February 11, 2014
the economic principle of supply and demand establishes a price equilibrium which allows markets to be established. undisclosed prices on demand or supply do not contribute to the capital markets. the principle of transparency should apply to this. yet this is what is enabled by exchanges, banks and brokers, clearinghouses and the regulators.
my comment is not just addressing NASDAQ's proposals. they address the market structure. i have nothing against NASDAQ except that they are just another enabler in the securities market.
should investors be forced to trade under these conditions? i do not think it is wise to enable financial actors to take $ out of the capital markets. exchanges enable non-disclosed prices and supply/demand anomalies by allowing marketmakers to post orders that do not execute or do not display. these strategies have been requested by exchange clients so that investors do not have good information and profit will be made by these actors because of the denial of accurate information.
marketmaking has long been desired by exchanges to smooth transactions, but at what cost is the current smoothing? changes required by these actors have shifted risk to investors, forced investors to bear the cost of these activities.
exchanges adopted the practice of paying marketmakers for selling, whether the selling is actually shortselling/selling imaginary shares or supplying real shares to the market. marketmaking costs the capital markets through the cost of transactions. it is not a service to fail to show price, supply or demand. exchanges should not pay for this service in the form of rebates per order. this practice has decreased order size and enabled price in the hundredths of cents in order to jump over the bid/ask prices. volume is hidden through non-disclosed prices and post only orders. these actions intend to misdirect the capital markets.
all regulations have to be found to be in the public interest, rather than benefiting the few but frequent traders seeking to advantage themselves.
exchanges represent their customers' interest, the financial industry. locating shares and not borrowing the shares is a naked shortselling strategy. high frequency traders locate shares at the beginning of the trading day. this reduces their costs and enables them to consume the demand in order to profit by forcing the price downward. this strategy is profitable but it is not in the best interest of the investors and should not be enabled. the float of a stock should not be increased by all the dollar bills that can be leveraged.
marketmakers must qualify with each exchange. however if marketmakers use post only orders or non-displayed orders or fade-away orders, they are shifting their risk to the non-informed actors in the market due to lack of information. marketmakers that supply "liquidity" with shortselling imaginary shares are really offering a debt to the buyer and to the market for that security in general. this is not supplying liquidity. investors supply liquidity through paying cash for their shares. if marketmakers supply imaginary shares, their value is less than the price agreed by the buyer. imaginary shares are responsible for all failures-to-deliver. there should be no transaction that has failed to settle because the buyer has not received shares.
brokers accepting IOUs at settlement is a dysfunction of the market. buyers do not authorize the acceptance of IOUs. brokers are simply breaching their duty to their client and forcing the investors to fund these trading practices. this would be called theft in any other industry.
exchanges that fail to report trades daily are contributing to the problem. the daily transactions on level 2 should equal the daily short report submitted to FINRA, and the brokers' reports of shorted shares reported to the SEC should equal the shorted shares submitted to FINRA in each stock two times a month. the fact that these reports do not match indicate market dysfunction.
do investors have any choice? few investors receive their stock purchases from their broker. most investors prefer to receive credit for their purchases from their broker, perhaps not realizing that all the brokers own is an IOU. this is why regulators should represent the public interest. should frequent traders use the anomalies in the capital markets to profit and have influence over the rules that they trade? frequent trading is a capital outflow from the market, as they put their profit in their pockets.
shortselling increases the # of shares in the float and is not a service to the market. nothing should be done to enable this. while regulators expect the outstanding shares to be declared by companies, regulators allow the outstanding shares to be inflated freely by actors in the stock market.
if the SEC finds that shortselling is inappropriate for IPOs, then the SEC should also understand the damage to the capital markets.
the difficulty in calculating margin should not be tolerated by regulators. the use of margin is like putting a down payment on the transaction and financing the rest of the price. leverage=debt.
our economy will not improve by allowing capital market dysfunction to persist.
is this risk-shifting profitable? wildly. but this is a capital market outflow from the market to professional trader's pockets.
money from IRA and mutual $ is added every month/every year. this money should force the capital markets to appreciate over time. yet sellers force the market price downward in some stocks. are investors taking $ out of the system at the high price? unlikely.
i urge the SEC to look at market structure as a whole and then look at the rules for the particular actors. i urge the SEC to change their rules website so that people can comment on the practices without trying to read each particular actor's requests in sub-categories.
thank you for your time.