Mr. Jonathan G. Katz
Re: File No. S7-23-03
Dear Mr. Katz,
I am writing to express my concern about Regulation SHO which would replace SEC Rules 3b-3, 10a-1 and 10a-2. I have been working as an equities trader for the past 7 years and firmly believe that this proposed rule change would hurt all investors and give market makers an unfair advantage. Regulation SHO runs contrary to many of the SEC's conceptions of a fair and liquid marketplace. It should not be implemented. Instead the SEC should further explore the proposed the 2 year suspension to the bid test rule for specified liquid stocks.
The proposed bid test under Regulation SHO would require that a short sale be effected at least one cent above the best bid. This would make it extremely difficult for small investors to sell stocks short. From personal experience in the Nasdaq stock market, I find that market makers and ECNs are constantly making erratic and rapid bid changes. When investors can't execute against these bids as short sales, it creates an atmosphere of limited liquidity-investor A can't fill investor B's order, simply because he's not long the stock. Regulation SHO would make it very easy for market makers to manipulate a stock by making it nearly impossible to sell a stock short. Moreover, the proposed exemption of this short sale rule for "bonafide market maker activities" would further exacerbate this situation and create an unfair playing field for small investors.
The continuous presence of sellers and their ability to short stocks is critical to the liquidity and legitimacy of any stock market. Since the SEC has yet to produce any incontrovertible data proving the legitimacy and necessity of a short sale rule, Regulation SHO should not be implemented. Instead the proposed 2 year suspension to the bid test rule for specified liquid stocks should be further explored and expanded. In fact, it is my belief that to create a more fair and liquid marketplace, the short sale rule should be fully revoked. Thank you for your attention.