August 24, 2009
Re: SECURITIES AND EXCHANGE COMMISSION 17 CFR PART 242 [Release No. 34-60509; File No. S7-08-09] RIN 3235-AK35 Amendments to Regulation SHO AGENCY: Securities and Exchange Commission. ACTION: Proposed rule; notice of re-opening of comment period and supplemental request for comment.
I worked in the investment banking business from 1970 - 2000. My focus was underwriting new issues of debt and equity securities for electric, gas and water utility companies. During that period I assisted my clients in raising billions of dollars of capital to expand their plant and equipment to better serve the public.
The riskiest part of our business was the offering of new issues of common stock because of the uncertainty about whether hedge funds would sell the securities short knowing we would stabilize the offering price in order to protect our customers who had just purchased the new shares. On larger issues we frequently had to sell 10 to 20% more stock than the companies issued in order to be able to buy the stock that the short sellers flooded onto the market immediately after the issue was released by the Commission. The short sellers made the underwriting of new issues more costly for issuers and on occasion drove prices down below the offering price making new investors dissatisfied and less likely to buy on the next offering. Thus making it harder and more costly to raise capital for essential industries.
In my opinion, short sellers hurt the new issue market and did nothing to help it.
During my career, the uptick rule was in effect, which required an uptick of at least 12.5 cents before a short sale could be made. However, when the exchanges switched from fractional pricing to decimal pricing, it probably was not hard to persuade someone to cause an uptick of 1 penny thus allowing a short seller to sell a lot of stock short. After the rule was eliminated last summer, the ability to short was made much easier.
In my opinion, short selling only enriches hedge funds. It does nothing to create capital or to grow a company. It causes head aches for corporate leaders and runs contrary to the interests of the millions of ordinary long-term investors saving for retirement or living off of their investments in retirement.
I believe that the total elimination of the uptick rule accelerated the volatility we saw in the markets following the bankruptcy of Lehman Brothers. Those who benefitted from the rapid decline in equity values only hurt the interests of long-term investors. No good came of it for the equity markets or corporate issuers. It only helped create more disruption in the markets.
Some argue that shorting stock creates liquidity. That is a difficult pill for me to swallow. There is no net increase in shares outstanding for the company being shorted. I recommend that short selling be eliminated from the national markets. Yes, hedge finds will figure out how to move their business off shore, but perhaps we can influence foreign exchanges to bar shorting also.
No doubt, the exchanges and hedge funds and their investors who regularly bet against the best interests of U.S. corporations, will argue to maximize the ability to short. Politically, it is difficult for the Commission to eliminate shorting since it has been announced that some hedge fund managers make sizable political contributions.
As a second best rule making, I urge the Commission to reinstate a meaningful uptick requirement. 50 cents would be a reasonable uptick to require.
Thank you for considering my opinions.
Martin L. Lyons