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UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

SECURITIES LENDING AND 

SHORT SALE ROUNDTABLE 

PAGES: 210 through 330 

PLACE: U.S. Securities and Exchange Commission 

100 F Street, N.E. 

Washington, D.C. 

DATE: Wednesday, September 30, 2009 

The above-entitled matter came on for hearing, 

pursuant to notice, at 9:33 a.m. 

Diversified Reporting Services, Inc. 

(202) 467-9200 
 

 

 

 

 

 

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P R O C E E D I N G S 

CHAIRMAN SCHAPIRO: Good morning. Welcome today to 

day two of the Securities and Exchange Commission's 

Securities Lending and Short Sale Roundtable, which will 

focus on short sale issues. 

First, on behalf of the Commission, let me thank 

all of you who've agreed to participate today. Our 

consideration of these important short selling issues will be 

enhanced by what I expect will be informative and interesting 

comments, insights, and recommendations by our panelists. 

During my tenure as Chairman, the issue of short 

selling has been the subject of numerous inquiries, 

suggestions and expressions of concern to the Commission. We 

know that the practice of short selling evokes strong 

opinions from both its supporters and detractors. I have 

made it a priority to evaluate the issue of short selling 

regulation and ensure that any future policies in this area 

are the result of a deliberate and thoughtful process, which 

is why we're here today. 

Today's roundtable discussion includes two panels. 

Each panelist will take a few minutes to share his or her 

thoughts on the issues being discussed, and when these 

introductory statements are complete, the floor will be 

opened to questions from the Commission. 

The first panel will consider the merits of 
 

 

 

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imposing a pre-borrow or "hard locate" requirement on short 

sellers, either permanently or on a pilot basis. The panel 

will also consider the alternative forms that a pre-borrow or 

hard locate requirement could take to enhance its 

effectiveness and benefit to investors. 

Among the many inquiries, suggestions, and 

expressions of concern that the Commission has received 

concerning short selling, and particularly "naked" short 

selling, many have recommended that the Commission impose a 

requirement that anyone effecting a short sale must borrow or 

arrange to borrow the securities prior to effecting a short 

sale. 

The Commission is concerned about abusive naked 

short selling and persistent fails to deliver, and the 

potentially manipulative effect this activity can have on our 

markets. Thus, we are examining whether a pre-borrow or hard 

locate requirement or another alternative is necessary or 

would be effective in addressing such activity and preventing 

problems in the marketplace. 

The discussion will take into account the 

Commission's existing "locate" requirement under Reg SHO, 

which requires broker-dealers, prior to effecting a short 

sale, to borrow or arrange to borrow the securities, or have 

reasonable grounds to believe that the securities can be 

borrowed so they can be delivered on the delivery date. 
 

 

 

 

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The discussion will also consider the impact of 

temporary Rule 204T, and now final Rule 204, which requires 

clearing firms to purchase or borrow shares to close out a 

fail to deliver resulting from a short sale by no later than 

the beginning of trading on T + 4. 

The second panel will consider additional 

measures -- additional means to foster short selling 

transparency so that investors and regulators have greater 

and more meaningful information about short sale activity. 

The panel will consider enhanced disclosure methods such as 

adding a short sale indicator to the Tape to which 

transactions are reported for exchange-listed securities, or 

requiring public disclosure of individual large short 

positions. 

In the fall of 2008, the Commission adopted a 

temporary short sale reporting rule, Rule 10a-3T. The rule 

required certain market participants to provide short sale 

and short position information to the Commission. 

Instead of renewing the rule, the Commission and 

its staff, together with several SROs, determined to 

substantially increase the public availability of short 

sale-related information by publishing, on a daily basis, 

aggregate short selling volume data in each individual equity 

security and, on a one-month delayed basis, publishing 

information regarding individual short sale transactions in 
 

 

 

 

 

 

 

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all exchange-listed equity securities. 

In addition, the Commission has enhanced the 

publication on its website of fails to deliver data so that 

such information is provided twice per month and provided for 

all equity securities, regardless of the fails level. 

Today's panel discussion will consider whether 

additional public or non-public disclosure of short selling 

transactions and short positions would be beneficial, and if 

so, what type of disclosure should be implemented. I am also 

particularly interested to hear about the experiences in 

foreign jurisdictions, such as the United Kingdom, that have 

implemented short sale reporting regimes. 

Today's panelists are leaders and experts in their 

respective fields. They represent a range of constituencies 

that includes issuers, financial services firms, 

self-regulatory organizations, foreign regulators, investors, 

and the academic community. It's a privilege to have them 

here, and we look forward to an informative and interesting 

discussion. 

I'll be happy now to turn the meeting over to Jamie 

Brigagliano, Acting Co-Director of the Division of Trading 

and Markets, who will introduce and moderate our first panel. 

Jamie. 

MR. BRIGAGLIANO: Thank you, Chairman Schapiro. 

We will now begin the day's first panel, titled 
 

 

 

 

 

 

 

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Controls on Naked Short Selling: Examination of Pre-Borrow 

and Hard Locate Requirements. Following introductions, the 

panelists will each make a brief opening statement. Because 

we have a lot of information to cover in a relatively short 

amount of time, we ask that panelists limit their opening 

statements to no more than three minutes. 

Following opening statements, the panel will 

receive questions from the Chairman and Commissioners. While 

responding to questions from the Chairman and Commissioners, 

panelists are encouraged to engage in a dialogue with one 

another. We welcome discussion of other panelists' 

viewpoints, differing opinions, and additional thoughts in 

response to other panelists' remarks. 

Before we begin, I would like to welcome and 

introduce our distinguished panel. 

William Conley is Managing Director of the Equities 

Division of Goldman Sachs. 

Peter Driscoll serves as the Chairman of the 

Security Traders Association. 

Dr. Frank Hatheway is the Chief Economist of the 

NASDAQ OMX Group, Inc. 

William Hodash is the Managing Director for 

Business Development at the Depository Trust & Clearing 

Corporation. 

Paul Lynch is Senior Managing Director and Head of 
 

 

 

 

 

 

 

 

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Global Trading for the Securities Finance Division of State 

Street Corporation. 

Michael Mendelson is the Director of Global Trading 

Research for AQR Capital Management. 

Dennis Nixon is the President and CEO of 

International Bank of Commerce and Chairman of International 

Bancshares Corporation. 

William O'Brien is the Chief Executive Officer of 

Direct Edge, the third-largest equities marketplace in the 

United States. 

Thomas Perna is Chief Executive Officer of 

Quadriserv. 

Bill Conley, would you like to get us started? 

MR. CONLEY: Thank you. 

I'd like to start by thanking the Chairman, 

Commissioners, and members of the staff for the invitation to 

join today's panel. This panel has been asked to address 

topics that would likely have considerable impact on market 

structure, liquidity, and efficiency. We appreciate the 

opportunity to join the discussion. 

We believe that the available evidence does not 

support the need for any form of pre-borrow or hard locate. 

The Government Accountability Office confirmed in its May 

2009 Report on Regulation SHO that 99.9 percent of daily 

transactions in U.S. equity securities, by dollar value, 
 

 

 

 

 

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clear and settle within the standard three-day settlement 

period. 

This data confirms that current regulations, 

including Rule 204 of Regulation SHO, are the most effective 

ways to control abusive short selling. Rule 204 requires 

clearance brokers to close out any delivery that does not 

settle in the prescribed settlement period. 

In the case of short sales, the mandatory closeout 

period is one day after contractual settlement. Our review 

of CNS fail data suggests that fail rates have declined over 

80 percent since the implementation of the mandatory closeout 

provisions. 

The time and cost associated with a pre-borrow or 

hard locate requirement should be carefully considered if the 

objective is to increase timely settlement only by 0.1 

percent. 

Both pre-borrow and hard locate requirements will 

require significant expense to the industry and its 

participants. 

At a minimum, pre-borrow requires the funding of 

the borrow begin on trade date instead of settlement date. 

In this regard, it is important to note that short sale 

proceeds are not available to clearance brokers until 

settlement date, requiring the clearance brokers to fund the 

pre-borrow out of their own capital. 
 

 

 

 

 

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For example, in the wake of the July 15, 2008 SEC 

emergency order that resulted in pre-borrows on 19 covered 

financial stocks, broker dealer balance sheet impacts of up 

to $2 billion on those securities in particular for preborrows were reported. 

Only a small percent, estimated to be less than 5 

percent, of all locates result in the need to borrow. 

Consequently, pre-borrows would needlessly drain supply from 

the securities lending market, which would result in reduced 

liquidity. 

The costs associated with short selling will rise. 

Pre-borrows or other reservations of stock will result in 

fees being paid by borrowers to lenders, and that will be 

passed along to short sellers. 

Both a pre-borrow and hard locate requirement would 

require significant infrastructure builds on the part of the 

industry as well as its participants. For example, a hard 

locate concept that has been circulated would require every 

executing broker, clearing and prime broker, custodian, agent 

lender, and DTCC to build or modify systems. 

A pre-borrow or hard locate requirement can be 

expected to have minimal impact on abusive naked short 

selling because an entity that engages in this activity does 

not comply with locate requirements, nor does it seek to make 

delivery when it's due. Pre-borrow and hard locates serve to 
 

 

 

 

 

 

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add cost and complexity that impacts those who are already 

complying with regulations. 

The implementation of the mandatory closeout 

provision of Rule 204 has largely eliminated fails. That 

said, we recommend that the Commission move forward with the 

adoption of the revised prime brokerage no-action letter, 

which has been submitted on behalf of the industry by SIFMA. 

The framework outlined in this letter provides for 

enhanced order marking (long versus short), customer 

positions to support long sales, and locates, but most 

importantly requires communication between prime brokers and 

executing brokers when certain discrepancies are detected. 

In summary, Section 10 of the revised letter 

requires notification of order marking discrepancies (long 

versus short). Section 11 requires the validation of 

positions on long sales. Section 12 requires the prime 

broker to validate locates on short sales. 

Any discrepancy not resolved with the customer must 

be reported to the executing broker. The executing broker 

must consider this information in determining subsequent 

transactions with the customer. 

These procedures are specifically targeted at 

ferreting out anyone who attempts to engage in abusive naked 

short selling. Thank you. 

MR. BRIGAGLIANO: Thank you, Bill. 
 

 

 

 

 

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Peter Driscoll? 

MR. DRISCOLL: Good morning. My name is Peter 

Driscoll. I'm the current Chairman of the Security Traders 

Association. The STA is a professional trade organization 

that provides a forum for our traders to share their unique 

perspective on issues facing the securities markets. 

Our members work together to promote investor 

protection and efficient, liquid markets. The STA 

appreciates the opportunity to share our opinions on short 

selling regulation in general and abusive or naked short 

selling in particular. 

We believe that the Securities and Exchange 

Commission should be applauded for the development and 

implementation of Regulation SHO. The Commission went to 

great lengths through the regular notice and comment 

rulemaking process, and an extended pilot implementation, to 

ensure that all points of view and relevant facts were 

examined, and that the new rule was appropriate for the new 

market structure. We continue to believe that with some 

minor adjustments, Regulation SHO can effectively control 

abusive short selling, including naked short selling. 

The STA believes that short selling is a 

legitimate, economically important activity that fosters 

price discovery and is a critical component of overall 

liquidity. We commend the Commission for focusing on the 
 

 

 

 

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balancing of costs and benefits of any additional short 

selling restrictions. 

We are not aware of any evidence showing that 

restricting short selling would have eliminated naked or 

abusive short selling, increased investor confidence, or that 

the benefits of the new regulations would outweigh the 

additional costs they would impose. 

We believe that Rule 204 has produced empirical 

evidence that the clearing and settlement function is the 

appropriate area on which to concentrate short sale 

restrictions. Implementation and enforcement of Rule 204 has 

reduced the number of stocks on the threshold list from 582 

in July of '08 to 63 issues one year later, a reduction of 

89 percent. 

The STA has expressed concerns about the reasonable 

grounds to believe standard contained in Rule 203 of 

Regulation SHO, and recommends that the SEC undertake a 

review of Rule 203 and its interpretations to amend the 

rule's language and address any circumvention of the intent 

of the rule. Surgically altering the language and strict 

enforcement could provide significant results in the effort 

to control improper and abusive short selling, including 

naked short selling. 

If the Commission believes that additional 

regulation is absolutely necessary, the Association would 
 

 

 

 

 

 

 

 

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suggest that the Commission review our circuit breaker 

elected pre-borrow proposal sent May 4th. 

While the circuit breaker pre-borrow proposal would 

be a reasonable alternative to short sale price tests, it may 

not be a reasonable alternative to Rules 203 and 204 in an 

effort to address naked short selling. Placing a mandatory 

pre-borrow requirement on hard-to-borrow issues may restrict 

liquidity to an unreasonable degree and cause unwarranted 

price fluctuations in the issues trading. 

The cost/benefit analysis will be extremely 

important when considering imposing a market-wide mandatory 

pre-borrow requirement. Implementing a market-wide permanent 

pre-borrow requirement would be very expensive. 

As we have mentioned in previous comments, the 

breadth of the abusive short sale problem appears to be 

limited in nature, and a market-wide permanent solution would 

be inappropriate. Thank you. 

MR. BRIGAGLIANO: Thank you, Peter. 

Dr. Hatheway? 

DR. HATHEWAY: Thank you, Jamie. 

As Chief Economist for the NASDAQ OMX Group, the 

world's largest securities market operator, I'd like to thank 

you, Chairman Schapiro and Commissioners, for organizing this 

roundtable on securities lending and short sales. 

Issues that list their shares on our markets and 
 

 

 

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investors that risk capital there demand rules that are 

soundly reasoned, clearly articulated, and rigorously 

administered to create a safe, fair, transparent, and 

efficient venue for securities trading. 

My remarks today are similar in theme and content 

to those I made at the roundtable on May 5th. First, based 

on numerous studies of empirical data, the Commission has 

been quite successful over time in reducing fails to deliver. 

Second, the Commission achieved this success through 

incremental, narrowly tailored regulatory changes. 

Third, the Commission should continue to focus on 

reducing fails to deliver and abusive short selling, and 

continue using its proven approach, careful analysis of 

empirical data followed by incremental regulatory responses. 

The requirements of Rule 204T and the subsequent 

Rule 204 focused on issues associated with the delivery of 

borrowed shares. As we turn today to the practices involved 

in the lending process and consider strengthening the locate 

or creating pre-borrow requirements, it is important to know 

whether there is evidence of continued abuse in the stock 

loan market or if there are shortcomings in the enforcement 

regime which have not been addressed by Rule 204, if that's 

the case -- or, excuse me, if that is not the case, one 

course for the Commission is to monitor potential loopholes 

in existing regulations for signs of abusive conduct, much as 
 

 

 

 

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they did with fail to deliver. 

Acting on the hypothetical possibility of abusive 

conduct and at the same time restricting beneficial liquidity 

oriented behavior in the market is not in the best interest 

of investors or listed companies. Barring reliable empirical 

evidence that steps taken to take have not been sufficient to 

prevent abuses in stock lending, we would encourage the 

Commission to closely monitor this area rather than taking 

regulatory action at this time. 

Should the Commission believe, however, that there 

currently exists abusive conduct in the stock loan markets, 

we would support the Commission taking immediate and 

effective steps to close any existing regulatory gaps. 

NASDAQ OMX Chief Executive Officer Robert Greifeld has 

publicly urged the Commission to consider adopting a hard 

locate rule. 

Under current rules, securities lenders are 

constrained in issuing locates by the risk of a short squeeze 

or other events that would simultaneously force delivery of 

all located shares. Borrowers are similarly constrained from 

accepting locates from unreliable lenders. The regulations 

do permit, however, firms to assess that risk on a stock-bystock basis. Therefore, there may be gaps in the current 

locate practices. 

A hard locate rule would augment current rules and 
 

 

 

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practices by placing a fixed regulatory limit on the number 

of locates per share firms could issue. The limits could be 

fashioned in a variety of ways: a fixed ratio; dollar volume 

of locates issued measured against the firm's capital, a 

relevant indicator; or a scale based on a characteristics of 

the stock, the firm making the loan, or general capital 

market conditions. 

