October 2, 2006
In response to your request for comments on File No. S7-06-03, I would like to make the following points. The SEC is charged with acting in the interests of the investor, a task complicated by the fact that there are at least two investors for each trade. In the particular case of a short sale the interests of the investors are diametrically opposed, and there are at least three investors involved: the investor "loaning" the shares, the short seller, and the long buyer. The core issue as I see it is that the current rules, and the current enforcement of those rules, is heavily biased in the favor of the short seller. Every other investor acts in an atmosphere of transparency, where time is of the essence and the transaction costs are obvious and immediate. The short seller acts with near complete opacity, and the paths to permitted fails to deliver allow for delaying or by-passing costs and settlement recording.
The market maker exception and the grandfathering exception are loopholes that allow for manipulations that favor one class of investors over another. I suggest you close those avenues for abuse. If shares cannot be located and procured within three days of initiation then the trade should be voided. Allowing otherwise favors short sellers and option investors over long purchasers.
The minimal, untimely reporting of short sale information wherein total reported short interest excludes fails to deliver, and is communicated monthly well after the fact, favors one class of investors over another, and should be changed. I suggest that short sales be reported in a fashion similar to options trades. Report daily open short interest within each quarter of a dollar increment, the daily number of shares sold short within each increment, and the daily number of short shares covered within each increment. The costs to borrow shares should be as readily available information for each security as margin costs and terms are.
If both of these suggestions are enacted, you will have made great strides in restoring the confidence of all investors in the fairness of the market. I understand that the broker-dealers have an essential role in the market, and that their interests are important as well. I submit that transaction transparency and strict adherence to the rules of settlement will enhance their position and continue to be a very profitable endeavor for them.
Thank you for your consideration