May 8, 2011
Securities and Exchange Commission
Division of Risk, Strategy and Financial Innovation
RE: Requested comments pertaining to Dodd- Frank Act Section 417(a)(2)
In regards to your request, I would like to address the questions as they were structured in Release No. 34-64383 File No. 4-627
My general opinion is that all short sales should be reported to the investing public either in real time or within 24 hours of the occurrence of said sales. One of the major intents of Dodd-Frank is to add more transparency via informed information to the investment process and your ongoing study of short sales and hopefully, rules benefitting the public, is crucial to leveling the investment playing fields. As a practicing investment advisor, my comments will lean towards the benefits that should inure to investors in the public markets such as retail investors and small institutions rather than the Wall Street behemoths that currently control the process.
Replies to questions contained in your request:
Q1. The currently available data is only available in limited form published twice per month and the additional costs to publish at least on a weekly basis if not daily would be well justified if the intent of Dodd-Frank is to be accomplished. In addition all short holdings should be treated in the same manner as long holdings. For many years the section 13 filings as to long holdings have been enforced while short holdings were allowed to remain confidential to a great degree. This is one of the major inequities in the commissions rules and needs to be addressed by the S.E.C.
Q2. I have observed that short selling is not only used by market makers to hedge existing positions but is also being used to artificially depress pricing in order to fill large orders for major clients. A simple study of time, sales and volume for specific issues shows many cases of short selling and especially naked short selling intentionally being used to depress and hold down prices on certain securities.
Q3. The abusive market practices used by short sellers in either temporary bear raids or intentional naked shorting are well documented and with the rise of internet use over the past 10 to 15 years, the aforementioned practices as well as manipulation via false rumors, abusive paid bloggers, and trade manipulators have risen to epidemic proportions. While the commission has recently been enforcing REG SHO violations, the amount of commission personnel available for enforcement continues to be less than adequate to combat the abuses that continually occur. Greater transparency of all short positions as well as short sale transactions would undoubtedly be the best deterrent in curbing the abuses. If the short sellers simply were not given the advantages of anonymity, and confidential holdings status, normal market action would curb many of the abusive and illegal practices without incurring additional costs by the SEC.
Q4. Real time reporting of all short holdings is feasible as well as being fair and equitable to all investors. Prompt Reporting would be acceptable to the general public if the definition of prompt included a maximum limitation of 72 hours. The current reporting rules basically only apply to holders of long positions and give short-sellers a significant advantage over the general investing public. These rules have been fostered by consistent lobbying campaigns over the years designed to make sure that the small institutional investors as well as retail investors were kept at a disadvantage. At the current time it appears that the lobbying efforts have worked well and that the average long term investor is at the mercy of short-sellers in many instances. All positions, both long and short must be made public as soon as feasible in order that all investors are finally treated fairly.
Q5. All investors would likely use real time short position data and simple logic tells us that it would be of significant importance in making efficient investment decisions.
Q6. Real time data on short positions would be the most effective deterrent to the current abusive practices and in actuality would aid the SEC in identifying abusers in a more timely manner and at a reduced cost to the SEC. Under the ongoing tips campaign, investors would become a form of aid to the commission in identifying and reporting abusers and, its more than possible that real time data would more than pay for its implementation. Its no secret (especially to abusive short-sellers) that the SEC is understaffed and if real time data were available to all investors there would be a purely inherent change in the behavior of most short-sellers in that before someone abused the system and rules, they would have to take into account the probability that that would be reported and prosecuted. Had a system that was far more equitable been available in the past, Bernie Madoff might never have happened.
Q7. At the present time, there is no concrete evidence that real time data would have any effect on liquidity, price efficiency, or capital formation except that improved recognition of data might quite possibly improve all of the aforementioned circumstances.
Q8. Position should quite simply be defined as any monetary interest or monetary risk position held or instituted by any individual or institution. For many years the commission has allowed semantics and truly illogical wording to govern many instances, and its simply time to put a stop to needing a thesaurus to understand what should be simple definitions.
