May 7, 2009
Re: Public Investors Confidence in a Fair and Balanced Market
The investing public has lost faith in a fair and balanced market place for their investments. The recent change by the SEC in allowing unabated short selling in our public securities market appears to be a major contributing factor.
The comments made by the Agency certainly leaves great doubt in the minds of the public that the Agency can even understands their own rules. It is no wonder after "a representative" for the your humble Agency makes the following statement quoted in the March 31, 2008 Wall St. Journal article , Heard on the Street, "The Uptick rule debate":
"A representative of the SEC, which made the rule change, notes that since 2001, stocks have traded in decimals, rather than fractions. So even before the July change, a bearish-minded investor easily could have pushed a stock even just a penny higher with a little buying and then come back with a big short sale, effectively skirting the intent of the rule. He notes that some foreign markets also have seen a volatility spike, even though there were no similar changes in how stocks can be shorted."
Tell me the why the unit of trading makes any sense in this argument? The long standing uptick rule prevented a short sellers from selling shares at a price lower than the last uptick. Your example doesn't work in the real world, unless there are 'buyers" at the uptick price for the short sell to sell additional shares to. Once the price drops, has a downtick, the short seller is prohibited from selling more shares until there is an uptick and there are "buyers" willing to purchase stock at the higher price. The short seller could manipulate the market but can not create or induce others to artificially buy shares he is shorting.
My observation would be that the SEC was unable to police this long standing rule and succumbed to the pressure of the short sellers and hedge funds to change the rule for the benefit of these "investors" and these investors alone. Please correct me if I am wrong
Wall Street is good at creating new and novel investments. Many receive special exemptions that circumvented the short selling rule. Maybe because there were not directly shares of a "public" company, they were allowed to be shorted without the consideration to the uptick ruling. It is my understanding that the keepers of these derivative products, to keep the books balanced as new shorts were being created, have no choice but to short shares of the underlying securities and as such were exempt from the uptick rule. Who is the beneficiary? Wall Street, certainly not shareholders.
Review the figures. In mid 1999 the combined short interest of the NYSE and NASDAQ was 5.75 Billion shares. By the end of 2007 that figure was a staggering 21.9 Billion shares, an increase of over 280% or more than 16.1 Billion shares. There are several results from of all this. Creation of shares without regulatory oversight and dilution of real investors long term investment interest, just to name a couple of points.
Where do all these borrowed shares come from? Certainly they can come from investors that buy shares in margin accounts. Wall Street brokerage firms makes money lending shares. However the biggest source today has to be Mutual Funds. A change in the laws a few years back started allowing mutual funds to loan shares of the companies a fund invest in to short sellers, for a fee. Makes a lot of sense to be making big investments with investors money, and then let short sellers borrow shares, for a minuscule fee, to unmercifully sell the shares lower in totally unregulated market. A huge conflict of interest in my opinion. Worst yet, leaving a huge potential for market manipulation. What can happen when a fund is struggling for performance decides to call in outstanding shares lent to short sellers? It is no wonder some mutual funds are notorious for end of quarter/end of year "window dressing" They are manipulating the market in an attempt to look better, be it for one or two days a year.
And we don't want to even get into the Naked Short Selling argument that everyone, most notably the Agency, has continued to turn a blind eye towards.
It is no wonder the public investors are losing faith in our investment markets. The oversight committees are so bogged down in bureaucratic paperwork an menial enforcement policies that they don't have time for the real important rules that have a major impact the investing public.
A very concerned investor.