From: Tal Sharon [talsharon@optonline.net] Sent: Wednesday, December 31, 2003 8:37 AM To: rule-comments@sec.gov Subject: File No. S7-23-03 (Regulation SHO) Wednesday, December 31, 2003 Mr. Jonathan G Katz Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 RE: File No. S7-23-03 (Regulation SHO) Dear Mr. Katz, I am writing this letter to express my opinion as an experienced trader on the Regulation SHO proposal (File No. S7-23-03). I feel that my 4 years of trading experience will help you gain insight into a new short selling policy for all markets. First of all, the idea of one uniform rule for short selling across all markets is a great idea. As it stands now there are too many different rules as to when you can get short and on which venue, so this should simplify things. However, I do not agree with the proposed uniform bid test rule. It states that one may only effect a short sale at a price a penny above the "Best Bid". This rule would severely restrict investors and traders from opening short positions. One situation that will become more common if this rule is passed is if an investor would want to get short he would have to enter an order to put up an offer at the inside and if he does not get executed, he would make the order a pegging order, going lower each time the bid dropped. In my experience as a professional trader, a pegging sell order has a worse effect on a stock than somebody just hitting the bids. When somebody hits the bid a trader would think, "ok, somebody wants to sell and there is somebody there buying it", but when you see a pegging offer and nobody is buying it you think "ok, somebody wants to sell and there is NOBODY who want to buy it either"!! This makes a stock look even weaker, perhaps artificially. If the person that wanted to get short could just hit the bids, assuming it was an uptick, it would show a truer market for the stock. You mention a "Bear Raid" in your proposal as reason for restricting investors from being able to hit the bids to sell short a stock. The notion of a "Bear Raid" in today's times does not exist, where information is disseminated very quickly to the whole world, and the large number of informed investors. Because information is so easily available to everyone, a stock being artificially sold down would not last because somebody out there would realize that the stock is being artificially sold down and is a great value and would buy the stock, thus creating upward pressure on the stock. Another way to look at it is that what is the difference between a "Bear Raid" and the giant bubble the Nasdaq market created in the year 2000 when prices were artificially high because of rampant buying? Investors lost more money in that artificial bubble than they did in all the bear raids together. If you feel you have to restrict short selling for this bear raid reason, then you should also be restricting buying in stocks so as not to artificially inflate stocks. By restricting only one side of the trade (the shorting side and not the long side), you would be enhancing the ability of certain investors from artificially inflating stock prices. This new rule proposal will also restrict investors from buying stock on the bid. For example, suppose I put in a bid to buy stock ABCD at 47.50, which is the current Best Bid and is higher than the previous best bid (uptick). Now if another investor would like to get short the stock, under the current short sale rules, he could have hit my bid to get short, allowing me to buy the shares I want and allowing the second investor to get short the shares he wanted to. Under the new proposed rule, the second investor would not be allowed to hit my bid in order to get short. So under the new proposed shorting rule, the SEC would be limiting the liquidity in stocks. The markets are all about enabling investors, big or small to buy and sell stock at current levels, given there is enough liquidity. Another issue to consider is that shorting stocks should not be looked at in a negative light. Shorting stocks is a tool used by many in portfolio management in order to reduce stock specific risk and many other risks involved with investing. By restricting their ability to get short, you are taking away their ability to reduce risk for their investors. The SEC proposal also mentions that market makers be exempt from the new proposed short sale rules. I feel this is wrong. In today's Nasdaq market, being a market maker does not carry the same burden it did years ago. In today's market, ECNs do the bulk of the trading on Nasdaq. 80% of the volume on Nasdaq is done on ECNs. Market makers today do not risk the capital they used to in order to do their jobs. They are mainly order flow houses. They fill customer orders at prevailing market prices all the while not risking any of their own capital. By allowing market makers to be exempt from any short sale rule, it would create an unfair advantage to the big institutions on wall street over the small investor. It is for these reasons that I feel market makers should NOT be exempt of any shorting rule, however the final rule is constructed. My recommendation for a new unilateral short sale rule is as follows; A short sale should be allowed to be effected at any price assuming the current best bid is at least a penny higher than the previous best bid. For stocks that are very liquid (a volume measurement would be used to determine the liquidity level) such as INTC, SUNW, MSFT, where effecting a short sale in that stock would not effect the stock since there are always an abundance of buyers and seller, there should be no restriction at all on when one can execute a short order. With regard to the very illiquid stocks (again, a volume measurement would be used to determine the liquidity level, perhaps an average daily volume of less than 50,000 shares), some type of additional restriction should be placed on short orders, such as only allowing investors to hit bids up to 5 cents through the current Best Bid (which should obviously be higher than the previous Best Bid). Short selling is an important part of the investment universe. It can be used for good and for bad, that is why there should be some regulation as to when one may enter a short position. At the same time, restrictions should not be put in place that would greatly increase the difficulty investor will have to opening a short position. I wish you luck and much understanding in determining the best set of rules for this situation. I am sure you will make a wise and informed decision. Sincerely, ________________________________________ Tal Sharon Trillium Trading Registered Principal