The essential feature of any hard locate rule, 

however, is substituting a regulatory limit to risk-based 

features used by the markets today. A well-constructed 

locate rule would be a powerful yet flexible tool for the 

Commission to reduce the costs of abusive short selling, 

while still preserving the benefits of price discovery and 

liquidity made possible by prudent lending. 

The Commission should also consider differential 

requirements for market makers. Implementing a hard locate 

rule or other restriction on security lending will likely 

increase the cost of providing liquidity. Again, the 

empirical evidence should dictate the exact structure of this 

exemption. 

NASDAQ OMX stands ready to assist the Commission in 

analyzing appropriate and necessary steps necessary to reduce 

fails to deliver and abusive naked short selling. As I 

stated earlier, the Commission should first determine whether 

sufficient empirical data exists to warrant further 
 

 

 

 

 

 

 

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tightening of lending through restriction on locates. 

If the Commission can make that determination, 

NASDAQ believes that a hard locate rule, as described above, 

would be the most effective, flexible tool to balance the 

overall risk, cost, and benefits associated with short 

selling. Thank you very much. 

MR. BRIGAGLIANO: Thank you, Dr. Hatheway. 

Bill Hodash? 

MR. HODASH: Thank you, Chairman Schapiro and 

Commissioners, for inviting DTCC to participate in today's 

roundtable. 

As part of DTCC's mission, we are closely following 

discussions with regard to potential new regulations that may 

affect our customers with an intention to, wherever feasible, 

develop central tools that can support regulatory objectives 

while helping minimize their compliance costs. 

Those who believe that naked short selling is a 

severe problem in the U.S. markets often cite fail to deliver 

statistics as an indicator of naked short selling activity, 

notwithstanding the SEC's own cautionary statements that 

there can be any number of reasons for fails, and that the 

existence of fails cannot automatically be construed as 

evidence of naked short selling activity. 

Even bearing that caution in mind, recent trends 

and fails can suggest some conclusions about what's happening 
 

 

 

 

 

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in the markets. For the Commission's consideration, many in 

the industry believe a measure of the efficacy of Commission 

Rule 204T and Rule 204 in combating naked short selling may 

be the impact it has had on fails to deliver in CNS. 

Thus, a look at the fail rates over the last year 

before and after the introduction of Rule 204T may be 

relevant to the discussion of whether naked short selling 

remains a problem. Clearly, these statistics suggest that 

the regulations have had a dramatic impact. 

Now, these fail statistics are not about trades. 

They are about net obligations that are owed to the 

clearinghouse by its members. They include both long and 

short sales. 

Fails during July of 2008 in CNS averaged 

1.09 percent of total daily value processed. Following the 

implementation of Rule 204T, fails dropped precipitously, 

averaging about 0.23 percent over the last three months of 

2008, and recently 0.16 percent for the month of July 2009. 

Now, many in the industry feel that this low fail 

rate, combined with Rule 204's requirement to close out fails 

on T + 4, place appropriate back-end settlement date controls 

on fails resulting from naked short selling. 

DTCC's current discussions with the Commission 

staff include a focus on naked short selling and the locates 

rules. Omgeo, a joint venture with Thomson Reuters, has been 
 

 

 

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working with SIFMA's prime brokerage committee for several 

years with regard to proposed amendments to the no-action 

letter on prime broker arrangements, and has held out its 

trade suite system for use in helping to identify any 

remaining short selling abuses by going well beyond relying 

on customer representations, focusing on identifying 

discrepancies between executing brokers and prime brokers 

regarding whether a sale was short or long, inventory issues 

on long sales, and locate issues on short sales. 

In recent discussions we've had with industry 

members on these and related issues, including a concept put 

forth by a company named Global Locate Services, that calls 

for a phased approach to enhancing the locate's process 

beginning with post-trade monitoring and reporting, there has 

been initial industry reaction in three areas. 

Those concerns are mainly, first, that the decrease 

in fails calls for, at a minimum, additional time to assess 

whether abusive short selling is still a problem. If abusive 

short selling remains a problem, then work is needed to 

identify whether locate practices contribute significantly 

to it. 

If this determination is reached, industry members 

feel that the enhanced procedures called for in the draft 

amended no-action letter should be implemented and monitored. 

Then if it's determined that there is still a residual 
 

 

 

 

 

 

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problem, there may be a basis for considering additional 

proposals, and the industry is prepared to participate in 

that analysis. 

In conclusion, DTCC stands ready to assist our 

customers with automated and centralized solutions that can 

help them meet any new or enhanced regulations, including any 

with regard to naked short selling, in a cost-effective 

manner. 

By the nature of our governance, we will look for 

guidance from both the Commission and the industry before 

embarking on the development and implementation of any such 

tools. 

MR. BRIGAGLIANO: Thank you, Bill. 

Paul Lynch? 

MR. LYNCH: Good morning. My name is Paul Lynch, 

and I'm the Senior Managing Director for State Street. I'm 

the Head of Global Trading and Risk Management for the Agency 

Lending Business, and the Head of our Enhanced Custody 

Product. I would like to thank Chairman Schapiro and the 

Commissioners for inviting me here today to discuss this 

important topic as financial markets continue to be shaped 

for optimal efficiency and transparency. 

State Street Securities Finance is opposed to the 

proposal to impose new pre-borrow or hard locate requirements 

in connection with short selling for equity securities. We 
 

 

 

 

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support regulations that contribute to a more efficient short 

sale marketplace, including the Commission's now permanent 

Rule 204 of Regulation SHO. 

We agree with the Commission's analysis that Rule 

204 has been -- had a positive impact. It has addressed the 

issue of naked short selling while preserving legitimate 

short selling activity. Given the success, we believe 

imposing additional pre-borrow or hard locate requirements is 

unnecessary. It will reduce the efficiency of short sales 

and have a number of unintended results. 

Since asset managers are constantly adapting to 

changing economic environments and markets, a pre-borrow 

regulation in practice leads to multiple pre-borrows for 

every eventual short sale due to the many locates never 

materializing in a short sale. 

Any type of pre-borrow activity that would encumber 

my clients' assets would require a form of borrowing fee for 

my client, whether or not a physical delivery was made. The 

result would be unnecessary utilization of inventory and 

increased fees from borrowers. Short-term, this would be 

beneficial to my firm and my clients. But long-term market 

consequences made adverse to all. 

The long-term increased borrowing costs, the 

potential increased prime brokerage capital usage, the 

securities lending inventory illiquidity resulting from a 
 

 

 

 

 

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pre-borrow or hard locate requirement, could lead to a number 

of detrimental consequences for a legitimate short sale 

activity. As legitimate hedges and short sale strategies are 

restricted, market volatility will increase. 

In summary, we believe a pre-borrow requirement 

could expose the market to detrimental consequences and 

provide no demonstrable improvement in market efficiency or a 

measurable impact on naked short selling beyond the 

Commission's existing policies and regulations. Thank you. 

MR. BRIGAGLIANO: Thank you, Paul. 

Michael Mendelson? 

MR. MENDELSON: Chairman Schapiro, Commissioners, 

and staff, thank you for inviting me to appear before you. 

I'm a principal at AQR Capital Management, an investment 

management firm that manages assets for, among other, pension 

funds, endowments, and foundations. 

Short selling is an important activity with many 

benefits. But a tiny portion of short selling is abusive 

naked short selling, a practice we oppose. Regulation of it 

should seek to maximize the benefit of constructive short 

selling while mitigating the problems associated with both 

benign failures to deliver and illegal manipulation. It 

should not ensnare the vast majority of short selling 

activity, for that will prove costly to legitimate investors, 

possibly without having any effect on the problems we are 
 

 

 

 

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trying to solve. 

I had planned to promote the success of Rule 204, 

but at this point that would just be piling on. Rule 204 is 

well-targeted. Pre-borrow and hard locate proposals are 

unguided. 

Pre-borrow requirements are ineffective and very 

costly. They will have little effect on someone who isn't 

bothering to get a locate now, and will require clearing 

brokers to forward cash collateral to lenders three business 

days before the proceeds from any short sale are available. 

This is an excessively expensive requirement whose costs will 

be paid by investors in the form of higher fees, increased 

trading costs, reduced prime brokerage competition, and 

greater market inefficiency. 

Hard locate requirements are ineffective and 

excessively burdensome to investors. They do not suffer from 

the substantial funding problem of pre-borrow, but still 

force dramatic costs on the stock loan market that are not 

offset by gains in compliance or, I believe, improved 

investor confidence. 

Hard locate requirements won't deter naked short 

sellers. They don't comply with locate rules. It will not 

accomplish the goal of eliminating fails since we cannot 

prevent the actual owner of the long security from selling; 

it will turn an automated, auditable process into a 
 

 

 

 

 

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cumbersome and costly function; it will substantially impair 

liquidity providers, and will create an economic value to 

locates where little or none has existed to date, leading to 

hoarding, additional costs to investors, and the potential 

for new manipulative practices. These same concerns apply to 

pre-borrow, too. 

While I do not support pre-borrow or hard locates, 

the system can be improved. The Commission may wish to 

consider: 

(1) Requiring clearing and executing brokers to 

conduct daily reconciliations of locates, including 

verification that locates were obtained before the time of 

sale and that sale orders were properly marked as long or 

short; 

(2) Requiring executing brokers to determine which 

of their clients show a pattern or a practice of failing to 

deliver securities; and 

(3) Requiring that short sellers employing 

exemptions from locate rules mark their orders with the 

specific type of locate exemption under which the stock is 

traded, and examine whether short sellers employing 

exemptions for the locate rules are using those exemptions 

for their intended purposes. 

It is possible that many of the non-operational 

failures to deliver we see today are failures of this type. 
 

 

 

 

 

 

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For those interested, I have provided further detail in my 

written statement. Thank you. 

MR. BRIGAGLIANO: Thank you, Michael. 

Dennis Nixon. 

MR. NIXON: Good morning. I'm Dennis Nixon, 

President of International Bancshares Corporation. And I 

thank the Commission for the opportunity to participate 

today. 

To respond directly to the topic of this panel, IBC 

firmly believes that short traders should be required to 

pre-borrow shares before engaging in a short trade, and 

should have parallel disclosure obligations to long traders. 

IBC has spent the last six months with a team of 

professionals educating, investigating, and taking action to 

prevent what appears to be manipulative short selling of IBC 

stock. 

IBC has met personally with the Commission, ABA, 

FINRA, NASDAQ, and several members of Congress to explain the 

negative effect short sellers have on financial institutions. 

Additionally, IBC submitted a 22-page comment 

letter dated June 9, 2009 on reinstating the uptick rule, 

which called for the Commission to vigorously enforce current 

short selling rules, institute a pre-borrow requirement for 

short sale transactions, promulgate disclosure rules for 

short sellers which mirror those obligations for long 
 

 

 

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positions, investigate the impact of the market maker 

exemption, and promulgate rules which would require brokers 

to allocate lent stocks and disclose the margin account -- to 

the margin account holder of the loss of voting for those 

shares. 

In a supplemental comment letter dated June 17, 

2009, IBC urged the Commission to promulgate rules to address 

the lack of reporting and transparency in which short sellers 

operate. IBC has also submitted letters to bank regulators 

requesting their investigation into how short sellers may be 

violating certain banking laws. 

All these efforts involve substantial expense of 

both time and money in an effort to better protect our 

shareholders, depositors, and the communities we serve. IBC 

is a well-capitalized $11.4 billion multi-bank holding 

company headquartered in Laredo, Texas, serving 104 

communities in Texas and Oklahoma, and is traded on NASDAQ 

under the ticker symbol IBOC. 

IBC is an award-winning bank and has been rated as 

one of the best performers among its peers. We have a record 

of over 136 consecutive quarters of continuous profitability. 

Having experienced economic downturns in the past, we 

expected an impact to our stock price, given the financial 

crisis. However, none of us expected that short sellers 

would be able to severely detach IBC's fundamental value from 
 

 

 

 

 

 

 

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its trading price. 

Since the beginning of the year, IBC's short volume 

has increased to a record -- to a level of over 11 million 

shares, an increase of 891 percent. At its peak, short 

sellers represented over 21 percent of IBC's generally 

accepted float, and drove IBC's stock price from over $24 to 

a low of $6.55 in a matter of months. 

We have provided two charts in our written 

statement filed with the Commission which show the dramatic 

impact that short sellers have had on IBC. IBC believes 

short sellers provide little value to the market outside of 

legitimate market-making activities. 

The current rules allow for naked short selling of 

stock within the three-day window, but only classify the 

trade as naked once there is a failure to deliver. IBC 

believes a true naked short position is created when a short 

seller sells a stock without first borrowing the security. 

We have yet to be convinced why the current three-day 

delivery time should be allowed. 

I want to thank you, and I look forward to 

discussing these issues with you today. 

MR. BRIGAGLIANO: Thank you, Dennis. 

Bill O'Brien. 

MR. O'BRIEN: Good morning. I'd like to thank both 

the Commission and the staff for the opportunity today to 
 

 

 

 

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participate on behalf of Direct Edge, the nation's third 

largest stock market. 

The Commission's targeting of naked short selling 

through the passage of stringent locate, borrow, and delivery 

requirements, such as Rule 204, have yielded impressive 

results to date by drastically reducing the incidents of 

failures to deliver, the data points of which I won't restate 

here. But the data clearly suggest the actions that the 

Commission has taken to date are working very well to curtail 

truly naked short selling. 

Thus, at this juncture, the Commission's focus 

should be on what measures would be cost-effective in further 

curtailing abuse, while making the process of short sale 

delivery and settlement more efficient, and leveraging these 

efforts to rationalize the regulatory framework surrounding 

short sales generally. 

Our belief is that imposing a pre-borrow 

requirement for short sales would constitute an inefficient 

use of capital, as such a requirement would need to be funded 

by prime and clearing brokers and would force securities to 

be locked up in a customer's account for the three days 

preceding settlement. 

On the other hand, we believe that an examination 

of potential cost-effective improvements to the locate 

process are warranted, particularly if they can mitigate some 
 

 

 

 

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of the inefficiencies that exist in the current regulatory 

structure governing locates and improve coordination between 

custodians, executing brokers, market centers, and 

regulators. 

Today, when a customer executes a short sale and 

custodies their assets at the same broker, whether it be a 

retail investor or an institution with the prime broker, 

generally the custodian will decrement shares available for 

lending thereafter on a real time basis as part of the short 

sale execution process. In such a scenario, a reliable hard 

locate is effectively obtained. 

The challenge in broader mandates for hard locates 

would appear to be in achieving the same level of reliability 

for away locates, where the custodial and the executing 

broker are different, and provide similar certainty for 

actual delivery on a cost-effective basis. 

Reliability could be enhanced by improving trade 

date validation for locates through end-of-day 

reconciliations between the locate broker and the executing 

broker. Such an approach potentially enhances the 

reliability of away locates, exposes naked short sellers, and 

facilitates inventory management of securities available for 

loan. 

Initiatives and processes to facilitate this 

warrant further examination and support both with respect to 
 

 

 

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their efficacy and potential for expansion, such as the 

revised prime broker no-action letter. 

Greater transparency for borrowing and lending 

transactions with proper audit and compliance standards also 

offer potential benefits of enhanced reliability. Further, 

such market developments can create an opportunity for 

integration of securities lending activity into the 

transaction process itself, alleviating systemic and 

regulatory risk. 

Any regulatory initiatives, especially mandates, 

must heavily weigh their resultant costs. If properly 

constructed, regulation can make markets more efficient and 

allow for rationalization of certain short sale regulation. 

Any further regulation of the locate process needs to 

consider that current short sale regulation prompts overlocation, that is, locating more shares than a market 

participant actually intends to short on a net basis. 

Any inventory management efforts grounded in 

locates run the risk of restricting the availability and cost 

of locates, potentially disrupting even net long or market 

neutral trading strategies. Thus, any consideration of more 

stringent regulation will also need to consider how to 

alleviate some of the regulatory inefficiencies that will 

only be exacerbated by a closer correlation of located shares 

to shares sold short. 
 

