Robert J. Merrill
December 31, 2003
Mr. Jonathan G. Katz
Re: Regulation SHO, File No.S7-23-03
Dear Mr. Katz:
I am writing to you regarding the proposed Regulation SHO. I am currently employed as a professional trader by Trillium Trading, LLC, with over four years of experience being actively involved in the market on a daily basis. There are a number of reasons for which I am greatly disturbed by this change in policy, which would restrict short selling through the use of a new uniform "Bid Test" Rule.
My main point of argument against the bid test rule is the fact that it would diminish liquidity in the market. By definition of this proposed rule, the short interest in the market would greatly contract, thus making it more difficult for an investor to sell a position. Fewer short positions in a given security lead to fewer buyers with whom a seller could match an order. Because short positions could no longer be initiated on the bid, it also makes it more difficult for an investor with a short position to cover that position at a favorable price. Liquidity is an integral part of any fair and equitable marketplace, and the adoption of this rule would damage it greatly.
Another point of contention in the proposed rule change is the exemption of market makers from the bid test qualification when engaged in "bona fide market making activities". This exemption gives market makers an unfair advantage over the general public, especially considering the recent increase in proprietary trading activity at bulge bracket firms. It would be nearly impossible to distinguish the "bona fide market making activities" from proprietary trading for their own profits, thus creating a tremendous opportunity to take advantage of the exemption. With corporate scandal and public deceit in the papers on what seems to be a daily basis, the markets should look for ways to increase the protection of the individual investor, not lessen it.
I hope that you will take my viewpoint into consideration and refrain from adopting this new regulation. Thank you very much for your time and consideration in this matter.
Robert J. Merrill