Skip to comments.Overstock CEO Comments on SEC's New Rules Against Naked Short Selling
Posted on 09/18/2008 5:59:35 AM PDT by devane617
Overstock.com, Inc. (Nasdaq: OSTK - News) chairman and CEO Patrick M. Byrne comments on the SEC's September 17, 2008 press release (see http://www.sec.gov/news/press/2008/2008-204.htm) that purports to protect investors against naked short selling. Dr. Byrne commented, "At the core of the SEC announcement is a decision that if a hedge fund naked shorts a stock, its broker isn't supposed to let them naked short again. But guess what: they were not supposed to naked short in the first place.
(Excerpt) Read more at biz.yahoo.com ...
Naked!?? I can’t look
Why should anyone be allowed to short a commodity that they do not have control of in the first place?
Naked CEOs? Hasn’t the country suffered enough?
After being turned down by Obama, Lindsay Lohan has found something she can do.
They’re letting it all hang out on this issue.
it should be illegal, and it is. but our absent sec looks the other way. the new rule will have little effect if the sec does not pursue the rule-breakers. our economy has been raped by the money grubbers on ws and we are now in a mess.
Dirty little secert is the SEC & DTCC receive transaction fees, whether the stock is delivered or not.
In other words, selling something they don't have. Short selling by itself is shady, this is beyond the pale.
Can someone explain to me exactly what shorting is and how one makes money off of it?
My understanding is that you believe the stock will sell lower in the future, but how does that translate into a profit?
The definition of shorting is that you don’t have the control of the particular security in the first place. You have to borrow it from someone to sell it. The practice of naked shorting is selling the stock without locating the shares to borrow. Technically it’s legal for the brokers (only they can really do this FOR a client), however there have been abuses of it.
Huh ? SEC gets transaction fees ? When ? Isn’t it a govm’t agency ? Aren’t we already paying their salaries ? This is first time I’ve heard of that.
What a load of BS. There is nothing 'shady' about shorting stock that you control.
Short selling is not shady. It’s a perfectly valid AND needed tool in the financial markets. You have to have people who bet the stocks can go down in the markets otherwise you don’t have an efficient market for a security.
Naked short selling is an abuse of the power brokers have to serve their customers.
“Lend them to me, I’ll pay you later” sounds personally shady to me. Sorry if I’m wrong, it’s just me.
I love this guy. Talk about a maverick!!! McCain/Palin should be talking to him to get the details on the corruption within the SEC. They could use a guy like Patrick Byrne, at least as a consultant in their adminstration.
Patrick Byrne has been fighting for a level playing field for small companies (and their investors) for many years at his own expense. Any advances made are due in no small part to his personall efforts.
Yes, it’s valid. I know that. Sorry, I didn’t expect to cause all this noise.
Short selling is borrowing the stock of a company and then selling it. If it goes up in price, you will lose money as you will have to replace the stock at a higher price. If it goes down, you will make money as you can now replace the borrowed stock at a lower price and keep the difference.
GE is trading at $23/shr... you borrow someone else’s shares and sell it. You get $23/shr.
If it goes down to $10/shr, you can buy GE on the open market to replace the shares you originally borrowed. The $13/shr difference in your selling and buying price is your profit.
In essence, it’s the inverse of the “buy low, sell high” strategy. In this strategy, you are buying high and selling low. You make money the same way but in the opposite direction.
My understanding is that you believe the stock will sell lower in the future, but how does that translate into a profit?
Let's say you borrow a stock from someone and sell it for $20. You have $20 in your pocket but you owe that stock. Later, you buy the stock on the market for $15 and return it to the original owner and you are left with $5 as profit. The most you can make is the original value of the stock if the value drops to $0 before you buy it and return it. Your loss is unlimited because the stock could go up and up and up while you are waiting to buy it to return it to the original owner.
I have no idea how the naked selling works because how can the purchaser own the stock without the share actually existing. I also don't know what happens if the original owner wants to sell the stock you have borrowed and how he gets dividends if he doesn't have it anymore.
Ok, thanks, I had a few concepts wrong. Sorry everybody.
Shorting is nothing more than betting the stock will go down.
Normal shorting is putting a SELL order in with a broker on a stock you don't have in your portfolio. The Broker then has to place the order and "borrow" those shares from some source. If the stock goes down then you "BUY" the shares and you make money. The Broker returns the shares and we are back to square one and hopefully you made a profit.
