April 25, 2022
Good evening,
I commend the SEC for their attempt to improve some of the major market risks associated with short selling with the proposed rule \"S7-08-22\" however, I believe there are some major issues that were not resolved. I have detailed some of the concerns that would likely be shared by retail investors:
1- Eliminate the market maker exception for locating and reporting, regardless if the stock is hard to borrow. Naked short selling is abusive, illegal, and disproportionately affects small businesses and retail investors.
2-Verification of data accuracy by an independent organization should be required and exponential penalties should be in place for frequent offenders who provide erroneous reports. Further, errors on reporting should be corrected by the end of the next business day that the institution determined or was made aware of the error. Data without verification are meaningless numbers on a page.
3-Securities lending transparency is nearly 10 years overdue (see Dodd-Frank Reform). Daily aggregate short positions should be required, which would facilitate FINRA to provide daily short interest for broker-dealers. The markets cannot respond to investor sentiment when the investors are in the dark. Broker-dealers have a disproportionate and completely unfair advantage over the retail investor.
4-Securities lenders must utilize a well-structured consolidated audit trail system so that shares that are being lent out can only be borrowed once until that short position is closed with the actual security to prevent abusive rehypothecation strategies, specifically to provide erroneous reports or distorted lending positions. Better tracking leads to better transparency and better policy enforcement and better oversight.
5-A stock should not be allowed to be shorted more than 90% of the free float. Any circumstance in which the threshold is exceeded would require a commissioned investigation to determine the practices taken by investors of the security.
6-Reintroducing the uptick rule. This will help dissuade abusive short sellers from trying to drive a stocks price down and take advantage of the market.
7-Broker-dealers should be required to immediately (T+1) close all failure-to-delivers at a rate of 1.5x of the trade with proceeds distributed to enhance market stability and investor protection initiatives. Any delays, for example, when there is illiquidity, would result in exponential penalties as the FTD closing period lengthens. Frequent offenders should be required to pay even higher penalties (2.0x-5.0x) to not allow large institutions to profit illegally and pay minimal fines as a cost of doing business.
8-The settlement cycle should be quickly transitioned to T+1 settling. This can be made possible by the above changes being implemented. The shorter settlement cycle will reduce margin risks as there will likely be fewer trades in limbo. Further, the shorter cycle will reduce the number of unsettled trades that may lead to phantom shares.
9-All trading data should be free of charge to the public, structured so that is easily readable, and available at the same time as broker-dealers and other institutions have access to it. Large institutions providing and receiving payment order flow have a distinct advantage over retail and the disparity only grows as technology improves.
10-ATSs and dark pools must not be allowed to dominate the market, if be part of the market structure at all. If a trade is sent to a lit market, it should be executed on a lit market.
11-There must be anti-trust considerations made in order to preserve a free, fair, and competitive market. Some market makers are executing more than half of the daily trades via block trades and internalizing orders. This does not allow for best execution and it also allows PFOF recipients to take short positions based on order flow alone, instead of relying on company fundamentals. Large institutional investors now try to game the market instead of investing in companies.
In general, the financial and criminal penalties need to be more frequently pursued when there is evidence and the penalities must be larger than the outcome of the illegal activity. No longer can institutions consider the fines as a cost of doing business. Rather, repeat offenders should be considered for temporary, prolonged, or permanent trading bans if illegal activity persists.
Thank you for your consideration.