 

 

 

 

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One potential tandem effort would be the extension 

of the buy-to-cover concept to all securities. Currently, 

Regulation SHO guidance requires a locate for each short sale 

of a hard-to-borrow security regardless of whether a market 

participant has covered such shares to repurchase between 

such shares on an intra day basis. That standard doesn't 

apply to easy-to-borrow securities. 

In such a situation where a locate can be directly 

tied to actual shares used for delivery, there should be no 

distinction between hard-to-borrow and easy-to-borrow 

securities as the locate effectively assures to ensure 

delivery, regardless. 

Additional further efforts to minimize the need for 

market participants to locate more securities than they 

actually will need to deliver for settlement, such as a broad 

reevaluation and potential expansion of the role of the 

market maker or similar exemptions in today's market 

structure, should also be examined. 

There are many other markets where short sale 

regulation is based on net economic position as opposed to on 

a transaction-by-transaction basis, focusing on the 

sequencing of transactions. 

With securities lending and short sale regulation 

coordinated more in this fashion, the likelihood of investor 

benefit from greater confidence and the more efficient market 
 

 

 

 

 

 

 

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will be optimized. 

Once again, I'd like to thank the Commission for 

the opportunity, and I look forward to any questions. 

MR. BRIGAGLIANO: Thank you, Bill. 

Thomas Perna. 

MR. PERNA: I'd like to thank the Commission for 

the opportunity to appear here today. Quadriserv is happy, I 

think, to have been included in the Commission's review of 

the securities lending process. 

Our company holds a strong view on the need to 

continue to improve transparency and make settlement more 

efficient in the securities lending market. As we've seen 

with Rule 204, pursuit of this objective should involve 

targeted regulatory improvements and market-based solutions 

that enhance transparency and efficiency. We have and will 

continue to support efforts that advance those important 

objectives. 

Those responsible for implementing any proposals 

certainly would face challenges that should be carefully 

considered. However, many participants in the securities 

lending process have expressed a desire to move beyond the 

reasonable determination locate structure. 

The mandatory pre-borrow requirement, although 

having a benefit of zero sum inventory accounting between 

shares located and shares borrowed is balance sheet intensive 
 

 

 

 

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and would significantly raise the net cost of borrowing 

stock. We believe that the unintended consequences brought 

on by these additional costs would certainly far outweigh the 

benefits. 

In the interest, though, of evolving towards the 

most efficient, reliable market possible, we hope to see a 

middle ground. We believe that a logical middle ground could 

be developed. We could develop an auditable capital 

operationally efficient marketplace for locate supply and 

demand to interact. 

We believe there are technological and operational 

frameworks that exist and can be further developed to achieve 

that objective. A centralized settlement or inventory 

accounting system could serve to further reduce settlement 

friction and contribute towards the industry's collective 

goal of making markets more efficient for investors. 

With that said, we're very cognizant of the complex 

challenges that face the broker dealer community, in 

particular with many of the proposed hard locate proposal 

standards. With the adoption of Rule 204 as a guiding 

indicator of success, we're confident in the industry's 

ability to arrive at a compromise solution that works for 

those on both sides of the debate. 

If a common belief emerges on the need for 

incremental steps to be taken to address the last mile 
 

 

 

 

 

 

 

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challenges of settlement date efficiency in the market, those 

steps should allow for the supply and the demand dynamics of 

a market where there is both a cost and a benefit to 

satisfying locate requirements, and something that's easily 

auditable. 

This would allow for a market-based resolution to a 

challenge where there are incentives for participants to 

participate in a solution. Thank you. 

MR. BRIGAGLIANO: Thank you, Tom, and thank you, 

all the panelists, for your thoughtful statements. 

Are there questions from the Chairman or 

Commissioners? 

CHAIRMAN SCHAPIRO: Thanks, Jamie. I have a couple 

that I could start us off with. 

I'm interested -- I think Bill and Michael had a 

number of suggestions for improving the existing locate rule. 

I wondered if others of you had further thoughts on that -- I 

guess something short of a hard locate, but tweaks to the 

existing rule that would improve it. 

And I guess let me add to that. I'd also love to 

know, as a second matter, what are the differences in costs 

between the current locate rule, if everybody's following it, 

and a hard locate rule? Is there really a significant 

increase in costs if we go to a hard locate? 

MR. DRISCOLL: Well, the STA has mentioned several 
 

 

 

 

 

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times already that we have concerns about the reasonable 

standard in Rule 203, and we think that that needs to be 

tightened up. 

We also have concerns whether the industry is 

complying with the requirement to locate whether or not 

you're going to cover that short within the same day. We 

think that those two areas could bring some considerable 

improvement in the way the locate rule works now. 

MR. MENDELSON: I would also like to say that I've 

heard many different hard locate proposals. There are some 

that are used in Hong Kong. There's a proposal that's 

floated around the industry a little bit that I think has not 

been very well received. There's a few other proposals in 

between. 

And I think the cost is -- I think the cost is 

pretty high for all of them to investors, but it does vary. 

Proposals that -- you know, there was one particular proposal 

that is a little bit of a Rube Goldberg device, where we end 

up having to make so many different steps of communication 

before doing a trade, after doing a trade, that it would 

really throw a lot of sand in the gears of trading. 

I think that there are other proposals that are 

much less onerous. They still, I think, have some basic 

economic problems. But the costs do vary quite a bit. 

CHAIRMAN SCHAPIRO: Are the costs -- this is an 
 

 

 

 

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industry that is so talented when it comes to technology, and 

so creative and so capable of solving problems with 

technology. So are the costs in the creating the solution to 

have a hard locate, or are the costs in having a hard locate, 

period? 

MR. MENDELSON: I think there are a lot of the 

costs that are just about having a hard locate that are 

economic. I think there are other parts that are technology, 

and that yeah, you know, with some expense, the industry can 

find a way to evolve, although it will have an effect. 

There is not going to be a low latency way of 

communicating between all these different organizations that 

will satisfy all the liquidity demands of the market. 

Nevertheless, irrespective of those costs, if we faced all 

those costs, there are still going to be costs to our 

investors in the form of additional costs of short selling; 

and as a long -- in our purchases of stock, it will also cost 

us more because market-making activity will decline. 

MR. LYNCH: I think part of the answer is how 

perfected do you want the hard locate to be? So at a general 

high level, obviously there will be a cost of technology and 

all of the documentation and administration around the hard 

locate. 

But then if you want an extremely perfected hard 

locate, so much so that you're actually encumbering shares 
 

 

 

 

 

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somewhere for that hard locate, well, then, there's going to 

be an actual cost of encumbering those shares. 

Whether you call it all the way to the point of a 

pre-borrow and a physical delivery, or whether you just call 

it that shares are set aside within the prime broker or set 

aside within an agent lender for the potential for that short 

sale to go through, well, there's going to be a cost with 

encumbering those shares. 

COMMISSIONER WALTER: But isn't part of the problem 

today -- let me pick up on cost. Isn't part of the problem 

today -- the way it works is statistical, and yet there's no 

cost to developing, at least theoretically, a reasonable 

ground to believe that you can locate the shares. 

There are no dollars that change hands, which gives 

a perverse incentive to go out there and cover whatever your 

potential activity might be, which undermines the statistical 

analysis. 

So I'm sort of surprised that the industry hasn't 

come up with a solution, particularly as this controversy has 

continued to swirl and does not go away, that realigns by 

imposing a cost on locates, at least for hard-to-borrow 

securities, that would keep that from happening. 

And I would add to that that the fact that there 

isn't a cost transfers the cost, in effect, to our 

enforcement program and leaves us with a problem in terms of 
 

 

 

 

 

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trying to determine whether people in fact have reasonable 

grounds to believe that they can locate the securities, which 

is a very difficult case to bring, and is not the place where 

you want the cost to be. 

So I'd love to get your reactions to that. 

MR. DRISCOLL: Well, we certainly believe that 

there has to be some rationalization of the shares located 

with the shares available. How that's done, it could get a 

little tricky. But somewhere along the line, the practice of 

going out in the morning and trying to borrow a million 

shares of every S&P 500 stock -- somewhere along the line, 

that stuff has end. 

COMMISSIONER WALTER: And so what's the way to do 

it, as a pragmatic matter that works? I mean, might it be 

possible, for example, to use the fail list, and as soon as a 

security, for example, appears on that, to impose a hard 

locate requirement then? 

You know, the industry has been grappling with this 

for a long time and doesn't want regulation. Yet I don't 

think we've seen any movement to really cure this problem. 

And there isn't anything to stop everybody from going out and 

borrowing a million shares of the entire, you know, Russell 

3000 every morning. 

MR. DRISCOLL: We did suggest that the circuit 

breaker hard borrow would work along that line. We think it 
 

 

 

 

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would be effective and targeted, and we would go along with a 

proposal like that. 

MR. CONLEY: Well, I'd just add a couple of 

comments to that. The first thing is a hard locate is not a 

guarantee of delivery. We should really delineate the two of 

these because if we go to a bank, in this case State Street 

since they're on the panel, and say, we'd like to get a hard 

locate on this security, their client can still sell the 

security. 

So the hard locates are done on trade date. Their 

client can sell on trade date simultaneously, which will be 

reported to them in the evening on trade date. That stock 

will be delivered for the client's sale rather than lent to 

the prime broker or short seller for delivery. 

So I think, as we're contemplating this, that's 

just a fundamental tenet that we need to understand. And if 

we do restrict or encumber those shares, essentially what 

we're telling the investors is they can't sell those shares 

going forward because those are secured for a securities loan 

transaction. And I don't think that the Commission would 

want to -- would want to go down that line as well. 

COMMISSIONER WALTER: But there's a difference, I 

think, between taking the risk that the shares will be sold 

and taking the risk that those same shares, in effect, have 

been located by, you know, a hundred different people. And I 
 

 

 

 

 

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think focusing on the sale risk is only a minor part of the 

issue. And maybe that's a risk that we ought to be willing 

to live with, but not the other. 

MR. O'BRIEN: I think you have to recognize that 

only does the reasonable grounds standard, you know, prompt 

over-location. But a lot of other aspects of short sale 

regulation do, you know, as well. 

I mean, even, you know, the recent change to FAQ 

2.5 where, you know, all sale orders have to be marked short, 

assuming that they're all going to be executed, but 

outstanding buy orders at the same time don't -- there's a 

lot of aspects of current regulation that prompt market 

participants that are not really true short sellers in the 

fundamental economic sense to have to locate a lot of stock. 

And I think it's a question of mandates, too, 

versus motivation. There may be products out there where you 

can, you know, tie back the shares more effectively. And 

maybe there's disparate regulatory treatment under the short 

sale rules to prompt that. 

And then people can make their own economic 

decision of whether that transaction flexibility, you know, 

warrants the economic cost of using a hard locate or similar 

system. 

COMMISSIONER WALTER: But what if -- can I come 

back to my initial thought and get a reaction to that, which 
 

 

 

 

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is, what if there were a cost imposed on the location 

process? How would that -- how would you think that that 

would change behavior? 

MR. MENDELSON: Well, I think we should start by 

thinking about why do we over-locate, which is a concern you 

have. We over-locate because when we have to do the locates, 

we don't know what we're actually going to short that day. 

So all of us, speaking for my firm as well as other large 

investors, we may at the beginning of the day say, well, I 

don't know how much Exxon we may short today, but it might be 

as many as 50,000 shares, so I'll locate 50,000 shares. 

We won't, for sure, all of us, sell short the 

maximum we could. We have that locate request out there 

because the market opportunity may exist for us to short sell 

those securities. It won't exist if everyone else who's 

over-located the stock has sold short that stock. 

And so the result is that the statistical issue 

which you raise -- and you're right, the system does work 

today on a statistical basis -- that there is such a low 

probability that those locates that the prime brokers give us 

will not in fact be delivered on. 

COMMISSIONER WALTER: Understood. But I'm trying 

to change the scenario for you and say, if there were a fee 

charged, and not an outrageous fee, a fee charged for the 

location process, how would people's behavior change? 
 

 

 

 

 

 

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MR. MENDELSON: Well, you would locate less for 

sure. Okay. I mean, that would be the obvious result of it. 

But I think what would happen is you would impose a cost on 

investors that would really end up impairing liquidity. 

All you would be doing is -- right now we have a 

system that does work pretty well for this. We have 

suggested some improvements to it, but it works pretty well. 

You'll start imposing additional new costs on our investors 

that will widen bid/ask spreads. It'll be the first thing 

you'll see. 

DR. HATHEWAY: Let me take a different tack a 

little bit on Mike's answer, if I can. 

We don't know who the sort of marginal user of a 

locate is right now because there's no price. It might be a 

liquidity provider. It might be an arbitrageur. It might be 

someone taking a large, speculative short position, or even 

launching an abusive attack on a company. 

My guess is it's not that last guy. So unless we 

can put -- somehow figure out who should pay what price, 

putting a constant price on a locate is going to be a very 

difficult thing to do. 

And frankly, it may create, even within a subset of 

the community -- say, the liquidity providers -- it may 

create advantages for large firms who can or will locate in 

scale and use the locate to the detriment of smaller firms, 
 

 

 

 

 

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or some other dimension of it. One size fits all pricing, I 

think as you understand, would be a challenge. 

MR. LYNCH: I'd like to go back to your initial 

point, which was that if you targeted the 0.1 percent fail 

list and then you strategically placed that list within a 

potential structure, whether that's a pre-borrow or a hard 

locate, that's a much more strategic regulation to find where 

the potential abuse is, as opposed to put it across the 

entire industry. 

MR. HODASH: Could I have one point of 

clarification? The hard locate proposals, I think the 

questioning has uncovered there is no single hard locate 

proposal; that perhaps transparency into the process and 

understanding which securities, which market segments, are 

over-locating, if it's happening, might be a prudent first 

step. 

So even in discussing that, the hard locate 

proposal that we've been discussing with clients, there are 

costs associated with that. But there's less of a latency 

issue involved in post-trade transparency reporting type 

solutions in order to understand what's going on, and 

sometimes that changes behavior itself. 

That said, there's still technical issues with that 

concept as well. 

MR. CONLEY: I think, ultimately, the objective 
 

 

 

 

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here is to reduce down fails and eliminate abusive short 

selling. And I think the way that you do thought is you link 

the order marking and communication between the client, prime 

broker, and the executing broker. 

And the executing broker is then mandated to use 

any information of discrepancy, contemplating forward trades 

with customers. I think that's really connecting the circle 

of all the different parties in these transactions. I think 

that's really the solution. 

And then potentially with some regulatory output of 

the discrepancies that aren't resolved between prime broker 

and customer, I think it will give the regulatory authorities 

clear visibility on if people are circumventing the locate 

rules. 

MR. NIXON: Yes. Just to comment, I think, you 

know, from the Main Street side of this, I think there's a 

lot more involved here than just this locate rule because I 

believe this whole side of the market, frankly, is out of 

balance. 

And we've seen a tremendous damage to our company 

of 30 years of productive work being fundamentally destroyed 

by a predator practice that came against us in a bear market, 

when all financial institutions are in chaos, you know. And 

for somebody in our case to be able to go out and issue 

11 million new shares of our stock without any kind of 
 

 

 

 

 

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registration process or any kind of formal process is just 

unbelievable to us. 

And on the long side of the market, when you're 

going to -- if John Doe America wants to sell a share of 

stock, he's got to put it in his broker's account. He's got 

to go through the process to put it in a nominee name before 

anybody will even accept the sale of that stock. 

So it seems somewhat ridiculous to me that we're 

talking about the short guy who can, just like a cowboy here, 

go do anything he wants to; but on the long side of the 

market, you have all this extreme restrictions. And it puts 

us at a disadvantage on the long side because we're trying to 

build an investment here. 

Are we worried about the short sellers or are we 

worried about the investment community? And Mr. and 

Mrs. Mainstream America, in my view, is being abused. We 

lost $1,200,000,000 worth of value in our company in about 

45 days. 

And I think it was all attributed to this predatortype short selling that goes on in this market today that's 

uncontrolled. It's unbelievable. And if you live through 

this in a mainstream fashion, then you understand this. 

We're talking about a bunch of guys here making 

money off of Main Street. We're transferring -- we 

transferred that $1.2 billion from Main Street to Wall 
 

 

 

 

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Street. And it doesn't seem anybody's concerned about it. 