Naked Shorting is "skipping the borrowing" part. In essence it can place more shares of stock in play than are available. It causes BIG players to be able to control the market without alot of the risk because they can sorta wrest control from the legal shareholders and put the stock in play.
“the new rule will have little effect if the sec does not pursue the rule-breakers”
It’s easier to go after Martha Stewart than your buddies.
Toss in the removal of the uptick rule, and the piling on by these vultures is that much easier. Interesting to see Morgan Stanley’s CEO crying to the SEC yesterday, when his stock was pounced on, bc MS traders probably do it all the time
Its a rampant practice. I've seen collusion practiced right out in the open on Yahoo Stock Message Boards. I've even forwarded the links to the SEC and the same people can be found posting the same collusive crap to this day.
The SEC couldn't care less.
someone stated that the IBanks have destroyed most of their targets, and are now going after each other. that is when the problems started...vultures is correct.
yahoo should be made to either: shut down those boards, or police them. there is so much invalid, openly illegal, stuff posted on those boards that it is incredible. All Yahoo wants is the click count.
Well that's good, because that is naked shorting, you don't have control over the stock, which is also illegal. So you are smart enough to recognize illegality as 'shady'. But what you said was shorting was 'shady' and in that you are FOS.
Sorry if Im wrong, its just me.
Your name is wrong? Should've been sorry.
It works because brokerage houses cheat. Transactions go through without shares being delivered. There is no certificate to back up the short sale.
I also don't know what happens if the original owner wants to sell the stock you have borrowed and how he gets dividends if he doesn't have it anymore.
There is a process called a buy-in. At any time, the brokerage can force you to cover the shorted stock if the owner "wants it back" (or the broker for whatever reason can't pretend you have a legit sale anymore, such as an audit in conjunction with litigation). The broker buys the stock in the open market at the market price and the customer is forced to cover whether he likes it or not. Part of the risk of shorting.
I am under the impression that most naked shorting is done in stocks that do not pay dividends. If a dividend is due, I would guess that it is simply paid regardless of whether it was a legit sale but since I have never done a naked short, I really can't confirm this.
Why is it shady? It's the same as a mortgage or a car loan. They lend you dollars now and you pay them back later. In a short transaction you borrow shares now and pay them back later. What's shady about that?
What happened in 1995?
That year the Dow went up 1300 points. Previously it had taken the Dow 5 years to move up that many points.
from 70 - 82 it stayed between 600 and 1000.
In 82- 87 it went to 2000
In 88 - 95 it went from 2000 to 3800
In 1995 it went from 3800 to 5100 IN ONE YEAR. ...OFF TO THE RACES AFTER THAT.
Does anybody know what happened in 1995?
How is it ‘technically legal’ for brokers not to have to locate shares for shorting? I would like to see a reference to that claim.
The Republicans controlled congress for the first time in 40 years?
Is it the same as if you buy one of those shorting ETFs like...
ProShares UltraShort FTSE/Zinhua China 25 FXP or something like that?
“Does anybody know what happened in 1995?”
The Republicans assumed control of Congress for the first time in 40 years. And there have been several changes in regulations related to financial markets, most all of the served to increase the volatility of markets.
But what is your answer?
I didn’t remember. Very interesting. Thanks all.
Naked shorting is trading stock that you do not have. This is like buying stock with money you do not have...but only if the price immediately goes up and you can sell for a profit, otherwise the deal is off.
The mere fact that the SEC has come out at this time of downfalling stocks says everything. They have known for yeasrs that nakes shorting has been going on and have done nothing, not a single thing, about it. They are now worried that the market can tumble to nothing while investment houses cleanup up using naked shorting. The SEC easn’t worried yeterday about the little guys and small companies getting clobbered by institutional traders illegally depressing stock prices for their own gain.
I don’t see where Moose Burger earned your acid. He’s admitted he doesn’t understand and is trying to learn. You are rude.
CodeToad, You are exactly correct. What concerns me is that this has been widely known for years. The raping of the economy, and companies has gone unabated. Where the hell has the SEC and the Feds been? Busting Martha Stewart? I suspect the complaint level at the SEC is, and has been, full for years, yet NOTHING has been done.
