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December 22, 2003 Mr. Jonathan G. Katz
Dear Sir: I am writing in response to Regulation SHO currently being proposed by the Securities and Exchange Commission. I feel there are several key components I believe are imprudent or misguided. The biggest complaint I have is the "Bid Test" portion of the proposal. I believe that in order to attain the best trading environment, exchanges should strive to be true markets. Exchange Traded Funds such as the DIA and the proposed "Pilot Program" of Regulation SHO are examples of true markets. In both ETFs and the Pilot Program, buyers and sellers are allowed to trade with each other at prices they determine with little limitations. Other than locating the securities to be borrowed, all sales (long or short) are permissible regardless of the last trade or up tick. I believe that all securities could operate like ETFs because any selling pressure short sellers could create would at some point create buying opportunities for others. Rather than implementing the Bid Test rule, which would in effect hamper the way stocks should trade, I believe it would be better to have all stocks included in the Pilot Program. If the SEC feels the exchanges and the NASD would be incapable of properly monitoring a true market system, than at very least the rules that govern short sales should be as close to a true market as possible. In a true market there are three ways one can get short, on the offer, on the bit with an up tick and on the offer with a down tick. The current short sale rules for NASDAQ securities are closer to a true market more than the proposed Bid Test rule in Regulation SHO because it allows options 1 and 2. The proposed Bid Test rule would only leave option 1. I would question the need for the "Severe Market Decline" portion of Regulation SHO. I believe the rules that are currently in place for extreme declines in the markets that result in temporary halts are effective enough. There should be a better determination of when to halt individual stocks. Sincerely, Michael Lucarello
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