Mar. 14, 2022
Dear Chair Gensler and SEC Commissioners: Re: Comments on the proposed new Rule 13f-2 and amendments to Regulation SHO and CAT to increase market transparency regarding short selling As a retail investor who has witnessed over the past year an almost never-ending saga of price manipulation and a range of corrupt practices utilized by Short Hedge Funds, particularly in relation to GME, AMC and other “meme stocks”, and including everything (and all well documented) from abusing market maker privileges in relation to liquidity to illegal naked shorting to manufacturing synthetic shorts through ETFs to mismarking short positions to diverting transactions to dark pools and internalizing to avoid price discovery, I am writing to strongly voice my support for the Securities and Exchange Commission’s long-overdue proposed new Rule 13f-2 and amendments to Regulation SHO and CAT to increase market transparency regarding short selling. I strongly support the proposed changes of new Rule 13f-2 that would require market participants collect and submit certain short sale-related data to the SEC on a monthly basis, or even with more frequently (say biweekly), and for The Commission then to make aggregate data about large short positions, including daily short sale activity data, available to the public for each individual security. This is fundamental to transparency, leveling the playing field for retail, and ensuring the public’s continued faith in the legitimacy of the US markets. While the proposed changes would fulfill the Congress’s mandate under Section 13(f)(2) of the Securities Exchange Act, added under Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, to prescribe rules to make certain short sale data publicly available, one really must wonder why it has taken over 12 years to even get a proposal on the table for this basic, fundamental step toward greater transparency and more efficient, honest markets. I would, however, question why the Commission is of the view that the reporting under proposed Rule 13f-2 and Form SHO should be limited to only on a monthly basis, limited only to certain short sale related data, and steps to obscure the data points through aggregation before being made public. Of why certain data, including the identities of such managers and individual short positions, would remain confidential? Why not push for greater reporting, and fuller transparency, which in turn would make such market transactions clearer to all and reduce the amount of criminal behavior we now all witness on a daily basis. The events of 2008, leading to the collapse of the markets through unchecked fraud, deceit and manipulation by various parties on Wall Street should stand as a stark reminder to us all that failure to properly regulate the markets, and purge the system of bad actors, is critical to sustainable, sound and efficient markets, and as a means to avoid another financial crisis. I also laud and strongly support the Commission’s proposal to supplement the short sale data available to regulators with a new provision of Regulation SHO under the Exchange Act — Proposed Rule 205 — as well as amendments to the consolidated audit trail plan created pursuant to the requirements of Rule 613 of the Exchange Act. Collectively, these amendments would require broker- dealers to collect and submit additional data on purchases to cover short sales as well as assertion of Regulation SHO’s bona fide market making exceptions. The data resulting from these amendments would not only provide the Commission with greater visibility into market activity related to short selling, thus aid it in reconstructing market events and identifying potentially abusive trading practices, but also ensure a more level playing field for retail investors, who operate in the markets at an obvious and severe disadvantage. I would also suggest, in complete alignment of the proposed new rules, that the SEC reconsider the ban on publicly listed companies to suggest or encourage shareholders to directly register their shares with the company’s official stock transfer agent. By having one’s shares listed in one’s name, and removed from DTCC, is perhaps the only way to ensure the circular and often hidden onlending of shares for the purposes of abusive shorting can finally be curtailed. To validate my concerns over the abuse of short sellers in the current market environment, and the lack of reporting of short positions, all to the detriment of the retail investor, please refer to the following links: Prospect.org https://prospect.org/power/how-the-gamestop-hustle-worked/ Due Diligence Library https://fliphtml5.com/bookcase/kosyg Evans, Richard B. and Moussawi, Rabih and Pagano, Michael S. and Sedunov, John, ETF Short Interest and Failures-to-Deliver: Naked Short-Selling or Operational Shorting? (March 3, 2021). Darden Business School Working Paper No. 2961954, 2019 Academic Research Colloquium for Financial Planning and Related Disciplines, Available at SSRN: