April 9, 2007
Ladies and Gentlemen,
After reviewing the comments presented to date, and based on the statements released by the Commission, the grandfather clause was adopted to prevent the short squeeze. The Commission justified that unsettled trades, extended unsettled trades, was necessary in avoiding such market reactions.
Today a stock called Dendreon Corp (DNDN) is in the midst of a short squeeze. Last months short interest report had a short interest of near 33% of the public float. The company had one other alarming concern, it became an SHO threshold security as the short interest grew. Short interest and settlement failures accumulated until they spilled over until suddenly the market became unstable.
On March 21, 2007 as DNDN was first seen on SHO (this latest stint) the stock closed at $3.70. The oversold securities were based on a bet that the company would not post positive phase three test results. The bet was wrong.
Because DNDN posted positive results, the market reacted and suddenly the excessive shorts were forced to cover. Dendreon now trading at over $22.00/share or a near 6X run in a mere few weeks after being posted on the threshold list.
But this leads to a bigger issue. Did the run on DNDN exceed responsible market levels because of the short squeeze on shares that never existed thus should never be squeezed in the first place? Is DNDN an example of the damage that could occur when excessive short sales (fails in the system) are forced to be covered because of the positive news a business presents?
For some time now the SEC has protected against the short squeeze by rationalizing fails in the system. Question is, did the SEC evaluate what these extra shares (fails) in the system mean to a market if market conditions force a cover beyond those forces excercised by the SEC?
When a legitimate run on a stock takes place, extra shorts due to fails certanly can not have a positive impact on market controls and volatility. In fact, the excessive fails can only exacerbate the situation which is why the SEC should enforce the trading laws including such laws as those pertaining to prompt settlement.
Something to think about anyway.