Subject: File No. S7-10-10
From: Cavan N. Bray
Affiliation: Stock and Options Trader and Invester, Individual Account

June 10, 2010

I completely support your endeavor.

I was fumbling through a comment earlier, trying to get the wording right and I think I accidentally sent it. It was not finished and I was going edit it for clarity. It wasn't organized or even finished. I was typing thoughts and was going to fix it up. If it sent, please disregard that one.

I combine leap options to trade a position of intrinsic value through time if the historical minimum deviation by percentage for that stock's history makes sense. If I can put the position on for less premium at risk than I could expect to receive from that stock achieving its minimum deviation over my selected time, then it would be a good pursuit. Verbalizing this is hard, but if you can own an 18 month position that has always moved enough percentage-wise over any given 9 month period in it's history to allow you to sell your upside or downside for a profit, then you should do it. Of interest is that options pricing has change such that strangles now can often serve the same purpose for less premium at risk and no intrinsic value. Of course that is generally speaking, there are always exceptions. In other words I used to put less premium at risk by overlapping my leap puts with my leap calls but that is not always the case now. If strangles are cheaper they do the same thing easier. You don't have to sell the upside or downside, just sell the leg of the strangle and your profit is secured with one leg still open.

I wanted to discuss that because it feeds to a point I wanted to make. You can see that I use delta neutral type strategies and adjust them. The details above are just one scenario, but they best serve to make my point.

I began to trade this way because I wanted to see if I could prove to myself that firms weren't targeting individual accounts. Testing their liquidity, etc. The neutral strategies brought me through 2008 just fine and by September of 2009 I was about even, despite some mistakes, etc. Since that time my next four neutral positions didn't move out of their ranges, and I struggled to break about even. My most recent set of positions have already exceeded their minimum deviation duration records. I know sometimes it will happen but not to all 5 when the market went up 8 more months while my stocks all troughed into too narrow a range to benefit me on the downside for eight months, now nine. Even with the flash crash and this most recent selloff, my stocks won't drop enough to benefit me either. That would be fine if they would have gone up during the 14 months or even if they had not set a record for the lowest 6 month now 9 month deviation.

I like the conservative approach of staying neutral and adjusting. I do not mind the patient and systematic approach. It never seemed fast when it worked perfectly. I feel worried that my success of recouping my long losses with neutral strategies through 2008 and from March 2009 through September 2009, red flagged me in some way. I had some trades from March 2009 to September 2009 that are not included for my longer positions discussed below. These were put sells, or purchased calls that paid off during that period.

I know I got too detailed here, but it really is the only way I see to preface my questions.

My questions for consideration are:

Is it possible that high frequency trading is used by institutions to neutralize sectors, basically creating record low deviations for blocks of time? Can anything naturally move stocks out of the ranges established by the high frequency trading or can they hold it in their set range as long as they see fit?

Can institutions identify successful traders that they would rather not sell options to or buy them from? If so what would keep them from indentifying those individuals, neutralizing as many of them as possible by applying high frequency trading to a large block of stocks that they hold and making money elsewhere, away from those trapped in historically super-narrow ranges during a 14 month run up in the market? I ask because from September 2009 to present felt like an overpowering force neutralized some very good neutral positions for a record amount of time despite being priced very low in a resurgent environment. The result of course was that none of those positions crossed above my threshold for action. I recouped most of the 2008 losses with neutral strategies. By the time I made the first adjustment, the position had a profit and had potential in the opposite direction still. I can see how whomever sold or bought from me would lose money on those transactions cumulatively. Is it possible that high frequency trading and dark pools are a response to successful tactics that cost exchanges money? Is it possible that they are targeting neutral strategies that may be more common than I know, because exchanges are the main buyers and sellers of options? I don't know if that is right. I just wanted it out there for your consideration.

My next question follows eventually: I have always felt that the high risk, high reward traders provide the speculation and the engine that makes what I do work. I also feel they provide that for the investment banks and professional investment community. I wondered why those speculators weren't there for reasonable bounces during the many sell-offs that began in 2008. The sell-offs felt calm and systematic. The charts for so many stocks look tight almost like a moving average line with very little bounce to ever fool anyone to the upside. Despite huge volatility, the selloff had less bounce than any ever seen. Look at the charts for individual stocks with this in mind and see if you notice the difference. I began to hear about dark pools and when I learned more, I began to wonder if those traders you would most want to trade against could be indentified and red flagged over time. If so, then why not direct that desirable traffic to your dark pool and away from the open market where my transactions and the transactions of others like myself would cut into your profits? The result would probably be nice bounces off sell-offs in dark pool markets and conversely, steep sell-offs with little bounce for the regular market. Could a dark pool do that?

