61 Van Reypen Street
Jersey City, NJ 07306-4409
December 27, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
RE: File No. S7-23-03
Dear Mr. Katz:
I am writing this letter in opposition to the Securities and Exchange Commission's proposed Regulation SHO. As an investor and professional equity trader with many years of experience in the NASDAQ market, I believe that the rule's proposals would adversely affect the market's efficiency (liquidity and pricing structure) and maintain the unfair competitive practices already present in the marketplace.
Rule 201's uniform bid test is inappropriate and does not fulfill the fundamental goals of short sale regulation. Instead, it undermines the equity market's efficiency. As an investor, when I place a bid order, I expect a quick and orderly fill as should occur in a liquid market. I do not care whether the seller is effecting a long sale or a short sale. Ultimately, regardless of whether I am attempting to buy or sale stock, I only care that my order be matched and filled in a timely manner. Short sellers provide liquidity to the markets and enacting the proposed bid test rule would effectively remove a large part of any stock's liquidity, thus making it unlikely that investors' orders would be filled in a reasonable manner. Imposing such a bid test rule would also hinder the fair pricing of equities. As an investor and trader, I rely upon the supply and demand in the market to provide me with an accurate pricing structure. Short selling, even with the current and less than ideal bid test rule, allows for the supply side to balance demand, thus more accurately reflecting an equity's true value. Rule 201 makes it extremely difficult to effect short sales, potentially resulting in price manipulation and overvalued equities. I believe that by eliminating the short sale price rule completely and allowing investors to freely short sell potentially overvalued equities, equities' prices will more accurately reflect their fundamental value.
Not only will Regulation SHO adversely affect the market's efficiency, but it will also maintain the currently unfair marketplace because of its inclusion of NASD Rule 3350, which exempts market makers from short sale rules. Market makers are exempt because they engage in "bonafide market making activity," supposedly by providing stabilizing functions and liquidity. The NASD argues "if there is heavy selling pressure by investors and the market is moving down, market makers provide stability by standing ready to buy stock" (Section VIII, Regulation SHO). In my experience, I have yet to see a market maker stand by and buy stock as the market moves down. In fact, market makers will routinely abuse their exemption to continuously sell short into and below the bid. Is this bonafide market making activity? With regards to providing liquidity, the market maker's role has diminished greatly in importance because ECN's now provide such a large percentage of trading volume. On a daily basis, the vast majority of my trading volume is executed against ECN's, not market makers. Market makers should not be exempt from short sale rules because their activities, in the context of liquidity, in no way provide beneficial market activity.
With the inclusion of Rule 3350 in Regulation SHO, a level playing field on which the public investor can participate does not exist. Proposing half-measures which only protect industry insiders undermines the Commission's credibility and its mandate to protect the investing public. I sincerely hope that Regulation SHO will not be enacted as it would only detract from market efficiency and promote unfair practices against smaller market participants.
Registered General Securities Principal