From: Carl Z. Giannone []
Sent: December 10, 2003
Subject: File No. S7-23-03

Re: Regulation SHO (Short Sales)

Dear Sirs,

I would like to comment on a number of issues surrounding the proposed 'Regulation SHO.' I have been a professional trader and principal at proprietary trading firms for the last four years, having been in the 'trenches,' I have a great deal of insight into the practical workings of the US equities markets. This experience has led me to conclude that while certain aspects of Regulation SHO will be beneficial, other of the proposed rules would have severe deleterious consequences.

First and foremost I want to address the 'Bid Test' rule. In practice, I feel that any 'uptick' limitation on short selling is very antiquated, and irrelevant in today's market. If my memory serves me, the original '0+ tick' rule was part of the Securities Exchange Act of 1934 as a direct response to the 'bear raids' that occurred during 'the crash,' and subsequent market decline. The US equities markets have changed greatly in the last 70 years... spreads have been reduced to pennies, liquidity is exponentially higher, as is volume. The 'bear raids' of our father's day just aren't possible in today's global investment community, so this isn't a real concern anymore. What is a concern, is if the 'uniform bid test' proposal is passed, liquidity will actually be less and intraday trading will be more volatile. This actually seems counterintuitive, however if you look at examples where a 'market sell order' comes in on an ECN ("pegging" one penny above the bid) you see far larger down moves, than if the shorter would just 'hit the bids.' An example of this can be seen on December 5th, 2003 in COCO. An erroneous large sell order came in on the BTRD ECN that was pushing the stock down one penny above the bid. The sell order drove the stock down 19 points, and when the order was filled, the stock rallied 4 points in seconds.

One way to prove my theory would be to implement the pilot program in which all bid test rules would be suspended for a two year period. Everyone has their beliefs and opinions... this sounds like an outstanding way to test the soundness of any case being made to keep a bid test rule.

Now I would like to comment on what I believe is the most egregious rule that is being considered, the exemption of market makers from the bid test qualification if they are engaged in 'bona fide market making activities.' Back in the 1970's the base of deployable capital at the major investment banks in the US was around $20-50mm, today it's more like $20bn. Investment banks derive more and more profits from proprietary trading... they are essentially acting as mega hedge funds. Look at Lehman Brothers most recent earnings, they recorded revenues very close to the previous quarter, except capital markets revenues doubled to $1.67bn. They maintained their earnings by essentially 'day-trading' equities. Goldman Sachs has increased their 'value at risk' from $47mm to $64m. Giving market makers exemptions from bid test rules is giving these 'day-traders' a huge advantage over the general public... the 'public' that the SEC is entrusted to protect.

In spite of my disagreements with the bid test rule, I do believe there should be at some level where 'un-restricted short selling' should be collared. The proposed 10% 'circuit breaker' over a trading day should suffice to prevent sheer panic in a day of major market collapse.

I hope these points will be taken into consideration when evaluating these matters.

Carl Z. Giannone

General Securities Representative
Limited Representative Equities Trader
General Securities Principal

Trillium Trading, LLC.
417 Fifth Avenue
New York, NY 10017