April 14, 2009
The SEC may not have all the empirical evidence but it would be counter intuitive to believe that unrestricted short selling enabled by the repeal of Rule 10a-1 in July, 2007 did not contribute over the last 18 months to the severe decline in equity values resulting in increased public risk aversion, reduced private capital formation, and contraction in economic activity. Re-establishing robust and effective short sale rules should help increase public confidence in the integrity of our markets which is essential to economic health and stability. In this regard I offer the following comments on the SECs proposed rule changes:
1) I support adoption of the proposed uptick rule based on the last sale price for a price test. Im concerned the national best bid reference point under the proposed modified uptick rule could be subject to more potential manipulation since it represents only a buyers intent and not an actual transaction. Although there are issues with both price test rules the original uptick rule served us well for 70 years and I would suggest the continuation of a sale price reference as the basis for any new rule.
2) Any proposed uptick rule must be market wide and permanently applied and not triggered by a circuit breaker. A circuit breaker trigger would only weaken the application and effectiveness of the price test rules and I would strongly oppose this approach.
3) In addition to a market wide and permanently applied uptick rule I believe a circuit breaker halt rule prohibiting short selling in a security after a precipitous decline of 5% to 10% would be effective to further reduce price volatility. Id suggest suspension of all short selling for the balance of the trading day including after-hours with the exceptions as outlined in the proposed amendments.
4) Under the price test rules a short sale could only be entered as a limit order and I believe there would be some benefit in having a short sale increment other than a penny above the reference point to help reduce possible sale or bid price manipulation to execute a short sale. Id suggest an increment of $0.05 which I believe would benefit the process without unduly encumbering the functions of legitimate short selling.
5) I strongly believe a price test rule should be in place during after-hours trading to prohibit a short sale at a price lower than the last sale price reported on the consolidated tape. The after-hours market is typically thinly traded and should not become a haven for abusive short selling that would be prohibited during regular trading hours.
In closing, I commend the SEC for their renewed efforts to address short selling abuses including naked short selling with vigorous and meaningful regulation. Id only add that any new rules should be at least as robust and effective to address current market issues as was the original Uptick Rule in effectively addressing the market abuses of 1938 and thereafter.