Subject: File No. S7-08-09
From: Robert Petti

June 15, 2009

Mrs. Elizabeth Murphy
Secretary, Securities and Exchange Commission
100 F Street, NE
Washington DC, 20549-1090

Ref. File No: S7-08-09

Dear Mrs. Murphy,
The notion of bringing back the uptick rule or introducing a circuit breaker into the market is completely preposterous. If the SEC wants to do anything to curb short selling, they should end naked shorting.
Before discussing this, though, it is important to discuss trading and its implications. Outside of stock offerings (either an Initial Public Offering or secondary offering), buying stock really has little to do with investing in a company. There is a finite amount of stock available and the price at which a company trades is based on principles of supply and demand. Trading is a zero sum game, meaning one can only buy when another wishes to sell. No matter the side, the person involved in the trade has one goal in mind making money. However, where does it say that they only way someone can accomplish this is by buying low and selling higher?
Enter short selling. Short selling does not mean that someone is taking money from a company or doing anything to affect its livelihood. When performed properly, going short a stock allows an investor to hedge another trade (just like a put option) or profit off a stock returning to a more realistic value. The media portrays short sellers as vicious people who want to see the stock they short go to zero. This is absurd it is the equivalent of people buying stock in a company expecting the price to go to infinity. Do people really do that? Maybe, but they are few and far between. The use of a short position as a hedge is purely a protectionist play and differs little from asset diversification. It is bad investing to have, to use a popular saying, all ones eggs in a single basket.
So if short selling is not as evil as people make it out to be, why does it get its bad reputation? There are really two issues that people take with short sellers naked shorting and capitulation. Naked short selling is a problem and an awful idea. It provides investors with greater liquidity than the float available in a stock. Just like people cannot buy more stock than what is available, they should not have the ability to sell more than exists. Capitulation often has little to do with short sellers. The clearest example of this was in March of this year when major indices hit their lowest levels, but short interest in stocks decreased from February. Yes, of course, there are people who profited while the market fell, riding the coattails of others who were selling. But one has to remember that there are also people who buy up stocks Warren Buffett holds for Berkshire Hathaway. Do we prevent people from doing this?
Just like there is no restriction as to how high a company can go on a given day, there should be no reason a stock can only fall a certain percent. Why instill rules that govern one side and not the other? Similarly, what sense does it make to regulate when a person is allowed to short a stock when there is nothing that dictates when a person can buy stock? This is the equivalent of asking someone to parallel park and not allowing the driver to use reverse.
So what if you really, really want to do something about short selling? Get rid of naked short selling. This would ensure that the only way that one can short is if there is someone on the other side of the trade willing to lend stock out.

Sincerely,

Robert Petti