September 29, 2008
Dear Mr. Cox,
First of all, I wish to disagree with your use of the adjective "abusive" with regard to "naked short selling". In my opinion, ALL naked short selling is manipulative and abusive. Common sense dictates that an individual should not be permitted to sell a security "short" without having preborrowed the shares. Nonenforcement of rules against naked short selling invaribly leads to manipulation of the stock's price and the creation of "phantom" shares that are NEVER borrowed. Appropriate rules and regulations are important, but they mean nothing if the SEC does not enforce the rules, impose punitive damages, and permanently eliminate loopholes for market makers.
The current ban on "legitimate" short selling on over 800 financial institutions is a mistake. Legitimate short selling is not the problem, though I also believe that restoring the uptick rule would further legitimize the practice of short selling. It is ironic and disturbing that companies on the "No Shorting List" contain companies such as Goldman Sachs, which has made billions of dollars from "shorting".
In conclusion, all "naked short selling" should be banned permanently. This ban should be rigorously enforced. This enforcement will increase the confidence of the investor to buy stocks, ETFs and mutual funds. A lack of confidence in the SEC to protect investors from "naked short sellers" will lead to an exodus of funds from the financial markets. The world is watching.