And I think that's what the Commission should be concerned 

about. How do we protect Mom and Pop Investor out there 

versus enabling a bunch of guys who are really speculating on 

the demise of companies, not the growth of companies? 

MR. DRISCOLL: While I have great sympathy for the 

predicament of certain stocks that are targeted, I think that 

you have to remember that the vast majority of short sellers 

are legitimate people using hedge positions. 

I think that you have to target the unacceptable 

behavior, root out the manipulation, and go after that. You 

can't just expel the whole class because of one disruptive 

student. 

MR. HODASH: And to stay on your question, 

Commissioner Walter, $1.2 billion on the table, you can't 

price a locate high enough. So we're really looking at 

another type of solution, either a transparency one that 

facilitates the enforcement process, or a different mechanism 

other than sort of the price mechanism for either the locate 

or the pre-borrow. 

Because if you're focusing on a concentrated attack 

on the company and the costs, the price of doing it, is based 

on sort of the average price of a short sale across the 

market, you've got a big disconnect between what you intend 

to gain from an abusive attack and what it's going to cost 
 

 

 

 

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you to do it in a locate or a pre-borrow. 

COMMISSIONER WALTER: The other thing that we 

potentially could do is to put harder edges around the 

reasonable belief requirement, and put more objective edges. 

Now, there are going to be costs to that as well. But when 

you've got a standard like that, you have to expect that the 

enforcement efforts are going to be difficult. 

MR. O'BRIEN: And I think you go back to validation 

as well because unlike a regular transaction, where the 

broker that's executing it and the broker that actually is 

going to make delivery and settlement are the same in a short 

transaction where there's an away locate, you have the 

possibility for the left hand not to know what the right hand 

is doing in terms of what's the reasonable grounds for an 

executing broker to say that they've made that determination 

that effectively, the prime or other custodial broker is 

going to ultimately have to back up, you know, with 

settlement. 

And so the validation point, I think, echoes true, 

and having a regulatory output to that to make the cost of 

enforcement, you know, much more -- much more efficient, 

potentially. 

MR. BRIGAGLIANO: I'd like to jump in here on the 

issue of away locates because I think there is an important 

point. Currently, the broker does have the requirement to 
 

 

 

 

 

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locate, but the broker may also rely on an assurance from a 

customer. And that customer is not necessarily a regulated 

entity. 

So I'd like to get the panelists' reaction to this 

situation, the costs and benefits of continuing with the 

broker dealer requirement to do the locate, but not allowing 

the broker to rely on a customer and putting it all on the 

broker, so to speak. 

MR. DRISCOLL: Well, that interpretation came from 

a footnote in a Frequently Asked Question release. And we 

have great problems with the broker dealer being allowed to 

rely on his customer, especially the unregulated entity. 

It seems that as the hedge fund community has 

grown, they've become a huge part of the revenue stream that 

a broker dealer gets. And we kind of believe that the broker 

dealer would be very readily acceptable to any offer of 

assurance that the hedge fund would give them. We don't 

think that that's a reasonable standard. 

MR. PERNA: You know, I think, going back to some 

of the earlier comments, I think, you know, we believe that, 

you know, there can be a market, a central market; whereas I 

think I said in my opening comments the locate requirements 

and locate shares could meet. 

I think, you know, the pool, a centralized pool, I 

think would deal with some of the issues around customers 
 

 

 

 

 

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pulling back, between trade date and a settlement date, those 

shares. There could be -- there certainly would be a 

minimal, you know, cost, you know, imposed there during that 

time, which certainly could, you know, inure to the benefit 

of the beneficial owner of the shares. 

But I think that's certainly, you know, one listing 

to all the issues, which certainly are true. I think that 

central pool of available locate shares, you know, I think is 

something that certainly should be considered, and I think is 

doable. 

MR. CONLEY: While we talked about Rule 204 several 

times in the beginning, I'd just like to reemphasize the 

policing nature of this because if somebody -- if a customer, 

you know, misrepresents a locate, for example, the trade is 

going to get closed out on trade date plus four. 

So after settlement date, the trade will fail, and 

then the trade will be closed out through the buy-in process. 

So the rulemaking, as it stands currently, protects against 

abusive behavior in that particular sort. 

And one other comment on the statistical nature of 

the locates, referencing back to 204. If you are wrong on 

the locate, you will get closed out. And that's a painful 

experience, to get forcibly closed out of a position. 

So I think that most professional players in the 

market, as well as the prime brokers, are very cautious about 
 

 

 

 

 

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how they're locating inventory. You know, we go through 

great lengths to collect lots of different inventory feeds 

from lenders in the market and haircut those through 

statistical provisions to understand what we believe is the 

reliable nature of that because if we're wrong, we forcibly 

have to close out our customer. 

MR. BRIGAGLIANO: Bill, I'd like to follow up a 

little bit because there's a point that Dennis raised that 

others occasionally raise, and I think it's worth bringing to 

the panel's attention. 

204, as has been noted, has had dramatic results in 

reducing fails. But some say that even though the broker has 

to close out, you know, on T4, that still allows a window for 

a customer to, you know, commit naked short selling. 

I'd like your reaction to that. 

MR. CONLEY: I think my reaction is -- back to my 

earlier comments about moving forward with the prime 

brokerage no-action letter because that effectively connects 

the prime broker, customer, and executing broker on trade 

date plus one. That to me seems like the most rational way 

to control for behavior and to eliminate any type of 

activity, taking advantage of the normal settlements, like on 

the United States right now. 

Short of that, I mean, I don't think the Commission 

is prepared to do this, but to consider changing the 
 

 

 

 

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settlement period, the standard settlement period, for short 

sales versus long sales. I know there's been a lot of 

historical work looking at shortening settlement cycles in 

the U.S., and I don't think that that's an issue on the table 

today. 

COMMISSIONER PAREDES: If we can take just a little 

bit of a step back. We're talking a lot -- and I think 

appropriately so, and the discussion is fascinating -- about 

solutions. But just to take a step back to make sure we're 

all on the same page, or at least get the sense of folks, as 

to the problem. 

And there I guess my specific question is: When 

you think about fails, to help us better understand from you 

perspective, what are the potential causes of a fail? And so 

often we're talking about naked short selling. We're talking 

about the failure to deliver. We're talking about abuses. 

We're talking about manipulation. And yet there may be 

reasons other than manipulation, that there is, in fact, a 

fail. 

And without assessing that and trying to dissect 

the potential causes in a little more refined way, we may get 

off course in terms of some of the suggested solutions. 

So I'll start with Bill, and Bill, to give a couple 

of different perspectives -- but we'd be delighted to hear 

from folks along the way on their thoughts. 
 

 

 

 

 

 

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MR. CONLEY: Thank you. You're absolutely right. 

I think we are focusing a lot on manipulative activity here 

and not looking at the broad basket. 

Our most recent review of fail data shows that, I 

think, more 50 percent of the fails are ETFs right now, which 

are broad baskets of securities. And we believe that that's 

a functional result of the latency between the create and 

redeem process, between the issuers and the underlying 

baskets. 

Additionally, a large percent of the fails 

currently in the market are penny stocks, so positions less 

than a dollar. And there are issues -- I can refer to Bill 

Hodash on this -- but some securities get chilled and just 

don't move through the security system. So if they're in 

transit during the chilling process, they're not going to 

move. 

So I think if we were to undertake some effort from 

this meeting today, I think one of the things would be to 

understand and make public what really are the issues that 

are failing. And I know that you're doing this on the 

website, and we pull the information down and look at it. 

But I do think that investors will find that it's 

ETFs and a lot of penny stocks are really the two themes that 

we've observed there. 

MR. DRISCOLL: When I did do my analysis of the 
 

 

 

 

 

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63 stocks that I mentioned that were on a threshold list, the 

day that I looked at it, five of them were actual operating 

companies, and the other 58 were ETFs. 

COMMISSIONER WALTER: Do people have any 

suggestion, given the prevalence of ETFs on the fail list, as 

to what could be done to eliminate or at least minimize that 

problem? Because I think we would all agree that the optimal 

result is for the fail list to have nothing on it. 

Now, that may be an impossible dream, but we ought 

to try to get as close as we can. And given the structural 

difference with ETFs, is there a different way to approach 

them? Do we need a targeted solution? 

CHAIRMAN SCHAPIRO: And can I add a question to 

that, given that penny stocks seem to be the other prevalent 

presence on the fail-to-deliver list? Is there any reason to 

think about them differently and to have a different set of 

requirements around penny stock locate or pre-borrow, as 

opposed to companies over a certain size? 

MR. HODASH: Since nobody's jumped on the two 

recent questions, I'm going to go back to Commissioner 

Walter's. 

Fails are an issue. Large short positions, 

particularly when the short position is of a magnitude that 

can't readily be explained by the shares that are available 

to lend, are a problem that we hear from our issuers, and I'm 
 

 

 

 

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sure other exchanges do likewise. 

While I've never had anyone on the regulatory side, 

either of the Commission or Commission staff or FINRA, say 

they can't bring an enforcement action, I have heard people 

say that it is difficult to bring enforcement actions around 

short selling, around locate, around the rules that predated 

204. 

I haven't had a conversation since 204, but given 

the arguments I heard, I would suspect that it's the same 

today. And I think one avenue for the Commission to pursue 

is improving the audit trail and the paper trail around the 

short selling process so when we have a short position that 

it's hard to understand and it's hard to understand how fails 

are avoided, there's a better documentation on, frankly, how 

the short sales were accomplished. 

MR. LYNCH: I think the two characteristics of 

those two types of securities, the penny stocks and the ETFs, 

that are -- that kind of tie it together is both of those 

types of securities in the long-only beneficial owners 

portfolio are something that are actively traded in and 

out of. 

So if you're in penny stocks, there's a good chance 

that you're potentially liquidating at some point in time. 

Something brought it to that point. If you're -- if you're 

sitting in ETFs, you're getting in and out of that exposure, 
 

 

 

 

 

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from a basket perspective, at the client level. 

So that creates a lot of volatility to the prime 

broker as of what supply is there on a day-to-day basis to 

cover the shorts. And that volatility potentially puts you 

into a fail situation at times. 

MR. HODASH: Just one clarification on the ETFs. 

The figure is -- in July 2009, it was about 43 percent of the 

fails that I reported were in ETFs. And though I don't have 

the figure precisely a year before, although I cited 

statistics to show that the overall fail rate dropped 

precipitously during that period, the proportion of fails in 

July 2008 that were ETFs were smaller. 

So there may be, to your point about studying the 

redemption, the create redemption process, something 

structural to be looked at because they did not drop by near 

the same amount as the non-ETFs dropped in that time. 

COMMISSIONER WALTER: Does it also suggest that the 

statistical analysis that is engaged in in the marketplace 

for those two types of securities needs to be re-looked at? 

Since there is a tilt in that direction and it happens that 

much more often, if we all agree that that result is not what 

we want, perhaps the statistical analysis needs to be 

tightened up. 

MR. MENDELSON: Well, it may be possible that the 

rise in the share of ETF fails is because of the decrease of 
 

 

 

 

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everything else. 

COMMISSIONER WALTER: Oh, it clearly is. But 

we're -- I mean, at least in part that's what it is. But 

nonetheless, if you'll assume with me for a moment -- and 

maybe you don't agree with this, which you should feel free 

to state as well -- that having the number of ETFs and penny 

stocks on this list that we do is not what we want, and given 

the prevalence, it suggests to me that the statistical 

analysis is working better for other types of stocks than for 

this. 

MR. MENDELSON: Well, I think, at least in my, you 

know, discussions I've had over time with participants in 

this market, I think one of the surprising things is that the 

understanding of the source of the fails is not as good as 

you would expect. 

And so in understanding, let's say, the problem 

with ETFs, chilled stocks, other, you know, real operating 

companies, of which there are really only a few on the list, 

and to understand why some operating customers are 

persistently on the list and some only pop up occasionally, I 

think we really need to have a better understanding of this. 

Because I think one of the reasons that we're all 

here today is because of fears that certain people have -- I 

do not share those fears, but fears that some people have. 

They look at a list, and without dissecting what the source 
 

 

 

 

 

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of those fails are, they attribute it to behavior that is 

probably not in fact happening. Okay? 

And I think if we better understood the sources of 

those fails through additional requirements on the executing 

and prime brokers, or executing and clearing brokers, to 

gather the data and examine statistically the source of the 

fails, I think that we would have a much better understanding 

of the problem. 

COMMISSIONER WALTER: Do people in today's 

marketplace take into account the nature of the person, the 

identity of the person, who is asking for the locate? I 

mean, is that part of the analysis? 

If you've been doing business with somebody who 

persistently, you know, never sells short after the locate, 

does that -- I would assume that, again, given the last of 

cost, there's no reason for anybody to take that into 

account. 

MR. CONLEY: The overriding factor on locates is a 

function of availability. I think it's less a function of 

customer behavior, and really our ability to be able to 

deliver the stock at the point of delivery. 

MR. NIXON: Can I make one additional comment? 

Listening to all these experts on Wall Street, I still don't 

understand why the short side of the market is allowed to 

issue shares at random, at will, at whim, without any kind of 
 

 

 

 

 

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registration restrictions at all. 

In my case, in our company, we have a certain 

number of registered shares, and we've had to go through an 

exhaustive process through your agency to get those shares 

registered. We have to file proxy statements. We have to 

file annual reports. 

But somebody, at a whim, can go out and issue 

11 million of my shares in 45 days without any of those 

requirements. And so I just don't understand -- I understand 

all this discussion of locate and borrowed shares and all 

that. But I don't understand the underlying principle of why 

the long side of the market has such tremendous restrictions 

and barriers, but the short side of the market is the Wild, 

Wild West. 

MR. MENDELSON: I guess my response would be that 

when there's naked short selling, which again is a practice I 

don't think any of us are proponents of, then that does have 

potentially the effect that you describe. 

But covered short selling, where we borrow 

securities, does not have that effect. There's only one 

person who can vote a share, and that is the point, I think, 

of why we locate and borrow and deliver securities. And 

that's what's at issue here today. 

But if that's done properly, I think the problem 

that Mr. Nixon is raising does not exist. 
 

 

 

 

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MR. NIXON: I disagree with that because we've seen 

a pattern of over-voting. But I still get down to the fact 

that if I have to issue -- if I want to issue 11 million more 

shares of my stock on the long side, I've got to go through a 

very diligent process, and a very exhaustive process, to do 

that. 

And under the short side of the market, they simply 

have expanded my shares to another 11 million shares. And 

they've imposed them on a market situation on a short period 

of time where there's no effort being planned on the positive 

side of the market to acquire -- to ensure any kind of 

orthodox issuance. 

Most people, when they go out and have a new stock 

issuance, have road shows, promote the value of the company, 

all of those positive aspects in issuing shares. And I have 

had a stock that's traded in the range of a couple of hundred 

thousand shares a day -- some people have joked that my 

shares trade by appointment -- and suddenly I'm trading at a 

million five and two million shares a day, and somebody in a 

short period of time dumps 11 million shares of stock on the 

market. 

There is no way in the world that that stock can be 

defended against loss. I can't come out and make positive 

statements about my company because those would be forwardlooking comments and I'd be slapped down for that. 
 

 

 

 

 

 

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But the short side can create all kinds of 

speculative comments and issue negative reports and draw 

questions against the company. And in the bear market which 

we've just recently experienced, there's almost no defensible 

position that a positive side of the market has. Nobody 

wants to listen to good news. They only want to listen to 

bad news. 

So there's no defensible position on the long side. 

And so when the Commission is looking at this, I think it's 

important that we look at these technical and strategic 

issues, like we're dealing with today. But the big picture 

here is why should this go on? 

Well, I can tell you why it goes on: because these 

guys make a lot of money out of lending stocks. I'm in the 

lending business. But I don't understand why we have an 

unequal playing field here. If you want me to compete, well, 

I'll compete. But I don't want to compete against a field 

that has a strategic advantage against me. 

MR. DRISCOLL: As Mike --

MR. NIXON: And we've spent -- we've spent 30 years 

building value, which was destroyed in 45 days. 

