The Senior Vice President of Citi/Smith Barney pleading in a letter to extent the emergency rules currently in place for 19 financials against naked shorting (forcing shorters to borrow the shares first) and a plea to re-install the uptick rule (shorts could only be placed on upticks previously, a rule that was eliminated a year ago.
It has been posted on some message boards already, but it’s important enough as it not only shows that the momentum gathers against naked shorting, but it also shows mechanisms by which they influence prices.
Here is the letter (the emphasis is ours):
Subject: File No. S7-19-07
From: Gary D Markoff
Affiliation: Senior Vice President Citi/Smith Barney
July 29, 2008
I’ve been participating in the financial markets for nearly 30 years advising clients on both the long and short sides of the market. I’m deeply concerned over the imbalances created since the ‘uptick rule’ was removed 12 months ago, the subsequent explosion of short interest and the Bear Market that has followed.
It’s either unusually coincidental or more probably causal with the broader market meltdown we’ve been experiencing since the rule change. I have no objection with shorting, but I do have an objection to hedge funds (or anyone else) manipulating the process and the price of securities by selling shares that haven’t at least been borrowed first and then slamming the bid with short sales on rapid downticks.
I am not allowed to do that for clients at my firm, and can’t understand why anyone else should be allowed. Returning to the Uptick rule and requiring prior authorization on a Borrow need to appply and be enforced for ALL publicly traded companies and not just FRE, FNM and the primary dealers.
The ability to sell ‘market on close’ for a short seller is major unintended consequence of the ‘uptick’ removal, especially in smaller cap (say under $5 bill but more significantly on market caps below $1 billion). This has enabled shorts to dominate the end of day trading and ‘mark’ the closing price (daily, weekly, monthly, quarterly) which is illegal for both shorts and long side players.
The difference is that longs must identify themselves in filings to the SEC at least once per quarter and anytime positions go up or down thru 5, 10 or 15% thresholds. Short sellers DO NOT have this requirement and because of this ability to be anonymous, the SEC does not have effective control of surveillance nor do the shareholders and the company itself know who is short.
My request and recommendation is that for transparency purposes, ALL positions both long and short be filed equally and size restrictions be implemented on shorts the way they are on longs. As a shareholder, I should be able to know in the proxy statements who the short sellers are that are short more than 5% of a company just the same way I can see who is long greater than 5%.
I also can’t understand why stocks that are showing up on the Reg SHO lists aren’t subject to immediate buy-ins after a minimum grace period. It’s the SEC’s job to enforce this and hasn’t. Why have a rule if it is not going to be enforced?
I also take issue with short interest getting up to over 50% in some companies. Again, without transparency as to WHO is short, it’s possible that one player can corner the market (short) in a declining environment. Position limits apply in commodities for a reason, they should apply in equities, too.
All of these factors have gone on to raise the cost of capital for companies unnecessarily, and to bring about a broad disengagement from public participation. It’s time to turn those factors around before we create another Depression.
Thank you for your consideration, Gary Markoff
Senior Vice President, Smith Barney- Boston
This is very good stuff, and we wholeheartedly endorse this view:
- Removal of uptick rule has enabled the shorts to avalanche the market and dominate end of day (week, quarter) procedures, flodding the market with naked market sales, especially for companies with a market cap below $5B (we know one..)
- Shorts are anonymous (unlike longs) and thereby can escape surveillance
- Regulation SHO is not enforced, companies can be on that list for a long time (we know one..) without what should be an automatic buy-in requirement
- Shorts can corner the market, taking positions larger than 50%
Just as a parting shot, here is a truly remarkable story about that:
- On Feb. 3, a man named Robert Simpson filed a Schedule 13-D with the SEC describing his purchase of 1,158,209 shares of Global Links Corp. (OTCBB: GLKCE), “constituting 100 percent of the issued and outstanding common stock of the Issuer.”
- As described in a story that ran on FinancialWire on March 4, Simpson stuck every single share of the company in his sock drawer — and then watched as 60 million shares traded hands over the next two days. In other words, every single outstanding share of the company somehow changed hands nearly 60 times in the course of two days, despite the fact that the company’s entire float was located in Simpson’s sock drawer. In fact, even as recently as last Friday, 930,872 shares of Global Links still traded hands.
Quite remarkable indeed! Somebody should stop this nonsense.