May 5, 2009
It is clear there have been market abuses involving short selling, especially in regards to the demise of Lehman Brothers and Bear Stearns. I have also seen individual stocks that I have owned become victims of short attacks, plummeting 10% to 75% in one day, with no negative news or no major company announcements which would prompt such a quick and precipitous drop.
Hedge funds and short sellers can signal to each other when they are planning a short attack through various means, often through the publishing of a convenient, negative (most likely contracted for) sell-side, analyst report, that is immediately followed by a day or two of massive short selling, or a non-fact based, negative-inference type of opinion article on the internet, again, non-fact based or with a very negative interpretation of the facts, and once again immediately followed by one or two days of massive short-selling. THESE ARE NOT COINCIDENCES.
Short selling is needed in the market, BUT SHORT SELLING ABUSES AND NAKED SHORT-SELLING MUST BE BANNED AND PROSECUTED.
HERE ARE MY RECOMMENDATIONS TO LEVEL THE PLAYING FIELD FOR ALL INVESTORS, LONG AND SHORT, AND RETAIL OR INSTITUTIONAL:
1.) Reiterate the illegality of, enforce the ban on, and prosecute NAKED SHORT SELLING.
2.) Force Hedge funds, especially those that are SHORT SELLING oriented, to have to comply with the same trading rules that LONG BUYERS need to, as in:
a.) regularly reporting on current short positions
b.) having to settle all completed trades in three days
3.) Install an upbid rule for any short selling.
4.) Complement this upbid rule on short selling with a 10%, daily drop, circuit breaker on any individual stock.
Again, these changes are long overdue. It is not coincidence that the current decimation of the stock market began in the summer of 2007, at approximately the same time the previous uptick rule was removed. There may not be exact empirical evidence to pinpoint this cause and effect relationship, but there is an overwheliming amount of real world anecdotal evidence.
In conclusion, please:
1. Restate and enforce the BAN on NAKED SHORT SELLLING.
2. Put an upbid rule in place and complement it with a 10%, daily drop, circuit breaker.
3. Require that Hedge Funds and short sellers have to play by the same rules as long buyers in regards to reporting their holdings and in settling trades on a timely and legal basis.