MR. DRISCOLL: As Mike said, legitimate short 

sellers go out and borrow the stock. And just to remind 

people that the beneficial owner of that stock can refuse to 

have it lent and restrict the short selling even more. 
 

 

 

 

 

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But legitimate short sellers are not creating 

phantom shares. They're actually going out and buying the 

stock -- or borrowing the stock. 

MR. NIXON: And that's -- I would respond that 

that's also an interesting issue, too, because half of -- or 

two-thirds of the people who have their stock in margin 

accounts don't even know that the stock is being lent. You 

know, most people -- you ask the average guy on the street, 

is your stock being lent? They don't have an idea. They 

have no idea that that's going on. 

Most of this is -- and I call this the Darth Vader 

side of the market, you know. And it's really not a very 

pleasant side of the market. 

DR. HATHEWAY: We certainly have increased 

disclosure under the guidance of the Commission on short 

trading and now the aggregate short selling on a daily basis. 

And NASDAQ has long been in favor of the equivalent of a 13F 

disclosure for short positions as akin to what exists on the 

long side. 

It's sort of an interesting concept on a disclosure 

document from a large short seller. I don't -- yeah. The 

long side doesn't have to reveal investment strategy. Should 

there be a different obligation on the short side to explain, 

you know, what they're doing and disclose? It would be a 

change for you all. But it's an interesting thought. 
 

 

 

 

 

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MR. LYNCH: And without getting into the kind of 

disclosure of what should happen in relation to long versus 

short, it's just important to have the underlying premise 

that legitimate short selling is very important in the 

marketplace. It creates a positive conflict as securities go 

up in value. It creates a positive conflict as securities go 

down in value. And it stops the ability of falling off the 

cliff with only sellers in the marketplace at a given time. 

So for an efficient marketplace, short selling is 

an extremely important part of it. 

MR. BRIGAGLIANO: Well, that's a perfect place to 

end our first panel. I'd like to thank all the panelists for 

their thoughtful and candid insights. And we even got a good 

segue and preview of our next panel, which will be all about 

disclosure and transparency of short selling, and will 

promptly begin at 11:10. Thank you. 

(A brief recess was taken.) 

MR. BRIGAGLIANO: Today's second panel is entitled 

"Making Short Sale Disclosure More Meaningful: Public versus 

Non-Public Reporting; Consolidated Tape Disclosure; 

Timeliness of Information." I will be moderating this panel 

along with my colleagues John Polise, Assistant Director in 

the Division of Enforcement, and Brian Breheny, Deputy 

Director of the Division of Corporation Finance. Following 

introductions, the panelists will each make a brief opening 
 

 

 

 

 

 

 

 

 

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statement. Again, because we have a lot of information to 

cover in a relatively short amount of time, we ask that 

panelists limit their opening statements to no more than 

three minutes. 

As with our first panel, following opening 

statements, the panel will receive questions from the 

Chairman and Commissioners. Again, we encourage the 

panelists to engage in dialogue with one another so that we 

can have a lively and informative discussion. 

Before we begin, let me welcome and introduce our 

distinguished panel. 

Dr. Jim Angel is an Associate Professor at the 

McDonough School of Business of Georgetown University. 

David Carruthers is the Head of Quantitative 

Strategy at Data Explorers. 

Richard Gates co-founded TFS Capital, and serves as 

a Co-Portfolio Manager at the firm. 

Michael Gitlin is a Vice President of T. Rowe Price 

Group, Inc., and T. Rowe Price Associates, Inc. 

Jesse Greene is Vice President of Financial 

Management and Chief Financial Risk Officer of IBM. 

Joseph Mecane is Executive Vice President and Chief 

Administrative Officer for U.S. markets at NYSE Euronext. 

And Michael Treip is Technical Specialist in the 

Market Infrastructure and Policy Department of the U.K. 
 

 

 

 

 

 

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Financial Services Authority. 

Dr. Angel, would you like to start us off with your 

opening statement, please? 

DR. ANGEL: Thank you. Good morning. It's an 

honor to be here. 

When we talk about transparency, there's one thing 

we must not forget. When we mandate transparency, we are 

imposing a compliance tax on the industry and an enforcement 

burden on the regulator. 

Furthermore, we are confiscating intellectual 

property and breaching financial privacy. In order to do 

that, there had better be a compelling public purpose. And I 

believe, around short selling, there is a compelling public 

purpose that more than meets this very high burden. 

For one thing, better transparency will promote 

market integrity. Whenever stocks go down, the short sellers 

get blamed. You know, there are allegations of unsavory 

activity, sometimes founded, often not. With better 

transparency, the markets can see for themselves whether 

indeed there is abusive short selling or not. 

The second compelling reason is that of market 

efficiency, especially in the stock lending business. One of 

the problems with trading is what I call the prisoner's 

dilemma of trading. That is, you know, around trading, it's 

often said that I want to know what everybody else is doing, 
 

 

 

 

 

 

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but I don't want to give up any of my information. 

And so we have a certain degree of mandated 

disclosure that makes everybody better off, and our exchanges 

and our regulations require in the equity business, in the 

fixed income business, in other areas, a certain amount of 

mandated disclosure. And it makes the market function much 

more efficiently, and we are all better off. 

You know, and so for these reasons, I support 

better transparency, both with respect to short selling, with 

respect to short interest, and with respect to stock lending. 

Thanks. 

MR. BRIGAGLIANO: Thank you, Dr. Angel. 

David. 

MR. CARRUTHERS: Thank you. Good morning. My name 

is David Carruthers. I'm actually the head of quantitative 

services rather than strategy at Data Explorers. So my 

position in the company is one where we're looking at data in 

a fairly neutral way. So I hope that my comments can 

primarily focus on what our data can tell you, and provide 

a bit of a backdrop to some of the discussion in this 

session. 

Any discussion of short selling disclosure does 

have to clarify the reason why the disclosure is deemed to be 

useful. For long positions, disclosure is primarily avoiding 

a stealthy buildup of a control stake, so it's primarily to 
 

 

 

 

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protect the interests of minority shareholders. 

When we look at short positions, we have to think 

equivalently of who is the disclosure aimed at protecting. 

In general, I think we would all agree that the objective is 

to prevent market abuse and prevent the development of a 

false market, or to prevent situations where market 

participants take advantage of a vulnerable company or simply 

a thinly traded market for stock shares. 

In addition to my written comments, I'd like to add 

here a comment about the situation last year in Volkswagen 

shares, where despite the disclosure rules that are generally 

in force in Europe, although perhaps not so strongly in 

Germany, there was in fact a stealthy position, an enormous 

stealthy long position, built up in cash-settled options in 

Volkswagen shares by Porsche or their representatives. The 

sudden disclosure of that had an enormously destabilizing 

effect on the marketplace, and I'll talk about the short side 

of that later on. 

In the experience of Data Explorers, data of short 

selling has a number of facets. It's primarily used for 

hedging by market makers, option dealers, arbitrageurs, and 

so on. That short selling is, as has been discussed in the 

previous panel, covered by a stock loan, especially since the 

2008 crackdown on naked shorting. 

However, we should remember that there are OTC 
 

 

 

 

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derivatives such as total return swaps which may not actually 

involve any kind of underlying dealing in the stock or short 

sale. 

Much of the concern, as has already been voiced, 

around short selling is centered on the illegal and welldocumented and policed activity of naked shorting. However, 

directional shorting is clearly also controversial. 

Anecdotal or, rather, informal research on our part suggests 

that the directional shorting is around 20 percent of the 

total. The rest is for the hedging purposes. 

A key question is: Does short selling create false 

markets, and does it or indeed can it drive down stock 

prices? There are various academic papers which suggest that 

covered short selling is generally beneficial to markets, 

gives greater liquidity in bid/offer spreads. 

However, since auctioneers need a buyer, the impact 

of covered shorting should in general be neutral, only 

market-negative if there is an imbalance of buyers and 

sellers. However, naked shorting does allow, as we've heard, 

the unlimited creation of synthetic shares. 

In our experience at Data Explorers, most short 

positions actually build up very slowly, not in such a way 

that would normally move the market. On the other hand, a 

very important phenomenon is where the accumulated short 

position may have to be unwound very quickly and we move the 
 

 

 

 

 

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price sharply upwards. Again, the Volkswagen case of 2008 

was an extreme example. 

We were inundated at that time with requests for 

data about the size of the short position, and most of those 

requests were coming from short sellers concerned that their 

position was so big that the pain could go on for quite some 

considerable time. 

So the irony is that if you disclose short 

positions in the same way as you disclose long positions, the 

people you may be protecting are the short sellers or long 

fund managers who are underweight of stock compared with a 

reference index. 

A further point from our data is in general, with 

short selling, what we see in our data is the anticipation of 

news and events rather than, in general, the driving down of 

share prices; whereas what we do see is the technical driving 

up of share prices through short squeezes. 

We've also seen a fair amount of evidence that the 

institutional ownership changes are as good at predicting 

share price movements. In other words, there is that same 

symmetry between the long and the short sides of the market 

when we look at what we might call informed traders. 

The final two comments about transparency: 

Anonymous disclosure of short positions in itself is unlikely 

to harm the market. The issue comes when you set up some 
 

 

 

 

 

 

 

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kind of feedback loop, and the disclosure of the data then 

creates another round of activity. The Volkswagen situation 

is a case in point. 

Finally, a question about public reporting versus 

private reporting. Our view is that there's room here for a 

strong public/private partnership, with public collection and 

private distribution that will almost immediately show which 

data items and metrics are the most valuable because those 

will be the ones that will be picked up by the private 

sector. 

Those are my comments. Thank you. 

MR. BRIGAGLIANO: Thank you, David. 

Richard Gates. 

MR. GATES: On behalf of TFS Capital, I would like 

to thank Chairman Schapiro and the Commission for inviting me 

to participate in this roundtable discussion. As the founder 

and portfolio manager of a 12-year-old asset management firm, 

I am eager to share in an open dialogue on ways to enhance 

regulations to better our industry. 

I enter this discussion knowing that academic 

literature suggests that short sale transactions add 

liquidity to the marketplace, reduce bid/ask spreads, and aid 

in price discovery. 

And outside of the two recent enforcement actions 

for Reg SHO violations, I have not seen evidence that 
 

 

 

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suggests that short sellers are responsible for pricing a 

security at a level that is inconsistent with its fair value. 

Restated, for the most part I don't think that short sellers 

manipulated prices or engaged in abusive trading during the 

financial crisis. 

For these and other reasons, I believe that short 

sellers have an unfair reputation in the court of public 

opinion. However, I come to the Commission happy to know 

that it is carefully and cautiously evaluating any potential 

regulation changes related to short sale transactions. 

Now on to the topic of the panel, disclosure. 

To me, good disclosure should meet two basic criteria. The 

first is that each disclosure requirement should stand on its 

own feet. In other words, it should provide real value to 

individual investors and the market as a whole, even when 

required costs are considered. And when considering costs, 

it is of course important to consider both the direct and the 

very real indirect costs that exist. 

The second principle with respect to short sale 

disclosure is that short sale sellers should not be subject 

to more onerous requirements than long-only managers. The 

reason for this is that it creates an unlevel playing field 

in the market that favors one participant over another. It 

also furthers the misconception that we are irresponsible 

investors that need to be scrutinized closer than our long-
 

 

 

 

 

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only counterparts. 

With these principles in mind, I will make a couple 

quick comments on three specific disclosures. 

The first is that in general, I think that a short 

sale disclosure should match disclosures that are required 

for long positions. More specifically, I think short 

positions should be reported alongside long positions in 

forms such as the 13F and the 13D. 

In addition to serving a similar purpose to the 

current long reporting requirements, such short sale 

disclosures could also provide other value as well. For 

instance, by capturing positions on both sides of a trade, it 

could be determined that a manager has a large boxed 

position. Such information could provide insight into issues 

like empty voting. 

Next up are failures to deliver. I don't think 

anybody, any of the panelists that I've seen in the last 

couple of days, want fails to exist in the marketplace. 

While I think it's still -- it's much less of an issue now 

than it was pre-Reg 204T, I'm a fan of having as much 

disclosure that the Commission thinks it needs to help it 

eliminate future fails and tighten up Reg 204T as necessary. 

Of course, the market's integrity is impacted by fails, and 

fails can occur on all different types of transactions. 

The last specific disclosure requirement I hope our 
 

 

 

 

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panel discusses, with David's assistance, is the aggregated 

short sale data that is now reported twice per month by the 

exchanges. This is a widely used metric, and is one that I 

believe is very important. 

Unfortunately, I also believe that is 

underestimates the actual number of shares sold short. Its 

major flaw is that it lacks positions held at non-U.S. firms. 

In addition, it's my understanding that it may also exclude 

positions held in arranged financing platforms, swaps, and 

enhanced leveraged relationships that are set up through the 

United States. 

Unfortunately, I believe this data is the 

cornerstone needed to fully understand short sales, their 

corresponding purchases, and the stock loan industry overall. 

In other words, if we want to have a thorough understanding 

of what is happening in the financial markets, I suggest a 

careful analysis of what can be done to get this figure 

described more fully and completely. 

Before I wrap up, I would also like to share one 

parting thought. That is, when putting all of this together, 

I encourage the SEC to consider the pending regulation to 

make hedge fund managers become registered. 

If or when this gets enacted, these managers will 

be required to maintain hoards of transactional-level data 

that presumably will include a high percentage of the short 
 

 

 

 

 

 

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sale transactions that exist. With just this one change, the 

SEC will then have access to far more information on short 

sale transactions than ever before. 

Thank you again for including me. I look forward 

to the dialogue. 

MR. BRIGAGLIANO: Thank you, Richard. 

Michael Gitlin. 

MR. GITLIN: Thank you, Chairman Schapiro and 

members of the Commission, for the invitation to appear here 

today. I'm pleased to participate in this roundtable on 

behalf of T. Rowe Price to examine short sales, and in 

particular, to discuss additional transparency measures for 

short sale-related information. T. Rowe Price is an 

independent global investment management company, and we 

welcome the opportunity to be a part of the industry dialogue 

on important market practices. 

As a starting point, we urge the Commission to 

continue to work closely with foreign regulators to encourage 

symmetry in the regulatory schemes across borders as more and 

more firms such as our operate and trade in a global 

environment. We are also supportive of the Commission's 

commitment to work with SROs to discuss additional public 

disclosure. 

We firmly believe the benefits of public disclosure 

of short sale positions outweigh the potential drawbacks. 
 

 

 

 

 

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Added transparency in the form of regular public short sale 

disclosure reporting will help remove the mystique around 

short selling, will put all market participants on the same 

level playing field, and will provide regulators with an 

efficient tool to monitor short selling. 

In formulating specific frequency reporting 

requirements and threshold triggers, we are in favor of a 

commonsense and fair approach whereby short selling would 

generally be no more or less onerous than current long 

position reporting requirements. 

There will likely be many views on the specific 

details for both reporting frequency and threshold trigger 

questions. But we think the primary question of whether to 

report -- to require public disclosure for short sales is 

straightforward and indisputable. 

Industry participants are currently required to 

publicly file long positions, and we see no reason why short 

sellers would not have to meet similar standards. We believe 

the market would benefit from such enhanced disclosure. 

We think the time frame for short position 

disclosures can generally mirror the reporting timelines that 

exist for long positions. Similar to Section 13, we imagine 

two levels of reporting detail. 

Firstly, largely symmetrical to 13F, there could be 

a standard quarterly reporting requirement for all short 
 

 

 

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positions that are above a de minimis threshold. Secondly, 

there could be another reporting requirement triggered when a 

short position reaches a significant threshold, due within 

ten days of execution, much like the 13D requirements. This 

approach is straightforward and consistent with long 

reporting requirements. 

We think it's important to have threshold triggers 

in place that provide the market with a proper amount of 

transparency. Determining the proper thresholds for 

reporting should elicit varied opinions and commentary. 

Therefore, we think the Commission should examine relevant 

empirical data and ask for input from investors before 

determining these thresholds. 

