To whom it may concern, I am an individual investor with no special expertise in financial markets or their regulation. However, I am a scientist who performs a lot of data analysis, statistics and machine learning for my profession, and therefore I believe I have more than enough expertise to analyze financial data that is available. In order for informed decisions to be made, whether in finance or science, one has to have all the data available. It is almost criminal the degree to which data in our financial markets is so hard to come by, even when we know that such data could easily be ascertained with a minimal amount of regulatory reporting effort. Specifically, I am referring to the practice known as naked shorting and share counterfeiting which has been a scourge in our markets for a long time, has been well known to the SEC and FINRA, and yet adequate regulation to address this has not been forthcoming. The former chair of the SEC, Harvey Pitt said it explicitly in 2007 “Phantom shares created by naked shorting are analogous to counterfeit money.” The rule 21-19 proposed by FINRA is an attempt to address some of the regulatory shortcomings that have led to the continued and excessive use of naked shorting to the point that the integrity of our markets is so questionable that it strains credulity. I therefore support most of the regulatory proposals. I will discuss these in more detail, using data from three different stocks subject to massive share counterfeiting, later in this comment but before I do that I would like to make a simple observation. It is by now so clear that share counterfeiting is a rampant part of the financial markets that simple logic would dictate that any regulation should be effected to stop any chance of this practice, erring on the side of making it more difficult to short in the interests of transparency and fairness even if it means that a lot of shorting will become less lucrative as a trade. While there is ample evidence that shorting provides a valuable service to the market as a means of price discovery and stock valuation (for instance, short selling bans were associated with impaired price discovery, liquidity and did not support prices in studies from around the world in the 2007-2009 financial crisis (Beber and Pagano J. Finance VOL. LXVIII, NO. 1 • Feb. 2013), it does not follow that naked shorting is also equally beneficial. In fact, it is illegal, but widely practiced. In the interests of brevity, I will only comment on synthetic short positions in 21-19, however I am in favor of, and have read, all the proposals even if I believe they don’t go far enough. “Synthetic Short Positions” - Any synthetic short positions should be illegal as it is clear that this provides one of the main tools for counterfeiting shares. One method to do this would be to disallow the purchase of put and call options (of size over some relatively large threshold) with the same date of expiry on the same stock. This is especially true where options are deep in the money as there is no reason for such a trade except to create synthetic shares. While there certainly may be legitimate trading reasons for a synthetic short position fairness would dictate that they shouldn’t be allowed as a) they are a primary tool of counterfeit share creation and b) the methods to report them to the market for transparency are still ill-defined in this proposed rule. In order to buttress the argument that these synthetic shorts should not be allowed I will provide data from two stocks where there is/was evidence of massive amounts of naked shorting including Fanny Mae and Freddie Mac in 2007/2008 and Gamestop in 2021. I won’t delve into the Overstock story since that has been covered in excruciating detail in many other loci. In 2007 it was known that most of the float of the two GSEs (Government Sponsored Enterprises) was locked up with institutional investors such that known ownership was larger than the number of shares available. The counterfeiting of shares made it difficult for the two GSEs to raise money. “The market manipulation of the GSEs began in October 2007 when virtually all shares outstanding were reported to be owned by just the institutional investors. Since October 2007, the GSEs have traded over 16 billion shares. This trade volume is ten times more shares than the GSEs issued. Throughout this time period, the reporting institutions owned all of the 1.6 billion GSEs shares.” (https://www.sec.gov/comments/s7-08-09/s70809-407a.pdf). Another excerpt from the same report showed that “From July 7, 2008 through September 5, 2008 (44 trading days), the average daily traded volume of the GSEs soared to over 210 million shares per day for a total trade volume of over 9.2 billion shares. This is 6 times the total number of shares outstanding of the GSEs trading in just these 44 days.” This created a crisis for both the GSE’s as well as the many state and local pension funds that owned these hitherto safe and stable shares. The crisis was so profound that the government took both GSEs into conservatorship in 2008. One of the reasons the SEC failed to look deeply into the issue was that there was a surprising lack of fails to deliver in the two securities in spite of the fact that there was clearly a huge number of short