Memorandum to: File No. S7-20-08; Securities Exchange Act Release No. 58190 from
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MEMORANDUM TO: File No. S7-20-08; Securities Exchange Act Release No. 58190 FROM: Division of Trading and Markets DATE: July 31, 2008 RE: Meeting on Securities Exchange Act Release No. 34-58166 On July 22, 2008, staff of the Division of Trading and Markets met with representatives from Overstock.com, Inc. to discuss Regulation SHO, “naked” short selling, and the Commission’s recent Emergency Order, (Securities Exchange Act Release No. 34- 58166). Overstock followed-up this meeting by sending an e-mail attaching a letter which is included as an attachment to this Memorandum. July 23, 2008 Subject: Follow-up on July 22 Meeting Dr. Sirri et al.: I thank you for meeting with Ken Salomon, John Welborn and me yesterday afternoon to discuss Reg SHO, naked short selling and the SEC's recent emergency order. As a follow-up, I want to emphasize the following points: 1. OSTK continues to believe that it is critical that the SEC extend the pre-borrow requirement of the emergency order to the entire market, not just the 19 select companies. OSTK requests that the SEC promptly undertake swift rulemaking so that this protection applies fairly across the market. 2. OSTK continues to support the prompt and full elimination of the option market maker exception, an exception that swallows up the good intentions of Reg SHO. During yesterday's meeting, we discussed the relationship between the markets for equities and their corresponding derivatives (including listed options). You stated that options market makers enjoy an exception from the Reg SHO requirement that they locate and/or deliver shares when hedging against options positions. I am not sure that I would read Reg SHO to say that. However, under your theory, if an options market maker sells a put with a 6- month expiration, then that same market maker has the legal right to naked short and fail to deliver an equivalent amount of the underlying equity (leaving the option market maker "delta neutral”) for six months. This exception is unnecessary and open to abuse/manipulation, particularly with the married puts that often occur in Reg SHO threshold securities. Further, OSTK does not believe that such a transaction is “net
for an issue, as a whole. That would be true if the options market maker entered into a legitimate short sale arrangement to borrow shares for the duration of the options contract. The act of naked shorting and failing to deliver in perpetuity, however, creates a "net change" in the aggregate “risk profile” of an issue (that is, the sum of all long/short positions, both in the derivatives space and in the underlying equity). Furthermore, the change in the gross sum of tradable securities entitlements in the equity market can drive the price below its equilibrium level, both in the short run and long run. In addition, the option market maker exception has the added effect of depressing stock loan rebate rates, as the options market has become a surrogate for the stock loan market. The option market maker exception is not only unnecessary, it is tool used for market distortion and manipulation. 3. OSTK applauds the SEC for beginning to disclose the daily volume of failures-to- deliver on a company by company basis. This is useful information that investors need to be able to access. OSTK urges the SEC to disclose (or perhaps better yet require either the exchanges or the DTCC to disclose) this information on a much more timely basis. The current lagged disclosure is as much as five months stale. At the very least, this
failure-to-deliver data should be available to investors at least as frequently as the legitimate short interest data (which the exchanges release twice a month). 4. OSTK (along with many others) has long advocated including a pre-borrow requirement in Reg SHO. Yesterday you asked whether in a world where shares are always delivered, is such a pre-borrow requirement necessary. Assuming such world, OSTK believes the answer is "no" -- with several caveats: o
enforcement and penalties to ensure delivery, such a world is hard to imagine. o
o
A pre-borrow requirement focuses on the front end of the trade and would ensure that no trade would result in a failure-to-deliver; a hard delivery requirement focuses on the back end of the trade and creates a period ripe for fraud. I suspect this is why theatres require patrons to present a ticket prior to entering the show, rather than allow them to watch the show and deliver a ticket five days later. o
A hard delivery requirement still allows for an intra-period raid (the period would be a day if the hard delivery period was T+1 or a week if the hard delivery requirement was T+5). A trader (day trader, market maker, etc.) could raid a stock on naked short sales and cover under the panic sell that day. Without a pre-borrow requirement, a naked short selling trader never engages in a borrow so long as he covers during the required period. Having no pre-borrow allows the trader to sell as many shares as he likes, so long as he covers within the hard delivery period. There is a lot that can be masked by such trading activities, especially by hedge funds with the financial firepower to use fast trading technique to create the panic selling into a profitable cover. As the SEC considers the differences between a pre-borrow requirement and a hard delivery requirement, OSTK suggests that it consider the emerging technology (e.g., the Lendex platform) that may allow for maximum liquidity in a pre-borrow world. 5. Attached is a spreadsheet showing the $8.5b mark-to-market value of all of the failures-to-deliver that occurred with in the DTCC on March 31, 2008 (the most recent date for which failure-to-deliver data is available to the public). Companies listed on the Reg SHO threshold list make up $6.1b (72.5%) of the value. These numbers do not include failures-to-deliver occurring outside the DTCC. In addition, OSTK believes that the mark-to-market calculation is an overly conservative way to calculate the effect of the failures-to-deliver because those creating the failures-to-deliver would likely be unable to cover them at the market prices -- especially in stocks where the failures-to-deliver are a large part of (or exceed) the float.
