December 19, 2003
Mr. Jonathan G. Katz
RE: File No. S7-23-03
Dear Mr. Katz:
I am writing with regards to the bid test rule in the proposed Regulation SHO. I believe that it will prove detrimental to the overall state of the market as well as to the livelihoods of many small investors and traders. I can only speak from my limited professional experience as a registered representative, but I do hope to provide insight and helpful comments toward making a decision that benefits as many people as possible.
During my studies at Harvard where I graduated with a M.A. in statistics, I have come across many statistical models of the market. In all these models, the main signal of the market has an uptrend regardless of any short-term noise that may be seen due to volatility or momentum plays. Since the original purpose of the bid test rule was to prevent the crash that occurred back in the Depression era, we can see that it is not necessary in the current state of the market.
From my limited time as a proprietary day trader with Trillium Trading LLC, I have gained much perspective with regards to the internal workings of the market. The most important things that keep the market going are volume and liquidity. The efficiency of the market will sort things out in the long run, while the small investors and traders play an important role in moving the stocks from proposed buyer's price to a proposed seller's price. To implement a new bid test rule where all short positions can only be initiated at the offer will have a negative impact on liquidity and the market internals will slow down.
Therefore, I believe it is in the best interests of the current market not to move forward with the proposed bid test rule as stated in Regulation SHO. The rules must change with the times and the present state of events, and so must the purpose of these rules. It is my opinion that while this proposed bid test rule may have been beneficial for the market of the early 20th century, it will actually be detrimental if applied to the market conditions of today. I hope the points I have illustrated here will be taken into consideration before a decision is made on Regulation SHO.