Has anyone examined not only the steepness of the 2008 decline with respect to the lack of speculative bounce and why the speculative bounces were so lacking and subpar during this event compared to others?

Many stocks sold off 90% or more in 2008 and so many are still down anywhere from 80% to 60%. The indexes were 25% from there alltime highs after the 14 month run-up. If you compare previous recessions on long term charts on an individual stock basis, can you see how flat and unresponsive so many stocks were from the March 2008 lows for 14 months as the market went to 25% from its highs. Many stocks look very L shaped for the entire duration of the 14 month run-up. I realize many stocks doubled from their lows, but they were down 90% sometimes and a double from 3 to 6 from a previously $30 stock is still down 80% from its highs.

Do you think high frequency trading can be used in a way to level stocks off after a small recovery following a recession thus creating numerous dead money stocks? If so, is there a financial incentive for the institutions to do this? Doesn't the recovery usually at least halfway match previous recoveries? If you consider that sectors were priced for armageddon and you compare the concensus view for the last 14 months, how can so many stocks and sectors be so near their panic prices. I am convinced this nonrecovery in so many areas is manufactured in some way.

The most important thing anyone could tell me to ease my mind would be that brokerages cannot target an account in it's entirety. I keep finding myself wishing that I knew for sure that no one could view my account and implement exactly the worst performance to it. Too many occurences that felt that way led me to my current approach which worked well and should continue to do so. However, I am suprised at the last 9 months. I am diversified by sector with about half my positions neutral or hedged for narrow ranges which is diversification in itself. I am not overcommitted. I am very knowlegeable and persistent. I have a lot of cash on the sideline and not committed. By September of 2009, I felt I had probably performed in the top 10 percentile, however, for the nine months since every long I own is down 50% and near the March 2008 lows or below. The longs are all good values, and they are low dollar stocks so the 50% is anywhere from $1 to $4. Still my longs essentially have done nothing since March 2008. Every long term neutral or hedged position is obediently walking historically narrow ranges. After a tough and stressful 2008 I came out o.k. and saw a 5 month run-up starting in March 2009 through September 2009. From September until now, I have given all of that back despite the market running up during the 9 months that my portfolio flattened or sank, depending on what was worse for me. 100% of my portforlio was denied any profit taking. I am used to having several stocks feel as if they may be targeted, but not all 10 positions. I have 8 months until expiration and each of those positions has already exceeded its minimal deviation duration. Having exceeded this record low range for record months I should feel encouraged that 8 more months in this small range is very unlikely unfortunately, I do not feel that way. I feel uneasy that so many good positions did a precisely specific thing that they had to do for longer than any of them had done it before. They each are in different sectors, they were selected at different times. I do hope the SEC will search hard to find out what is going on. Speculation will drive value stocks up when they get left behind. I own some of those too. Something is stopping natural market forces in numerous areas.

Finally, if high frequency trading has the effect of dictating a range and a duration for a stock, it is very important for everyone to know. At that point, they control the stock. The CEO could be arrested for fraud and the high frequency traders could keep buying it at 15 and selling it at 16 for years if they wanted to. The point being no other market force can move the stock. Nothing else is sizeable and coordinated enough to overpower that kind of systematic buying and selling. If it is making money, and I assume it must be, then don't those profits just pile back into more leverage for high frequency trading. Imagine how bad that can get incrementally. If high frequency trading moves out of a stock, does it automatically crash due to the sudden and immense loss of volume? Should we trust institutions not to initiate and benefit from such a fabricated crash?

Those are my concerns and ideas. I am sorry if it is too long or maybe disorganized a bit. I feel there is a lot activity out there that should be identified as criminal. I think it mainly is stealing from long term investors, but I think it is beginning to target more. I think there are some smart people who think they are entitled to manipulate the system because they know how and it is technically not illegal. Anyone smart enough to know how to do what they are doing is also smart enough to know it is stealing. I am sure they want us to believe the markets could never function without the high frequency trading to stablilize it. The problem is it super stabilizes areas to the point of no action until they are ready to rotate into it for a quick move up. Then they can stabilize it again at the higher level with high frequency for a year, then rally it or crash it, whatever they want. I would love to see the SEC expose individuals who intentionally push these practices that they fullwell know are costing others. I really hope you can expose immoral behavior for what it is and make it illegal. Thank you.