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In the letter, FlexTrade's President and CEO Vijay Kedia argues that creating a real-time database tracking short-sale activity in equities using FIX messaging technology, would require fewer technology resources than required by Regulation NMS.
Kedia points out that recent research by the Office of Economic Analysis, (OEA), sponsored by the SEC, and posted to the Web, indicates that delivery failures at settlement were the true source of short sale problems. The OEA's research dispelled the notion that episodes of extreme negative returns are the result of short selling activity. The study showed, "On average, short sale volume as a fraction of total volume is higher for periods of positive returns than for periods of negative returns," wrote Kedia in the proposal.
Rather than reinstate the uptick rule (price testing) to deal with the alleged problems of short selling in the market, FlexTrade's CEO alerts the SEC to a simple technology based solution that is in use today at national securities exchanges, ECNs and among broker-dealers offering sponsored access. He recommends the SEC require lenders of securities to establish real-time databases of the available levels of stock eligible for borrowing. "That would allow the SEC to extend the test for naked short selling back to the time of execution, rather than settlement three days later." Orders sent into the market would be tagged, as "a short sale" would be required to identify the broker from, which the security is borrowed. After the order is executed in the market by a national securities exchange or ECN, the values in the FIX tag would be inspected and information on the execution (identity of entering broker, security, symbol and number of shares shorted) would be forwarded to the broker.
The broker providing the original borrow would be required to decrement in real time the amount of stock in that name available for other short sale borrow. When the stock is covered, the process is reversed. A FIX tag again identifies the customer is covering a short sale and the broker providing the original borrow increments the database for each share covered.
According to Kedia, the advantages of this proposal are twofold: Real time monitoring of borrows rather than at settlement, as well as intra-day monitoring of naked short selling and subsequent covering by day trader and other short-term traders. Second, it uses technology in use today among national securities exchanges and broker-dealers, such as FIX-based messaging and drop copy interfaces supported by national securities exchanges offering sponsored access.
To read FlexTrade's full proposal on short selling of equities, click here.
