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The Delo Comment On Regulatory Notice 21-19

The Delo
Securities Trader

There is a lot covered here, it is obvious that some steps toward better transparency are at work. The simple fact of the matter is that there systemic issues with the creation of shares to borrow based on future volumes, failures to deliver, and shorting in general. While appreciated, and needed, the solutions to these do not lie in the resolution of transparency alone. Removing the capability to generate future transactions to borrow from, use for offsetting failed to deliver positions, and in general affecting the stock price negatively needs to be resolved. If these transactions had never been hidden in the first place, we would not be finding ourselves discussing the details of this proposition but instead working out solutions to the problem itself. Bringing greater visibility will indeed help us be able to trade and make better decisions, but the problem will only go away and require much less effort by removing the ability to do it in the first place. Propositions for removing the ability to create share equivalents through futures contracts or arbitration should be the first line of work. The simplest solutions are generally the best, and that means making all transactions T0, with the existence of High Frequency Trading, it shows that the systems are already in place to be able to track the multitude of different shares being trades at extremely fast rates, so there is no excuse for any delays. Reducing all pre-borrowing capabilities to only that which will resolve within that day should effectively remove the majority of the problems. Future transactions would then need to be limited to only being used for their intended purpose and not to offset a failed to deliver position. This would resolve the most pressing issues with shorting, which is less so that they occur and more that volumes that are not available are being sold short. The only other issue is that of marking of the transactions appropriately by the entities doing the selling. Borrowed volumes are often marked long, we see this as a selling of shares where the known quantities should not exist and thus tracks easily as divergence in price action from the associated volumes of buying to selling on a given day. This can be easily quantified by simple calculations even on a rudimentary level to find fairly accurate counts of volumes being marked inappropriately. Please consider resolving the major issues rather than attempting to assuage the trading and investing population with a half measure that will only allow the issues to remain, but further exposing how broken the system is presently. Thank you for your time and consideration in this matter.