September 21, 2009
SEC/Ms. Elizabeth M. Murphy--
Thank you for the opportunity to comment regarding File No. S7-08-09.
I support your ban of naked short selling. Whether they sell or buy, it makes no sense to let traders deal in shares that nobody owns.
I have seen heated rhetoric but no compelling evidence that conventional short selling is pernicious. As global competition among financial markets increases, the nationís economic interest will not be served if the SEC is perceived as biasing prices. The better that price discovery is in Americaís markets, the better and more stable will be the American publicís investment results. SEC rulemaking should facilitate the marketís discovery of best current prices. To optimize price discovery in a normally operating marketóeither the overall market or the market in a given security--, buyers and sellers should be treated on an impartial footing.
Occasionally markets do not operate normally. Despite my wariness about unintended consequences, I support mechanisms to stabilize such markets. An uptick rule with a circuit breaker of 10% or 20% for a given stock seems like a plausible stabilizing measure. I strongly oppose such a rule if there is not a circuit breaker. It is counterproductive to stabilize what is not unstable. Without a circuit breaker that is triggered by unusual circumstances, an uptick rule requiring short sales above the best national bid has an effect equivalent to biasing prices.
I support treating all market participants impartially: institutions, professionals, and individual investors. The recent market carnage was not due to individuals or speculators. The prime malefactors were highly trusted, impeccably credentialed fiduciary institutions. Not all institutions and financial professionals would abuse being exempted from a short-sale rule, but some of them wouldómore than enough of them to debase the fairness of, and confidence in, the markets. If you make a new rule, please apply it across the board.
To sell short, an individual investor must have a margin account. That margin account can be used to borrow money to buy stocks. If you reinstate the uptick rule (with circuit breaker, please!), I suggest that you add a downtick provision In order to treat buyers and sellers impartially. For example, the provision could require that if a stockís price rises more than x%, the stock cannot be bought with leverage except at a price below the best national ask. A market-stabilization mechanism ought to stabilize markets that run away in either direction. Although itís hard to believe at present, irrational exuberance and market bubbles will return.
In summary, I respectfully urge that the SEC keep the following considerations in mind during your short-sale rule making (if any):
1. Facilitation of price discovery: noninterference, or minimal interference, with normally operating markets.
2. Prudent stabilization of anomalous runaway situations, e.g. circuit breakers.
3. Impartial treatment of buyers and sellers, e.g. uptick/downtick constraints.
4. Impartial treatment of all market participants, e.g. no exemptions.
5. Wariness about unintended consequences.
I believe that such rule making will facilitate the best long-term investment returns to the American public. I believe that such rule making is the best way for the SEC to position the nationís financial markets for global competition.