MrFrom: Incoming from Chris Gregg [cjgregg@rcn.com]
Sent: Wednesday, December 31, 2003 9:38 AM
To: rule-comments@sec.gov
Cc: Josue Portillo
Subject: subject: File No. s7-23-03

December 22, 2003

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Dear Mr. Katz:

            I am writing to comment on the SEC’s recently proposed Regulation SHO.  
I am a recent graduate of Harvard College with an Economics degree, and I am a 
registered representative of the NASD with Series 7 and Series 55 licenses.  I 
support and applaud the SEC for its efforts in preventing naked short selling, 
but I do not support the “uniform bid test rule.”  I believe that such an arbitrary 
restriction on short selling disrupts the equilibrium between buyers and sellers in 
the market.  I would prefer the “alternative test” or the “upbid test,” but I believe 
that no rule at all would best suit the needs of traders and investors.  

From my understanding of Regulation SHO, it appears that the SEC’s main concern with 
short selling is that it can be used to cause small trading panics, thereby allowing 
“bear raiders” to drive down the price of a security so that large holders liquidate 
their positions.  But how much panic do these so-called “bear raids” really cause?  
As the “death spiral” selling schemes have shown, much of the manipulative short 
selling activity in the market has been caused by naked short selling. Because naked 
short selling can be unlimited and unchecked, it overwhelms the buying interest in 
a security and forces prices to decline sharply. But if short selling is limited to 
those traders who legitimately borrow securities, then this limited short selling 
interest can actually benefit shareholders.  

As Regulation SHO clearly states, “short sales effected in the market add to the 
selling interest of stock available to purchasers and reduce the risk that the price 
paid by investors is artificially high because of a temporary contraction of selling 
interest. Short sellers covering their sales also may add to the buying interest of 
stock available to sellers.”  In other words, a free market with provisions to punish 
illegal activity benefits the public.  Naked short selling is illegal.  Selling stock 
to someone who is willing to buy it is not.  The proposed “uniform bid test rule” 
undermines the ability of short sellers to add liquidity and pricing efficiency to 
the market by prohibiting a trader to short a stock at any price equal to or below 
the best bid.  Every trader in the market understands the risks involved in putting 
on trades, so if a buyer places bids he does not care whether the seller is short or 
long the security.  The proposed bid test interferes with a free and equitable market, 
and it is in the best interest of the investing public to terminate it.  

 

                                    Josue Portillo
                                    Registered Representative
                                    Trillium Trading, LLC
                                    417 Fifth Avenue, 6th Floor
                                    New York, NY 10016