From: Zachary Hepner
Sent: Tuesday, December 30, 2003 3:04 PM
To: rule-comments@sec.gov
Subject: Reference File No. S7-23-03 regarding Regulation SHO

Mr. Zachary Hepner

12/24/2003

Mr. Jonathan G. Katz, Secretary 
Securities and Exchange Commission 
450 5th St., NW 
Washington DC 20549-0609 


    Dear Mr. Katz,

I am a level II quote trader, with an MS from the University of California at
Los Angeles, and MBA from the University of Arizona's Eller School of Business.
I would like to address my concern and disapproval of the new proposal File No.
S7-23-03 regarding Regulation SHO.


The proposal is in discordance with what I know about economics how to create a
fair and orderly market. Furthermore, this new rule will harm small investors
while giving large investment banks the upper hand to take advantage of any of
their customers with less preferable price order execution.

I would first like to address problems with "subparagraph (b) of proposed Rule
201" which "would require that all short sales in exchange-listed and Nasdaq NMS
securities, wherever traded, be effected at a price at least one cent above the
consolidated best bid at the time of execution"

As an experienced level II quote trader, I am confident that if this rule is
passed, small investors will certainly get less preferable price executions. I
invest in both very liquid and very illiquid stocks. I daily see market bids
pushing up the price of the individual stocks simply in order to clear levels at
the asking price. If Proposed Rule 201 passes, stocks prices will fluctuate much
more acutely to the detriment of smaller investors. Illiquid stocks will be
pushed up much more that normally with even less than one thousand-share market
buy orders. That is because scalping experts will buy ahead of the market order,
even at one hundred share incremental levels, push up the stock more, and sell
with the market order when they have bought equal to the size of the market
buying order. Ultimately, the investor who will have entered the order to buy on
market will receive worse price for his fill, and the price of the stock will
have been pushed up more acutely than it should have otherwise. I see examples
of this happen every day with all types of high and low volume stocks. Investors
who may have an automatic buy order when a stock gets to some price may have
their orders manipulated by more short term investors who are using Rule 201 to
their advantage by pushing up the stock more than normal and triggering the
automated buy order to buy even more.

The flipside example is just as worrisome. Market-selling orders will get filled
less quickly. Instead of an investor simply shorting at the bid price, the
investors will only be filling their shorts at the asking price that is less
preferable. Here is a scenario where one Rule 201 will enable investor filling
his order get worse price executions. Buyers see a seller selling five thousand
shares of a stock at market. They cancel their bids and bring down the price of
the stock more sharply than without Rule 201. They then execute against the
asking offer and the stock will rise up more sharply as a reversal. The investor
trying to short was not able to short at the bid, but had to get the worse
possible price far below the original price of the bid. The buyers will have
effectively taken advantage of this investor only because he could not short at
the bid and ended up buying far below the bid.

I do feel proposed temporary Rule 202 of Regulation SHO (that would suspend, on
a pilot basis, the operation of the proposed bid test of proposed Rule 201 for
specified liquid securities) is beneficial to smaller investors, should become
permanent (not temporary) and be extended to all stocks. It rationally makes
sense. Traders should be able to short a down move just as they may buy ahead of
a buying move. Economists do not feel there is any detrimental affect to a stock
price in any macro sense if a trader or investor has shorted against the bid
price when he could have shorted on the offer. I hold many short positions in my
portfolio and would benefit more expediently with the ability to short at bid
prices regardless of the tick. My affect on the price of the stock is not
noticeable yet I lose out on many shorting opportunities during the course of
the day. Let me give an example. A stock has a ten-cent spread, $11.20 by
$11.30, lets say. Some investor thinks the stock is a good short. He enters an
offer of five thousand shares at $11.29. The buyer anticipates the seller by
putting in a buy order of 100 shares to $11.27 and one hundred shares $11.28.
The buyer drops the bid at $11.28 and creates a down arrow. Now the seller
cannot execute a short sale against $11.27. The buyer however waits for an
automated bid to join the liquidity and he cancels his bid for 100 shares and
then sells at $11.27. Ultimately, the original short investor does not get his
short while the buyer can sell right ahead of the short investor using the short
investor's knowledge. That is not within the bounds of a fair and orderly market
place; hence I am in favor of making Temporary Rule 202 permanent and extending
it to all stocks.

Thank you for your considerations. Please contact me if you have any questions,
or would like me to discuss with you further



    Sincerely,

    Zachary Hepner