December 21, 2003
Mr. Jonathan G. Katz
RE: File No. S7-23-03
Dear Mr. Katz:
I am writing to you today to voice my concerns over the proposed Regulation SHO. I am currently a professional trader employed by Trillium Trading, LLC and have been involved in the securities business for over three years. Based on my understanding of the practical workings of the US equity markets, it is my concern that a new uniform bid test allowing short sales to be effected at a price one cent above the consolidated best bid would be detrimental for several reasons.
Firstly in practice, I feel that any 'uptick' limitation on short selling is quite outdated and irrelevant in today's market. The US equities markets have changed greatly in the last 70 years wherein spreads now have been reduced to pennies, and liquidity and volume are exponentially higher. I believe the 'bear raids' of the past just are highly likely in today's global investment community, and so it should not present a real concern.
However, what is cause for major concern is that the proposed Regulation SHO would have an overall negative impact on market liquidity. This lack of added liquidity could actually be more harmful and trigger exaggerated down moves in a stock. In examples where a 'market sell order' comes in on an ECN ("pegging" one penny above the bid), one will notice far larger down moves than if the shorter would just 'hit the bids.' A specific example of this was seen on December 5th, 2003 in COCO.
The proposed regulation would not only be harmful to short sellers but I feel that it would hurt buyers as well. In many cases, buyers will be forced to pay the spread in order to get long the stock because short sellers will not be able to hit their bids. Therefore, the buyer does not get the true best price.
The exemption of market makers from the bid test is truly unjust. The day-to-day business of a market maker involves a great deal of "day trading." Investment banks now derive more and more profits from proprietary trading where they basically play the roles of huge hedge funds. To give market makers the advantage of not having a bid test rule is ridiculous. It puts the public and moreover, people such as myself who actively trades for their livelihood, at an obvious disadvantage. And I believe the SEC has been entrusted by the public to protect and correct such blatant disparities.
In conclusion, it is my concern that the proposed regulation SHO would definitely have a negative impact on trading, and as a consequence, on the livelihood of many professional traders. I strongly urge you to reconsider the proposed Regulation SHO.
Bernard J. Lee