August 13, 2007
The options market maker exception in Rule 203 should be eliminated immediately. It is apparent that they have not only failed to deliver securities and profited greatly from this practice, but deprived private investor of fairness when investing in certain small companies.
They failed to deliver without penalty.
I am concerned that persistent fails to deliver will continue and recommend that when the options market maker exception is eliminated entirely, it is also enforced without exception, with penalties that get more severe with each additional infraction of Rule 203 of Regulation SHO. If there are no penalties, if it is not enforced, they will continue to misunderstand the rule.
The abandonment in June of the up-tick rule, was a mistake. It should be reinstated immediately, so that short sellers are unable to pile on to manipulate a stock's price.
Of course, an amendment to the long sale marking provisions of Rule 200 of Regulation SHO should also be approved requiring that brokers and dealers marking a sale as "long", immediately document the present location of the security. Please no more "I'm reasonably sure" explanations. There should be no delay in activation of this rule.
In reading the Arenstein Decision, it was shocking to find how much Rule 200 of Regulation SHO is needed. Without it, or going unenforced, allow some miscreants to engage in outright thievery. From the court documents:
(quoted) 15.In an example of one type of such a transaction, Respondents executed a buy-write using a one-day FLEX option that had the effect of temporarily resetting the buy-in date. In the transaction, Respondents bought stock from another Exchange market maker (buy-write contra party) and simultaneously sold (wrote) one-day, deep in-the-money FLEX call options for a corresponding number of shares to the same market maker. Respondents' clearing firm reflected the transaction in Respondents' account on the clearing firm's books and records.
16: The following day, the one-day FLEX call options expired in-the-money and Respondents, who wrote the FLEX call options, were assigned an exercise notice to deliver the stock. Respondents then used the purported long stock they had purchased in the buy-write the previous day, to satisfy this exercise notice. Respondents, however, had not received delivery of long stock from the buy-write contra party. Accordingly, shares were not delivered to close out the short position that was established during the initial reversal transaction. Based on the execution of the FLEX call option transactions, Respondents' clearing firm reset Respondents' Reg SHO close-our obligation to Day 1.
17. Respondents repeatedly engage in these or other types of transactions after receiving a Reg SHO Buy-In Notification from their clearing firm and these transactions caused the buy-in date to be reset. These transactions were executed approximately every 13 settlement days until the options positions either expired or were closed out. This course of conduct enabled Respondents to maintain impermissible short positions in a number of Reg SHO threshold securities for extended periods of time. (end of quote)
It's time to make a change, eliminating the exception for the options market maker, clarify the "long" marking rule, and bring back the up-tick rule.