Apr. 25, 2022
From page 5 of the proposed Rule: I. Introduction A short sale involves the sale of a security that the seller does not own, or a sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller.2 Short selling has long been used in financial markets as a means to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand,3 or to hedge the risk of a long position in the same security or a related security.4 Short selling has also been shown to improve pricing efficiency by providing information to the market.5 While short selling can serve useful market purposes, it also may be used to drive down the price of a security, to accelerate a declining market in a security, or to manipulate stock prices. It really is quite shocking seeing the Commission pulling such a blatant legerdemain. It is agreed that short selling a stock is a VITAL part of price discovery in a fair, transparent and orderly market. For this to be legal, the short seller MUST BORROW the stock BEFORE entering the short sale contract. Such a contract is perfectly legal. When the seller enters into a short sale contract BEFORE borrowing the stock, that is a NAKED short sale. The Commission has conveniently left out the word ‘naked’ from the above description. The seller is now selling something THEY DO NOT OWN. Nowhere, but nowhere else in life or commerce is this deemed acceptable. Actually, it is universally prosecutable. In Texas, they call it stealing. Yet the Commission lumps both together as ‘short sales’ and in so doing legitimises naked short selling. Giving the same an aura of respectability or normality that is very revealing. Now it is common cause that there are Reg SHO rules granting exceptions to naked short selling contracts, but it is also common cause that these have been and continue to be blatantly abused in a manner so widespread and routine, it is impossible to claim ignorance. More pervasively, it has become so normalised that the Commission has become numbed to the abuse and illegality. To the extent it feels comfortable saying a short sale may involve a stock the seller DOES NOT OWN, without even qualifying or blushing. In my opinion, naked short selling should ALWAYS be illegal and there should be NO exceptions EVER. This is the stance of market regulators world wide. The US stands virtually alone in having explicit (exploitable) wavers or loop holes. Naked short selling is highly corrosive. Leading to exactly the damaging market manipulation the Commission itself describes above. SEC Commissioners routinely use the words ‘strongest, largest, deepest, most liquid’ in the world when (proudly) describing US Capital / Securities markets. They almost never use the words ‘most transparent, most fair, equitable, or best regulated’ because the latter are known to be untrue and Commissioners would expose themselves to being a laughing stock if said aloud or written down. The SEC and particularly Congress continue to ignore the fundamental problem: the US outsourced the stock settlement system to a private, for profit company: the DTCC. A company owned by the major market participants. A ‘self regulating’ entity with an unresolvable internal conflict of interest: putting the interests of its shareholders and members ABOVE those of everyone else. An entity that proposes complex and absurdly Byzantine ‘Rules’ which the SEC rubber stamps. An entity which actively assists in abusive practices such as naked short selling and concealment of the true extent of Fails To Deliver (FTDs). An entity which, if incentives were not so perversely malaligned, could stop abusive naked short selling overnight. The DTCC: where the gamekeepers are employed by the poachers. The US needs to move to a unitary public (not private) Financial Regulatory Authority. Here in UK, I have complete unshakeable confidence that whilst the Financial Conduct Authority may be less than perfect, it is primarily on the side of the retail investor and somewhat feared by institutional market dealers / participants. I have NO such confidence in US Regulators, the plethora of which is baffling. Bellweirboy - Retail Investor. Citizen and resident of the United Kingdom. Sent from my iPad