From: David Schwarz |
Mrs. Nancy Morris File Number S7-21-06 Dear Mrs. Morris, I am writing in support of the SEC's current proposal to remove all short sale restrictions. I have been a registered representative since 2001 and have always perceived these restrictions as a hindrance to the efficiency of the marketplace. Therefore, I am very pleased that the SEC has taken it upon itself to review this matter. The current system simply does not make sense. If I am willing to sell at the bid and someone else is willing to buy there, then a free market should allow us both to actualize our intent. There are many times (particularly in NYSE stocks) when it will take me up to 15 minutes to get short any amount of stock, let alone the amount that I desire. The stock might not be moving, or it might be going down a mere penny every five minutes. In fact, often it is most difficult to get short some of the least volatile, most liquid stocks; they are devoid of the jerky movements (which create upticks) that more volatile, less liquid stocks have. Short sale restrictions are just an unnecessary wall separating buyers from sellers, and do a disservice to both parties. As for more volatile, less liquid securities, proponents of short sale restrictions worry that if given extra leeway, short sellers will drive these stocks down sharply. This fear of panic-inducing “bear raids” stems from a fundamental misunderstanding of the stock market. As someone who has successfully traded stocks for several years, and has become particularly adept at finding reversals, let me share two observations about the market: 1) if a stock goes down sharply on no news, market makers and other contrarian speculators are quite willing to step in and buy cheap stock; 2) while aggressive short sellers (just like aggressive long sellers) might induce some participants to panic, once they stop their temporary selling and the primary downward pressure is alleviated, then the equity typically bounces back quickly, making it difficult for short sellers to cover their shares profitably. Short sellers do not have sinister motives – they have profit motives. Therefore, since the overwhelming rationality of the marketplace would resist such an infeasible plan, the market needs not worry itself about the infamous, apocryphal “bear raid.” However, the SEC already knows this. If the results from its pilot program did not come back favorably, it would not suggest eliminating the short sale rule altogether. So while it is honorable for the SEC to seek out comments, I am hoping that it has the fortitude to listen to its own statistical evidence and abolish all short sale restrictions. There are people who believe that stocks going up are better than stocks going down, and resent those that speculate otherwise or hedge their long positions through short selling other securities. They do not care about a stock’s true value being reflected in its price. They want the SEC to be a cheerleader for bull markets. But I do not think this is the SEC’s job. The SEC’s responsibility as a regulatory agency is to insure a fair, efficient marketplace. Eradicating the short sale rule would be a worthwhile measure in pursuit of that goal. Thank you for your consideration. Sincerely, David Schwarz |