May 21, 2007
The Honorable Christopher Cox
Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Dear Chairman Cox:
I have invested in companies that were subsequently listed on the SHO list. Some where listed on the SHO list for very significant periods of time.
While it is difficult to quantify how much damage being on the SHO list does to companies, it is certain that it has a negative impact on companies that sell shares to raise money. It also has an impact on the share price of stocks and therefore on the investors in these stocks.
But the main problem with naked shorting is that it undermines the integrity of the entire market. When a stock goes down in price or fails to go up in price, many are certain that it is because of manipulation and naked shorting. The fact that naked shorting is allowed is starting to create the idea that the entire US market is corrupt.
I therefore propose the following changes:
1) If there is a failure to deliver in a short sale, then require an immediate buy-in to cover.
2) Short positions must "clear" prior to the position being transfered to another entity or broker. Any position that fails to clear due to it being a FTD requires an immediate buy-in.
3) Close settlement loopholes in foreign exchanges. Foreign exchanges that require longer clearing times than US brokerages must pre-borrow shares prior to allowing a short transaction or they should not be allowed to trade US securities. With the electronic nature of most trading, foreign brokers will find it easy to comply with US requirements and won't require additional time for a trade to "clear" if such a rule is put in place.
4) The grandfather clause which allows "old" naked short positions to persist in the market should be resinded. All naked short positions should be covered.
5) The purpose of Regulation SHO should be not only to close all naked short positions in a timely manner after any Failure to Deliver, but to make sure there are no loopholes that allow naked short positions to exist through any type of accounting measures, moving positions between brokers or to foreign exchanges and etc.
The current regulations with regard to shorting are causing more and more people to question the honesty and integrity of US markets. US markets are not seen as having a lot of transparency, or being a model for capitalism.
Instead they are seen as rather murky and dangerous where criminals and manipulators are allowed to short several times the number of actual shares in companies until honest businesses are destroyed.
Because of naked shorting, honest SEC officials are seen as complicent in allowing businesses to be destroyed by illegal manipulative trading.
It is time for the SEC to take action. If the SEC does not, the level of anger will continue to increase until calls for reform cannot be dismissed. If the SEC waits until that happens, the regulatory pendulum may go to far in the opposite direction and will make even legitimate shorting difficult and expensive.