June 12, 2009
Mrs. Elizabeth Murphy
Secretary, Securities and Exchange Commission
100 F Street, NE
Washington DC, 20549-1090
File Number S7-08-09
This letter is in reference to File Number S7-08-09
Short selling is an integral part of an efficient marketplace. It allows market participants to express their view that an asset is overpriced. Without this, the market would be inherently biased towards one side. This would allow asset prices to become even more inefficient. If there are no restrictions that limit the upside of the price of an asset, it is only fair to institute those same guidelines to the downside.
From a short term perspective these restrictions also will increase market volatility and decrease liquidity. Implementing restrictions on short selling will cause prices sought between buyers and sellers to substantially widen. Short sellers must buy back the stock they borrowed, creating bids for other market participants to use as liquidity. This also creates a zero net effect for short sellers. Yet, without shorts sellers able to freely offer and buy the stock back, overall market liquidity is hurt. While the goal is to stop the precipitous drop in asset prices, the equivalent can be done through the various derivative markets. Thus, the restrictions then do not accomplish anything but further cause more harm than good.
Short selling is also used as "hedging" for many companies. This can be critical for businesses to protect their exposure and minimize risk. There must be a willing counterparty (speculator) to take the other side of the transaction. It is important to foster this equilibrium between participants in order to minimize volatility and promote a transparent marketplace.
Short selling does not wipe out companies or create "bear raids," mismanagement of the company does. To implement restrictions on a market participant for a belief that an asset is overpriced represents a gross atrocity to our free market system. The market is a constant tug-of-war between investors, traders, speculators, and hedgers, but to restrict the movement of one side shows how unfair the entire system can become.
If it was such a simple matter of speculators pushing down asset prices, all while profiting from the destruction of the company; I'm surprised this strategy was limited only to a small amount of financial firms. The reason why this strategy does not work on simply any equity or asset is because this is a free market. Evidence further showed that the demise of many of the financial firms had little to do with short selling. Overall, it was the management that created these balance sheets. The marketplace does not need fixing. It is the underlying companies, where management was allowed to take excessive amounts of risk and create unstable balance sheets with high amounts of leverage. Therefore there is no positive outcome in instituting any short sale restrictions as the problems will still be inherent in our system.
David K. Sachs