Subject: File No. S7-19-07
From: Douglas F. Russell
Affiliation: Retired/investments/ex-Wall Street(1970's)

July 18, 2008

Instituting an up tick rule and a ban on naked shorting of a only small number of SEC/government favored stocks does not make sense. You need to think bigger thoughts. Re instate the up tick rule across the board and force an end to naked shorting in all its forms.

(To understand how absurd naked shorting is: consider the opposite ... how about allowing me to naked buy ... without having any money).

Over the past eight or so years I have noted a marked change in trading patterns of stocks that I have followed.

Large pools of fast money now far exceed the capitalization of many companies and these pools appear to be able to use their strength to push prices around to their advantage. Medium and smaller companies have frequently been overtaken by totally irrational upwards or downwards movements.

The decision last year to suspend the up tick rule opened the door to these large pools of money to really manipulate a stock in downward directions.

Bad news is always a little harder to take than good news for the average investor.

Upward movements soon comes under severe selling pressure as some seek to take profits and appear to be somewhat self mitigating.

Downward movements involve a different psychology: fear.

The average investor has a hard time "knowing" what is really happening at a company. Perhaps a company will announce a fairly innocuous disappointment such as a new product line being introduced perhaps a month later than anticipated.

Without the up tick rule, such an announcement can be snowballed into a panic selling frenzy by careful manipulation.

A flurry of spurious postings will erupt on internet sites such as Yahoo, Investor Village or Silicon Investor.

As the bogus bearish postings crop up a stream of smallish orders start hitting the bids with very large sell orders showing up a few pennies above the active trading range to make sure that prices do not recover. After a few days, large orders to buy show up and players scoop up shares from Joe Six Pack and his frightened wife.

Someone posted the following with which I agree:

Wall Street and the hedge funds are running a high-tech racketeering scheme disguised as a functioning market that many assume is comprised of 'normal' buys and sells based on rational investor decisions. That is far from what is actually happening. Computer programs are running 24/7 to create volatility, capture trading swings, and in many cases create a chaotic and panicked pricing pattern that can be exploited by those who run the game.

It fails to place the onus on the broker dealer to assure delivery by borrowing the shorted shares. Simply accepting the assurance of the hedge fund and dropping the matter entirely at that point is useless in preventing naked short selling.

SHO must require fails to deliver to be bought in on the fail date plus one day.

Using foreign exchanges to gain advantage in violation of the Reg. SHO, especially German and Canadian exchanges, must be stopped or Reg. SHO is rendered totally ineffective

Exempting primary dealers results in a giant loophole in any regulation honestly desirous of enforcing the already in place regulations. A primary dealer is by definition a trader who makes both bids and offers on a continuous basis. Because of this a primary dealer will be short but not for investment. The short in the primary dealer's position will rotate between short and even, possibly short on balance. A primary dealer will then be able to make delivery on the short without borrowing because when bids are hit (and they will be) he moves either to flat (even) or turns the short by purchasing voluntarily or involuntary. If this entity does not maintain a constant two way bid and ask then this entity is NOT a primary dealer. Giving the primary dealer 21 days to deliver before buy in is reasonable but any longer and you are supporting a camouflaged naked short.

Naked short selling is a long time violation of present regulations prior to Reg. SHO. As recent attempt to ban Naked Short selling by using an emergency declaration on selected financial entities shows the ineffectual nature of Reg. SHO It is highly prejudicial and has the apparent effect of blessing naked short selling against all other investment sectors."