the current price, then why should we slow down its progress towards that lower price? If overzealous short sellers push a security's price below the market's perceived value, then value buyers will take advantage of the discounted prices and take it back up to value.
It seems that some sort of regulatory action regarding short sales is inevitable at this time, due to the political exposure of this issue and the public's perception. Again, I urge you to take NO action, however, if you must, please do so rationally: The best way to decide what to do here is to very carefully and accurately model the problem you are actually trying to solve. I'm reading your press release, and I gather that you are trying to stymy "deterioration in investor confidence" that has resulted from "extreme market conditions". I don't see anything in that description of the problem that has anything to do with short selling, for starters. Have you established a demonstrable link between short selling, the removal of the uptick rule, and these "extreme market conditions"?
The only reasoning I see in your press release relates to a coincidental correlation between the subprime mortgage mess (when do we get to start calling it a scandal?) and the removal of the uptick rule. Is our massive market downturn related to the removal of the uptick rule? Certainly there are overwhelming macroeconomic pressures the world over that have led to these extreme conditions, which have nothing to do with short selling whatsoever. Unless you can demonstrate short selling's contribution to these extreme market conditions, then neither you nor I can come to any logical, rational decision on what to do about short selling to aleviate any such situation.
Right now, all I see is a political mess. Don't legislate or regulate based on fear and uncertainty. This will lead to unintended adverse consequences. Give us hard data, model the problem, identify the areas that need work, propose a solution, and then ask for comments. Right now, it looks like you're just trying to backpeddle to appease a few squeaky wheels who are pointing a finger at the SEC itself for removing the uptick rule in the first place. You've offered a few potential "solutions" without providing 1) a description of what they are trying to solve beyond improving "investor confidence" or 2) any explanation as to why these solutions are actually solving anything (obviously since we don't really know what you're trying to solve).
Thank you for your consideration in this matter,
Jim Mahood