April 21, 2022
I am writing about a genuine concern regarding the SEC's recent rule proposal: SR-NSCC-2022-003
This proposed rule would allow institutions, hedge funds and other actors except retail in the US stock market to effectively steal from the retail investors and businesses with little to no accountability further muddying the waters the US stock markets are already in.
While the SEC by voice of their chair Gary Gensler has come out and said that retail investors need to be protected and the current state of the US stock markets is anything but fair towards retail, the sponsors for this rule at the NSCC are brazenly asking the SEC to assist in covering up illegal naked shorting activities.
Naked shorting is the illegal practice that Wall Street firms use to pocket money by short selling companies through borrowing shares and selling them back to the market without actually having possession of such shares. A practice that has been uncovered recently by retail to be done en mass by the hedge funds and market makers in the US stock markets. Done at scale, this practice drives down stock prices artificially, stealing gains from retail investors, choking growing businesses of essential capital and stifling innovation.
Currently, the only risks these institutions face by naked shorting is a slap on the wrist and a small fine that more than justifies their resolve in breaking the rules. Regulation enforcement and unexpected price discovery are causing short sellers to lose money as the shorted stock actually rises in price, forcing them to close their position at a loss yet these regulations are hardly enforced and evidenced by this new rule are easy to circumvent by creating new rules allowing the practice.
In essence, this rule would enable avoidance of true market price discovery through onward lending. It prevents short squeeze scenarios as it allows firms to avoid forced delivery of shares and essentially 'wait out' stock price rises while keeping their short positions intact. It removes the infinite risk of naked shorting entirely under the guise of liquidity, and in so doing removes the deterrent of engaging in what is supposed to be very risky and ILLEGAL business practice.
It's all upside for market makers who excessively naked short securities, and all downside for retail traders, the very people the SEC are supposed to protect. This rule is the opposite of creating a fair market and dumps all risk onto retail investors, allowing naked shorts to obfuscate and dilute their risk while profiting greatly off the backs of pioneering companies and small investors.
There is no need for this rule in a fair market. I would suggest the SEC focus their attention on forcing the NSCC to deliver shares on pain of criminal prosecution and banning dark pool abuse to prevent the same illegal practices this rule change would enable.
It is outrageous that rules like this are still being proposed that only favor reckless institutions after several market events in the past 20 years that involved FTD's.
I strongly request that you oppose this rule change and start advocating for the retail investor by making the markets more transparent and fair for all instead of proposing additional rules like this one that complicate the markets even more and put retail at a disadvantage.
Keeping in mind that SEC Commissioner - Hester Peirce recently voted No on adopting greater market transparency, there is a lot of soul searching to do at the SEC As currently they DO NOT have the retail investor in mind when conducting their business. A vote against this rule would go a long way to mitigate this