December 22, 2003
Mr. Jonathan G. Katz
Subject: Regulation SHO
I am writing in response to Regulation SHO currently being proposed by the Securities and Exchange Commission. While the majority of the proposal I feel is fair and just, there are several key components I believe are imprudent or misguided.
My biggest grievance concerns the "Bid Test" portion of the proposal. I firmly believe that in order to attain the best trading environment, exchanges should strive to be "true markets". Exchange Traded Funds (ETFs) such as the QQQ and the proposed "Pilot Program" of Regulation SHO are examples of true markets. In both ETFs and the Pilot Program, buyers and sellers are allowed to trade with each other at prices they determine with little limitations. Other than locating the securities to be borrowed, all sales (long or short) are permissible regardless of the last trade or up tick. I believe that all securities could operate like ETFs because any selling pressure short sellers could create would at some point create buying opportunities for others. So rather than implementing the Bid Test rule, which would in effect hamper the way stocks should trade, I believe it would be better to have all stocks included in the Pilot Program.
If the SEC feels the exchanges and the NASD would be incapable of properly monitoring a true market system, than at very least the rules that govern short sales should be as close to a true market as possible. In a true market there are three ways one can get short:
On the offer
On the bid on an up tick
On the bid on a down tick.
The current short sale rules for NASDAQ securities are at least closer to a true market than the proposed Bid Test rule in Regulation SHO because it allows options 1 and 2. The proposed Bid Test rule would only leave option 1. I also think the proposed "After Hours Trading" portion of Regulation SHO is unwise for the same reasons stated above.
Lastly, I would question the need for the "Severe Market Decline" portion of Regulation SHO. I believe the rules that are currently in place for extreme declines in the markets that result in temporary halts are effective enough. If anything, there should be a better determination of when to halt individual stocks. That is an area where I have witnessed greater problems.
Raymond J. Murphy