July 18, 2008
Reg. SHO as written is ineffectual for the following reasons:
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.
SHO must require fails to deliver to be bought in on the fail date plus one day.
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
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.
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 declaration 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.