July 19, 2008
July 19, 2008
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
RE: File No. S7-2-08 Emergency Order Short Sales
I would like to take this opportunity to congratulate the Commission on a landmark decision to limit naked short selling practices in certain of the U.S. publicly listed companies. The positive reaction and recovery of these stocks within the 5 day grace period clearly indicates the level of artificial downward pressure that was being exerted upon them.
Although the ability to short is supposed to keep the markets in balance, abusive short selling causes a great degree of destruction of value. Nowhere is this destruction more apparent than in small and micro cap companies whose future growth and contributions to our society and progress of the human race depends on their survivability and fundraising capabilities. Many of such small sized companies could potentially be the next Microsoft or Merck in the making, contributing to our technological advancements as well as our ability to battle lethal diseases. Unfortunately so many such companies have been destroyed by abusive and naked short selling entities who have the financial means and market connections to pressure these companies out of business by destroying their market cap, hence their ability to raise funds. These naked short selling entities that are well capitalized and who operate through their brokers have the ability to push down stocks of small cap, low float companies that are in the developmental stage. The old adage that it is much easier to destroy than to build certainly applies. Therefore for certain financially oriented entities it is more tempting and much faster to profit from destruction of value than it is from building it.
I believe the resolution to naked shorting could be handled in a much simpler manner. Although shorting is supposed to be permitted in order to create an orderly market, an entity with an ill-intention to destroy value would most probably lack the character of honesty to follow through with the simple promise that it has located a source for delivery of a naked shorted position. A simpler solution which would close many loopholes would be to treat short sells on an equal level as long buys. If an entity is willing to pay market price and has the funds available to buy a certain stock it is allowed to do so. If the funds are not available it cannot do so. The same parallel should apply to an entity looking to short a stock. If the shares can be located to short and the entity has the funds to cover the transaction, by all means it should be able to do so. But to allow an entity to sell a security that it does not have with the promise of locating it later is clearly affecting the fair market value of what other investors are willing to pay. If elimination of naked shorting creates elevated stock prices, it does so simply because of supply and demand in the market for that particular security at a given time. A development might have taken place where the true valuation of a company might need to adjust to a higher PPS level. It is up to the aggregate markets based on the laws of supply and demand to value a certain company. There should not be artificial interferences in order to prevent a stock from becoming overvalued or pushing a stock down into oblivion. The markets themselves are very efficient on a macro level and will adjust fair valuations based on supply and demand. In my opinion it is very dangerous to allow third party entities to police the markets by injecting or removing supply of stocks. This creates an environment for abuse and a power position for large financial entities to dictate the faith of a small or micro cap company. The desire to limit and control a rising stock price should not be any greater than the desire to prevent destruction of value. Our markets are based on the principal of risk/ reward. To limit reward yet allow failure will be detrimental to the confidence of investors and our markets. Bubbles happen as well as crashes do, they are the extremes of investing in the public markets. Yet trying to favor one over the other disrupts the equilibrium needed to keep the markets functioning efficiently.
If a certain company has bad news then it deserves to have a lower stock price as the number of entities willing to purchase the stock diminishes in comparison to the number of sellers. Likewise if a company has good news or an important development affecting its future positively then it should be deserving of a higher stock price if the number of entities willing to purchase the stock at higher prices exceeds the number of sellers. It is unfair to allow artificial sellers to control the potential of reward from the fear of higher stock prices, yet allowing them to create an imbalanced playing field where the very same sellers can elevate the potential of risk and failures.
Since purchasers of stocks do not have a downtick rule to purchase a stock it is fair that there should not be an uptick rule to short a security. However access to the issued number of shares and financial requirements to secure a long or a short transaction should be even and equal as well. In my opinion, anytime that the balance of equilibrium is tilted and exceptions are allowed for one side of the market, the possibility of abuse increases greatly and continues to multiply exponentially in relation to the permitted time allowed for such practices to continue.
I would sincerely request the SEC to implement permanent and equal requirements for both the long and the short sides of the markets and allow the natural forces of our markets to efficiently create fair values and reward risk and allow failure. Do not remove the ability to create value by having fear of the creation of a bubble. In my opinion the possibility of collapse of a bubble is not even remotely comparable to the realities of destruction of value and loss of confidence in the financial markets.
Please disallow naked shorting for all securities, without exception and hold responsible criminally and financially all entities violating such regulations. The financial temptation of brokers to look the other way and allow their resourceful clients to continuously have undelivered positions, or in some extreme cases assisting these clients in masking their undelivered naked short positions, is liquefying the foundation of our markets. Embrace a fair environment for all companies, large and small, and allow our markets to once again start functioning efficiently and with the fluidity of normal supply and demand.
An individual investor