6. OSTK urges the SEC to expand the purview of Reg SHO to include transactions that occur outside the DTCC. As the SEC looks to improve Reg SHO, it makes sense to expand its purview to all trades. Otherwise, those that use Reg SHO's current loopholes to distort and manipulate the market will just move their abusive practices to ex-clearing transactions. Again, I thank you for taking yesterday's meeting and for your thoughtful consideration of the above points. Regards, Jonathan Jonathan Johnson Overstock.com, Inc. Mark-to-Market Value of FTDs on March 31, 2008 SYMBOL DESCRIPTION THRESHOLD SECURITY? TOTAL THRESHOLD DAYS SETTLEMENT DATE FTDs TRADE DATE PRICE FTDs*PRICE TOTAL: 8,475,914,767.63 $ 6,144,891,554.23 $ TOTAL (SHO STOCKS ONLY): 1 2 3 4 5 6 7 8 9 10
11 12
13 14
15 16
17 18
19 20
21 22
23 24
25 26
27 28
29 30
31 32
33 34
35 36
37 38
39 40
41 42
43 A AGILENT TECHNOLOGIES, INC N 3/31/2008 192,480 3/31/2008 29.83 $ 5,741,678.40 AA ALCOA INC N 3/31/2008 586,593 3/31/2008 36.06 $ 21,152,543.58 AACC ASSET ACCEP CAP CORP N 3/31/2008 126,922 3/31/2008 9.63 $ 1,222,258.86 AACS AMERICAN COMMERCE SLTS INC N 3/31/2008 27,961 3/31/2008 0.01 $ 139.81
AAGH Asia Global Holdings Corp. Com N 3/31/2008 68,029 3/31/2008 0.10 $ 6,462.76 AANI AMEDIA NETWORKS INC Y 131
3/31/2008 101,635
3/31/2008 0.00 $
71.14 AAPL APPLE INC COM STK N 3/31/2008 252,703 3/31/2008 143.50 $ 36,262,880.50 AAUK ANGLO AMER PLC NEW ADR UK Y 28
3/31/2008 26,748
3/31/2008 29.77 $ 796,287.96
Alabama Power Company Sr Nt Se N 3/31/2008 15,820 3/31/2008 26.74 $ 423,026.80 ABD ACCO BRANDS CORPORATION N 3/31/2008 48,175 3/31/2008 13.57 $ 653,734.75 ABDS Allegro Biodiesel Corporation N 3/31/2008 11,927 3/31/2008 0.09 $ 1,073.43 ABFS ARKANSAS BEST CORP (DEL) Y 7
76,112 3/31/2008 31.86 $ 2,424,928.32 ABH ABITIBIBOWATER, INC. Y 138
3/31/2008 1,359,481 3/31/2008 12.91 $ 17,550,899.71
APPLERA CP-APPLIED BIOSYSTEMS N 3/31/2008 13,893 3/31/2008 32.86 $ 456,523.98 ABK AMBAC FINANCIAL GROUP INC. Y 75
3/31/2008 72,154
3/31/2008 5.75 $
414,885.50 ABMBF ABCOURT MINES INC CL-B (F) N 3/31/2008 34,200 3/31/2008 0.42 $ 14,364.00 ABMD ABIOMED INC N 3/31/2008 39,068 3/31/2008 13.14 $ 513,353.52 ABN ABN AMRO HOLD N.V. ADS(1 ORD) Y 21
3/31/2008 10,602
3/31/2008 59.90 $ 635,059.80
CONSOLIDATED ABADDON RES INC N 3/31/2008 42,000 3/31/2008 0.18 $ 7,518.00 ABNPRF ABN AMRO HLDG N.V. CAP FDG TR N 3/31/2008 13,984 3/31/2008 22.34 $ 312,402.56 ABPI ACCENTIA BIOPHARMACUETICALS IN Y 36
