June 12, 2009
Elizabeth M. Murphy, Secretary
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090
File Number S7-08-09
Dear Secretary Elizabeth M. Murphy,
I am writing this letter in reference to File Number S7-08-09. I would like to voice my opposition to the proposed amendments within Regulation SHO.
Requiring the initiation of a short sale to be at least one cent above the best bid is detrimental to the stock market as well as its participants. The stock market is supposed to be a fair market where all buyers and sellers are matched based on the price they are willing to pay or receive for a particular equity. If two parties come together at a certain price it is because they both believe they are receiving a fair price; the SEC should not be able to interfere in their interests and the price levels they wish to trade at. The SEC should not be creating hindrances to trade.
There are many problems that arise with this new short rule besides the obstacle of not being able to trade at the price that you want. Within a less liquid, volatile stock there is always risk of the stock making a large down move within a day. Less experienced investors may fear short sellers are entering a stock and purposely driving the stock downward. There are many problems with this illogical fear. First, if there is no news or potential news in the stock there will always be many buyers interested in buying a stock at a nice discount. These buyers prefer to get their stock quickly and at the best price. If they are buying a falling stock they would love to get hit on the bid regardless of if it is a short seller or someone selling a long position. If they are unable to buy at the bid because only a short seller would be their counter party you are not only causing it to be more difficult to short but also to buy a stock at a favorable price. Second, a short seller will eventually have to buy the stock back in order to secure a profit. In a sharp down move, short sellers will continue to short at lower and lower prices. Eventually, this intense selling will slow down and the stock will begin to bounce. As a short seller you have unlimited risk and once you see this bounce, especially if you were shorting towards the bottom of this down move and are quickly moving out of the money, you will most likely try to cover frantically. As the stock continues to bounce due to these short sellers covering more shorts will be out of the money and push the stock up even further. With the combination of buyers getting stock at a discount and the short sellers trying to cover for a profit, it is not extremely unusual to see the stock rebound back to the beginning of the down move if not even higher. The fact that there was a free market place during the move actually allowed the stock to ultimately trade higher than it was before the "bear raid."
Another concern of mine arises within more liquid, less volatile stocks. These stocks are so liquid that it is certainly possible that the stock will not have an uptick for minutes. It may take a very long time to get any stock short, and if you want any kind of size then you will be waiting even longer. This could be a huge problem if you are trying to hedge another position that you have long. If you can only hedge some of the risk you are taking in the other stock the short tick rule is exposing you to more risk than you would otherwise face in a free market place. Also, in order to attempt to get short you may put in several large sell short orders, perhaps a large refreshing order. This can be intimidating to buyers and may actually cause them to sell bringing the stock down further. As it continues to drop this offer may continue to follow the stock down causing even more concern and driving the stock down further. If he were simply allowed to hit the bid there may be a momentary down move, but buyers looking for stock at a discount would be quick to step in if there was no new negative news.
Another poor decision would be to enact a "circuit breaker" rule within individual stocks seeing a large price decline. For example, speculators within a stock have bought it aggressively based on the anticipation of upcoming FDA approval causing the stock to move up 500% in a week. If the date comes and the results come back negatively the stock will surely open up at substantially lower price than the previous day's close. That means, under the proposed rule change, nobody will be allowed to enact any short sales. This company is not as good as people thought it was but I cannot even short the stock. This does not seem fair. Also, if you were one of the unfortunate buyers that have come in the next day out of the money you can sell your shares for a loss, but will not have any opportunity to take advantage of the ensuing down move in order to make up for this losing trade. Finally, (assuming the circuit breaker is enacted on a 10% down move) once a stock was down 8-9.5% I think that many shorts may come into the stock and try to short stock relatively quickly and aggressively because very soon they will not be allowed to for the rest of the day. There may not even be a problem with the stock, but if there is a decent chance this stock will continue to drop there will be even more aggressive short selling as we approach this 10% level, which I do not believe is the intent of the SEC.
I strongly oppose the proposal to amend Rules 200(g) and 201 of Regulation SHO. The SEC has already done extensive research on the uptick rule. They know that with or without the uptick rule weak companies will be sold and the price of the security will drop. With all of this important research in front of us how can we enact more rules that will hinder the free market place that is the stock market?
Thank you for taking public comment.
Andrew S. Green