Subject: File No. S7-08-09
From: William Hartley

May 8, 2009

Found the following article on the internet. It is not my writing but I agree the following would be a good answer to the uptick rules rescission in July 2007. I will attach the document.


William Hartley

"The uptick rule's rescission in July 2007 contributed directly to short-sellers (including funds) being able to relentlessly "pin the bids" of stocks, such as financials, forcing stock prices lower and lower, and causing massive damage to long investors. To date, shorts have conducted endless bear raids with impunity (and will continue to do so unless and until the uptick rule is restored).

The fact that the uptick rule had not already been re-instated, in the first place, throughout the entire market crash, is downright absurd (and suspicious)."

"The real problem is that shorts love to "pin the bid"- which is a manipulative technique whereby short-sellers don't first wait for a buyer to come to up them at a higher level, say on the ask price- but, instead, they short directly on the bid price repeatedly (called "pinning") until the bid finally "caves in."

Shorts have learned that if they "tag-team" the bid in this manner, it will, undoubtedly, cave- and the resulting bid will be pushed lower, and then lower and then lower still. With the ask price lowering in tandem with a dropping bid price- exacerbated by other shorts on the ask going lower, longs now start to panic and lower their sell (ask) price even further- and many longs then start selling on the bid itself, and, eventually, the bid is also taken lower and lower as longs panic further- and potential buyers lower their bids in trying to buy as low as possible.

Obviously, shorts don't first speak with each other in coordinating a pin-attack. But, in stocks where there is a lot of short interest- and there are (were) many, it doesn't take much for certain shorts- whether fund traders or wealthier individual traders to initiate the pin process- and for other shorts to immediately recognize the attack under way, and then pile in.

Indeed, with lower-volume stocks, the potential for downward manipulation is far greater, because resistance by longs is proportionally lower- and bid/ask spreads are wider. And with very low-volume stocks, such as ones that trade under 250,000 shares/day, a short-seller with a good amount of money can, single-handedly, easily crush the stock price downward.

One important additional component of the pin-the-bid technique is for well-capitalized shorts to first "load up" at as high as price as possible- waiting for the stock to have a strong market day or two, or an intra-day pop (even as a result of a "short-squeeze") to place the bulk of their short-sells. Then use additional funds available to them to then force the stock lower. In other words, these shorts make money off their "higher-priced" short positions, and then make additional money in relentlessly driving the stock lower.

The key to the latter- is that once a pin attack is launched, as I said, long-position sellers panic PLUS those who are looking to buy long will lower their bids to ultimately buy long as low as possible. These two resultant "panic plus bottom-fishing" motives by longs snowballs the bid-pin/downward short manipulation process. In effect: the shorts manipulating the bid downward rely on their technique to cause the snowball- thereby the shorts don't have to do much work (or spend much money during the pin) to cause the stock to sink a lot lower than it normally would have.

And, then, of course, once shorts have made enough money, they begin to cover buy and take their profits.

So, what can be done to solve this problem- which, I believe is rampant in the market?


1. Don't ban short-selling- as you need short-selling to create a liquid trading market.
2. Don't just re-instate the "up-tick" rule.

Instead: do not allow shorting on the bid. Period.

I'll say it again- do not allow shorting on the bid. Longs could sell on the bid. Shorts could cover buy on the bid. But shorts couldn't short on the bid.

It's simple. And it will resolve a ton of issues that relate to downward manipulation of the market.

Logically- if short-sellers were wanting to operate ethically, they would not have a problem with this. Why? Because if a short-seller truly (and ethically) wants to maximize profit on a trade- he would want to place his short at as high a price as possible and then cover-buy as low as possible. Why pin the bid, when you can short at the ask- or higher.

Indeed, if shorts were operating ethically, they'd want the longs to come up to them, and then rely on legitimate market forces at work- such as negative news- to fuel any sell-off.

But, since shorts rely heavily on tag-teaming a stock lower- which they could not do if they were not allowed to attack the bid, I am certain shorts would object to my simple proposal.

I would highly recommend that the SEC, Congress, and companies lobbying Congress against short-selling- such as Citigroup, strongly consider implementing this change. It will not result in stock prices being "higher then they should be"- but, rather, it would allow for stocks to not be crushed without reason.

As for naked shorting- interestingly enough- such naked "phantom" shares might then, very well, be exposed by surveillance bots as the only short-sells that show up on the bid- as legitimate ones would be prevented from doing so at their source.

Thus, such naked bids could be isolated and dealt with immediately by enforcement.

You see- most members of the SEC, Congress and company executives don't trade- so they don't sit there looking at Level 2 on any given day watching this manipulation in real-time. It's so easy to spot- in fact.

Perhaps someone should be invited to Congress- and set up a giant real-time trading screen for House members during market hours- so they can be shown what goes on in the very stock market they say they want to fix and support. Then, bailout dollars-to-donuts- they'll have it fixed before you can say- "Don't pin that bid, short fella." "

Copyright material redacted. Author cites the following article:
GT McDuffy, "A Remedy for Short Selling Manipulation,", December 4, 2008.