February 14, 2022
The past year has been enlightening for me as a retail investor, and I'm sure many others would agree with that statement.
Thanks to the ongoing research efforts of many retail investors, some formally educated in finance and others not, evidence pointing to the existence of security-based swaps that play a key role in the price movement (or lack thereof, at times) of securities we're invested in has become too large to ignore.
I applaud the SEC's recognition of the existence of these mostly hidden, yet incredibly large and impactful swap positions that large institutional investors are engaging in, and doubly applaud the efforts to bring them into the light and under regulation so that they may be prevented from doing further damage to the \"free and fair\" aim of our securities markets.
Retail investors, generally speaking, are already at a disadvantage compared to institutions and professional hedge funds in terms of capital, both in terms of how using it can impact securities pricing, and how access to more of it also means access to more market data enabling better, faster decision making moment to moment. For the retail investor, a comparatively larger amount of time must be spent researching and vetting each single security one by one before making an investment, if said investor wants to invest intelligently without too large of a \"leap of faith.\"
To that point, the hidden existence of securities-based swaps, in essence, turns every potential investment by the retail investor into the aforementioned \"leap of faith\" whether he or she realizes it or not.
To give an example which may be relevant today: Suppose an assortment of hedge funds have taken an very large short position in a security, but entered into a swap arrangement with a counter-party such as a large bank, be it based on entropy, variance, or another metric. Their positions and interest in the security are now essentially hidden from public view entirely, because they are not required to report on such arrangements. As a result, the current reporting requirements show that the short interest has disappeared, so the retail investor takes this into account when investing. Unbeknownst to him/her, the hedge funds are still short, and have an interest in protecting this short position, leading to, oftentimes, price action that cannot be explained by news regarding the security, or market conditions, and instead leaves the investor to, in many cases, watch what they perceived to be a sound investment in a healthy company, begin a death spiral due to, in essence, hidden machinations and scheming they couldn't possibly have been aware of. This undermines the very notion of a free and fair market and will, given enough time, erode the retail investor's confidence in investing in this nation's businesses at all. That may be fine enough for some large players, but in the long term it will be devastating to the American dream, including one of the chief ways to secure a happy retirement through investment.
I realize my comment is lacking on highly technical specifics, I'm still learning so much about our markets every day. That being said, I've learned enough to realize how vital the passing of S7-32-10 is to protect not just the retail investors of American securities, but also the foundations of the market itself.
To Chairman Gensler, and every crucial member of the SEC who has worked diligently the past months in bringing this rule proposal to the forefront, thank you very much. S7-32-10 will go a long way towards addressing the currently hidden fraud in our markets if approved and enforced as it is written now.