June 18, 2009
While I do not support any form of uptick rule and would hope that the commission will have the courage to look beyond the pleadings of long only investors and speculators spurned by recent market corrections, I would like to address the commissions request for comments in particular to the issue of whether ETFs should be included in any proposed uptick rule that is adopted.
Given that the value of an ETF is derived from the underlying holdings of each ETF share, it is not readily apparent that a market paticipant could effectively short an ETF with the purpose of manipulating the market. Attempting to do so would likely lead to material financial loss, as other qualified market participants could through a riskless arbitrage purchase the same ETF (now undervalued with respect to the underlying components) and exchange the ETF shares for the underlying components.
Since the economic rationale (which I find dubious at best) behind the uptick rule in general does not apply to ETFs, including them with other equities will only:
1) Create a less efficient market, ensuring that small investors from time to time will over-pay for long positions established in ETFs.
2) Shift a natural ETF arbitrage opportunity that is currently available to all market participants, to only those institutional investors who are able to create and redeem ETF shares through an exchange with the ETF operator.
Therefore, I would urge the commission to not place any new short sale restrictions on ETFs.