Posted on 09/03/2005 8:02:05 PM PDT by abletruth
How is this differentiated from selling derivitives?
Take a look at the Reg. SHO lists. Fail-to-deliver's are supposed to closed out within 13 days, and companies have been on those lists for months. What do you do when the SRO's and the SEC enforcement divisions aren't doing their jobs? Wait for a catastrophe before somebody finally wakes up and does something about the problem?
Think of naked short selling as naked short writing:
Writing Naked Checks
I dropped off a check at my broker dealer to pay for my stock purchase, but asked him to not cash it.
"Don't worry", said I, "the check proves you are the beneficial owner of a block of money in my account and it is more convenient to keep the money in my account in electronic check form. I'll keep it safe for you."
My broker was insistent that he receive cash proceeds, so I told him that if he paid me a $40 handling fee and waited 4 - 6 weeks, I would pull his cash for him.
I explained to him that sometimes it isn't possible to pull the cash as there are actually more checks outstanding then cash available to honor those checks. Lucky for me, the regulators came out with a rule in January that I don't have to honor checks written before the beginning of the year as that could create financial hardship for me.
The rule tried to dissuade me from writing new bum checks - I'm supposed to put money in my account within 13 days, but I get around that by kiting checks with my buddies.
I asked him again. "Are you sure you want to pull your cash? Most of my other creditors are happy to keep my payment in electronic, check form.", but it seems he doesn't trust me and would rather he be the actual owner of the cash rather then just the beneficial owner.
For some reason, he was unhappy that some of the checks I had written were naked and were not backed by cash and he wanted to cash his first before the other creditors found out.
Folks, ask for your certificate, which proves you own your shares. In reg SHO companies, there aren't enough certs. to go around, so it will be "first come, first served".
***
There's this guy named Bob O' who is campaigning against my check writing practices. He's started a group, NCANCB, or the National Coalition Against Naked Check Buying.
He's a nut case who doesn't understand that most of the checks I don't honor are for crappy stocks that I bought. I mean if these companies were well run and well managed, I'd be happy to put up cash to back up my purchase, but it is definitely the companies' fault that people like me write bum checks to buy their shares.
I mean, if Bob O' had his way, I'd have to put up cash to honor all my checks and it would financially benefit the people I wrote those checks to.
NCANCB is all about putting money in the pockets of the naked check holders. It's all about financial benefit to them, without consideration of the hardships it might cause me.
Shares represent proportional ownership in a company, something along the lines of a title to an automobile.
The two are very different.
Look, I'm the first to consider going against the received wisdom when there is a reasonable argument to listen to. If someone will offer a coherent explanation of why short selling, in principle (apart from credit, suitability and enforcement issues), is bad for the markets or the economy generally, I'll listen to it. I have yet to hear it made.
I'm short 2000 barrels of crude oil. Am I pond scum ?
Short selling is necessary. But not because a concensus of economists say that it is. It's just common business sense.
you are if you spring a leak.
You have the right screen name for this thread.
Hey, I like bashing the dismal scientists as much as the next guy, but economists are in fact experts in their field and we should pay some minimum amount of attention to what they say. My view of the Great Depression is essentially a failure by the powers that were to properly understand macroeconomics.
I'm short 2000 barrels of crude oil (2 futures contracts). I guess I'm naked because I did not borrow the crude and I don't own the crude. I do put up a margin requirement.
I believe I can short the sp500 index too. I can go short 1 contract which is about 250,000 dollars worth of stock. Further, I would be naked in that I did not borrow 250,000 dollars worth of sp stocks.
There are only X number of shares issued for any given company. Say, 10 million, just to have a number. That's all there are, that's all that have been ''issued'', as the term goes. Fine. Suppose I own all these shares, sell them to you, and now you own them. Normal transaction, no problem.
However, suppose Willie Green comes along after getting off a train and wants to sell your company's shares short, let's say a million shares. OK, his brokerage tries to borrow the shares -- from you in this case, since you're the only owner of shares in your company -- and can't. Normally, that's the end of the story, and Willie goes about his other business.
In naked short selling, the brokerage goes ahead and executes Willie's order (first mistake, and criminal if it happens regularly), with someone buying the million (putative) shares that Willie's selling. Now, what does the scoreboard look like?
You own 10 million shares, and whoever was on the other side of Willie's transaction owns (or THINKS he owns) 1 million. Bang! A million shares have (notionally) been created out of thin air, and you, who own the company outright, didn't have a thing to say about it.
Derivatives, as noted, are a contract. They can be and are created and destroyed (''closed out'' is the usual term of art) on a daily basis, and in any quantity whatever that is satisfactory to the parties involved, and to the exchange on which the transaction takes place. VERY different beast.
Hope that little explanation is of some use to you!
but you're short the index so you'll either have to buy it back or deliver the shares by contractual obligation. the demand for the shares is built into the contract. it's not "naked shorting."
And all pump and dump longs are angels, right? Get a clue before making idiotic blanket statements like that.
My comments were limited to STOCK shorting. As to the scenario you describe I would have to do further analysis as to whether things are borrowed with the knowledge of their owners or it they are the result of fraudulent brokerage activities.
But at first glance I don't see shorting futures contracts to necessarily to be an abrogation of fiduciary responsibility.
You're not naked, you're just short crude. Buy it back any day you like, and the transaction is settled, done, finis. Naked stock shorts never get settled...and that's the difference AND the problem.
Wow!! I don't know how serious of a problem naked short selling is, but the large number of exclamation points in this article causes me to question how seriously I should take it!!!! The alarmist tone reminds me of articles found in Weekly World News!!!
As I said other countries have banned short selling in their stock exchanges so that is not an issue. There is no doubt that this is the activity of specialists.
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