April 30, 2007
I have read the comment letter submitted from the options exchanges and stock market exchanges representatives. I believe their letters are intentionally misleading and contain errors of ommission.
First of all, because there is inadequate transparancy in both the stock market and options exchanges, it is impossible for US investors to verify the veracity of their comments.
But more importantly, these letters seem to rely on anlysis of specific time frames.
Respectfully, it is quite easy to cause significant damage in a short period of time, using the market maker exemptions and inadequate enforcement of settlement.
If a "bear raid" occurs simply for the purposes of expiring options, then of course the market will be cleaned up before an issue gets stuck on the Reg Sho list for too long, if at all. It is a straw man argument.
Looking at selected periods of time or at spefific stocks to analyze this issue does not do the issue justice, or put it in the proper perspective. Virtually every comment received by citizen investors request that the SEC eliminate the grandfather clause, force buyins of fails, and enforce timely settlement. They do not trust the exchanges or the SEC
Even if it were true that many issues do not get to, or remain for very long, on the Reg Sho threshold list does not mean that illegal manipulation of the markets is not occurring. Many investors watch in bewilderment the way the stock market behaves on options expiration week. Few regular investors and traders believe the playing field is fair.
There is no reason to give Market Makers exemptions. It amounts to an uneven playing field whereby the common investor is put at a distinct disadvantage by the manipulation of the supply of shares. It must end immediately if credibility is to be restored.
There is no reason to permit fails at all. Fails should be covered immediately with a mandatory buy-in on T+3. No deliver, mandatory buy-in.
Much more transparancy must be mandated. These markets must be cleaned up, for not only is it plain and obvious that the deck is stacked against the small investor under the current regulations, but it also poses an extreme credit risk to allow the inflation of a company's float with FTDs that investors are relying upon for credit and asset calculations. Too many people are relying on the same asset, and this poses and extreme credit risk for investors and brokers alike.
Sarbanes Oxley is not the problem. The problem is a lack of faith in the markets. Hedge fund investors are pulling out. Hedge funds are cashing in by doing IPOs and switching over to the LBO arena. These are not coincidences they are signs that even the most sophisticated investors are aware of deep rooted problems in the market, and I fear we are headed for a disaster if the regulations are not solidly built to protect investors and enforced with real teeth.