August 11, 2007
The marking of trades as to long and short will be more accurate if there is a requirement to designate the location of the security.
This information is useful for determining whether the fails that occur are from poor execution or from possible abuses.
This requirement will only aid in making the U.S. markets more competitive. There may be some expense, but this should be looked at as an investment and once it is implemented, the costs should drop dramatically as this becomes automated. The information collected can be used as a standard for performance and improvement and would be invaluable in enforcement should there be a pattern of abuse.
Since there have been more instances of mismarking of trades than is acceptable either through error or for nefarious reasons, the inclusion of where the security is located before the sale is initiated is necessary. The excuse that paper certificates are lost does not put the burden on the seller as it should be. Marking the location of shares will tell exactly how much of the failure problem is from the dog eating my homework vs. errors or manipulation. Certificates should be presented before a sale is initiated. That would eliminate that one excuse.
Since the uptick rule was removed for short-selling, there is a tremendous downward bias because the current options maker exemption is not being interpreted the way it was intended. Since the uptick rule was rescinded the market has experienced a tremendous amount of volatility. For certain securities that have excessive amount of fails due to the options market maker exclusion, this has been a boone for those who are abusing it. The sooner the options market maker exeception is eliminated, the better. The length of time that is necessary for closing fails should be uniform so that participants do not get confused or use any confusion as an excuse for not closing out fails.
The grandfather clause and the options market maker exemption have been abused and their initiation in the market are viewed as corruption on the part of the SEC by investors who are aware of them. The timing of the rescission of the uptick rule while delaying the rescission of the options market maker adds to the appearance that the SEC does things that are not in the best intestest of the investing public.
Please keep the rules simple and in plain English. Do not leave anything open to misinterpretation.
The daily publishing of fail data in aggregate per security and the overall data concerning accuracy in marking trades should be made public. This gives brokerages targets of performance and could be used as a competitive edge in sales. Instead of viewing the data as a whip, let it be a carrot. It will also be a standard that will register the performance of the market and be a tool for enforcement.
The most successful part of Regulation SHO was the publishing of the fail data as it raised public awareness of a problem. Unfortunately, it was not quantitative and the people responsible for the fails were left unrecognized. Aggregate numbers of fails in any security beyond the threshold should be published so that investors know if their investment is being manipulated. Again, this could be an opportunity to make the market more responsive and accountable. Publish the firm's name who had the most accurate trade data and the least number of fails by volume. It would be a tremendous boost to investor confidence and well-deserved recognition for whoever is doing the best job.