Subject: File No. S7-08-09
From: Harold Vogel, Ph.D, CFA
Affiliation: Vogel Capital Management/ Adjunct Prof. Finance Columbia U.

February 20, 2010

Changing to a new uptick rule is a HUGE error that is politically, NOT economically, motivated. From my own trading experience over many years, I can tell you that as a small trader, the previous restrictions allowing short selling only on an uptick often caused me great financial distress and harm because it allowed market makers and brokers to play very profitable (for them) games with limit and stop orders. With such rules, broker/dealers take easy advantage because it enables them to front run limit and stop orders much more easily.

The bias against shorting is also due to great misunderstanding and ignorance of the transaction. Short selling happens all the time in the real economy, for example, when you buy a new car, the car dealer who doesn't have the model on the lot, sells short the car to you and then has to buy it later from the manufacturer or another dealer.

Short sellers take on greater risk than long buyers because a stock can rise to price infinity, but can only drop to a price of zero.

Short sellers also help CUSHION market declines because in almost all instances they must purchase the shares they've borrowed. Thus they are a source of latent, ultimate demand, most often when there are few or no other sources of demand.

An uptick rule greatly distorts market function and adds to market inefficiency and cost for the entire society. It is asymmetric, and has no economic basis or rationale for being put in place. The only rationale is economic ignorance in politicians' understanding.

The end of the previous uptick rule had NOTHING to do with the massive financial crisis, which was caused by many other things (subprime lending, AIG credit default swaps, political backing for Fannie and Freddie, etc., etc.) The markets would have plunged in the same way even with an uptick rule in place.

Indeed, short sellers provide a valuable service in ferreting out corporate accounting frauds and malfeasances and in going against the grain of the normally bullish consensus. We should be applauding such efforts instead of restraining them. Enron, Worldcom, etc. frauds were all discovered first by short sellers, who early sounded the alarm and benefited society and the economy through redirecting capital allocations.

In making a decision, the SEC ought to give considerable weight to academic studies (many in the late 1990s) showing that imposition of an uptick rule of any type creates inefficiencies and costs. Ingrid Werner, a professor of finance at Ohio State University that has studied the impact of the rule change, says repealing of restrictions on new short-sales should only have an impact on price movements over periods less than a half-hour, not the entire day. "The repeal of the rule has nothing to do with the volatility we see on a day-to-day basis," she says.

Is it the purpose of the SEC to politicize our markets and drive trading to other countries by making US markets less efficient and more costly to use? I hope not.

The cause of the financial meltdown had NOTHING to do with the end of the uptick rule, and imposing new uptick rules now will be generally harmful to American interests, and do absolutely nothing to prevent another crisis. Remember, short sellers ultimately represent a pool of potential buyers, who will actually help cushion a decline.

Imposition of another uptick rule is an entirely misguided, and wrong-headed application of SEC powers.