March 15, 2009
Chairwoman Mary Schapiro
Securities and Exchange Commission
Dear Chairwoman Shapiro,
As an investor and trader I want to voice my thoughts on the current state of the uptick rule and short selling. I think the uptick rule needs to be reinstated because it does make it slightly more difficult to drive the market down. However, for the big operators it would not make much of a difference, because the markets are too easily manipulated by them. The much bigger problem is "naked" short selling and "phantom" shares. In case you missed the special report that Bloomberg News did on the naked short selling and phantom shares problem in 2006, I include the following link:
The phantom shares come from the fact that the DTCC clearing house had at that time a "failure to deliver" rate amounting to a $6B per day problem. A rough calculation over the last 2 years, assuming that the problem did not get worse, reveals the loss due to phantom shares of at least $3T of stock transactions for which a proper accounting cannot be made! Phantom shares, naked short selling, and failure to deliver infractions cannot possibly occur without the complicity of the broker/dealers and their extremely rich and powerful clients and certainly you must know that. But it also could not occur if the SEC was properly doing it's job.
If I, as a small investor, attempt to sell short, the broker's system has to locate, borrow, and allocate that stock to my account. If the Market Maker or their hedge fund clients want to sell short they just do it without any such system intervening to prevent it. Not only that, but they do not even have to cover their shorts and can get away with that for as long as they wish.
True short selling is a necessary part of the financial markets. It allows people with negative views on a particular stock or instrument to express that view, and it adds buying power to the market, because once someone has sold short, he MUST become a BUYER to either admit he is wrong and take a loss, or to take his profits if he is correct.
The ability to create naked shorts and phantoms shares at will, completely distorts and disrupts the financial system in which true supply and demand ought to be reflected. If ANY entity has the ability to use naked short selling and phantom shares, this has the effect of allowing that entity to arbitrarily increase the supply of that instrument at will, making a mockery of the true supply and demand factors that ought to be working and are the foundation of the system.
The broker/dealers and market makers argue that they need the ability to use naked short selling to provide liquidity to the markets. I argue that they are just lazy and do not want to do the hard work that needs to be done to maintain a proper inventory of stock so they are able to provide what is needed to the markets when necessary, like any other business has to do. They have been getting away with the shenanigans for centuries. Maybe now is the time, certainly there is the opportunity, to correct this problem for a while until they figure out a way to get around it, as they usually do. If we could correct it for even 30 to 40 years, that would be quite an accomplishment!
Kenneth I. "Kip" Page