July 23, 2008
I'd like to express my concern of the following existing and proposed SEC regulations:
1) The SEC recently prohibited Naked Short Selling (selling short without borrowing the shares) in a small list of bank and brokerage stocks including Fannie Mae and Freddie Mac. Naked Short Selling is illegal and it's not clear to me why there should be any exception. The SEC has created an exception for option market makers which I believe has contributed to abusive practices such as failure to deliver securities at settlement, and securities price manipulation. The exception should be removed and Naked Short Selling should be prohibited for all securities traded in our public markets.
2)On July 7, 2007 the SEC removed Rule 10a-1, better known as the Uptick Rule, which was put in place in the 1930s to protect the public from abusive short sale practices by requiring that a short sale could only be executed at a price that was equal to or greater than the last sale price. Now there is no longer this price test to complete a short sale and the removal of this rule has no doubt contributed to the increased volatility and speculation in our stock market over the past year. As we have seen, short sellers can now manipulate a stock by spreading false rumors about the company and short selling the stock into a falling market creating in some cases panic selling by the public which profits the speculator when shares are repurchased at a much lower price. The Uptick rule prevented the unrestricted dumping of borrowed (or in the case of Naked Short Selling "fantasy shares") into a falling market.
What are the public consequences of the above issues and the increase in volatility and speculation? Over time it will erode the public's confidence in the markets. Reduced confidence will likely cause increased public risk aversion and higher cost to capital formation both of which will reduce economic activity. Finally, what public benefit has been served by the exception to Naked Short Selling or removal of Rule 10a-1? I can see none. It seems to me that speculators and hedge funds are the only beneficiaries. I urge the SEC to re-examine and reinstate Rule 10a-1 which served our markets well for over 70 years, and to eliminate Naked Short Selling for all securities.