The real time tagging and display of short sale 

executions on the consolidated Tape would provide market 

participants with a more in-depth understanding of trading 

activities in any given security on any given day. By 

marking short sale executions as short on the consolidated 

Tape, we are creating an equal and fair marketplace whereby 

long sales would necessarily be recognized as having been 

sold long. 

Another benefit of real time tagging and display of 

short sale executions is the demystification of short 

selling. The ongoing debate of what caused an individual 

security to decline would largely disappear with this added 
 

 

 

 

 

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level of transparency. We believe the benefits of the 

consolidated Tape reporting for short sales outweigh any 

additional costs. 

In conclusion, while there are different empirical 

arguments for and against the uptick rule and other 

regulatory measures, we feel strongly the issue for short 

sale disclosure is just that, an issue of disclosure. We are 

in favor of short sale reporting requirements that largely 

mirror existing long position reporting requirements, and 

we're in favor of short sales being denoted as such on the 

consolidated Tape. 

Market participants will know what is being sold 

long and short in any given security, and added transparency 

in this regard on a real time basis can only help to inform 

market participants and calm investors' concern about short 

selling. 

Rumors, misinformation, finger-pointing, and the 

emotion around short selling can be addressed by both regular 

short position disclosure and consolidated Tape reporting 

requirements. Such information should be useful for 

regulators as they attempt to instill market confidence and 

monitor market manipulation. 

I thank the Commission, and look forward to the 

discussion. 

MR. BRIGAGLIANO: Thank you, Michael. 
 

 

 

 

 

 

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Jesse Greene. 

MR. GREENE: I would like to thank Chairman 

Schapiro and the Commission for inviting IBM to participate 

in the Securities Lending and Short Sale Roundtable 

discussion. We applaud the SEC for hosting an in-depth 

review of short sale pre-borrowing requirements and 

additional short sale disclosures. 

As we have indicated in our comment letter about 

the SEC proposed rules on short selling, capital markets are 

important drivers of our economy. Their purpose is to 

provide capital to business in order to advance our economy. 

And there are other consequences. 

How a stock trades is often viewed as an early 

indicator of the health of a company, which impacts 

shareholders, customers, and employees. Corporations work 

hard to make sure the information in the marketplace about 

their firm is accurate and complete. 

Corporations measure success of their effort via 

feedback from and dialogue with those who own and transact in 

their stock. We know the identity of the most influential 

long holders due to the stock ownership, as disclosed in 

Form 13F filings. We know little to nothing about large 

short positions and short selling activity due to the lack of 

disclosures by short sellers of their positions. 

Investors' ability to access full and complete 
 

 

 

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information about the company in the marketplace is impacted 

by what the SEC does after today's meeting. It is imperative 

that the SEC work to restore confidence by putting in place 

regulations that prohibit manipulative trading tactics and 

foster a fair and balanced information flow to enable a 

stable marketplace trading on fundamentals. 

We commend the Commission's recent efforts to 

address abusive short selling tactics. The SEC rules issued 

in October of 2008 and the adoption of interim final 

temporary Rule 204T tightened the controls around short 

selling, and are a step in the right direction to reduce 

fails to deliver and address potentially abusive naked short 

selling. 

However, there are also opportunities for the SEC 

to improve transparency with regard to short sale disclosure 

standards. As detailed in our comment letter, we have 

suggested that the Commission consider a comprehensive 

regulatory framework for short sales that would improve 

market stability and restore investor confidence, including 

public disclosure of short positions held by institutional 

managers with equal rigor to Form 13F requirements for long 

positions. 

A simple example demonstrates the point we are 

making. Under the federal securities laws and the SEC 

regulations implementing those laws, they apply different 
 

 

 

 

 

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disclosure standards for short positions in securities than 

are applied to long holdings. 

For example, an institutional investment manager 

may have a long position in ABC Company, implying a bullish 

view of the ABC Company. What the ABC Company and the 

investor community do not know is that the same institutional 

investment manager may have a substantially larger short 

position in the ABC Company, which implies a very different 

view of the company's prospects. 

As illustrated, it's not clear that the distinction 

for short and long disclosure standards has a rational basis, 

and it may result in misleading and incomplete information in 

the marketplace that diminishes the effectiveness of the 

required disclosures. 

Transparency in our financial markets is critical, 

and institutional investment managers should not be allowed 

to conceal certain positions while being required to disclose 

others of similar magnitude. 

It is vitally important that the securities laws 

provide for complete and balanced disclosure, and that these 

laws are applied in a fair and equitable way. We believe 

that parity in disclosure standards for short and long 

positions in securities is a significant step in restoring 

fairness to the capital markets. 

Without it, issuers are unable to address the 
 

 

 

 

 

 

 

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concerns of those betting that their business will fail, as 

they would their significant shareholders betting on the 

company's success, and investors do not have the information 

to gauge the true value of equities. 

Thank you, and I look forward to the questions. 

MR. BRIGAGLIANO: Thank you, Jesse. 

Joe Mecane. 

MR. MECANE: Thank you, Chairman Schapiro and 

Commissioners. I appreciate the opportunity to offer our 

views today on the reporting and disclosure aspects of short 

sale regulation. 

The NYSE believes that short sales are an important 

tool in the maintenance of an orderly market. We also 

believe that some information about short sales can be a 

useful tool for market participants. 

For example, the NYSE, NYSE Amex, and NYSE Arca, 

offer daily and monthly short sale transaction summaries. In 

addition, NYSE and NYSE Amex offer customers a semi-monthly 

file that contains the reported uncovered short positions on 

securities listed on NYSE, NYSE Amex, and NYSE Arca. The 

data for this is obtained from the reports provided by member 

firms under FINRA Rule 4560. 

Separate from these publicly available reports are 

regulations requiring audit trails and the marking of orders 

to identify whether a sale of an equity security is long or 
 

 

 

 

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short. These requirements assist the Commission and selfregulatory organizations in determining whether market 

participants are complying with regulations such as Reg SHO. 

These two types of short sale reporting illustrate 

different policy objectives. The short interest report and 

the Exchange's proprietary short sale transaction reports 

respond to investor and company interests. The audit trail 

information, on the other hand, is needed to prevent and 

detect fraud and manipulation in the market. We believe it's 

essential to keep these different policy objectives in mind 

as we consider enhanced disclosure. 

We believe the Commission should also bear in mind 

that there is a conflict between the potential benefit to 

investors and companies from disclosure of trading 

information and the proprietary interests of investors 

seeking to execute a particular trading strategy in the 

market. 

The questions thus are, one, will any change in 

disclosure mandated by the Commission serve to materially 

enhance the market by providing investors and companies 

information that they need without encroaching on investors' 

legitimate need for confidentiality? And two, will the 

disclosure enhance a regulatory oversight objective? 

Other factors to be considered include whether the 

costs of providing the information outweigh the benefits, and 
 

 

 

 

 

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whether the information may have unintended consequences. 

We can apply this analysis to the questions that 

you've asked us to address. With respect to whether a short 

sale indicator should be added to the consolidated Tape, our 

view is, first, there appears to be little regulatory benefit 

from this disclosure because the information is already 

captured by market centers and is available to the 

Commission. 

However, for a relatively low cost, additional 

disclosure of real time activity could be beneficial to the 

markets, although we should continue to evaluate whether that 

disclosure could have unintended consequences. 

Increased short reporting may be of some benefit to 

investors and companies. The increased cost of collecting 

and providing this information should be incorporated in the 

cost/benefit analysis. But it's our view that the public 

disclosure of an investor's short position should be based on 

a policy determination that the benefits of public disclosure 

outweigh the principle of protection of otherwise 

confidential information. 

A reasonable place to start could be disclosures 

similar to those under 13F or 13D, with additional public 

debate around the cost of more frequent or detailed level 

disclosures. 

The NYSE's primary interest in increased short sale 
 

 

 

 

 

 

 

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disclosure is whether it will enhance the ability of 

regulators to detect and prevent fraud and the manipulation 

of stocks traded in our market. On that basis, there are 

compelling reasons for increasing the confidential disclosure 

of concentrated proprietary short positions on a more 

frequent basis for regulatory purposes as we continue to 

debate the cost and benefit of public disclosure. 

Detection of manipulation is made more difficult 

today not only because the market for trading stocks is 

fragmented, but also because of the increase in derivative 

products and transactions. It's beyond the capability of any 

one market center to effectively police trading across one 

venue -- I'm sorry, across all venues. 

We think the solution is to consolidate 

responsibility for market surveillance and to be sure that 

the designated regulatory body is equipped with the tools 

needed to perform that surveillance. 

I look forward to your questions. 

MR. BRIGAGLIANO: Thank you, Joe. 

Michael Treip. 

MR. TREIP: I'd like to thank Chairman Schapiro, 

the Commissioners, and the SEC staff for inviting the FSA to 

participate in this roundtable. 

The FSA regards international dialogue and, where 

appropriate, convergence on short-selling regulation to be 
 

 

 

 

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critical. I personally wear two hats in this context. I 

have led much of the work developing the policy in the U.K., 

but I also sit as the chair of the CESR -- that's the 

Committee of European Securities Regulators -- the CESR Task 

Force on Short Selling. So I have a twofold role. 

It's worth mentioning a couple of points by way of 

background before I go on to a few key issues. 

Since the 18th of September, 2008, the FSA has 

operated an individual position public disclosure regime with 

respect to U.K. financial sector stocks. In the first 

quarter of this year, we published a discussion paper where 

we indicated that we didn't favor any form of ban or direct 

restraint, but we did propose that we felt the most 

appropriate form of regulation was that holders of net short 

positions of 0.5 percent and above in all U.K. stocks should 

have to disclose those identifiable individual positions to 

the market as a whole. 

We also thought that these obligations should kick 

in at a lower level, not 0.25 percent, where the company in 

question was engaged in a rights issue. These disclosures 

would be made by the end of the trading day after the day on 

which the position was reached. Those engaged in genuine 

market making activities would be exempt from the obligation. 

We will, in fact, publish our feedback statement to 

these proposals tomorrow. 
 

 

 

 

 

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Proposals in a CESR consultation paper on 

disclosure that was published in July of this year are very 

similar to the FSA's, apart from the fact that CESR proposes 

that there should be one additional lower threshold for socalled private disclosure to the regulator, and that should 

be at 0.1 percent. That consultation, in fact, closes today. 

So what is our thinking on what I see to be some of 

the key issues of interest today? We note, of course, the 

beneficial impact that enhanced transparency has on market 

efficiency. But I have to say our principal objectives in 

the short selling space are to mitigate the risks of market 

abuse and disorderly markets that we consider it to pose. 

We believe this is best achieved by enhancing 

transparency of investors' short interest, howsoever the 

short position is reached. That is the reason for our 

interest in position reporting. 

In addition, with one exception, the infrastructure 

for sales reporting simply does not exist in Europe, so the 

implementation costs of sales or transaction reporting would 

be very great indeed. 

The second issue, as I see it: Why public 

disclosure? We do want the market as a whole to receive 

better quality information around short selling. But we also 

want to have some impact on investor behavior through a 

disclosure regime. And we feel it is very important to be 
 

 

 

 

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open and up-front about that motivation. 

Let me come to that point now. Why identify the 

position holder to the market, as we propose? I can say 

unequivocally that we do not want to halt short selling in 

non-crisis market conditions. We recognize the beneficial 

role it plays in markets. 

What we do want to do, however, is create a degree 

of deterrence against the most aggressive short selling by 

requiring short sellers to consider their trading strategies 

as they approach the public disclosure threshold. 

We recognize that there are concerns in some 

quarters about phenomena such as herding; enforced disclosure 

of intellectual property, that's been mentioned already; 

short squeezes; and ultimately, it's argued, reduced levels 

of short selling; and lower market quality. But from our 

analysis of the impact of a disclosure regime in the U.K., we 

have not seen these concerns crystallize to date, so we think 

our proposed model strikes the right balance between 

competing interests. 

Two further issues to mention briefly. Why no 

aggregation by the regulator, as is on the table from some 

respondents? Clearly, this can facilitate some of the 

informational benefits that we're looking to gain. But we 

think, because of the inherent anonymization that's involved, 

it will not result in any significant changes of behavior. 
 

 

 

 

 

 

 

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It also, I have to say, carries with it resource implications 

for the regulator. 

And finally, why, as we proposed, disclosure at 

T + 1? We're not seeking to achieve genuine real time 

disclosure. With the current market infrastructure in 

Europe, this would be disproportionately burdensome on the 

market and unmanageable for the regulator. 

However, if the market is to benefit from current 

and meaningful information and we are to have an impact on 

the most aggressive trading strategies, we do believe that 

disclosure should be timely. And our current measure of 

timeliness is one day. 

Naturally, I know that there are many other issues, 

and I'm sure these will come out in the ensuing discussion. 

Thank you. 

MR. BRIGAGLIANO: Thank you very much, Michael. 

Thank you, all the panelists, for your thoughtful statements. 

We're now open for questions from the Chairman and 

Commissioners. 

CHAIRMAN SCHAPIRO: Thanks, Jamie. I'd like to 

follow up with Michael. And I should start by thanking you 

for coming from such a long distance to help us today. We're 

very grateful for that. 

You've had the benefit now of about a year's 

experience with your disclosure regime in the U.K., and you 
 

 

 

 

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highlighted some of the things people worried about that 

would result from the revelation about trading strategies or 

herding or other potential consequences of having a 

disclosure regime. 

Were there any negative impacts, as you look back 

over the past year, from requiring the disclosure that you do 

require? And from your perspective, and I guess I'd like to 

know what industry would say was negative impact from the 

disclosure regime, or positive? 

MR. TREIP: Thank you. I'm loath to start off with 

some caveats, but I feel I should. Firstly, we have to be 

cautious trying to extrapolate how -- a very broad scope 

regime is the one we're proposing -- may pan out on the basis 

of a really very narrow scope regime, which is what we've had 

to date. But that is the data we have. 

Secondly, of course, that regime has operated in a 

number of contexts, which have almost certainly distorted any 

measurements that we can make. Firstly, for the first three 

or four months of the operation of our disclosure regime, we 

also had a ban in relation to the active creation or increase 

of short positions in U.K. financial sector stocks. So in a 

sense, we have to disregard that data because it's in that 

context. 

We have actually worked a little bit with David's 

organization and looked at stock lending data. And although 
 

 

 

 

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our analysis to date has not been hugely sophisticated and we 

are working further, we really have seen relatively little 

impact, as far as we can see, from a stand-alone disclosure 

regime on levels of short selling. 

We have seen changes, but those have really been in 

line with what we would expect from the underlying trends in 

the market. Levels of short selling seem to have gone down 

over the last few months, but pretty much at exactly the same 

level as the markets have broadly gone up, which is what we 

would expect. 

So on limited data to date, we haven't seen an 

enormous negative impact. We did see some impacts from the 

period we had a ban in place, which we would not necessarily 

want to have on a long-term basis, such as a widening of 

bid/offer spreads. But disclosure alone, not a huge impact. 

COMMISSIONER PAREDES: To pick up on an aspect of 

what you had just mentioned in terms of the studies, and 

you're still pushing further to kind of make them more 

robust, if you could maybe just say a little bit more about 

what the limitations are on the studies so far, and what the 

plan is on a going-forward basis, and why you think that will 

yield more robust results, whatever they happen to be in 

substance. 

MR. TREIP: Well, one of the limitations -- and 

again, I'd really like to pick this up with David, perhaps in 
 

 

 

 

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the margins -- is that we've struggled a little bit to 

actually come upon what would be meaningful data to reflect 

herding behavior or squeezes. And clearly, those are two 

concerns which have been expressed very loudly. So David, if 

you have thoughts on what Data Explorers has seen in that, 

I'd be very interested. 

The other limitation, of course, is that as we all 

know, stock lending data, which is really the main source of 

information we have, is a proxy, and it's not a perfect 

proxy, for levels of short selling. 

And also, a third limitation is the point that's 

been made a number of times this morning, is that of course 

short selling is conducted for a number of reasons, some of 

which are relevant to our objectives and some of which are 

not. And some data would suggest that the majority of short 

selling is done for purposes which really have no link to our 

regulatory objectives. 

So going forward -- I apologize, David; there was 

an element, a further element to the question -- we really 

are at a very early stage as to how we can make our analysis 

more sophisticated. 

