From: Shichtm@aol.com
Sent: Monday, January 05, 2004 4:59 PM
To: rule-comments@sec.gov
Subject: File No. S7-23-03 - Reg SHO

To:       Securities and Exchange Commission
          Rule-comments@sec.gov

From:     Marshal Shichtman
          shichtm@aol.com
		  
RE:       Comments on regulation S. H. O.
          File No. S7-23-03

Dear Sirs, 

Comments to selected questions regarding regulation S. H. O. are as follows:

C: proposed amendments, 1 short sales

Question One

What harms result from naked shortselling?  Conversely, what benefits accrue 
from naked shortselling?

 

The harms resulting from naked shortselling are numerous.  The initial effect 
of naked shortselling is to depreciate the market capitalization of the issue, 
thus negatively affecting market participants, either justly or unjustly.  
However there are also some secondary effects which are less well-known.  Once 
the market Has decreased in the issue the issuer has less leverage to make 
acquisitions.  Furthermore, the decreased market capitalization of the issue, 
the issuers credit rating usually goes down.  This is because the company has 
less assets to securitized any financial arrangements and market capitalization 
is usually indicative of the companies valuation.  Therefore, the credit rating 
going down causes in increase in debt service.  This increase in debt service 
puts strains on cash flow.

Among other less known harms of naked shortselling is the adverse effects this 
has upon employee stock ownership plans, current financial arrangements involving 
options, and puts the issuer at risk for a hostile takeover.

The benefits accrued from naked shortselling, are most simply put, market 
efficiency.  The benefit of market efficiency should not be underrated.  This 
gives, or can give, the investing public a more indicative valuation of the issue, 
and can give the astute investors more tools in their toolbox with which to create 
a more dynamic capital market system in the American marketplace.

 

Question three.

What is the appropriate manner by which short sellers can comply with the 
requirement to have "reasonable grounds" to believe that security sold short 
could be borrowed?  Should short sellers be permitted to rely on blanket assurances 
that stock is available or borrowing, i.e., "hard to borrow" or "easy to borrow" 
lists?  Is the equity lending market transparent enough to allow inefficient means 
of creating these lists?

 

The requirement should not be "reasonable grounds" to believe that security sold 
short could be borrowed.  The requirement should be actual possession (not 
necessarily physical possession of certificates, but book entry will suffice), or 
a letter of intent assuring that the underlying security sold short can in fact be 
covered.

Such lists as "hard to borrow" or "easy to borrow" may or may not be indicative of 
the actual situation.  The environment of the issue can change within minutes on 
concerted shortselling activity.  Moreover, the term "reasonable grounds" is 
somewhat empherical.  A defined criteria for what constitutes "reasonable grounds" 
should indeed be considered.

 

Question four.

should short sales effected by a marketmaker in connection with bona fide market 
making be excepted from the proposed "locate" requirements?  Should the exception 
be tied to certain qualifications or conditions?  If so what should these 
qualifications or conditions be?

 

Although market makers should be given somewhat more leniency to facilitate 
efficient markets, there have been more than a few bad market makers.  What I 
mean by bad market makers is market makers who either break, bend or find loopholes 
to clearly frustrate the intended result of any rules.  These bad market makers, 
although in the minority, constitute a very real threat with dangerous consequences.  
In allowing softer requirements for market makers, which eases administrative 
burdens and increases market efficiency, these allowances give a very real 
intangible weapon for bad market makers to disembowel the vulnerable companies.  
Therefore, I suggest that no exception be placed for market makers, due to the 
potential abuse by bad market makers.

 

Question five.

Should the proposed additional deliver requirements be limited to securities 
in which they are significant failures to deliver, if so, is the proposed her 
shoulder and accurate indication of securities with excessive fails to deliver?  
Should be higher or lower?  Should additional criteria be used?

 

The proposed additional requirements to deliver should not be limited to securities 
in which there are significant failures to deliver.  The securities with significant 
failures to deliver, will become relatively in active once those additional 
requirements are imposed.  Naked shortselling activity will then move on to a more 
viable and easier target; thus making a rolling list.  The naked shortselling 
activity will begin on securities that do not have additional requirements, and 
once the additional requirements are imposed the activity will move on to another 
security that do not have the additional requirements, thereby perpetuating a 
vicious circle.  It is very important to remember that the people and are parties 
committing shortselling and naked shortselling have no lack of intelligence, and 
there is no want of any vulnerable companies.

 

Question six.

Are the proposed consequences for failing to deliver securities appropriate and 
affective measures to address the abuse is a naked shortselling?  If not, why not, 
what other measures would be effective?  Should broker-dealers buying on behalf 
of customers be obligated affect the buy-in for aged fails?

 

Broker-dealers buying on behalf of customers should be obligated to affect the 
buy-in for aged fails.  If broker-dealers are obligated to affect a buy-in they 
are essentially acting as a safety net and incurring possible negative financial 
ramifications.  This is putting broker-dealers in a position where they are 
incentivized to police the marketplace by making them responsible for buy-in's 
on aged fails.  Moreover, this is putting the broker-dealers own wallet on the 
line which will hopefully make them very particular in these situations.

 

Question seven.

Is the restriction preventing a broker-dealer, for.  90 calendar days, from 
executing short sales in the particular security for his own account or the 
account of the person whose account the failure to deliver occurred without 
having three borrowed the securities in appropriate and affective measure to 
address the abuse is a naked shortselling?  Should this restriction apply to 
all short sales by the broker-dealer in this particular security?  Should the 
restriction also apply to all further short sales by the person per whose 
account the failure to deliver occurred, effected by any broker-dealer?

