October 6, 2009
To Whom It May Concern:
Re: Short Sales
In my opinion there's nothing wrong with shorting in general. There's a place for selling shares of a poorly-performing company, just like there's a place for buying the shares of an outperforming company. Indeed, it's arguable that a poorly-performing company deserves to have it's shares sold. For every trade there's a buyer and a seller, so if someone's shorting an outperforming company it's likely that a greater number of buyers will buy those shares and more, to the detriment of the person who's betting against the good company (the shorter). So the idea that short-sellers have a disproportionately negative effect on the price of a good stock is fundamentally wrong, in my opinion. If it's a good stock then buyers will come in and the short-seller will lose. I think the unfairly negative views of short-sellers often come from buyers of bad stocks who blame shorting for the price depreciation that would (and arguably should) naturally occur anyways because it's a underperforming company.
In my opinion what needs to happen isn't further restrictions or prohibitting shorting in general, but rather amendment of how the shorting process works. At present the greatest risk faced by the short-seller isn't that the stock price will go up ad infinium, as is often proclaimed by uninformed observers of the shorting process. The greatest risk is that the person who lends those shares to the borrower will force an unexpected buy-in, usually when the stock starts to go down and the lender realizes they made a mistake in their prediction of what direction the stock will go. At present such forced buy-ins are excused on the grounds that the lender recieves nothing in return for lending the shares, and in my opinion the parties to the loan transaction should be free to negotiate a 'lending fee' as compensation for the loan (arguably similar to the premium paid by option buyers), in exchange for an agreed waiver period during which the lender waives their right to recall the shares.
For example, the lender might charge $50 for every 1000 shares they lend, and waive their right to force a buy-in for 3 months or 1 year or whatever period is agreed. The parties would obviously always have the right to reject the proposed terms, but once terms are agreeed, they'd be bound to them. This scheme would require rules mandating brokers, as necessary intermediaries, to provide for such remote negotiation, which in my opinion would require simple modifications to their current trading software platforms (i.e. fields for the fee and the waiver period).
Thanks for considering my input.
Chris Wiltse