The Securities Traders Association of New York has issued the following statement in response to the US Securities and Exchange Commission’s moves to curtail short selling:
STANY is concerned about the instability in the US financial system and understands and appreciates that the SEC is taking extraordinary actions to bring a measure of stability to the markets. We are living through difficult times that require unprecedented actions on many fronts. We do not believe that current market prices are the result of the inadequacy of regulation of short sales, but rather the result of a changing economic climate which affects the underlying fundamentals of a broad array of exchange traded companies. Regardless of where the “blame” lies, STANY supports the SEC’s desire to prevent abuses that could exacerbate an already shaky financial system.
STANY applauds the SEC for the emergency order adopting new Rule 10b-21 which clarifies that deception regarding the intention or ability to deliver securities in time for settlement and failure to deliver those securities amounts to a manipulative or deceptive device or contrivance. STANY opposes market manipulation in any form and is pleased to see a hard-line being taken against those who intentionally engage in action to manipulate stock prices.
We also support the additional disclosure of short positions by institutional money managers, to the extent that these provisions are designed to discourage deceptive market practices. We support disclosure of short positions to the SEC as a tool to police any abusive short selling behavior. We, however, do not see a need for, or benefit of, public disclosure of short positions on a weekly basis as it would expose hedge fund and money managers’ trading strategies to competitors. Long positions are not disclosed to the public on a weekly basis, the same should apply to short positions.
While we fully support enforcement of rules that prevent the abuses in short selling, we believe that this can and should be accomplished without eliminating this useful order type. It is important to recognize the distinction between market manipulation and the legitimate use of short sales as an investment strategy that contributes to price discovery. Short selling is an important part of the investing, hedging and outright policing of corporate governance by the investment community. As the Commission has recognized in the past, short selling is a valuable component of risk management. Chairman Cox noted in a CNBC interview on 16 July, “if we are talking about legitimate short selling that’s vital to the functioning of our markets.” We view a ban on short selling as akin to “throwing out the baby with the bathwater.”
Short selling is an especially important tool in the options markets. When an options market maker facilitates a customer trade, it may be necessary for the options market maker to hedge its risk by selling short the underlying stock. These trades are neither manipulative nor intended to destabilize the price of the security. Rather they are related directly to a transaction in the overlying option. The exemption has permitted option market makers to provide liquidity and depth to the market for listed options. Without the ability to hedge their risk, liquidity in the options market will be significantly impaired. The potential negative impact on the options market maker should not be underestimated.
It is our view that emergency orders, being less well considered than rules developed through notice and public comment, tend to have unintended, adverse consequences. As with the previous Emergency Order, we believe that the current measures should be temporary. We are concerned that the proscriptions regarding short sales could be detrimental to the orderly function of the markets. Making short sales either more difficult or, in the case of the 799 financial industry stocks, prohibiting them altogether may result in market inefficiency, reduced liquidity, and inhibit the price discovery process. Moreover, we believe that Reg. SHO if properly enforced is adequate to prevent abusive naked short selling. Rather than banning short selling, or creating a new set of rules with no exceptions, such as the market maker exemption in Reg. SHO, the markets would be best served by enforcement of already available anti-fraud provisions.
STANY stands ready to work with and assist the SEC and Congress in any way possible to ensure that the temporary measures promote orderly markets and that price discovery and liquidity are not sacrificed.