December 25, 2003
Mr. Jonathan G. Katz, Secretary
Dear Mr. Katz,
I am writing you today to express my views regarding Regulation SHO and other questions the SEC has posed.
As a business student at the University of Maryland, I remembered taking numerous finance and economic classes where we discussed the SEC's role as the governing body of the financial markets. We learned that its mission was to protect investors, maintain the integrity of the securities markets, and help create a level playing field for all investors, big or small.
One of the main points of the SEC's proposed Regulation SHO is to institute a new uniform bid test. This new uniform bid test would allow short sales to be effected at a price one cent above the consolidated best bid. Allowing this rule change, the SEC would violate one of its key concept of a level and fair market for all investors. If this rule were to come into effect, Market Makers will have the opportunity, in stocks that are selling off, to continue to sell and push the stock price lower while investor and individual traders would have to extend offers in order to get short. Even in a situations where the stock is moving up. If a trader wants to get short he would have to put an offer up a penny above the best bid instead of selling short at the best bid to the person who wants to buy. In effect penalizing the investor by increasing the price of the stock he wants to short.
In addition, other forms of selling can cause more harm to a stabilized market than short selling. For example, suppose stock XYZ is being sold by an institution. Many institutions place market sell orders which are large orders that continue to go low offer until the offer is taken. In effect, quickly forcing the market to sell to the buyers on the bid, causing a very sharp down move. In this situation this sell order does more harm in a very short amount of time than if the intuition sold their amount to the buyers on the bids.
In regards to one of the other main points of Regulation SHO, I do heavily support the suspension of the operation of the bid test rule in certain liquid securities during a two year pilot program. I encourage the SEC to expand this program from more than just 300 stocks and to really pick these stocks with prudence. Stocks and the NASDAQ and NYSE both trade very differently even with similar volumes. The pilot program stocks selection sample should be wide enough to encompass many different stocks, different volumes from different exchanges to study their behaviors. When proven successful, I believe the SEC will the positive effects and fair markets on relatively unrestricted short selling on market volatility, price efficiency and liquidity.
In summary, I minimally believe that all the markets short sales should adopt the current NASDAQ bid test, which prohibits short sales at or below the best bid when the best bid displayed is below the preceding best bid. Ultimately, I believe the pilot program will prove that the elimination of a price test benefits the markets by allowing investors and traders the same rights as market makers. To freely short sell potential overvalued securities. Ultimately this process will make the market more transparent and the stock price will reflect this.
I have understood and supported previous rule changes because of the need to make the market place more transparent. I appreciate the SEC's attempt to gather information and comments on the issue of shorting and the bid test rule. Mr. Katz, I kindly urge you and your colleagues at the SEC to institutes and fair and equal bid test for the arguments listed above and for the mission for which the SEC stands.