Dear Sir or Madam:
This letter is in regards to the proposed Regulation SHO. I am especially opposed to the bid test in Rule 201. As for background on myself, I am a Cornell graduate who is now a proprietary trader for Trillium Trading, LLC. in New York City. My style of trading is scalping, in which I hold positions for anywhere between one and five minutes, on average, in order to capitalize on quick moves in a stock through use of ECNs.
The current Nasdaq short sale rule says that if there is an "up arrow," there is no restriction on the price that a short sale may be executed. However, under the proposed bid test in Rule 201, a short sale may only be effected at least one cent above the best bid at the time of execution. In essence, I would only be able to get short by putting out an offer. With such restrictions on shorting, I would not be putting in as many orders. Therefore, less liquidity is a result and customers will get worse prices. I strongly believe that this proposed bid test will greatly affect my trading in addition to reducing liquidity in the markets.
Another point that I want to address is that I feel that only market makers and large institutions will benefit from this rule. Traders, such as myself, and small customers who use ECNs will be hurt with these restrictions on short selling. The U.S. stock markets are meant to be a fair marketplace. However, I do not believe that it is a level playing field for market makers to be able to short with no restrictions. Market makers do not add much capital to the markets as they used to. Currently, ECNs are the major players. The vast majority of volume on the Nasdaq is through ECNs, and there is growing volume with ECNs on the NYSE. So if market makers have no restrictions, I feel that there should be no restrictions for anyone using ECNs.
Finally, I do not feel that the proposed bid test in Rule 201 can effectively prevent short selling from being used as a tool to drive the market down. In my experiences, I have noticed that a massive pegging offer can do a lot more damage and drive a stock down more so than by hitting the bids. To give a recent example, on this past October 30, NII Holdings Inc. (NIHD) was driven down eight points in a matter of minutes by a 500,000 share pegging offer. A second example occurred at the beginning of this December and even made the news. Career Education Corp. (CECO) was driven down about twelve points in a short period of time by enormous offers. Although this was a computer error, it still shows how massive offers can be more detrimental than just hitting the bids.
In conclusion, I am especially opposed to the proposed bid test in Rule 201 of Regulation SHO. I believe that U.S. stock markets should be a fair and opportune marketplace for small investors, traders, market makers, and specialists. It should be a level playing field for everyone. I am glad I had the opportunity to comment on this proposal. Thank you for your time.
Michael J. Protomastro