May 3, 2009
May 3, 2009
Chairman Mary L. Schapiro
Securities and Exchange Commission
100 F Street
Washington, DC 20549
Re: Response to request for comments regarding the proposed rule SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 242 Release No. 34–59748 File No. S7–08–09 RIN 3235–AK35
Amendments to Regulation SHO.
Dear Chairman Schapiro:
Thank you for the opportunity to comment on the various proposals to reduce volatility and to restore investors confidence.
After weighing the effectiveness of each proposal, I believe a price test on a market wide and permanent basis with the national best bid (the proposed modified uptick rule) would be the most appropriate.
The alternative proposal (the circuit breaker rule) would not go far enough. Because, a stock can continue plunge after going down ten percent, as more short-selling pour in around the world after the stock breaks support levels.
With this alternative proposal, a stock can still easily lose 50 percent or more in a few days. And thus, this rule will fail its basic objective of restoring investors confidence.
The modified uptick rule will certainly help to diffuse any coordinated attacks that involve the use of futures, options, ETFs, naked short-selling, credit default swaps, and so forth, as it tends to disrupt the timing and synchronization of leveraged instruments. Once, the timing is disrupted, there should be a small price difference in various markets, and arbitrageurs will come in quickly to bring prices together. Thus, the concern for a reduction in liquidity is not really legitimate.
Over centuries, the stock market had always been a place to raise capital for companies that need funds to expand. The stock market had also been a place for long-term investments for savers and retirees. But, the repeal of the uptick rule in 2007 tipped the delicate balance between buyers and sellers. Therefore, sellers have been able to push stocks at will, especially with the ability to execute naked short selling and with the use of leveraged ETFs. As a result, financial stocks plummeted out of control, and finally the chaotic declines of many large financial institutions such as Bear Stearns, Merrill Lynch, AIG, and Lehman caused a major policy mistake, resulting in the bankruptcy of Lehman. After the complete credit market meltdown in October of last year, taxpayers finally have to bear the costs of bailing out the economy in trillions of dollars. Thus, it can be argued that it was the repeal of the uptick rule that was one of the major factors that caused this credit crisis, the recession and massive job losses.
The collective wisdom of experienced investors and traders around the world cannot be wrong. Many have written to the SEC asking for the reinstatement of the uptick rule. You can also find many of my letters written to the SEC since October 2007, warning about the crashes of individual stocks, and eventually the crash of the stock market itself. Recently, Chairman Ben Bernanke and Mr. Warren Buffett, in their public statements, also favored the reinstatement of the uptick rule. Thus, the SEC should feel more comfortable that it is on the right track to gain back investors' trust.
I also would like to take this opportunity to comment on the naked short selling. Currently, options market makers are still exempted from the ban on naked short selling. I strongly believe that every short position has to be supported by borrowing in advance. Otherwise, sellers can continue to generate counterfeit shares by buying large amount of puts, forcing dealers and market makers to generate naked short sales. The hedging exemption has to stop.
Again, thank you for the opportunity to provide my personal thoughts on this important rule.
Sincerely,
Dan Nguyen, CFA
Chief Investment Officer
Midwest Professional Planners.