From: []
Sent: Monday, February 23, 2004 10:46 AM
Subject: File No. S7-23-03 (Short Sales; Proposed Rule)

Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549

Re: File No. S7-23-03 (Short Sales; Proposed Rule)

Mr. Katz,

As I see that the SEC continues to take on comment letters regarding the Short Sale Proposals, I would like to chime in myself at what seems to be a talking point that has lost much of it's meaning. Liquidity!

We continue to hear why Regulators have created such special exemptions by the Market Makers and specialists with regards to the Micro-cap and penny stocks. They need liquidity to trade. I believe one Member commenting on this rule change mentioned that the Specialist may be the ONLY SELLER in a particular security at present price levels. If that is so, maybe the pricing structure is wrong. How is a Market Specialist solely responsible for the dictation of a stock value? In economics lectures I was always taught it was a supply vs. demand thing.

Liquidity in these micro-caps is actually not an issue anymore but an excuse. Many of these stocks have outstanding shares that rival the Blue Chips and yet we continue to create liquidity on them. Shares on many of these stocks trade in the tens of millions to billions daily and yet we need Market Maker exemptions to allow for liquidity. If this liquidity is intended to mitigate the potential volatility in our stocks, why is it that they remain so volatile and why is there never any price protection on a sell off? Stocks actually dropped 25% in the Micro-cap markets on the recent news of an extension to the NASD Rule change to rule 3370. This extension being reported to Market Members and not the Retail and yet it was Retail investments that dropped. One can question as to whether the selloff was then initiated by the Market Members and drove retail out of their positions based on the rule change extension allowing more "Naked Shorting" to occur. One also needs to question why such volatility on the sell side was not protected by these Market Makers and specialists if that is the role they play and the exemption they are afforded.

Our securities that trade through this exemption can see buying power fluctuations of 10X from day to day (200K traded one day 2 million the next) and yet the stock barely moves with a change in buying regardless of volume. Is that due to the liquidity a Market Maker creates? If that is so, why will a stock drop 25% on no volume and no Market Maker is willing to prevent that activity. When a Natural seller is added into the mix, to get out of an investment manipulated by the Market, that seller only serves to drive down their own investment capital because no Market Maker will protect the sell side of a market. It seems fair Market is one that benefits the short seller at the expense of one who puts cash up front for long investments.

Our Penny stocks, due to Toxic Financing, have created nothing but liquidity. Comapnies sit on hundreds of millions to billions in registered shares. Tens of thousands of retail investors have gone to this corner of the market and picked up those shares. The liquidity is not institutional but retail as this market is not an institutional market but retail. Maybe that is the issue. Retail investors, to the regulators, are not well enough engrossed in the operations of Wall Street and thus need the assistance of market professionals who can take advantage of this situation without disclosure. Advantage the Securities Regulators continue to condone.

As for Market Liquidity and illiquid stocks, one can only ask why we are not seeing the same trade liquidities on securities like Berkshire Hathaway. Berkshire Hathaway (NYSE: BRK.a) trades a measly 200 shares daily at a share value of $90,000/share. Where then is the liquidity in that stock? Where is the need to create a Market where Sellers can sell and Buyers can buy? Should Berkshire Hathaway's trade under the same exemptions as these Micro-Caps, and trade settlement failures exceed the entire float, this $90,000 stock would be trading at $1000/share in theory. It would be over diluted and the imbalance of supply and demand would dictate a depression in the stock value. A depression that only supports the short, unsettled, positions, and goes against the long investor who put up the price at $90,000. The reason that it will never happen here on this stock is simple. Institutional Buyers and the power of Mr. Hathaway allow this illiquidity to be a non-issue. Berkshire Hathaway is not a Retail Holders stock. These investors have the full protection of the law and thus it trades without Manipulation.

The SEC and NASD are clearly at a crossroads on this entire issue. They fear the mess that is presently in the back offices of our firms. Will they do the right thing for the Retail Investor? They (SEC/NASD) have created an environment of class separation in their enforcement of fraud based on the pedigree of the investor and company involved. This Regulation change, regulation SHO, is a change based on the known problems that have been investigated and validated by our regulators dating back to 1999 and beyond. It has become an issue that pairs the Retail investors' rights to fair markets against the Revenue Streams to our Wall Street firms created by the liquidity on these stocks. Liquidity created through the non-settlement of issued shares. It is a change that protects the retail investor and thus it may not be in the best interest of the industry. Such decisions are difficult to make when the decision makers are industry insiders.

I believe the time is now for the SEC to step up to the plate and provide equal rights to all Investors. Regulation SHO is a step in the right direction and further delays to implement this rule, while allowing this fraud to persist, is only a sign that the SEC has not yet come to terms with the overall agenda of their very existence. Investor Protection. The SEC, in already allowing the extension of NASD Rule Change to Rule 3370, has begun to show their hand and it is a hand that needs to fold. The NASD Change to Rule 3370 was a proposal dating back to October 2001 and a proposal that was to close the loophole to the offshore naked shorting problem. To take 2.5 years to close a loophole that was in the best interests of the Retail investor, while this loophole generated tremendous revenues to our Wall Street Institutions, is simply prejudicial and inexcuseable.

Incorporate Regulation SHO immediately and put in it's infrastructure the full abilities to fine, censure, or dis-bar any Memebr Firm or Individual that fails to enforce proper trade settlements within a clearly specified timeline. Trade Settlement Failures, and the imbalance they create, are not in the best interests of the investing retail public.

Dave Patch