May 5, 2009
This comment is on the continued discussions by the SEC to modify REG SHO to limit the negative consequences of Naked Short Selling.
First, there should be no debate, in my opinion, on whether Naked Short Selling is a useful mechanism to increase liquidity within a market. It is the Board of Directors function, within a company, to decide the number of shares they want to Authorize (AS), and it’s then up to the Company’s CEO to decide how many shares they will actually release, and when, to raise money (e.g. Outstanding Shares) to fund and operate the business. It is not the right of traders and investors to manipulate the OS, and thereby depress the market price - by flooding the market with shares that they have illegally introduced into the market by not first purchasing or borrowing the shares, and then failing to deliver.
E.g. It should be absolutely illegal, and an act of criminal fraud, for any person or any company to create shares through simple electronic book keeping “Markers”, wherein securities buyers would have no way of knowing their purchases haven’t been covered with legitimate, company authorized and issued shares.
The only way to really eliminate this problem is to force the cover of all securities transactions, either through a borrow or purchase, at T+3. After all, what Seller would ever tolerate a Buyer coming to close with an electronic IOU, as opposed to real cash? So, why do certain brokers and market makers insist that somehow it’s ok for their Sellers, or in their own sales, to fail in their deliveries of bonafide securities at close?
In addition, now that the DTCC has gone to “paperless” trading systems, and failing to have true, full and open disclosure on trading activities, there is ample opportunity for continued fraud in terms of manipulating the price of securities through “undiscoverable” electronic fails to deliver.
Truly, as an IT Professional, I don’t really care that the DTCC has gone to “Paperless” Securities Trading Systems. But, an investor ought to be able to query a DTCC system and track their registered certificate number, and the “Parent” certificates before it, through any number of buy/ sell and borrow transactions – with the transaction dates and a unique transaction number displayed for every transaction, all the way back in time to the original company issue. In addition, the Buyer also ought be able to see a "unique" Broker License Number for every broker-dealer that facilitated a trade in their security across its trading lifecycle.
Broker/ dealers, Market makers, hedge funds, and other financial firms and large investors have taken advantage, in my opinion, because they know the DTCC has not implemented the proper information systems to track the lifecycle of a security, or at least make the information publicly available.
FYI, less anyone choose to discount that statement, I have more than 20 years experience in the IT Industry, and have worked directly for one of the Former CIO’s of Goldman Sachs who, with several of his former Directors from GS, established a company to create incredibly accurate, high transaction volume IT solutions for the Financial Industry. There are other companies that have built similar high-transaction volume systems for the Financial Systems industry. As an example, the DTCC’s systems already handle Quadrillions of dollars in financial transactions every year, without error. It’s simply not rocket science anymore to build and implement such a system as I have described above. In fact, my guess is that the DTCC already has such a system and capability in place.
But, let’s face it, nobody wants it on Wall Street because they are too busy using investors’ money to work the system for their own financial benefit. E.g. earn commissions from selling shares that don’t exist; or, by making a market with nonexistent securities and not just take the difference on the bid-ask price… but on the entire transaction. In either case, they know that if they “Pile-on”, and force the company to delist or go bankrupt, they never have to cover!
Please, we need your help fixing this seemingly corrupt system. Even if all brokers, market makers, hedge funds and other financial service providers were entirely above board in their dealings and transactions, we can’t know that they are without transparency.
Of course, we know that human nature, being what it is, will always present us with the handful of individuals who will abuse any loopholes they are given for their own gain. Therefore, we have to quit, in my opinion, allowing certain vested interests from keeping the status quo so that they can protect and hide their so-called “Trading Strategies”… when those trading strategies are really intended to manipulate the price of a security by temporarily increasing the supply in a way that the sellers can’t see.
C. Gary Rupp, PMP
Senior Vice President