August 30, 2004
The sweep function proposed in this filing needs to be considered in connection with the pilot proposed in Rule SHO. No consideration was given to the effect a sell short sweep order would have under the pilot where consecutive bids were hit. Both the SEC and the Congress have stated repeatedly that the major concern addressed by current short sale regulation is the avoidance of a manipulative bear raid.
For competitive reasons, the NYSE seeks to initiate a sweep function without any constraints on short selling. The logical alternative is to prohibit short selling sweeps of any kind from any source including but not limited to Exchanges, ECNs or alternative trading systems.
The issue for decision is how much system risk is appropriate for the premier capital market of the world. Permitting consecutive short sale executions through a sweep function undercuts any enforcement action against consecutive short sale orders entered outside of the sweep function based on the concept of parity of regulation.
The SEC has to consider whether an enforcement action taken after a severe market decline caused in part or in whole by selling short orders that wipe out consecutive bids can repair the damage caused by such activites or whether a snowball effect would be generated that would destroy investor confidence in the integrity of the securities markets.