Mr. Jonathan G Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Mr. Katz:
As a registered representative for Schonfeld Securities with a substantial amount of capital in the equity market, I am very pessimistic about the SEC's proposed bid test rule in Regulation SHO. If the proposed rule goes into effect, professional traders like me, and the investing public would be adversely affected by inefficient and unbalanced markets. Furthermore, the rules would create a more uneven playing field for the market makers, and would be a further detriment to the already weak investor confidence.
At first glance, the reasons for implementing the proposed bid test rule seem good; market and individual stock crashes will be less susceptible from being the victim of so called "bear raids." If a deeper look is taken at substantial market sell-offs in the past, one can see that they were often preceded by bubbles in which stocks became extremely overvalued. Thus blaming market crashes on excessive short selling is like blaming a missed deadline on too many other obligations instead of your procrastinating. Additionally, we have other measures to help prevent market crashes such as automatic trading halts after a substantial intraday sell-off has already occurred.
Since buying stock is already much easier than short-selling stock, temporary over-demand (as opposed to over-supply) is much harder to keep in balance by traders, especially now with the elimination of married puts. Too often I have witnessed a single buyer significantly drive up a stock because of the inability to sell short by others. This is further compounded since many orders are now run by unintelligent computer programs which can easily be manipulated. For example, a program set to by hundreds of thousands of shares must continuously be on an up tick to fill its order if there is no order on the other side to liquidate stock. Since the buy order can easily be out-bidded by an order to buy as few as one-hundred shares, the buy program inadvertently drives up the price of the stock, when it wouldn't need to if short-selling was allowed at any time. If the SEC's proposed short bid test rule goes into effect, artificial price inflation by single buyers, especially program orders, will be a much bigger problem.
Market makers are supposed to keep markets efficient and prevent things like artificial price inflation by single buyers, but in my year and a half of trading I have rarely witnessed any market making done by market makers. Market making by market makers has basically been reduced to using automated computer programs which sporadically buy and sell hundred share lots in order to maintain volume requirements. Market making has essentially been relegated to registered representatives and independent traders who trade on ECNs, which do about 90% of NASDAQ's volume. So if the bid test rule is implemented, not only will markets become more inefficient, the so-called market makers will have an unnecessary, unfair advantage over the rest of the investing public.
When a bid is placed, the intention should be to buy a stock, whether or not the purchase is made from someone who owns the stock or someone who is short selling the stock. Unfortunately, because of current short sale rules, the buyer inherently must make the distinction of who he or she is buying from which is an inefficient process. If the proposed bid test rule is implemented, buyers will have to make a further distinction which will only create more inefficient markets and create an equity market that is more prone to artificial price increases.
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