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 SEC has made and I feel that the negatives far outweigh the positives of Regulation SHO. Following is the reason why I think so.
Instituting a uniform bid test rule would only allow the market makers 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 through the proposed rule whereas an individual investor would face looking from the sidelines as the value of the stock declines. An example would clarify this further. Let's say a stock ABCD suddenly starts declining in value due to some negative news in the stock and the average spread of the stock in the previous ten days is a penny. 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 only hit 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 would switch to market maker(s) of the stock to establish a fair price of the stock, which is not only just, but also against the Securities Exchange Act of 1934.
In contrast a freer short selling of stocks will create plenty of opportunities for both the buyers and sellers. There will be movement in the stock and fundamentals will eventually dictate 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 ABCD has a daily range between $10 and $12 and the stock trades in this range every 2 hours. Buyers and sellers will have plenty of opportunity to buy or sell at prices they think are fair than in the stock that trades in this range once a day.
In short, I think that proposed rule would not only move the pricing power to a bunch of firms than the buyers and sellers. Thus making the market less liquid and loss of confidence in the marketplace in general.
Thanking you in advance for your time and cooperation.