Subject: Small Trader losing ALL S7-26-08

September 25, 2008

Thank you for your time,

I am writing in hopes someone actually reads this email and cares about its contents. While I understand the problems occurring what I do not understand is the actions taken to fix them. People claim 'naked shorts' are the issue but the stocks that people claim where hurt are stocks that had serious flaws that each claimed wasn't an issue (FNM, FRE, BSC, LEH, AIG) and yet turned out to be the complete opposite.
Now my issue is that each of these stocks was easy to borrow and giving full short interest rebates so it wasn't illegal to sell them and even after the rules went into effect one could still borrow stocks such as MS, GS et al which therefore meant these 'naked shorts' weren't being stopped.

The only ones being stopped are option market makers. Our small firm has a handful of traders who through their fiduciary responsibilities were selling puts, buying calls and hedging these positions with short stock in these instances. Now that the rules are in place there is no liquidity in the options and as a result of not being able to be short the stocks we have to buy in the short stock. This creates huge risks as the individuals can no longer sell the stock against their positions and the puts in many cases have gone from .10 to .20 cents wide to 3-5 dollars wide.

This being said all these position which many don't expire until January will have to be hedged by paying up for puts and locking in huge losses or buying in the stock and hoping (not a good word in our industry) that these stocks go up and somehow the puts finally get to a level that one can simply break even. But for this to happen the stock would have to rise dramatically to get these 3-5 dollar wide puts to come to what use to be fair value. Or we have to sell calls at very cheap levels (since no one can sell stock no one can buy calls) and incur huge short gamma risks and possibly assignment risk which then becomes a violation of these rules now set in place (catch-22).

My question then is has is become okay to destroy the lives of a few because of the mistakes of the greedy? If this order was phased in we could have taken care of our issues but the way it was done it was impossible to do so. Hedge funds, mutual funds, and the public in general where using options to hedge but now cannot since in many instances there is no liquidity and as a market making firm we cannot provide it since we cannot hedge trades anymore efficiently and cost effectively.

Without put sellers there are therefore less stock buyers as people would use the puts to buy stocks as they fell. The stocks that fell were 'borrowable' and still many are so maybe the issue was the firms simply got greedy, didn't know what they were doing and the market did what the market does and weeded out the bad and the week. Unfortunately we might get weeded out ourselves and not due to our negligence but to the fear of others who got bullied into putting in a rule too quickly without asking for input from those who would be most effected.

We are required to make markets and disseminate a fixed percentage of markets by the exchanges, we do this, we trade and then the rules to which we were trading on suddenly and without warning completely change to where we and many many others are aversely affected and unable to trade, hedge or close down positions without incurring losses that could force them out of business.

Not sure anyone will get this, read this, respond to this, care about this, or react to this but if I didn't write (email) then I could only blame myself for being a sheep led to the slaughter because I didn't do anything (even something as little as an email).

Thank you for your time, pardon any typos or misspellings but I have to get to work and figure out how we are to survive.

R. M.