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SEC Proposed Rule Changes To Reg SHO Now Up

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Posted by:   bobo 7/17/2006 5:18 PM
The proposed REG SHO amendments are now open for public comments.
Specifically, the proposed amendments would:

• eliminate the grandfather provision in Rule 203(b)(3)(i); and

• limit the duration of the options market maker exception in Rule 203(b)(3)(ii) to the later of 13 consecutive settlement days from the date on which the security becomes a “threshold security,” or the options position expires or is liquidated.

- The SEC is asking in the proposal whether they should tighten the locate requirements for borrowing shares. Of course!! Just use the "search" feature in Adobe for the word "locate" and see what the SEC itself sees as problems; among other things, the same pool of shares being pledged to multiple borrowers to satisfy their "locate" requirements. That's one of the many ways more than 100% of the outstanding shares can be shorted. (starting at the bottom of page 15 and onto 16 of the pdf document).

- For me the locate requirements need to be very strict, fully verifiable with no reliance on "belief" - and safeguards that the same pool of shares are not concurrently used to satisfy the locate requirements of multiple parties.

- Too me, it's also clear that the options market and their market makers use FTDs to hedge for free by rolling off their credit and business risk and expenses onto the backs of regular long investors. Options should intrinsically price in all the risk and expenses within the options realm and not roll off any risk to unsuspecting and unrelated long investors, who will see their investments harmed by the activity of the options market makers off-loading this risk to longs. For this reason, options market makers should not be allowed to FTD at all. Let the options price correctly rather than relying on others to pay for the risk of the options market makers. The long investors are harmed, and never asked for this risk sharing by FTDing options market makers.

- An of course, according to it's own mission statement and the 1934 Securities Exchange Act is supposed to, most and foremost, protect investors, not market makers, specialist, and other Wall Street professionals. If the little guy is protected and treated fairly, by definition, everyone including all Wall Street professionals are also treated and trade fairly.

Please read the proposed changes here :
http://www.sec.gov/rules/proposed/2006/3...
Copyright ©2006 Bob O'Brien
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Comments (15)
Re: SEC Proposed Rule Changes To Reg SHO Now Up By InTheKnow on 7/17/2006 5:45 PM
Why would anyone grandfather grand-theft unless you are the thief?
Re: SEC Proposed Rule Changes To Reg SHO Now Up By rtway1 on 7/17/2006 6:01 PM
I want to thank you for all the work you have done it is deeply appreciated. I have not the expertise of you or Bob or Dave and others so forgive me if my comments seem off-base. Is it possible for the SEC to team up with DOJ or at least leave the door open for the DOJ if in fact their is evidence of criminal fraud. If there is no meat in this new change or a consequence of repercussion this will be viewed as the cost of doing business if all they have to do is pay a fine.IMO. Jail time sheds new light on the evil doers.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By long_ostk on 7/17/2006 6:18 PM
This has to be the dumbest question the SEC has ever asked. Did I miss out where the SEC gave short sellers the SEC's job of policing the markets?

"To what degree would the proposed amendments help reduce abusive practices by short sellers? Conversely, to what degree will eliminating the grandfather provision make it more difficult for short sellers to provide market discipline against abusive practices on the long side?"

Thats a new one on me... The shorts are empowered by the SEC to police the markets and help against abuses on the long side? Just what do we need the SEC for again? What a friggin joke.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By Little Bo peep on 7/17/2006 6:23 PM
http://business.timesonline.co.uk/article/0,,13129-2274633,00.html

Naked short sell on the agenda next? I think the SEC is going to see the LIGHT soon.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By Selene on 7/17/2006 7:33 PM
Yes yes yes yes yes. You have got to get rid of the Options MM exemption. We need to force them to settle otherwise the bears can keep buying puts (long puts), the MM's will keep writing them (short them) and the MM's will hedge by shorting the underlying stock (naked). This is a viscouse cycle. The put buyers make money and the MM's are hedged and the stock goes down because of excess sell presure which are naked which is why the put buyers make money. So they keep doing it over and over and over. If we force the Options MM's to settle then they can't do this forever. The downside is of course the options mm's wont be able to write as much business as before, but that's not our problem.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By mig on 7/17/2006 8:27 PM
How I believe the options MM situation should be handled is this.

The options MM probably should be granted 13 days. Others should be granted no more than 3. Market makers may need some time to find millions of shares to borrow from large options transactions. With a limit on the amount of time though the MM will have to pay interest on shares to borrow. On hard to borrow stocks this may be 15, 20, or 25 percent. The MM knowing this will price in more time value to sell a put thus making it less attractive to buy those puts.

