Emails are making the rounds today that highlight what the likely Washington response will be regarding Dark Pools and Short Sale Rule changes. In the past I feel we have made our views on Dark Pools known, specifically the difference between those that add value and those that do not, and the importance for size discovery; I will like to instead relay some thoughts I have regarding proposed short sale rules.

Specifically, proposals are rumored to address:

1) Price Test. An offer-not-hit style price test is the likely price test. So one can short stock by offering stock, and not hitting bids. My question is which quote will be used? The slow and turtle-like NBBO? What about a colocated quote? If so, which colocated quote? Firm A’s? Firm B’s? The Red Bank Firm’s quote? What does the quote mean anyway, nowadays? As long as there are legal, colocated rents being collected by the exchanges from the highest bidder (HFT Prop Firm), this whole exercise is a farce. It is unenforceable. And it means nothing.

2) A part of the new rule that makes it illegal to effect “manipulative” short sales of any security. What is the definition of manipulative? Is shorting one firm’s thin ETF product manipulative because it is not as liquid as another firm’s similar ETF product? I am dizzy.

3) Brokers may be required to allow all customers the right to refuse to loan out their stocks. So might this create greater inefficiency, and more intense short squeezes (manipulative)? Have the “back office” stock loan departments become modern all of a sudden? Do they even today know as they loan out tough names what the actual inventory is? I sure hope that today’s  back office processes are as progressive and quick as today’s actual order generation.

So. I will wait to see what comes out actually this month. I hope it is well thought out. It darn well needs to be.