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Re WhatCan Petition and Endorsing Publication

I'd like to more thoroughly document some of my responses in a format usable in future references.1 The nature of WC's drafting style to date2 revolves around Google Docs, which has two main top-of-mind limitations, ignoring privacy and interfacing concerns. First one was a lack of dark mode, which I solved after finagling Chrome extensions for a little bit lol.

The second is that material review comments made are (i) non-permanent in the sense that dismissal removes the metadata, (ii) nonpublic in the sense that the drafting doc has undergone multiple clones, and (iii) non-referencable in the sense that you cannot link to a specific comment in elaborative future work. I'll try remedying it here with stable section numbers.

Failure is an Option Paper​

John Wooten • 7:31 PM, Jul 26 (EDT):

One challenge I've faced in presenting these arguments with the 2002–2007 evidence are the changes implemented after the GFC. While much of the media interest and hence evidence disappears after the "swiss cheese" of "fixes" implemented in Reg SHO and associated D/F, this behavior continues. I hope the letter continues to substantiate this viewpoint because the last thing we want is to let them cite the 2008 amendments as a "prior fix" and unilaterally drop the petitions.

WhatCanIMakeToday • 9:58 AM, Jul 28 (EDT):

Agreed that various parties will try to argue fixes have been implemented. But this is why I highlight the FTD count and notional values shooting up... hard to argue the problem is fixed when the numbers keep going up.

Agree with this, and glad we got it reiterated outright in the final comment with a great source. For clarity, here was the original substantiating footnote quoting increased fails from an SEC (read: non-NSCC-reported) doc. The later direct fail file comparison (which I hadn't seen when drafting here) works wonders to get the point across with similar authority given they review the filing numbers:

See 89 FR 105152 nn.1–3 and accompanying text where the Division of Economic and Risk Analysis reports “8,378 average daily fail to deliver positions” at a registered clearing agency under 17 CFR § 242.204 as recently as 2023. See also explicit past short-selling reforms under Part 242 "protecting the independent pricing mechanism of the securities market so that” issuers raise funds given the “natural forces of supply and demand unencumbered by artificial forces” like clemency over FTDs, available at https://www.sec.gov/files/rules/final/2007/34-56206.pdf. Despite these promulgated written commitments, DERA staff remark that the rule "help[s] further the Commission’s goal of addressing potentially abusive 'naked' short selling[,]" plainly acknowledging blatant continued contradictions to the Commission’s mandate to facilitate capital formation at legitimate prices without flagrant centralized distortion through counterfeit stock.3 Why do we still need OMB’s approval for "1,506,165 hours [of paperwork] per year" to enforce byzantine 2000s-oversight mandates because the clearing monopoly refuses to deploy beneficial tracking seen abroad?

In response we have WhatCan with a really solid deference to another Federal site. I appreciate how all the hyperlinks keep us out of the weeds (vis-à-vis direct Commission publications, for the most part). I am keen to see how it works as it's new!

I'm inclined to take a different tack with the footnote. Instead of the other citations, I think I'll go with this investor.gov quote about FTDs being legit.

The main reason is to then hit the growing FTD numbers followed by the fraud and deceit bit in Rule 10b-5 contrasted against the "seller lied" exemption.

The setup here basically forces the SEC to choose: are FTDs legit or not? Why is there a FTD exception for literally a seller lying about delivery which the SEC says is fraud (see text for new footnote 17 below)?

There's a great interpretation here from WhatCan showcasing some stellar long-term thinking on comment output. Similar sentiments in the FR drafting comment4 where WhatCan expertly focuses on the long sale fails through FTDs in Reg SHO. "Am trying to avoid short selling since the focus here is long sale fails (which ends up as a short, but categorized as a long). If the amendments in this proposal go through, then Rule 203(a) effectively means all long sales must deliver or get bought in by the broker and so short sales would be properly marked as short."

Footnotes​

  1. For clarity, I do not stay in Discord group chats for extended time periods. I make an intentional habit of closing old DM conversations (Discord lets you remove a chat from your recently-messaged users in the interface while maintaining the chat history). I find this aligns with my stack-based mental model of only leaving open things that require immediate action. Accordingly, because you cannot "recreate" a group chat, I lose all group discussion histories once completed. ↩

  2. See first petition, available at https://www.sec.gov/files/rules/petitions/2024/petn4-842.htm. ↩

  3. Re 12:51 PM, Jul 28 (EDT): "Do you have that 'counterfeit' term coming from the SEC (or another entity/paper)?" — we have the original paper from an underreported public executive fighting short sellers. I just reached out to them to solicit interest in shared working goals. See Discord thread with someone who cited this! ↩

  4. I write that: "staff remark in the OMB request that the rule 'is intended to help further the Commission’s goal of addressing potentially abusive "naked" short selling in all equity securities[,]' plainly acknowledging that abusive naked short selling exists in contradiction to the Commission's mandate to facilitate capital formation at legitimate market prices not distorted by excessive supply of securities. See also explicit past short-selling reforms "protecting the independent pricing mechanism of the securities market so that offering prices result from the natural forces of supply and demand unencumbered by artificial forces" through other rules under 17 CFR § 242, available at https://www.sec.gov/files/rules/final/2007/34-56206.pdf. I've taken a bit of a risk here by connecting Reg SHO and Reg M with under ten words, but I think it's reasonable." ↩