shares. The quantitative details of the trades and the entities making the trades can be found in the report linked above. One astounding quote that came to light during the fallout from the GSE debacle was during an interview with Chairman of the SEC Christopher Cox in which he stated in reference to shorting “Both the Securities and Exchange Commission and the SROs have ample enforcement in place already. We are able already to monitor fails to deliver. We'll be able to see whether or not shares are actually delivered within three days, for example. And so I don't think enforcement's going to be a problem here.” In spite of this here we are with FINRA recognizing that this isn’t the case. Moving to the current day, we are now seeing another stock, GME, where there is convincing quantitative evidence for naked shorting. For instance, during the recent proxy vote at the annual shareholders meeting in June 2021, it was reported that approximately 100% of the shares voted in spite of the fact that numerous brokerages reported far lower percentages of their shareholders voted. For instance, Etoro reported 63% of their shares held were voted and Fidelity, a much larger brokerage, reported only 69% of their shares voted (corroborating evidence is presented here: (https://www.reddit.com/r/GME/comments/o0rsas/update_from_fidelity_on_eligible_shares_that/?utm_source=BD&utm_medium=Search&utm_name=Bing&utm_content=PSR1) ). In addition, a number of surveys conducted have found that retail shareholders already hold approximately 100% or more of the float (approximately 75 million shares) notwithstanding the fact that, based upon the latest Form 14a filing Ryan Cohen and other directors and officers already control 11.6 million shares (about 15% of the total shares outstanding) and estimates of the total float as a percentage of TSO is about 58%. There is no point belabouring these details as any quantitatively minded person who looks into it will come to the same conclusion as we saw with Fannie Mae and Freddie Mac which is that there are many more shares held than exist. There is also good evidence that married puts were used after the spike in GME prices in January 2021. Starting September 22, 2020 GME made the threshold list for failures to deliver and stayed on the threshold list for 39 days between Dec. 8 – Feb. 3 2021, with hundreds of millions of shares (at the time the TSO was about 70 million) failing to deliver. FINRA itself reported short interest of 226 percent of the float in January during the spike of GME price. A user on Reddit named u/brocca showed that during the time that FTD’s spiked, deep in the money options were purchased combined with deep out of the money puts to cover up the naked shorting and thus, hedge funds like Melvin Capital, who had massive short positions, were able to pretend they covered with synthetic naked shorts. These options tricks (why is there ever a reason to buy massive quantities of deep in the money calls?) led to the reported FTDs dropping precipitously at the end of January. In short, there are numerous experts on naked shorting, such as Wesley Christian a lawyer who prosecutes actions against naked shorting, that can provide much more detail than I. I will add a few more sentences about things that regulation 21-19 should be doing in conjunction with proposed changes. 1. Outlaw naked shorting - period the end. Do not give market makers the ability to naked short in order to “maintain an orderly market”. Why should anyone ever be allowed to short a share unless they can locate it first? This would solve a lot of problems. Why allow any time to deliver a short. How about locate first and if it takes two days to locate then the trade has to wait two days. 2. Along these lines market makers are really not necessary in today’s world. Such supposed benefits of MMs, including creating markets in thinly traded stocks, could readily be attained now using fully automated transactions and market creation as are currently being done with crypto-currencies. In a world where there is no need for MMs, it follows therefore that there is no need for special trading privileges including the ability to naked short. 3. Make it mandatory for all brokerages or stock repositories to give an accounting to the SEC every month (or period to be determined but at least monthly) of all the shares held in their accounts whether direct or beneficial. This would eliminate, I believe, one of the main problems with transparency in the market. It is criminal that no one really knows how many fake shares of GME there are outstanding. If all the brokerages had to report on every stock monthly, it would make it transparent that, for instance, there are supposedly 300 million shares of GME held for a stock where only about 75 million truly exist. This would then make truly transparent the degree to which criminals have been counterfeiting and thus make enforcement of Reg SHO easier. 4. There is no need to worry about differences in reporting for regular and OTC markets as a means to not regulate regular markets. OTC markets have a number of risks already associated with them that most prudent investors understand. The inability to make OTC markets as transparent is no reason not to make regular markets transparent.
