December 29, 2003
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-23-03
Dear Mr. Katz:
I write in opposition to the SEC's proposed Regulation SHO. I am a registered representative at Trillium Trading and trade my own proprietary account, as do my co-workers. I believe the proposed changes would result in onerous restrictions on traders, causing them significant financial harm. Short sellers perform a valuable role in the equity markets, and placing further restrictions on short selling shifts much more risk to such traders, above the significant risk inherent in shorting stocks. My education in economics at Yale University has made me a proponent of free markets, and I believe the laws of supply and demand are sufficient checks and balances to any perceived negative aspect of short selling. Also, shorting potentially overvalued stocks is as valid an investment strategy as purchasing undervalued issues, and as such should not be restricted. The elimination of a price test would benefit the equity markets by allowing investors to more freely short sell overvalued securities so that their prices more accurately reflect their fundamental value.
A concern attributed to short selling is a bear raid, or downward price movement in a stock driven by short selling. If buyers believe short sellers are manipulating a stock downward and the equity is unfairly valued, they can buy it and eventually market forces will prevail and the stock will rise. In fact, short selling enables buyers to purchase stock at an improved price. Without a short sellers ability to sell at the bid, buyers would have to pay the offer more frequently, losing the amount of the bid/ask spread on those occasions. A bear raid can only drive down a stock temporarily, as buyers would flood into the market to buy the stock at a discount. Additionally, any stock bought on the bid from short sellers in a down move represents legitimate buying interest. Why introduce regulations to limit interested buyers' ability to purchase stock at attractive levels?
Short sellers can also weed out irrationally overvalued stocks. I fail to see how a bear raid is more damaging to stocks than an over-inflated bubble. The market excesses of the late 1990s were driven by irrational and hyped up buying, egged on by greedy large corporations. If enough sensible short sellers had been able to hold sway, perhaps the destructive bubble might not have occurred, and it is obvious that short-sellers had no ability to drive down the stock market as it vaulted higher.
Addressing another issue, I support maintaining unrestricted short selling after-hours. The SEC has "supported investor choice in trading hours provided that essential protections for investors and the markets are not compromised." Stocks have trade efficiently after hours without an up-tick rule, why institute one now? In fact, the lack of restrictions works so well outside market hours it provides an argument for not having such restrictions between 9:30-4:00, when there is even more liquidity. Additionally, I have saved money through unrestricted shorting after market hours,
via hedging a long position which had negative news released after the market closed. One could short a similar issue which might have liquidity at more favorable prices due to an absence of news directly concerning that company. In one instance, I was long a semiconductor stock after hours, and when negative news on this stock was released, I was not able to sell immediately because of limited liquidity. However, I was able to short a competitor in the same industry and therefore hedge my long position.
I do fully support the proposed two-year suspension on short selling regulations in liquid stocks; however, I believe this suspension should be on the current rules already in place, without any new regulations first going into effect. Short selling regulation of any kind is irrelevant in liquid stocks. I personally lost a lot of money shorting liquid stocks in 2001 and 2002 because buyers are always able to drive stocks up for periods of time, forcing me to minimize my risk by covering any short positions which were temporarily `squeezed' upwards. I believe short sellers had absolutely no power to cause these stocks to decrease in price. Short selling, in the limited instances it is abused, can only be a problem in illiquid stocks, and even in those cases the laws of supply and demand will root out any inefficiency.
The proposed short sale rule suspension should be put into effect without implementing the new, more restrictive short sale rules. Suspend the existing rules instead of the new proposed ones, and see if there is any effect on those liquid securities. I believe you will find there is only a positive impact, and the SEC will have avoided a costly, unnecessary rule change.
Thank you for your time and for considering my concerns regarding the proposed regulations.