3/31/2008 486,544
3/31/2008 1.11 $
540,063.84 ABR ARBOR REALTY TRUST INC Y 80
3/31/2008 130,034
3/31/2008 15.08 $ 1,960,912.72
AGRIBIOTECH INC N 3/31/2008 24,412 3/31/2008 - $
ABVG ABV GOLD INC COM STK Y 72
3/31/2008 1,261,200 3/31/2008 0.01 $
7,567.20 ABWG A.B. WATLEY GROUP INC Y 153
3/31/2008 31,780
3/31/2008 0.06 $
1,906.80 ACAD ACADIA PHARMACEUTICALS INC Y 45
3/31/2008 247,431
3/31/2008 9.06 $
2,241,724.86 ACAH ACA CAPITAL HOLDINGS INC COM Y 38
3/31/2008 46,088
3/31/2008 0.30 $
13,826.40 ACAR AEGIS CONSUMER FUNDING GROUP N 3/31/2008 18,500 3/31/2008 - $
ACAS AMERICAN CAP, STRATETIES LTD Y 78
3/31/2008 2,773,095 3/31/2008 34.16 $ 94,728,925.20
Alert B&C Corporation Ordinary Y 13
3/31/2008 2,226,667 3/31/2008 0.07 $
155,866.69 ACDQW ARCADE ACQUISITION CORP WT EXP Y 26
3/31/2008 266,300
3/31/2008 0.37 $
98,531.00 ACEL ALFACELL CORP Y 28
3/31/2008 60,460
3/31/2008 2.38 $
143,894.80 ACEN AC Energy Inc. Common Stock Y 120
3/31/2008 23,199
3/31/2008 0.02 $
429.18 ACF AMERICREDIT CORP Y 85
3/31/2008 3,362,452 3/31/2008 10.07 $ 33,859,891.64
ALLIANCEBERNSTEIN INCOME FUND N 3/31/2008 10,437 3/31/2008 8.22 $ 85,792.14 ACGU ASSET CAPITAL GROUP, INC. N 3/31/2008 34,824 3/31/2008 - $
ACGY ACERGY SA AMERICAN DEPOSITORY Y 14
3/31/2008 15,078
3/31/2008 21.35 $ 321,915.30
ALUIMINUM CORP OF CHINA ADR (2 Y 57
3/31/2008 63,313
3/31/2008 40.43 $ 2,559,744.59
ARCH COAL, INC. N 3/31/2008 17,786 3/31/2008 43.50 $ 773,691.00 ACII AmeriChip International Inc. N N 3/31/2008 33,048 3/31/2008 0.03 $ 859.25
ACIW ACI WORLDWIDE INC COM STK (DE) N 3/31/2008 108,550 3/31/2008 19.92 $ 2,162,316.00 ACL ALCON CHF 0.20 PAR VALUE N 3/31/2008 26,152 3/31/2008 142.25 $ 3,720,122.00 ACLI AMERICAN COMMERCIAL LINES INC Y 6
42,572 3/31/2008 15.80 $ 672,637.60 SOURCE: SEC FOIA Office, Bloomberg, CSI Data, FinancialContent, MarketWatch and Dow Jones. 1
Mark-to-Market Value of FTDs on March 31, 2008 44
45 46
47 48
49 50
51 52
53 54
55 56
57 58
59 60
61 62
63 64
65 66
67 68
69 70
71 72
73 74
75 76
77 78
79 80
81 82
83 84
85 86
87 88
89 90
SYMBOL DESCRIPTION THRESHOLD SECURITY? TOTAL THRESHOLD DAYS SETTLEMENT DATE FTDs TRADE DATE PRICE FTDs*PRICE ACOR ACORDA THERAPEUTICS INC Y 47
3/31/2008 32,097
3/31/2008 17.95 $ 576,141.15
ADVANCED CELL TECHNOLOGY, INC. Y 132
3/31/2008 425,597
3/31/2008 0.17 $