If you have shares in an account, your broker can loan me your shares to sell and I have to deliver them back later after I buy them back after selling them. I am hoping to profit by buying them back at a lower price,
I will sell a stock when I believe it is overpriced. If I hold the shares, then I sell hopefully at a high and buy back when it is low.
But when I short, I do not have the shares to begin with so I have to borrow them and then sell what I borrowed. I must buy them back at some point and return them to the lender of the shares (normally the broker).
So a broker knows from all their accounts who has shares and they can agree to lend them to me even without informing the account holder who owns the shares. But if the shares are held as paper certificates by the owner of the shares and not electronically by the broker, then there is no way I can borrow the shares to sell unless the owner agrees to lend them.
So there are a few ways the broker cannot loan shares to short. One is when the shares are held by the owners as paper certificates. Another is the shares are held in an IRA account or other type of retirement account.
Who are the brokers? The major brokers are the Investment banks (Ibanks) such as Goldman sachs, JP Morgan, Lehman, Morgan Stanley, Others are online brokers such as Schwab, Ameritrade, etc.
What they do is lend shares to sell often without the account holder knowing the shares are being loaned out. They do this legally via fine print in the account agreement.
Shorting is legal and is known to help facilitate the flow of transactions by adding ‘liquidity’.
But ‘naked shorting’ is entirely illegal.
What has happened is this. The brokers like those that are listed above have learned they can allow their hedge funds to short shares without loaning them, without locating them in the first place. They think ‘Oh, the shares are out there somewhere in our account holders accounts, and we’d rather not bother to locate where they are, so we will just let our hedge funds sell the shares however they want and we will settle everything up later’.
So a brokerage hedge fund will be allowed to sell shares that may not exist at their parent brokerage. For example, say a Goldman Sachs (GS) hedge fund named GSHF sells 1,000,000 shares of Boeing (thinking it will lose a major contract) or it will sell 1,000,000 shares of Lehman. But if GS has only 500,000 shares of Boeing or Lehman among its account holders, then GSHF has just sold hundreds of thousands of shares that don’t exist in the GS brokerage bank.
Now the hedge fund, GSHF in our example, is required by SEC rules to deliver back the shares it shorted and bought back within 13 days. This is known as the REGSHO rule. But the SEC never enforces the 13-day rule. They, the SEC, are complicit in the naked shorting because it is so big a scandal that it would bring down Wall St. When the shares are not delivered back, they become known as a Failure-to-Deliver or FTDs.
So what the market is left with is a pile up of shares that are not real (FTDs). These are counterfeit shares and they never get settled by the Depository and Clearing Corporation (DTCC). And the DTCC refuses to release the data on unsettled short trades (FTDs) because they know there are enormous amounts of counterfeit sales from naked shorting and they know the data will sink the Ibanks on Wall St.
So this is the scandal of the last two decades when electronic stock trading took hold (and all other types of electronic trading). When it was a paper system, the counterfeiting of shares was minimal and would be prosecuted. Today with billions of trades performed electronically, the SEC has decided to look the other way even though they are aware it is happening.
This scandal dwarfs the Enron scandal.
Incidentally, this practice of naked shorting is linked with another practice of forcing margin calls and liquidations. But that is another post of which I wrote just a little about.
I have written too much already. Hope it has been helpful.
It IS illegal...and HAS been illegal.
I've attempted to short stocks many times...where my brokers say "No Shares" available. Happens all the time.....
Your definition is plain wrong. As is your understanding.
Hey! Sometimes I like doing my trading naked. It's liberating.
And also more prone in OTC stocks.....
I've not read of big houses naked shorting DOW stocks.
I could be wrong.......
“But naked shorting is entirely illegal.”
Actually, it is not illegal.
Notice that the SEC’s announcement says “abusive naked short selling”, not “naked short selling”. The SEC still allows investment firms to naked short but they must always cover the short. They can initiate a short sell through immediate borrowing without there having to be a stock borrowing transaction. In other words, if an investment firm thinks they can immediately capitalize on a short sell they can do so without actually borrowing the stock and selling it, but they must complete the transaction within T+3, or three days.
The SEC still refuses to required positive exchange of stock, a stock sell for cash, and a cash transaction for the purchase of stock. They will allow investment firms (you will never get this privilege) to make phony transactions as long as the initial stock borrowing is concluded within T+3. The SEC seems to believe that such a concluded transaction will not have a dramatic affect on creating depressed stock prices. I totally disagree.