MR. CARRUTHERS: I can perhaps add to some of 

Michael's comments by telling about some of the research that 

we've done at Data Explorers. If I could also say thank you 

very much for the opportunity to present to you; I think I 
 

 

 

 

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may have omitted to do so in my opening comment. Apologies. 

I blame jet lag. 

The work that Michael has mentioned was very 

interesting because we worked with the FSA, including a 

number of members of the market abuse committee there, some 

of whom had fairly extensive industry experience, having 

worked in investment banks themselves. 

So there's really two things. One is a roundabout 

short selling in the form of covered shorting that you 

collect data on and you can identify and it's transparent. 

And here in the U.S., you do calculate short selling data and 

publish it every two weeks with a delay. 

We've compared the stock lending that we collect 

with the public data. There's certainly a very considerable 

overlap. But if you think of it in terms of two sets 

overlapping, there's definitely situations where people 

borrow stocks, such as pre-borrows, which are not reflected 

in short selling; and situations where people short sell 

without it being reflected in a stock borrow, hedging being 

one of them. 

So when it comes to the herding that you talked 

about, I think we can identify fairly closely, but not 

exactly, through stock lending data what the short side of 

the market is up to, at least where its legitimate activities 

are concerned. 
 

 

 

 

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The points I made about Volkswagen apply here, that 

some of the largest positions that we see -- and I'm talking 

about where the percentage of a company's shares that are 

actually on loan and hence broadly shorted are perhaps over 

5 percent, which would be a typical disclosure for a long 

position. 

Once you get to that stage and beyond, there is 

actually a very significant danger that there will be a short 

squeeze. There will be short covering. And anyone who is 

short is extremely vulnerable to that because if you think 

it's unpleasant to be on the receiving end of a falling share 

price, it's even worse to be on the receiving end of being 

short when share prices are rising. The panic levels around 

about the Volkswagen situation and the Citigroup short 

squeeze earlier this year were evidence of that. 

Where I think the conversations with the FSA 

revealed some very interesting points was around about the 

definition of naked shorting. We discussed this for about 

two hours, and it became obvious that there are a number of 

ways in which naked shorting can actually manifest itself, 

which are very difficult to track down. 

The previous panel talked about the level of fails, 

which is certainly one of the ways you can track it, but not 

the only. There's also the possibility of putting a trade on 

and then disappearing off to get a coffee, coming back and 
 

 

 

 

 

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closing it out again, all within the space of half an hour. 

That in itself is a form of short selling. 

And there's the derivatives that I mentioned, where 

you can create a contract which replicates the behavior of 

shorting without there being an underlying trade, and the 

risk is on the side of the person who decides to write that 

contract and not hedge it. 

So in reality, the naked shorting is a little bit 

like water. It flows through all sorts of cracks everywhere. 

It can be very, very difficult to make that completely 

watertight. 

COMMISSIONER PAREDES: On the disclosure point, I'm 

curious, going to the professor, whether or not there's any 

relevant academic literature that gets at -- whether from an 

empirical perspective or perhaps a theoretical perspective, 

given the limits of the data, that would offer some insights 

in terms of what the expected results are from different 

types of disclosure. 

You had mentioned, I think, in your remarks that 

there's a whole lot of benefit to having more transparency in 

these respects. But a couple of you recognized that at some 

point there of course are costs that need to be factored in. 

And I'm curious, in terms of the academic take on 

it, what is out there again, either empirically or 

theoretically. 
 

 

 

 

 

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DR. ANGEL: I'm not aware of any academic studies 

that look at any transparency regimes that are of interest 

here. We have seen in areas like with bonds, for example, 

that when we got better price data, the bond market 

functioned better. 

One thing I would suggest, since short selling 

represents 25 percent of our equity trading volume, that we 

carefully design any changes in a way that we can investigate 

the results. For example, phasing in new disclosure regimes 

or, better yet, having carefully controlled pilot 

experiments, as was done with Regulation SHO. In that way we 

can intelligently gather the data we need to find out, you 

know, the impact of any new disclosure regime. 

CHAIRMAN SCHAPIRO: Could I -- I want to make sure 

I understand. In the U.K. regime, and I guess what's 

contemplated with CESR, is non-anonymous disclosure, 

disclosure by entities of short positions. Is that correct? 

MR. TREIP: That is correct. The CESR proposal 

would have a private disclosure to the regulator at a low 

level, and then at the more significant level, a public 

identifiable disclosure. 

CHAIRMAN SCHAPIRO: Okay. So David Carruthers, I 

don't want to put you on the spot. But your submission talks 

about "Anonymous disclosure of short positions is unlikely to 

directly harm the market." 
 

 

 

 

 

 

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Do you have a view about identified disclosure? 

MR. CARRUTHERS: I think the critical issue is the 

timelag. I think that if you have disclosure a few weeks 

later or a few months -- it depends on someone's trading 

strategy -- but in general, if some time after the fact it's 

named, then in general, that shouldn't be an impact. 

I think it was mentioned earlier about the 

prisoner's dilemma, the problem that you have with markets, 

that if we have full transparency, you may reach a situation 

where no one would trade because everybody knows everybody's 

positions. 

So the FSA's definition of timeliness is one day. 

I would imagine that if you were to name the -- if you were 

to make it non-anonymous, it would certainly have to be 

significantly more than one day for the market participants 

to feel comfortable. It really depends on their turnover 

level, how fresh that data is and whether it would place them 

in a disadvantageous position. 

CHAIRMAN SCHAPIRO: Do others of you have views on 

that, on anonymity? 

MR. GITLIN: One thing I'd say is when we're 

contemplating looking at herding and short squeezes, if we 

look at a level playing field -- and that's one of our 

missions, is try to get a level playing field -- on the long 

requirement right now, when someone like T. Rowe Price 
 

 

 

 

 

 

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reports its positions in 13F filings, we have the same risk 

of effectively long squeezes. 

When we own up to 15 percent of companies and when 

we report in our 13F filings, we have the same risk of people 

seeing that filing, noting T. Rowe Price may own a 5 percent 

position and may be on its way to a higher position and then 

could buy ahead of us as well. 

So I would just think of that in the context of a 

level playing field and timelines. 

COMMISSIONER WALTER: Can we talk for a few moments 

about the exceptions that are in the U.K. and proposed CESR 

regime? As I understand it, there is one for market maker 

transactions that are bona fide, genuine market maker 

transactions. 

And I wondered if, Michael, you could comment on 

why it's there, how you define it, and what other types of 

exceptions you think might be appropriate. 

MR. TREIP: Certainly. Commissioner Walter, you 

rightly identify that the market maker exemption -- really in 

carving out that role from obligations. 

But we are recognizing the role that short selling 

generally, and particularly market makers, plays in relation 

to liquidity. And we do feel that it's very important not to 

over-egg the pudding, if I can put that way; and to impose a 

disclosure obligation without any exemptions whatsoever could 
 

 

 

 

 

 

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actually take the impact on liquidity too far. 

We are -- that's our core principle at stake. 

There have been arguments from some quarters within Europe 

that we should actually have a very broad definition, that we 

should actually talk about liquidity providers rather than 

market makers. 

We in the U.K. feel that that would be taking it 

too far. That's creating a charter for an awful lot of 

people who will put their hands up saying, yes, we provide 

liquidity, too, so we don't have to make any disclosures. 

So we are holding the line. And there is a 

consensus in Europe that that line should be held on this 

concept of market making. That then begs the next question 

as to how precisely we should define that. 

The FSA has put forward a definition -- I won't go 

into the precise details of it -- in our frequently asked 

questions, which does slightly diverge from our technical 

definition in our rule book. 

But one thing we are conscious of within the 

European context, again, is to avoid a proliferation of 

definitions. Market makers are defined, I believe, already 

in three different ways in three contexts within European 

legislation. So we have to be careful. We have to be 

cautious about creating a fourth definition. 

COMMISSIONER WALTER: So is it principally -- are 
 

 

 

 

 

 

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there any other significant exceptions, and the rationale for 

this one that makes sense is the liquidity provision function 

that's being served on a pretty constant basis. Are there 

other rationales that would justify exemptions as you 

consider those? 

MR. TREIP: Well, we've had various representations 

made to us. One that was mentioned relatively recently when 

I attended a CESR open hearing was that positions as a result 

of ETF trading or indices trading or basket trading should be 

exempt. 

Our feeling quite strongly, and I know that there 

is a CESR consensus on that, is that that should not be 

exempt. We recognize that it may create logistical 

difficulties in actually determining your precise position in 

relation to the components of an index, for example. 

But let's say if you look at what -- the regulatory 

objective we're seeking to achieve, we feel that the same 

risks apply, and therefore the same solutions should be 

applied to them. 

COMMISSIONER WALTER: Thank you. 

Do others of you have any things about any other 

aspects that you think deserve exemption from a disclosure 

regime? 

MR. MECANE: I would just add that I think it's 

important to look at that question and a number of the other 
 

 

 

 

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issues in the context of activity versus positions because 

there tends to be, I think, a lot of confusion in general 

with regards to those two types of disclosures. 

I think with respect to positions, you probably 

don't need exemptions because, by definition, market making 

tends to be flat and not carrying a lot of inventory, so 

positions wouldn't necessarily need an exemption. 

But I think with respect to activity, and when I 

mentioned unintended consequences with respect to putting 

short sale locator on the Tape, I think that's where you have 

the potential for a lot of confusion. 

Because you could end up seeing a very large amount 

of short selling activity happening throughout the day, 

especially in the way that, you know, the high-frequency type 

activity has evolved, that doesn't actually result in short 

selling activity -- I'm sorry, in a net short position at the 

end of it. 

And there's nothing -- there's no issue with that 

other than it makes it very difficult to interpret what value 

you get out of the disclosed activity because you can't 

necessarily dissect all the short selling activity that 

happened and what's behind it, meaning there could be a very 

large amount of activity that happens that does not end up 

any net short position. But someone just looking at the Tape 

or looking at that data has no way to see that. 
 

 

 

 

 

 

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So I think that there's a valid case to be made 

around whether, you know, exempting market making activity 

from a more real time disclosure might help improve the 

quality of the activity disclosure. I think then, you know, 

where that evolves into and where it gets very, very 

complicated is that, you know, how do you define that 

activity that should be subject to the exemption? 

And obviously, we're dealing with that in a number 

of different contexts in terms of how to define a market 

maker because you could exempt a certain type of activity, 

and then a lot of activity that doesn't necessarily qualify 

for it ends up, you know, behaving similarly. 

So it's a difficult question, obviously, to 

resolve. But it's something that I think should be part of 

the debate. 

MR. POLISE: Joe, can I follow up on something 

quickly on that? I'd like to talk about it not from the 

public disclosure aspect, but from the regulatory disclosure 

side. 

MR. MECANE: Yes. 

MR. POLISE: And when we make the distinction 

between activity and positions, the relative merits of the 

pre-marking requirement -- for example, pre-trade, when 

somebody's doing a high frequency trade, which may end up in 

a net flat position, versus the post-execution disclosure. 
 

 

 

 

 

 

 

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From a regulatory purpose, I think I would take a 

different tack, which is you need to know what the intent is 

at the time the trade is executed -- I'm sorry, at the time 

the trade is put in. 

MR. MECANE: Right. 

MR. POLISE: And I was wondering if Michael had any 

thoughts on that from the United Kingdom as well. 

MR. TREIP: I do apologize, Brian. I was just 

making a note of something else. I didn't quite catch the 

second half of your question. 

MR. POLISE: The relative merits of a pre --

sorry -- order entry marking regime versus a post-execution 

net position. That is, it comes up more frequently with high 

frequency traders who may not know or claim not to know 

whether they're actually going to be short or not at the end 

of the trade. 

MR. TREIP: It's a fair question. I mean, we 

recognize that with high frequency trading, and indeed with 

intra-day short selling, which in the U.K. we believe makes 

up much of the naked short selling activity, it's not going 

to be captured by the sort of position regime we have. The 

problem -- and, you know, an obvious solution for means of 

creating transparency in that space would be through having 

flagging or marking of transaction reporting. 

The stumbling block, as I've mentioned already, in 
 

 

 

 

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Europe is that that infrastructure simply doesn't exist. And 

we do feel that the very great costs of putting some kind of 

marking regime in would then really strain the cost/benefit 

analysis. 

MR. POLISE: But Joe, you think that's probably 

possible here in the United States? We have a fragmented but 

still somewhat centralized market, maybe not for public 

disclosure but for audit trail purposes. 

MR. MECANE: Right. I mean, I think the issue that 

you're raising is more around how a lot of the high frequency 

business models have evolved over a number of years. And I 

think there's consensus. You know, there's been a lot of, I 

think, debate on both sides of that issue in terms of how 

orders should be marked. 

And I think it's largely an outcome of the fact 

that, you know, a lot of strategies are executing or at least 

posting orders in multiple markets simultaneously. And so, 

you know, the intent is really for only one of those orders 

to get executed. But obviously, you know, they're spreading 

their interest around in the hopes that, you know, of those 

will get executed and they could cancel the balance. 

So I think, to your point, to the extent that the 

reporting requirements in those situations get harmonized and 

become more of a pre-trade definition of what your intended 

activity is, it certainly helps clean up the audit trail. My 
 

 

 

 

 

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point was more even if we go in that direction and all the 

trades that we consider to be short are marked as such before 

the fact, those trades could subsequently be covered, 

shorted, covered, you know, very frequently throughout the 

day. 

And from a public disclosure standpoint, seeing all 

that activity and just looking at, let's say, what the net 

effect of all the shorting is is difficult to know because, 

you know, positions are established and covered continuously. 

So I think the clarification that's out there 

simplifies the definition of what short sale activity is. 

But I think you still end up with a feedback mechanism. 

CHAIRMAN SCHAPIRO: That's a really interesting 

discussion, I think, about the potential for putting an 

indicator, a short sale indicator, on the Tape. 

I wonder if any of the others of you have any view 

about that, and whether there would be any advantages to 

having that kind of information available, perhaps in some 

way to provide the context so that it's not misleading to 

investors. 

MR. GITLIN: I think one of the interesting things 

about having it denoted as such on the consolidated Tape, in 

what Joe describes, what you'd end up with is information in 

itself. So if what Joe describes would occur, where there'd 

be lots of trades that ended up net but looked like shorts on 
 

 

 

 

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the Tape, that ended up flat at the end but were actually 

shorts, that's good information for market participants to 

know that a lot of the activity in that name was actually 

just electronic market making activity and not fundamental 

activity. 

And that's an important piece of information for 

the marketplace. So I would use that as a reason why marking 

on the consolidated Tape -- and from what I understand from 

both NASDAQ and NYSE is that that can be done tomorrow -- why 

that would be a benefit for participants as a whole. 

I don't know if the professor has any thoughts on 

that, but I think I've read in one of your comments that you 

thought that might be positive. 

DR. ANGEL: Yes. I concur. I believe that the 

instantaneous real time marking would help to assure 

investors that there is a lot of legitimate short selling 

that you see under normal circumstances, that not every short 

seller is a predator, and that if there is an abundance of 

short selling, people can see it, you know. 

So in this way we won't have people wondering about 

what kind of mysterious conspiracies are taking place in the 

dark. So I think transparency on a trade-by-trade basis is 

something that we can achieve easily, at low cost, and with 

very little harm to the rest of the market. So I think we 

should do it. 
 

 

 

 

 

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MR. MECANE: If I could just add, very quickly, 

just to clarify one thing. So it's definitely something that 

could be easily done. And just to be clear, we are in favor 

of that level of disclosure. 

I think, though, to the point that Michael just 

made, if you have the activity but not the position, it then 

becomes difficult to back into how much is transactional 

versus establishing a position. So I think the two are 

somewhat related, meaning they go hand in hand. 

The issue that comes up is just the time lag 

between those two because, you know, assuming we had a 13F or 

13D type regime, we just need to recognize that there's a 

time lag involved if we're doing real time activity 

reporting, but then delayed position reporting for valid 

reasons. There's just a time lag between people -- you know, 

for people to be able to do that analysis to separate the two 

pieces out. 