https://ssrn.com/abstract=2961954 or http://dx.doi.org/10.2139/ssrn.2961954 Richard Evans – Darden School of Business Slides on Operational Shorting https://jacobslevycenter.wharton.upenn.edu/wp-content/uploads/2018/09/Evans-Slides.pdf Youtube video of Evans giving a talk to Wharton’s on Operational Shorting https://youtu.be/ncq35zrFCAg?t=1641 Responses to Specific Questions: Q6: Securities Covered: Under Proposed Rule 13f-2, Managers would be required to report to the Commission certain short sale related data, as described above, for equity securities consistent with the Commission’s short sale regulations (i.e., Regulation SHO). o Should reporting Managers be required to report short sale related data for a different universe of securities than equity securities consistent with Regulation SHO? If so, please explain why and describe the universe of securities that would be more appropriate. Reporting should include all securities that are shorted, as it is well known that certain Short Hedge Funds use a number of tools to obfuscate and hide their short positions, and resulting fails to deliver, and seem to have an impressive ability to somehow ‘kick the can’ down the road almost indefinitely, while flooding a given equity with synthetic shares far above the official float. The only way to reasonable address this would be to force greater reporting and to cap any loopholes as soon as they are discovered—and we can rest assured that these market participants will find and exploit any loophole or oversight in the regulatory framework to their benefit. o Should fixed income securities be included under Proposed Rule 13f-2? If yes, explain why and describe what costs and benefits might be associated with such reporting. Yes, why not? Let’s see who is betting against the US Treasuries and hoping to financially benefit from a decline on our economy. o Should other securities be included under Proposed Rule 13f-2? If yes, identify such securities, explain why, and describe what costs and benefits might be associated with such reporting. Include every possible security that can be shorted, swapped, flipped against a synthetic derivative, hidden in an ETF, etc as it will reveal the true nature and intent of any abusive shorting to manipulate markets and hide price discovery. o Should certain securities be excluded from Proposed Rule 13f-2 reporting? If yes, identify the securities in question, and explain why. Let’s have no exclusions, as we know this will almost certainly be abused as a means to hide short positions. o ETFs would be included under Proposed Rule 13f-2. Should ETFs be excluded from Proposed Rule 13f-2? If yes, describe why. If no, explain why not. No, they should definitely be included. We know Short Hedge Funds use ETFs to hide their short positions and use ETFs to manipulate the price of a given equity with short ladder attacks, which are facilitated by the range of tools at their disposal, including ETFs. Q7: Economic Short Positions: Proposed Rule 13f-2 requires that a Manager calculate its gross short position in the equity security in determining whether it meets the Reporting Thresholds. o Should a Manager also be required to include short positions resulting from derivatives in determining whether it meets the Reporting Thresholds? If so, explain why, and describe any associated costs and benefits to doing so. If not, explain why not. Should only certain derivative positions be included? If so, which ones and why? Should certain derivative positions not be included? If so, which ones and why? Does excluding derivative positions create opportunities to avoid triggering the Reporting Thresholds through other economically equivalent instruments? If so, please explain. All short positions should be reported, especially derivatives as these will surely be used to sidestep Reporting Thresholds. Moreover, SEC fines and penalties for failures in reporting, machinations to avoid reporting, and should be significant, so as to create a major deterrent effect, with referrals to the DOJ for criminal prosecution. Such SEC fines and penalties for violating regulations can no longer be deemed the cost of doing business insofar as they represent a fraction of the revenue derived from ‘legitimate’ shorting (if even a case can be made for that), illegal naked shorting and related efforts to manipulate stock prices. Q8: Short Position Information: Under Proposed Rule 13f-2, Managers that meet a Reporting Threshold are required to report their end of month gross short position in the equity security. o Should a Manager also be required to separately report its end of month gross short position in derivatives, including, for example, options? Please explain. o If yes, should only certain derivatives be reported? Please explain. o If yes, should certain derivatives not be reported? Please explain. o Please describe any views related to the pros or cons associated with reporting end of month gross short positions in derivatives. Yes, short