July 17, 2008
Reg. SHO as written is ineffectual for the following reasons:
1. It fails to place the onus on the broker dealer to assure delivery
by borrowing the shorted shares. Simply accepting the assurance of
the hedge fund and dropping the matter entirely at that point is
useless in preventing naked short selling.
2. Requiring fails to deliver to be bought in on the fail date plus
one day.
3. Using foreign exchanges to gain advantage in violation of the Reg.
SHO, especially German and Canadian exchanges, must be stopped or
Reg. SHO is rendered totally ineffective
4. Exempting primary dealers results in a giant loophole in any
regulation honestly desirous of enforcing the already in place
regulations. A primary dealer is by definition a trader who makes
both bids and offers on a continuous basis. Because of this a
primary dealer will be short but not for investment. The short in
the primary dealer's position will rotate between short and even,
possibly short on balance. A primary dealer will then be able to
make delivery on the short without borrowing because when bids are
hit (and they will be) he moves either to flat (even) or turns the
short by purchasing voluntarily or involuntary. If this entity
does not maintain a constant two way bid and ask then this entity
is NOT a primary dealer. Giving the primary dealer 21 days to
deliver before buy in is reasonable but any longer and you are
supporting a camouflaged naked short.
5. Naked short selling is a long time violation of present
regulations prior to Reg. SHO. As recent attempt to ban Naked
Short selling by using an emergency on selected financial entities
shows the ineffectual nature of Reg. SHO It is highly prejudicial
and has the apparent effect of blessing naked short selling
against all other investment sectors.
Selective application of law is a total violation of the need of all forms of jurisprudence to deal equally will all it regulates.