From: Edward E. Hong [email@example.com]
Edward E. Hong
Mr. Jonathan G. Katz
RE: Comment on Regulation SHO, File No. S7-23-03
Dear Mr. Katz:
I am a Registered Representative writing to comment on the proposal for Regulation SHO. I am concerned that the proposed bid test revision actually makes the market in a stock less efficient than before and that it would increase volatility in stock prices, making it more difficult for the ordinary investor to buy shares with confidence. Regarding the other provisions of the proposed rule, I agree with the Commission that "naked" short selling is a problem and I endorse the proposed changes to that end. Also, I endorse the pilot program in which the bid test rule would be suspended in the trading of certain liquid securities; that would make the market more efficient.
The current restriction on short selling via the different bid tick rules, whether on listed or Nasdaq OTC securities, already fails to achieve that for which it is intended, for a very simple reason: a declining stock will fall even more rapidly and precipitously if there are fewer buyers in the stock - this is just supply and demand. And restrictions on short selling produce exactly that condition: the fewer opportunities to short-sell a declining stock means that there are also fewer short sellers willing to be buyers by virtue of covering their short positions - either because they were unable to sell short in the first place or because they know it would be extremely difficult to reestablish a short position after taking profits too early.
The revised bid tick rule in the proposed Regulation SHO places further, much stricter restrictions on short-selling and therefore reduces drastically the number of buyers present when a security is in decline, while also increasing the number of sellers present when a stock is going up. Therefore, no reprieve from negative pressure on the price of a stock is afforded by the revised rule.
Furthermore, I believe it is not the Commission's duty to buoy stock prices, whether by restricting the conditions under which one can sell a security or by some other means. Rather, I think that it should do what it can to ensure the efficiency and fairness of the markets - and stock prices are efficiently and fairly determined only when all available opinions about a stock's worth can be factored into the stock price, i.e., only when participants can buy and sell at any time regardless of their existing positions.
It is up to publicly traded companies themselves to demonstrate their worth if they want their stock prices to go up. History has shown that the stock prices of good companies are never affected for more than the immediate term by so-called "bear raids," and that the companies who do complain about "bear raids" are usually hiding negative material information to be revealed at a later date, when the inevitable scandal instantly erases many millions of dollars of retirement savings.
Lastly, the proposed rule still exempts market makers from the bid test rule for the purpose of "legitimate market-making activities." As an active daily participant in the markets, I can say with confidence that I have not seen any legitimate market-making activities in the last three years. After the crash of 2000 and the subsequent phase-out of non-liability orders, so-called market makers have been blatantly unwilling to take on risk for the purpose of making a market. In fact, today they are virtually indistinguishable from day-traders on any count except for their larger size. The proposed rule change would give them further advantage over all other market participants in their speculative activities by increasing their ability to manipulate stock prices.
Thank you for your time in reviewing this letter. I am confident that the Commission will do what is in the interest of ordinary investors everywhere.
Edward E. Hong