positions in Options should also be included, as we have seen in the case of GME the utilization of thousands of deep out of the money puts to hide short positions and fraudulently ‘balance their books’ and avoid accurately reporting their short position. This is outright abuse of the system and must be stopped. By reporting this, such egregious behavior will be illuminated. Q10: Indirect Short Positions or Short Activities: Managers meeting a Reporting Threshold would be required to report a gross short position in an ETF, but would not be required to consider short positions that the ETF holds in individual underlying equity securities that are part of the ETF basket in determining whether the Manager meets a Reporting Threshold for such underlying equity securities that are part of the ETF basket. o Should Managers be required to consider short positions that the ETF holds in individual underlying equity securities that are part of the ETF basket in determining whether the Manager meets a Reporting Threshold for such underlying equity securities that are part of the ETF basket? If yes, explain why. If no, explain why not. o Are there other diversified portfolio products in addition to ETFs that should be included? If yes, describe the product. Describe why, or why not, a Manager should be required to consider short positions in individual underlying equity securities of the product’s basket of assets. Yes, Managers should be required to consider short positions that the ETF holds in individual underlying equity securities that are part of the ETF basket in determining whether the Manager meets a Reporting Threshold for such underlying equity securities that are part of the ETF basket. The reasoning: When faced with “excess buying” pressure for ETF shares, the AP/MM can sell shares “naked” and then locate or create the shares at a later time (up to T+6 for “bona fide” market making) Market makers, often commercial banks or hedge funds, create ETFs for their issuers by buying the securities that the funds are supposed to represent. But they've discovered that they can make a predictable return by delaying the purchases and selling retail investors nonexistent exchange-traded fund shares that they will create later. These transactions are a form of shorting, known as “Operational Shorting” as coined by Richard Evans, Professor at the Darden School of Business (see links above). Q11: Frequency of Reporting: Under Proposed Rule 13f-2, a Manager that meets a Reporting Threshold must file Proposed Form SHO with the Commission within 14 calendar days after the end of each calendar month. o Is monthly reporting by Managers appropriate? If so, explain why. If no, explain why not and describe an alternative frequency of reporting that is more appropriate. o Does reporting within 14 calendar days of the end of the calendar month provide reporting Managers sufficient time to accurately report the short sale related information as described in Proposed Rule 13f-2? If no, please explain why not and describe any suggested alternative timeline(s). Alternatively, is the 14 calendar days after the end of the calendar month reporting period for Managers too much time? If so, please explain why and describe any suggested alternative. Reporting of short positions should be more frequently, if not in real-time. Waiting for data on shorting to be aggregated over the course of one month, and then adding another 2 weeks to actually report the same, is 6 weeks, which makes the data stale and undermines the point of greater transparency in markets. The technology and the short data are available and thus can easily be released to the public in shorter timeframes. I would suggest that data be provided at least weekly, on the next market day following the close of a trading week. Q28: Is the Commission’s estimation that, over the course of a year, for every short position created by a “short” or “short exempt” sale order, there will be an equal and opposite number of “buy to cover” purchase orders placed in order to cover, and ultimately close out, those short positions, an accurate projection of how frequently “buy to cover” order marks will be used? If there is a more accurate means of estimating the volume of anticipated annual “buy to cover” order marks, please describe its structure and why it is more accurate. This is a good start. But why “over the course of a year”? Why not over the course of, say, a quarter, or at whatever T+35 days it takes to settle all trades? And what is the penalty if things do not tally at the end of the year? A failure to have a defined and clear balance between short, short exempt sales, and an equal and opposite numbers of buy to cover purchase orders, would imply that abusive short selling continues. Thank you for offering me the opportunity to share my support for the proposed new Rule 13f-2 and amendments to Regulation SHO and CAT to increase market transparency regarding short selling. Sincerely, A Retail Investor