From: James Lem [james4396@yahoo.com]
Sent: Wednesday, October 22, 2003 4:06 PM
To: rule-comments@sec.gov
Subject: short selling

Rule change is not very good if you are actually trying to level the playing 
field and increase liquidity. New rule does not make it easier and do not 
provide protection which is the original reason for the short selling rule. 
The new rule should make it easier to short and yet still provide protection 
against excessive hammering (heavy selling) by traders.

A better rule would allow easing shorting ( even on down ticks) if the stock 
is positive for the day or above a threshold point. A threshold point would 
impose the up-tick rule again. This threshold point can be if a stock is down 
a certain amount (4%) or the indexes are down a certain point (2%). 

The rule to locate stock before shorting again does not add liquidity or make 
trading more fair. That rule should be amended to apply to stocks with high 
open short interest only. If a stock starts the day with a high open short 
interest (30%) the the rule should apply.  Or if the daily shorts volume surges 
to 3 times normal then the  locate rule should apply. The locate rule should not 
applied before the trade if open interest is below a certain threshold (like 30%). 
Rather this rule should say the stock must be located by the close of the trading 
day. Purpose of locate rule should not be  to impede trading but rather to limit 
excesses in shorting. 

I'm actually not sure why there should be short restrictions on stocks 
rallying 70% for the year with PE above 50 and an open short interest of higher 
than 30%. Such restriction only hurt shorts as the trading community has developed 
a tendancy to short squeeze these stock because of the restriction imposed on 
shorts. Buyers have been greater leeway on sell-off. Margin requirements have 
eased so that maintance calls do not trigger massive selling on down days. Yet 
shorts are hindered by liquidity issues and a uptick rule. Free and unhindered 
shorting of over priced stocks should be allowed. As should  shorting when there 
is no real selling crissis in the market or in the particular stock. Easing the 
short selling rule when there is no selling pressure will insure a better priced 
market. Hindering the sell side of a free market only causes bubbles and the 
unrealistic run-ups. Shorts will not add liquidity to a high flying stock cause 
the rules play against! then. Traders line up on the buy side for the same reason. 
This is why there are so many bubbles and crazy run-ups in prices.


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