Mr. Jonathan G. Katz
I am writing this letter in response to the proposed rule change replacing SEC Rules 3b-3, 10a-1 and 10a-2 with Regulation SHO. I have read the proposal the SEC has made and feel that the negatives far outweigh the positives of Regulation SHO. Following are the reason why I think this.
Instituting a uniform bid test rule would only allow the market makers and market makers only to make profits shorting a stock. This would be possible because the market makers can easily attribute the selling short of a stock to bona fide market making activity and hence would not go violate the proposed rule whereas an individual investor would forced to watch from the sidelines as the value of the stock declines. An example would clarify this further. Let's say a stock AEIO suddenly starts declining in value due to some negative news in the stock. Now an individual investor can only get short on the inside offer in this case making it almost impossible for him/her to do so. Whereas a market maker can get short by hitting the bid to do so. Finally if the market maker feels that the stock has reached its fair price he/she can start covering his shorts. The stock market is a place to bring buyers and sellers together to establish a fair price of the stock based on all available information on the company. But this rule change would allow market makers of the stock to establish the fair price of the stock, which is not only unjust, but also against the Securities Exchange Act of 1934.
In contrast a free short selling of stocks will create plenty of opportunities for both buyers and sellers. There will be free movement in the stock and fundamentals will eventually prevail in dictating the fair price in the stock not just market makers. There will be more liquidity as the buyers and sellers will be free to participate eventually creating more opportunity for the individual investor. An example will clarify this further. Lets say a stock AEIO has a daily range between $13 and $15 and the stock trades in this range several times within the day. Buyers and sellers will have many opportunities to buy or sell at prices they think are fair, than if the stock trades in this range once a day driven by Market Makers.
In short, I think that the proposed rule would not only move the pricing power to a small group of firms, rather than the individual investors looking to buy and sell. Thus making the market less liquid and loss of confidence in the marketplace in general.
Thanking you in advance for your time and cooperation.