Bruce Jenkins Comment On Regulatory Notice 21-19
To whom it may concern, I am an individual investor with no special expertise in financial markets or their regulation. However, I am a scientist who performs a lot of data analysis, statistics and machine learning for my profession, and therefore I believe I have more than enough expertise to analyze financial data that is available. In order for informed decisions to be made, whether in finance or science, one has to have all the data available. It is almost criminal the degree to which data in our financial markets is so hard to come by, even when we know that such data could easily be ascertained with a minimal amount of regulatory reporting effort. Specifically, I am referring to the practice known as naked shorting and share counterfeiting which has been a scourge in our markets for a long time, has been well known to the SEC and FINRA, and yet adequate regulation to address this has not been forthcoming. The former chair of the SEC, Harvey Pitt said it explicitly in 2007 “Phantom shares created by naked shorting are analogous to counterfeit money.” The rule 21-19 proposed by FINRA is an attempt to address some of the regulatory shortcomings that have led to the continued and excessive use of naked shorting to the point that the integrity of our markets is so questionable that it strains credulity. I therefore support most of the regulatory proposals. I will discuss these in more detail, using data from three different stocks subject to massive share counterfeiting, later in this comment but before I do that I would like to make a simple observation. It is by now so clear that share counterfeiting is a rampant part of the financial markets that simple logic would dictate that any regulation should be effected to stop any chance of this practice, erring on the side of making it more difficult to short in the interests of transparency and fairness even if it means that a lot of shorting will become less lucrative as a trade. While there is ample evidence that shorting provides a valuable service to the market as a means of price discovery and stock valuation (for instance, short selling bans were associated with impaired price discovery, liquidity and did not support prices in studies from around the world in the 2007-2009 financial crisis (Beber and Pagano J. Finance VOL. LXVIII, NO. 1 • Feb. 2013), it does not follow that naked shorting is also equally beneficial. In fact, it is illegal, but widely practiced. In the interests of brevity, I will only comment on synthetic short positions in 21-19, however I am in favor of, and have read, all the proposals even if I believe they don’t go far enough. “Synthetic Short Positions” - Any synthetic short positions should be illegal as it is clear that this provides one of the main tools for counterfeiting shares. One method to do this would be to disallow the purchase of put and call options (of size over some relatively large threshold) with the same date of expiry on the same stock. This is especially true where options are deep in the money as there is no reason for such a trade except to create synthetic shares. While there certainly may be legitimate trading reasons for a synthetic short position fairness would dictate that they shouldn’t be allowed as a) they are a primary tool of counterfeit share creation and b) the methods to report them to the market for transparency are still ill-defined in this proposed rule. In order to buttress the argument that these synthetic shorts should not be allowed I will provide data from two stocks where there is/was evidence of massive amounts of naked shorting including Fanny Mae and Freddie Mac in 2007/2008 and Gamestop in 2021. I won’t delve into the Overstock story since that has been covered in excruciating detail in many other loci. In 2007 it was known that most of the float of the two GSEs (Government Sponsored Enterprises) was locked up with institutional investors such that known ownership was larger than the number of shares available. The counterfeiting of shares made it difficult for the two GSEs to raise money. “The market manipulation of the GSEs began in October 2007 when virtually all shares outstanding were reported to be owned by just the institutional investors. Since October 2007, the GSEs have traded over 16 billion shares. This trade volume is ten times more shares than the GSEs issued. Throughout this time period, the reporting institutions owned all of the 1.6 billion GSEs shares.” (https://www.sec.gov/comments/s7-08-09/s70809-407a.pdf). Another excerpt from the same report showed that “From July 7, 2008 through September 5, 2008 (44 trading days), the average daily traded volume of the GSEs soared to over 210 million shares per day for a total trade volume of over 9.2 billion shares. This is 6 times the total number of shares outstanding of the GSEs trading in just these 44 days.” This created a crisis for both the GSE’s as well as the many state and local pension funds that owned these hitherto safe and stable shares. The crisis was so profound that the government took both GSEs into conservatorship in 2008. One of the reasons the SEC failed to look deeply into the issue was that there was a surprising lack of fails to deliver in the two securities in spite of the fact that there was clearly a