MR. CARRUTHERS: If I could add one comment from 

our experience. We collect quite a lot of regulatory data 

already, and we do collect around about 3 million 

transactions every day. And what I can tell you is it's 

quite a lot of work to take all of that and then turn it into 

something more meaningful, both from the point of view of the 

transactions and the overall position size. 

I think when it comes to transactions, part of the 
 

 

 

 

 

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objective, I think, with disclosure there is almost to 

discourage the mere fact that you're requiring disclosure. 

And that it will be a matter of public record then 

discourages some of the activities that you're concerned 

about. 

On the other hand, the collection of the aggregate 

or the net position can lead to a whole series of subsequent 

additional questions. We certainly find that taking the raw 

data and aggregating it in such a way that we address the "So 

what?" question from our clients is not a trivial 

undertaking. 

So I think that it's certainly a very important 

first step to giving the reassurance that the activities 

you're talking about will at least be captured. 

MR. GREENE: Let me comment from an issuer's 

perspective, because we have, I think, come at it from a 

slightly different perspective. We work very hard, as I 

indicated in my remarks, to communicate with our investors 

about issues about the company. 

And when we find out about a rumor or concern about 

some part of our company, at the next earnings call or an 

analyst meeting or even an 8-K, if necessary, we will try to 

address those issues. 

Information about short selling that's coming 

across the Tape is information we can use that indicates 
 

 

 

 

 

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something is going on, that maybe we need to find out what is 

the issue that's behind it. 

So from our perspective, we support having the 

indicator in the consolidated Tape. We think it's a valuable 

piece of information from an issuer perspective. 

MR. BRIGAGLIANO: Can I ask if trades were marked 

short, could or should there be a designation for "buy to 

cover" trades to provide the counterpoint information so that 

investors would understand whether a short might be 

directional or not? 

DR. ANGEL: Well, as an academic, I'd love to see 

that data. But I'm concerned there may be a lot of 

operational problems in that the person putting in the trade 

may not necessarily know whether they are covering a short 

position, so that I think it would lead to additional 

compliance and enforcement burdens. 

So I'd say, for now, start with the simple thing. 

We already mark trades long or short. The exchange systems 

already have the data internally. It's a very simple thing 

to go forward and release that data publicly. To require 

additional marking would be a much bigger step. 

MR. BREHENY: Can I ask, a number of you commented 

on the importance that you believe in leveling the playing 

field between long and short position reporting. But if I 

understand it correctly, in the U.K. the long report 
 

 

 

 

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threshold is at 3 percent, and the current proposal is to 

have the short positioning reporting at 0.5 percent. 

So I'd ask you: If the Commission was to think of 

potentially extending the requirements that we have now for 

long reporting at 5 percent, 10 percent -- 10-day reporting, 

like in the 13D, and also thinking about 13F -- and as you 

know, 13Fs are filed by institutional investment managers as 

that term is defined in the Commission's rules -- could you 

see the reason why the thresholds and the timing and other 

disclosure may not -- may not make sense for those to mirror 

each other? 

DR. ANGEL: Yes. There's a very good reason for 

asymmetric treatment of short selling versus long activity, 

and that is that the alleged allegations against short 

selling are that the short sellers have an incentive to 

destroy productive enterprises. 

And since the purpose of our capital markets is to 

promote capital formation, to promote efficient risk-sharing, 

to promote enterprise, if somebody has an incentive to do 

something bad to our productive companies, that indicates a 

lower threshold for disclosure than for a long investor. 

MR. MECANE: One thing I'd add, just conceptually, 

is that as a lot of people know, the logic for disclosing the 

long side was largely based on a determination that as 

someone moves towards voting control or, you know, towards 
 

 

 

 

 

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being able to exert influence over the company, that that's 

something that should be -- that should be publicly 

disclosed. 

And so, you know, that exact logic doesn't 

necessarily apply in this case. Similar to what Professor 

Angel was saying, I think one perspective is that on the 

short sale, we're largely worried about manipulative-type 

behavior. 

And so I think one way to separate the argument is, 

similar to the logic the FSA is using but the numbers, I 

think, need to be debated publicly, is there could be a 

different level for private disclosure to the regulators, who 

are primarily concerned with potential manipulative-type 

behavior; and then public disclosure to investors, issuers, 

et cetera, which might not be at as granular a level, but 

makes the public disclosure more meaningful and more 

applicable. 

So one way to think about the debate is separating 

those two pieces out because it is a different policy 

objective than we necessarily had on the long sale, or with 

insiders and so forth. 

MR. BREHENY: I don't want to put Michael on the 

spot. But if you could give us any gloss on how you came up 

with the threshold, that would be helpful, too. 

MR. TREIP: Well, I'll certainly come to that in 
 

 

 

 

 

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just a moment. But I would -- I would reiterate the 

sentiments that it is critical in our minds to look at the 

fundamental objectives of transparency for long versus 

transparency for short. 

Certainly in Europe, the underlying philosophy for 

transparency for long positions is to shed light on voting 

rights. And the thinking is that that has to be referenced 

against the entire issued share capital. 

Whereas if you're looking at the regulatory 

concerns that are posed by short selling, we're really 

looking at the potential impact that the short selling has on 

price movements and on trading. 

And that really, in our mind, is referenced against 

a much lower figure. It's a reference against the daily 

volumes and so on. And that really brings us to how we came 

up with the thresholds. 

And I have to say -- and this is probably not of 

comfort to everybody -- but there's as much art in this as 

there is science. I mean, it has to be said that that 

becomes even truer when you're looking at a one-size-fits-all 

regime for all types of stocks, and a regime, as is proposed 

within Europe, across all manner of different markets, some 

of which are very large, like our own, and some of which are 

really quite small and quite illiquid. 

So it's a very difficult area. There's a high 
 

 

 

 

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degree of compromise. Our starting point in reaching the 

figures, certainly, in the U.K. was that we started off with 

a regime based on U.K. financial sector stocks. And we 

looked at the daily volumes and tried to come up with a 

figure that seemed to be a meaningful proportion of the daily 

volumes. 

My recollection is that it was somewhere around the 

sort of 10 percent mark, that if your position represented 

something around 10 percent of the daily volumes, then that 

really could have an impact and cause a concern. 

That was -- that was where we came out with U.K. 

financial sector stocks. It was also where we came out 

with -- came out in relation to rights issue stocks, which 

were just financial sector stocks but have an inherent 

vulnerability, obviously. 

When we then looked at a broader scope regime, we 

felt that it was -- inevitably, we would need to be pushed 

up, that meaningful short positions in relation to 

non-financial stocks were going to be higher. 

The share price and shorting in relation to 

financials, obviously, has a very direct link to consumer 

confidence, a much closer link than in relation to -- for 

financials has a much closer link than in relation to 

non-financials because ultimately you might have a run on a 

bank if people don't like the way it's going. 
 

 

 

 

 

 

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So we felt, inevitably, a broad regime would 

probably have to be higher. And 0.5 in the end was kind of 

where we came out with, as I say, perhaps as much art as 

science. We also recognized that once a regime has been in 

operation for a while, it may well be necessary to take 

another look at those thresholds to see whether they are 

producing the right type of information and are creating the 

right level of burden and not too much regulatory burden. 

MR. CARRUTHERS: Michael, if I could just add a 

couple of points of information to that. I mean, it was 

mentioned on the Tape, at the moment, around 20 percent of 

all sales -- of all transactions are short sales. So that 

would certainly lead you to scale things potentially 

differently. 

The point that you made, Michael, about the traded 

volume is a very important one, as well. There is, I think, 

what is called a trader's rule of thumb, that it costs you 

one day's volume, volatility to trade one day's volume. 

So when markets are particularly volatile, again, 

there might be an argument for varying the thresholds because 

the impact that you would have on the shares prices would be 

different, depending on the market regime. 

So that's just two little points of information 

that's worth bearing in mind. 

MR. GATES: I wanted to comment real quick on the 
 

 

 

 

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professor's comments earlier. I have a different perception 

of the value of short selling. To me, short sellers aren't 

out to destroy value or to hurt the capital markets. Rather, 

my opinion is that they are a big part of the markets because 

they help reflect the true value of securities. 

Since we've been managing money at TFS the last 

12 years, the two -- there have been a lot of interesting 

times in the market. But two of the most interesting were 

the tech bubble, and the credit crisis and the real estate 

bubble. Both of those events have something in common in 

that they have the word "bubble" in their names. 

So to me, short sellers are an important part to --

I guess I should say that long sellers are -- or long buyers 

have gotten more out of control than short sellers the last 

12 years. 

In addition, I think there are two important 

characteristics about short sales that differentiate them 

from long transactions. The first is that they have 

unlimited downside and only offer limited upside. That makes 

them a lot scarier than buying a security. For that reason, 

I think, most short sellers enter into transactions wary, and 

rightfully so. 

The second is that it's easier to punish an overzealous short seller. If a security is driven too low, an 

individual could come and purchase the company the following 
 

 

 

 

 

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day and drive the price up higher. It's harder to punish an 

over-zealous purchaser. If a stock is -- pets.com is driven 

up to huge multiples, there's not much you can do to properly 

reflect its value. 

And for that reason, I don't think that people who 

buy securities -- the bubbles that are created are not as 

easily pierced. 

MR. GREENE: From our perspective, we see no reason 

why the rules, disclosure rules for short selling, should be 

any more lax than for long holders. You know, our 

perspective, it's all information about the views people have 

taken about the company. And it's information important to 

the issuer, and it's important information for the investor, 

too. 

So from our perspective, there ought to be at least 

comparability between long and short positions. 

MR. GITLIN: Just getting back to the threshold 

trigger question, I'd say at this stage I don't know if 

anybody is basis point smart. But whether it's 25 or 

50 basis points, I would say as Hong Kong and the U.K. and 

CESR look at different threshold triggers, having something 

that's globally aligned would probably make sense. 

So if everyone is coming the line of 50 basis 

points, not 25, I would say we don't have the basis right now 

to have an opinion on that. But I think symmetry on a global 
 

 

 

 

 

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basis wherever possible is probably a good thing. 

DR. ANGEL: I would like to correct a 

misconception. I think that most short selling is good and 

helpful to the market. But there are abuses that we do need 

to be aware of. 

As far as symmetric treatment of long and short 

positions, I think there is a legitimate concern that 

disclosing every short position in an institutional-type 

filing might actually give away some important investment 

strategies. 

There are two ways around that. One is de minimis 

exception. You know, if somebody is doing a pairs trading 

type strategy and they don't really want to give away how 

they're coming up with their pairs to trade, well, then, 

they're probably doing a lot of those, and there's probably 

not a large fraction of the stock involved. So a de minimis 

exception would deal with the "We don't want to reveal the 

strategy" problem. 

The second way to deal with the "We don't want to 

reveal the strategy" problem is to allow on a case-by-case 

basis the SEC to make a decision as to whether, you know, a 

particular disclosure could be kept confidential for a period 

of time. 

MR. BRIGAGLIANO: We've got one more minute. Jesse 

Greene, is there an important reason why issuers want or need 
 

 

 

 

 

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to know the identity of large short sellers in their 

securities? 

MR. GREENE: Yes. Having the information there's a 

large short position out there doesn't help you find out what 

the problem is and what the concerns are about the company. 

A short position is essentially a bet against the company, a 

bet against its performance. 

From our perspective, we want to go and talk to 

that particular short seller and find out what is his 

problem. And is there something that we haven't disclosed or 

something that we haven't described well that will help the 

marketplace understand us better? 

So without the information about who the short 

seller is, we don't have the information we need to take that 

action. 

MR. GITLIN: Jamie, one thing I would add to that 

is that gets along the beneficial ownership argument and 

discussion, which is probably -- we don't have enough time 

this week to discuss. 

But I would suggest that that's one along the lines 

of what Jesse suggests, that if you imposed new regulations 

regarding short sale disclosure and you didn't have a 

beneficial ownership issue that you'd had to go along with 

that, you'd have short sellers hiding positions by shorting 

them on swap. 
 

 

 

 

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So I would highly suggest doing more and more work 

on beneficial ownership when it comes to reporting short sale 

disclosure. 

MR. TREIP: Can I just chip in with an observation 

in relation to that? And I was quite encouraged by what 

Jesse said because a representation that has been made to us 

in the course of our consultation, if you can call it that, 

certainly, in Europe is that in fact a practice of requiring 

the identity of short sellers to be revealed publicly will 

actually close off the dialogue between short sellers and 

issuers, will actually stop those information flows; whereas 

what you're suggesting is possibly that that's not the case. 

MR. GREENE: I don't see why it would. Certainly 

the short seller can always refuse to answer the question 

about what your concern -- our concern is. But it's 

certainly not going to stop us from asking the question, 

that's for sure. And it enables us to really target the 

question at the party that's taking the action. 

MR. BRIGAGLIANO: Unless there are further 

questions from the Commission, we've now reached the end of 

today's roundtable discussion on short sale, pre-borrow, and 

disclosure requirements. On behalf of the Division of 

Trading and Markets, Division of Corporation Finance, and 

Division of Enforcement, I want to thank our panelists for 

their insights and candor. 
 

 

 

 

 

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I will now turn the program over to Chairman 

Schapiro for her closing remarks. 

CHAIRMAN SCHAPIRO: Thank you very much, Jamie, 

Brian, and John for your great work today in moderating our 

final panel. 

First, on behalf of myself and my colleagues on the 

Commission, I sincerely want to thank all of you for your 

participation today. We know you are all very busy people, 

and that you spent time preparing for and joining in this 

discussion. We appreciate that so many of you traveled to 

Washington for this event, including two of you who've come 

from as far as London, but from other locations, as well. 

And I want to thank my colleagues on the Commission for your 

helpful and insightful questions throughout these two days of 

roundtables. 

Our decision to hold today's panel discussions is, 

I think, a reflection of our very deep commitment to 

approaching short selling issues in a thoughtful and 

deliberative manner, with the interests of investors foremost 

in our minds. 

In that spirit, we are very committed to closely 

reviewing and weighing the potential merits of any additional 

short selling regulations such as pre-borrow or hard locate 

requirement or additional public or nonpublic disclosure 

requirements. 
 

 

 

 

 

 

 

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I think that today's conversation and discussion of 

these issues, with lots of opposing views, will be enormously 

valuable to us as we move forward and think about our next 

steps. 

Today's panels particularly well complement, I 

think, the discussion we had yesterday about securities 

lending. And again, we're just so fortunate over the course 

of two days to have brought together so many experts. 

Before we disband, I want to thank the key members 

of our staff who brought their skills and efforts to bear to 

make today's event possible. And they include Josephine Tao, 

Tory Crane, Liz Sandoe, Jeff Dinwoodie, David Bloom, Katrina 

Wilson, and Andrea Orr, and of course our moderators, who are 

sitting here with us, as well. 

And once again, thank you all on the panel so much 

for your time and your assistance to us. Thank you. 

(Applause.) 

(Whereupon, at 12:26 p.m., the roundtable was 

concluded.) 

* * * * * 
 

 

 

 

 

 

 

 

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 21 

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PROOFREADER'S CERTIFICATE 

In the Matter of: SECURITIES LENDING & SHORT SALE 

Witness: Roundtable 

File Number: N/A 

Date: Wednesday, September 30, 2009 

Location: Washington, District of Columbia 

This is to certify that I, David W. Baker (the 

undersigned), do hereby swear and affirm that the attached 

proceedings before the U.S. Securities and Exchange 

Commission were held according to the record and that this is 

the original, complete, true and accurate transcript that has 

been compared to the reporting or recording accomplished at 

the hearing. 

(Proofreader's Name) (Date) 
 

 

 

 

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REPORTER'S CERTIFICATE 

I, Jon Hundley, reporter, hereby certify that the foregoing 

transcript of 119 pages is a complete, true and accurate 

transcript of the testimony indicated, held on September 30, 

2009, at Washington, D.C. in the matter of: Securities 

Lending and Short Sale Roundtable. 

I further certify that this proceeding was recorded by me, 

and that the foregoing transcript has been prepared under my 

direction. 

Date: __________________________ 

Official Reporter: __________________________ 

Diversified Reporting Services, Inc.