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December 19, 2003 Mr. Jonathan G. Katz
RE: File No. S7-23-03 Dear Mr. Katz: I am writing to you to express both approval and concern over the proposed Regulation SHO. I am currently a professional equity trader and was formerly employed as an Option Market Maker on the Pacific Stock Exchange. The two-year pilot program, under which a test group of highly liquid securities will be exempt from the Regulation's pricing restrictions, is certainly an idea whose time has come. I know that a similar proposal was made in 1976 in order to obtain statistical data on the effects of short selling, but it was never implemented. Certainly it makes sense to obtain this data to allow for more informed decisions regarding short sales in the future. I realize that this proposal will meet with opposition, primarily from the Listed Companies themselves. However, with the wonderful work being done in the Mutual Fund industry, I doubt that these pressures will weigh upon the decision, as they shouldn't. Never has information been more readily available to the public than it is in this information age. And with the access to this information comes the responsibility to perform ones own due diligence. As a student of the market and economy I eagerly await what effects this pilot program will have on securities, though I suspect it will be negligible. After reading the entire proposal and explanations espoused I was given the impression of a desire to eventually wean the markets off the bid tick rule, which should ultimately be the goal in our free market society. Though the markets may not be ready for the total removal of the bid test rule at this time, a gradual easing into it, with the pilot program, is the best direction to take. While I applaud the pilot program, I feel that the proposed changes to the short rule are at odds with the general free market trend regulation has been gravitating toward. By only allowing short sales to go off one cent above the bid, it will greatly reduce both of the major benefits short sales allow the markets. It will immediately reduce market liquidity, in no longer allowing a great many traders to readily offset temporary buy imbalances with short sales. This new proposal would require all shorts to effectively be offers, and not sales. Thus making it prohibitively difficult for most traders to execute these short sales, resulting in a significant drop in the supply of available stock for sale. More importantly, it would have dangerous effects on price efficiency. Short sales add to the selling interest of the stocks, and protect investors from paying an artificially high price due to a temporary contraction of investors wanting to sell their shares. Buyers will more likely be forced to pay the spread in order to get long the stock, as short sellers will not be able to hit their bids. Therefore, the buyer will not get the true best price. I know that when I put a bid in to purchase shares of a company, never once have I been interested in whether the seller(s) were closing a long position or opening a short. I put a bid in because I desire to buy the stock at that price. The proposed changes would reduce my ability to purchase shares at the lowest price possible. Less important, but worthy of mention, is that short covering often leads to both an increase in security price and to the available supply of buying for share holders to sell into. In conclusion, the proposed bid test regulation SHO would definitely have an adverse impact on market efficiency and pricing. I feel some of the proposals would benefit the market, but I strongly urge you to reconsider the proposed bid test rule. Sincerely, Kevin Karlberg |