72,351.49 ACTG ACACIA RESEARCH CORP AR ACIACI N 3/31/2008 32,302 3/31/2008 5.75 $ 185,736.50 ACTU ACTUATE CORPORATION N 3/31/2008 19,200 3/31/2008 4.10 $ 78,720.00 ACUS ACUSPHERE INC Y 91
3/31/2008 12,489
3/31/2008 0.48 $
5,982.23 ADBE ADOBE SYS INC (DE) N 3/31/2008 20,414 3/31/2008 35.59 $ 726,534.26 ADBRF ADMIRAL BAY RESOURCES INC Y 68
3/31/2008 21,800
3/31/2008 0.33 $
7,113.34 ADEN ADEN ENTERPRISES INC N 3/31/2008 375,720 3/31/2008 - $
ADF ACM MANAGED DOLLAR INCM FD INC N 3/31/2008 18,080 3/31/2008 7.04 $ 127,283.20 ADL AMDL INC Y 156
3/31/2008 50,280
3/31/2008 3.54 $
177,991.20 ADLS ADVANCED LIFE SCIENCES HOLDING Y 19
3/31/2008 24,775
3/31/2008 0.90 $
22,297.50 ADM ARCHER DANIELS MIDLAND CO N 3/31/2008 23,651 3/31/2008 41.16 $ 973,475.16 ADOT ADVANCED OPTICS ELECTRNCS INC Y 11
3/31/2008 100,000
3/31/2008 0.00 $
10.00 ADP AUTOMATIC DATA PROCESSING N 3/31/2008 24,915 3/31/2008 42.39 $ 1,056,146.85 ADPI AMERICAN DENTAL PARTNERS INC N 3/31/2008 28,061 3/31/2008 9.67 $ 271,349.87 ADS ALLIANCE DATA SYSTEMS CORP N 3/31/2008 30,490 3/31/2008 47.51 $ 1,448,579.90 ADST ADSTAR INC Y 15
3/31/2008 93,100
3/31/2008 0.24 $
22,344.00 ADVC ADVANCED COMMUNICATIONS TECH Y 49
3/31/2008 438,810
3/31/2008 - $ - ADVR ADVANCED VIRAL RESEARCH CORP Y 74
3/31/2008 5,649,650 3/31/2008 0.01 $
50,846.85 ADXDF ADEX MINING CRP (F) N 3/31/2008 11,500 3/31/2008 0.31 $ 3,565.00 ADXS ADVAXIS, INC. Y 66
3/31/2008 41,437
3/31/2008 0.14 $
5,801.18 ADY AMERICAN DAIRY INC N 3/31/2008 147,746 3/31/2008 9.20 $ 1,359,263.20 ADYE ARADYME CORPORATION N 3/31/2008 16,550 3/31/2008 - $
AEC ASSOCIATED ESTATES REALTY CORP N 3/31/2008 31,899 3/31/2008 11.44 $ 364,924.56 AECS AEC HOLDINGS, CORP. NEW COMMON N 3/31/2008 54,683 3/31/2008 0.01 $ 437.46
AED AEGON NV PERP CAP SECURITIES ( Y 6
11,984 3/31/2008 21.65 $ 259,453.60 AEIS ADVANCED ENERGY INDS INC N 3/31/2008 54,214 3/31/2008 13.26 $ 718,877.64 AEM AGNICO-EAGLE MINES LTD N 3/31/2008 52,747 3/31/2008 67.71 $ 3,571,499.37 AENA ADRENALINA COM STK (NV) N 3/31/2008 25,194 3/31/2008 1.35 $ 34,011.90 AEP AMERICAN ELECTRIC POWER INC N 3/31/2008 58,693 3/31/2008 41.63 $ 2,443,389.59 AEPW ASIA ELECTRICAL POWER INTERNAT N 3/31/2008 95,295 3/31/2008 2.35 $ 223,943.25 AER AERCAP HOLDINGS NV ORD SHS Y 10
3/31/2008 109,800
3/31/2008 17.58 $ 1,930,284.00
APPLIED ENERGETICS, INC Y 8
367,285 3/31/2008 1.66 $ 609,693.10 AERP Aero Performance Products Inc N 3/31/2008 120,156 3/31/2008 0.00 $ 96.12
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