September 19, 2006
I appreciate the Commission's intention to be responsive to public opinion. However, it is the Commission's job to lead, not to follow, to give the public what it needs, not what it wants. The general public is woefully ignorant about the realities of short selling, a fact that is readily apparent by reading the comments here, on message boards and in chat rooms, etc. Public opinion is being swayed by the anti-short lobby. The companies behind this movement have an obvious bias they use the excuse of short selling to cover over their performance or further their stock promotion or manipulation activities. Where is the pro-short lobby to insure that the debate is honest and balanced? There is none. The natural constituencies for this side of the debate are either unlikely to engender sympathy (short sellers) or so uniformed that they do not realize that they are being harmed (the public). The public is being deceived and it is the Commission's job to stand firm and insure that its regulations create and maintain balance in the marketplace.
Much is being made of the fail-to-deliver problem. Of course, fails-to-deliver are an issue that requires serious discussion. However, the reality is our markets are not perfect nor will they ever be. The notion that all fails are an evil that must be eliminated is a serious overreaction and completely ignores the other side of the equation. In a perfect world, all stocks would have diversified ownership and adequate float. What is the SEC doing to encourage that this is the case, particularly in the over-the-counter market where opposition against short selling is most vociferous? Has the SEC looked at how Regulation SHO affected heavily promoted OTC securities? From my vantage point, it appears that stock promotion has increased significantly since Regulation SHO promoted stocks move in a much more controlled fashion, have much greater volume, and last longer enabling the promoters to distribute even greater amounts of stock to the public than in the past. Has the Commission even considered how further restrictions on short selling, one of the few curbs on such promotional activity, will have on stock promotion and manipulation?
Finally, does the Commission realize that the stock lending system is becoming increasing concentrated in the hands of the large brokers and clearing houses? If the proposed amendment eliminating the use of locates is allowed to pass, the business of short selling for small, independent market participants will be effectively be closed. Market concentration leads to market power, and power leads to abuse.
The philosophy of the medical establishment is: "First, do no harm." Before making more radical changes to a system that needs fine tuning, not a complete overhaul, the Commission should carefully consider all the potential consequences of the proposed rule changes. The Commission should consider qualitative considerations as well as quantitative evidence always with an ultimate goal in mind: to increase market transparency, liquidity, and fair access while reducing market manipulation. When viewed with this goal in mind, the proposed amendment is clearly a large move in the wrong direction.