There HAS to be a penalty though for the FTD's or it is all pointless. It would be very difficult on a market maker to force a buy in on the MM. A more realistic approach would be to make the market maker pay a penalty of say 35% annual rate of the 30 day average stock trading price TO THE COMPANY THAT IS BEING HARMED by the fail to delivers. Thus if there are FTD's the company being attacked would have more income. This would make the MANIPULATIVE heavy handed bear raid self defeating.

just one mans opinion.

mig
Re: SEC Proposed Rule Changes To Reg SHO Now Up By sky on 7/17/2006 9:07 PM
The SEC should be asked to address the "ex-clearing" problem between brokerage firms in their rule changes. Bobo and others please address this to the SEC and to this board.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By clearthinker on 7/17/2006 9:43 PM
EX-CLEARING IS A RAT'S NEST
Re: SEC Proposed Rule Changes To Reg SHO Now Up By mfm1021 on 7/18/2006 4:27 AM
Kudos Tommy. Your energy and intelllect are to be commended. I have made the rather simple and obvious comments to the SEC : 1) enforce existing rules, ie. T+3, 2) add a penalty provision and 3) remember the original mandate of protecting the interests of the small investor, not therich andinfluential prime brokers and their hedge fund clients.
Thx Tommy. Hopefully the SEC is waking up and it really is different this time. Best of luck.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By brokeflat on 7/18/2006 6:00 AM
The SEC is asking in the proposal whether they should tighten the locate requirements for borrowing shares. And, you say "Of course!!". Well, I say Screw the locate rule.

Require ALL trades, originated long or short, to both settle and deliver not later than T+3. As we all know, if a trade is not settled by T+3 then the trades is rescinded and both sides positions are restored and penalties are imposed on the originating entity. Likewise, if the trade remains FTR at T+3, then either a buy-in should have to occur or, as with settlement, the trade should have to be rescinded. As to FTD (instead of FTR); there shouldn't be an FTD if there is no FTR. If an original trade has FTD status then that FTD should legitimately be cleared by (1) delivery of shares, (2) a 'normal' borrow from a lender, or (3) through the SBP where such invokes a true borrow with all associated tracking and fees.

If there are back-end penalties and rules such that the initial FTD/FTR is handled in compliance with the 1934 rule that ties together settlement and delivery and T+3 then this whole cumbersome 'locate' carp can simply be eliminated. Just Settle AND Deliver not later than T+3 or rescind the trade. Period. Brokers don't like to rescind trades--it pisses off the customer base--so it wouldn't happen. Problem fixed.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By Little Bo peep on 7/18/2006 6:09 AM
Are the bears about to get a taste of their own medicine. No better way to make them see the LIGHT. Everyone now understands the churning and naked short game and the manipulation isn't so much fun now. Just maybe money can NOT buy their way out this time huh? The talking heads are working overtime to paint the doom and gloom picture, that would not make one think there are some LARGE SHORT positions huh? nah....they would not do that right?
Re: SEC Proposed Rule Changes To Reg SHO Now Up By crstphr2 on 7/18/2006 8:35 AM
Hey, simple solution, get rid of the whole stupid concept of market makers.
Re: SEC Proposed Rule Changes To Reg SHO Now Up By ckza on 7/18/2006 12:03 PM
Little Bo peep:

You remind me of another valuable poster, Who's John Galt, who I have come across on other forums. I hope his alias shows up again on the Investor Village board(s) that is rapidly gaining popularity.

Anyway, I was wondering if you would expand on an important concept surrounding certain "undertones" that can be derived from your posts on this board.

You seem to suggest that the miscreants have a vested interest to tank the markets-with references to the Great Depression 1, even- assuming that they continue to be the focus of negative attention, and might be forced to cover. This gives them a cheaper exit strategy and puts the pain on Joe Public as usual. Geez, could the world's problems be so insideous that, the current escalation of fighting in the Middle East is part of their "power" and " exit plan"?

However, if I understand the potential "outcomes" in this horrible American saga-of course, I may be misunderstanding much-then even "forced" covering could cause implosions as a result of insufficient capital necessary to meet the previous "fraudulant" actiivities on the part of the IB's, brokers, etc. This too, could be potentially earth shattering for the "stock market" as a whole.

Finally, there are some market pundits, I'll mention Buffett as one example, who seem to suggest that the "overall markets" are fairly frothy today too.

So, that being said, is there any "outcome" at this juncture that would point towards a happy ending for the overall markets, as well as the specific stocks where blatent abuse had been occurring?

Thank you for trying to help me sort this wild "conundrum" out.

Re: SEC Proposed Rule Changes To Reg SHO Now Up By tommytoyz on 7/18/2006 12:11 PM
The locate rule would still be needed even if all trades with FTDs were busted and reversed. That is because there is a 3 day period were no shares are delivered.

So someone could FTD within the 3 day window and still deliver on time at T+3 and do a 3 day bear raid on a security.

Without a strong locate rule, anyone could short sell an unlimited amount of shares in the 3 day window - and then roll them over into another 3 day window and continue this daisy chain.

SO a strong locate rule will always be needed to ensure that people aren't FTDing during the delivery period.
puts must be in the money By short seller on 7/19/2006 5:16 AM
A stock is $1 I sell an otc put to myself or someone agreeable with a strike at .001 cents to hedge this I can naked short sell the common at expiration 2 or 3 years under current OCC guides I redo the transaction carrying the same naked short position ad infinitum.

A stock is $1 an in the money put , 1$ or higher has real value no one not even myself will write this just to put on the NSS.

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