huge number of short shares. The quantitative details of the trades and the entities making the trades can be found in the report linked above. One astounding quote that came to light during the fallout from the GSE debacle was during an interview with Chairman of the SEC Christopher Cox in which he stated in reference to shorting “Both the Securities and Exchange Commission and the SROs have ample enforcement in place already. We are able already to monitor fails to deliver. We'll be able to see whether or not shares are actually delivered within three days, for example. And so I don't think enforcement's going to be a problem here.” In spite of this here we are with FINRA recognizing that this isn’t the case. Moving to the current day, we are now seeing another stock, GME, where there is convincing quantitative evidence for naked shorting. For instance, during the recent proxy vote at the annual shareholders meeting in June 2021, it was reported that approximately 100% of the shares voted in spite of the fact that numerous brokerages reported far lower percentages of their shareholders voted. For instance, Etoro reported 63% of their shares held were voted and Fidelity, a much larger brokerage, reported only 69% of their shares voted (corroborating evidence is presented here: (https://www.reddit.com/r/GME/comments/o0rsas/update_from_fidelity_on_eligible_shares_that/?utm_source=BD&utm_medium=Search&utm_name=Bing&utm_content=PSR1) ). In addition, a number of surveys conducted have found that retail shareholders already hold approximately 100% or more of the float (approximately 75 million shares) notwithstanding the fact that, based upon the latest Form 14a filing Ryan Cohen and other directors and officers already control 11.6 million shares (about 15% of the total shares outstanding) and estimates of the total float as a percentage of TSO is about 58%. There is no point belabouring these details as any quantitatively minded person who looks into it will come to the same conclusion as we saw with Fannie Mae and Freddie Mac which is that there are many more shares held than exist. There is also good evidence that married puts were used after the spike in GME prices in January 2021. Starting September 22, 2020 GME made the threshold list for failures to deliver and stayed on the threshold list for 39 days between Dec. 8 – Feb. 3 2021, with hundreds of millions of shares (at the time the TSO was about 70 million) failing to deliver. FINRA itself reported short interest of 226 percent of the float in January during the spike of GME price. A user on Reddit named u/brocca showed that during the time that FTD’s spiked, deep in the money options were purchased combined with deep out of the money puts to cover up the naked shorting and thus, hedge funds like Melvin Capital, who had massive short positions, were able to pretend they covered with synthetic naked shorts. These options tricks (why is there ever a reason to buy massive quantities of deep in the money calls?) led to the reported FTDs dropping precipitously at the end of January. In short, there are numerous experts on naked shorting, such as Wesley Christian a lawyer who prosecutes actions against naked shorting, that can provide much more detail than I. I will add a few more sentences about things that regulation 21-19 should be doing in conjunction with proposed changes. 1. Outlaw naked shorting - period the end. Do not give market makers the ability to naked short in order to “maintain an orderly market”. Why should anyone ever be allowed to short a share unless they can locate it first? This would solve a lot of problems. Why allow any time to deliver a short. How about locate first and if it takes two days to locate then the trade has to wait two days. 2. Along these lines market makers are really not necessary in today’s world. Such supposed benefits of MMs, including creating markets in thinly traded stocks, could readily be attained now using fully automated transactions and market creation as are currently being done with crypto-currencies. In a world where there is no need for MMs, it follows therefore that there is no need for special trading privileges including the ability to naked short. 3. Make it mandatory for all brokerages or stock repositories to give an accounting to the SEC every month (or period to be determined but at least monthly) of all the shares held in their accounts whether direct or beneficial. This would eliminate, I believe, one of the main problems with transparency in the market. It is criminal that no one really knows how many fake shares of GME there are outstanding. If all the brokerages had to report on every stock monthly, it would make it transparent that, for instance, there are supposedly 300 million shares of GME held for a stock where only about 75 million truly exist. This would then make truly transparent the degree to which criminals have been counterfeiting and thus make enforcement of Reg SHO easier. 4. There is no need to worry about differences in reporting for regular and OTC markets as a means to not regulate regular markets. OTC markets have a number of risks already associated with them that most prudent investors understand. The inability to make OTC markets as transparent is no reason not to make regular markets transparent.