 

I believe that the 90 day restriction preventing broker-dealers from executing 
short sales is a positive step.  Moreover the restriction on the person per whose 
account the failure to deliver occurred is a better step.  This leaves the 
potential party completely open to market forces.  However, just because the 
party had a failed to deliver does not mean that they are a naked shortseller, 
and thus would comparably leave them completely open and vulnerable to market 
forces.

 

Question eight.

Should short sales effected by a marketmaker in connection with bona fide market 
making be exempted from the proposed deliver requirements targeted at securities 
in which there are significant failures to deliver?  If so, what reasons support 
such an exemption and how should bona fide market making be identified?

 

I believe no exemption should be available for market makers, as there are bad 
market makers.

 

Question nine.

Under what circumstances by the marketmaker need to maintain a failed to deliver
on a short sale longer than two days past settlement date in the course of bona 
fide market making?  Is today's the appropriate time.  He used?

 

Market makers often are put into a bind when securities are chilled, frozen, or 
under a judicial temporary restraining order, or preliminary injunction.  Also, 
when provisions of rule 144 are concerned, occasionally market makers get caught 
in the middle during contests of eligibility and applicability.  This is been 
especially prevalent in death spiral financing/toxic financing.

 

 

 

Operation of the uniform bid test.

 

Question one.

Should short sales continued to be limited by a price test?  If the commission did 
not adopt a price test under regulation S. H. O., should also preclude the ability 
of the SROs to have a price test?

 

The price test with current uptick rule are imperative to market operations.  This 
prohibits any given security from being shorted to death.  Granted, the dedicated 
naked short seller, and or short seller, with a little patience, can produce similar 
results by allowing interposing buys.

 

Question two.

Would there be any benefits in eliminating a short sale price test?  With elimination 
of a price test benefit the markets by allowing investors to more freely short cell 
potentially overvalued securities so that their price more actually reflects their 
fundamental value?  Are there other benefits the removal of their price test, such 
as elimination of systems and surveillance cost?

 

I cannot for see any benefit in eliminating a short sale price test.  As already 
stated, the short sale price test, or uptick rule, prohibits and serves as a 
substantial bar that securities do not free fall downward because of concerted 
shortselling activity.

 

Question seven.

The proposed bid test likely would inhibit short sales in a declining market because 
there would be few execution opportunities above the bid test.  Is this appropriate?

 

Yes.  Please see the response to question two (above).

 

Question eight.

Is a one cent increment in appropriate standard for allowing short sales above the 
best consolidated bid?  If not, was in appropriate increment?

 

A one cent increment is the smallest increment that can be gauged.  However, this 
might not be the most effective uptick rule, as normal market activity will most 
certainly trigger buy above the one cent increment.  Moreover, the one cent increment 
would not be indicative of any given volume.  That is to say to predominate in line 
share of the activity could be shorts, and one round lot could bypass the system.

Also of consideration, a consolidated bid requires a super montage system, or 
something akin to it.  This is more or less absent in pink sheets and bulletin boards.

 

Question nine.

With the proposed bid test operate effectively in the current decimal environment, 
i.e., would bid flickering inhibit the operation of the test?

 

Yes, it flickering would inhibit the operation of the test.  Please see response to 
question number eight (above).

 

Question 10.

With the proposed bid test to fill the fundamental goals of short sale regulation?

 

No, the proposed bid test would not to fill all the fundamental goals of short 
sale regulation.  However, this is an important and crucial first step.

 

 

B.  Scope of the uniform bid test.

 

Question one.

Should a proposed uniform bid test be extended to NASDAQ small-cap and OTC BB 
securities?  Do the securities need the protection of the proposed uniform bid test?

 

Absolutely!  The NASDAQ small-cap and the OTC BB securities are the securities most 
vulnerable and most usually preyed upon by short-sellers, with the least amount of 
resources to combat situation.  These are the issuers who need it the most.

 

Question two.

To the proposed uniform bid test be extended to other OTC BB securities, e.g. those 
quoted in pink sheets?  If so, are quotes in the securities disseminated in a manner 
that would allow for the use of the proposed uniform bid test?  In addition with the 
proposed bid test be workable due to the fact that the best bid in the securities 
could be outstanding for long periods of time?  If not could a last sale test or 
some other test be applied to the securities?

 

The bid test should most certainly be extended to the pink sheets for the reasons 
delineated above in question one (those are the most vulnerable and most preyed 
upon securities with the least amount of resources to combat the situation).  Even 
though pink sheet quotes may be extensively lagged and/or stale, instituting this 
test would be an extremely positive start by providing protection that does not 
currently exist.

 

 

 

International arbitrage

 

Question one.

Should the international arbitrage exception be retained for purposes of the proposed 
rule two a one?  If not sit specific reasons why the exception should be removed from 
the rule.

 

There should be no international arbitrage exception.  All this does is encourage 
sister firms and joint partners overseas to place orders in lieu of domestic broker-
dealers.  By allowing this loophole to exist it is simply encouraging international 
arbitrage.


Marshal Shichtman & Associates, P.C.
ATTORNEY AT LAW
1 Old Country Road, Suite 120
Carle Place, New York 11514
Phone (516) 741-5222
Fax (516) 741-5212

www.lawmsa.com



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