20 June 2000


To Whom It May Concern,

The rules, which allow Market Makers (MMs) to naked short stocks, should absolutely be changed. The behavior, which results from this activity, under any other circumstance would be criminal. The MMs, represented by their law firms, use the argument that it is necessary in order to maintain liquidity and to make a market, but in actuality this argument is nothing more than a smokescreen, which enables them to continue behavior, which caters to their own greed and profit motives. At a bare minimum the current rules allow activity which is a conflict of interest. It is like having the fox watch the hen house, and their actual past behavior clearly indicates that they cannot be trusted and are not capable of self-regulation.

There may be some value in the basic concept of shorting, but in current practice it has gotten out of hand, and the practice of naked shorting, on the OTCBB, should never be allowed, under any circumstance, by anyone allowed to trade on U.S. exchanges. The reason is simple; when someone goes long on a stock, the maximum loss is limited and there is a floor, since the stock can only go to zero value. When someone goes short, the losses are unlimited, as there is no ceiling. Under this circumstance the pressure is increased to do whatever is necessary to protect ones position. And that is exactly what happens to induce activity, which should be considered illegal market manipulation. Even the MMs can make mistakes and the practice of naked shorting allows someone to get into a situation, which they cannot get out of under normal means. The problem is exacerbated by the MMs being in a situation, where they can do this without any accountability, or required disclosure of their position. They are then empowered to actually set the price of a stock and control its movement. This is clearly a conflict of interest, which should not be allowed. How can anyone, even for a second, think that this makes sense? History has proven that money and greed are one of the most powerful motivators. People from all walks of life, have committed major crimes and behaved in ways that are completely unethical and immoral for far less money than is available to the MM industry through their ability to short and manipulate the stock market.

I have witnessed the effect of this type of potentially illegal manipulation on the price and movement of a stock, in my case INVT (Investamerica/Optica Communications) and have read numerous examples of others. I never would have believed that this type of activity could happen if I would not have seen it first hand. MM manipulation can be absolutely devastating to a company and it's stock. As a result, most of the risk on the OTCBB is not with the companies, but rather with the MM trading patterns. An investor can evaluate the risk of investing in a start-up company, but there is no way to evaluate the risk of MM manipulation. The MMs are in such an uncontested position of unregulated control that they feel invincible. With no checks and balances on their behavior, they have gotten out of hand. I have watched the MMs sit on, and even lower a stock price, over and over again, and for extended periods, in the face of significant buying, yet lower the price on very little selling. I have seen numerous trades executed for thousands and tens of thousands of shares with little or no upward price movement, followed by a lowering of the price on sells of a few hundred shares. You can watch intraday trading and tell when they are going to start lowering the price by watching them trade between the spread and then start walking the price down. You can see them trading between themselves to give the appearance of selling in order to lower the price, or selling to investors at the bid in order to paint the tape lower. They will raise the ask only to fill an order, or fill a partial order move the ask higher to fill the rest of the order, and then drop the price right back down, the net result being no gain from the buying. When watching the trading activity day to day the MMs seem to have constant downward pressure on this stock, even in the face of strong buying, or news from the company. Lack of buying, even without selling, causes the price to drop, and when there is no news the behavior is even worse. These tactics are all designed to play on the emotions of a less experienced investing public, and these are just a few of the tactics that are used by MMs to manipulate a stock price to their benefit.

This activity makes no sense, unless it is done in order to protect an excessive short position, or move the price to the benefit of the MMs alone. This often results in the MMs being at odds and in an opposing position to the company and the investing public. This should not be the case; the MMs should make their money on the trading activity and the spread. They should never be allowed to get into a position where their own position and greed takes precedence over the company, the investing public and the normal movements of a free market. In the current environment, they obviously cannot be trusted. Anyone who thinks that these things do not happen either has not looked closely enough, or has blinders on. It is virtually impossible that all of the people who are crying foul are wrong. The question is not whether, it happens. The question is whether anything will be done about it. If not, then all of the talk of protecting investors, fairness for investors, accurate warnings in disclaimers, and the expectation of a fairly executed and regulated market mean absolutely nothing. It is easy to see all of this as just movement of numbers and dollars, and forget that it all involves real people and families, who work hard for their money and are trying to find a way to make their money work for them. All investors should have a reasonable expectation of a fair market, instead they are being robbed by an unregulated environment that should not exist. Now what is going to be done about it?


Rick Ballenger