Q9. By reporting short positions as the short interest in any equity, it would give all of the investing public as well as the commission a single standard that could be used to identify the short metrics of the particular investment.
The position reporting in the divisions study should be far more comprehensive than on a bi-monthly basis. In todays markets, two weeks ago can easily be referred to as ancient history which reinforces the need for real time reporting.
Q10. The benefits to regulators in time savings, financial savings, and quantifiable information would be substantial almost immediately and there should be no delay in making the information available to the public. It is, and always has been, the public that is paying the salaries of the regulators and their right to know is paramount.
Q11. The broker dealers are probably the best suited to report real time happenings since they are already reporting it to their long clients. The availability of software to report instances of virtually anything is quite obvious even to the most basic of investors and since one of the missions of Dodd-Frank is to protect and help these investors, the effort should start at the front lines which would be the broker-dealers.
Q12. The collection and dissemination of short positions should be the responsibility of the exchanges and could be developed from existing systems. The voluminous amounts of data currently available at the exchange level is simple proof that adding computer code to the current systems could generate the information in question.
Q13. Since we are not defined as any of the organizations in Q13, we have no opinion on the question.
Q.14 The establishment of a significant threshold in reporting short positions would simply be the establishment of escape routes to the intended benefits. A short-seller who is a current abuser would simply open more accounts or more companies in order to stay under the thresholds. The establishment of thresholds higher than 1.0% in regards to any equity should be prohibited.
Q15. The experiences of other regimes should be studied in the divisions current efforts and consideration should be given to the fact that in many foreign markets, short selling is simply prohibited.
Q16.The idea of adding the mentioned transaction marks to the Consolidated Tape should not, in all actuality, be a costly procedure. Market commentators would undoubtedly use the information and the net result would be that the investing public would be more aware of market practices on their individual investments. The marks themselves could easily become the mechanism whereby regulators begin to identify abuses and perpetrators.
Q17. The marks short sale, market maker short and buy-to-cover are simple informational marks and could only be of help in the dissemination of pertinent information.
Q18. There is no evidence that tape marks would affect liquidity, volatility, price efficiency, competition, or capital formation. Information is what has been missing for many years in the current market system and the addition of any pertinent information is crucial to improving the ongoing systems. By the divisions own admission in the request for comments, up to 50% of any days volume could be short selling so how could the system be damaged in any way from the effects of reporting the other half of the information?
Q19. Since we do not have experience with these particular costs, no opinion or comment is offered.
Q20. Our feeling is that a pilot program is more than justified and that any inherent problems could be identified and corrected. Any pilot program should not last longer than six months and since it goes without question that many short-sellers will object to any and all of the proposed reporting, the pilot be completed as quickly as possible.
Q21. Since we do not agree with the idea of any reporting requirements being voluntary, we think that any and all reporting programs or pilot programs should be mandatory. The lack of volume in all of the equity markets illustrates the distrust that the American investor currently has of Wall Street and the existing systems and regaining that lost trust can not be on a voluntary basis.
Q22. The practices of other regimes should be studied in hopes of finding efficiencies that could be used in our system.
Q23. Consolidated Tape marks should be a supplement or a result of real time short position reporting and not a substitute.
We commend the Commission and the Division of Risk for their effort in this matter as well as the recognition that up to 50% of the market activity has been hidden from the average investor on a daily basis. The results of real time short position will be a significant benefit to every investor and will result in a substantial amount of trust in the system being returned. At the current time only long investors are penalized for putting their money and efforts into the current equities markets while short-sellers have been able to hide for years behind cloaks of anonymity because of inadequate reporting regulations and enforcement. We urge the Division as well as the Commission to prioritize the study and act on the findings as soon as possible in the hope that the results will finally begin to level the playing field.
Lee R. Donais
L.R. Donais Company Inc.
5340 North Federal Hwy. Ste 102
Lighthouse Point, FL 33064