What's the problem with naked short selling?
Posted on 09/18/2008 5:59:35 AM PDT by devane617
There’s an explicit memorandum that allows it, I’ve read it. That may have changed since, but...
It’s a courtesy extended large customers without the malitious intent - as execution is time sensitive, they execute the order before they’ve found all the shares to borrow. The broker is obligated to find those shares and deliver them. However... some brokers have enabled abuse of this courtesy, which is then not merely serving your customer, but being complicit in the abuse.
Erm, that guy is fit to be tied.
For years he’s been complaining of short sellers depressing his stock price as an excuse for being a failure as a manager. Give me a break - if your company is sound noone could keep your prices down for long, I don’t care how much short selling there is. In fact, short sellers usually get seriously burned by shorting stocks that have solid fundamentals. Overstock, on the other hand, is not exactly what you’d call a blue chip.
“Am I out in left field...in my belief that naked shorting generally only happens on foreign exchanges? And in OTC type stocks?
“
Hard to say, but I suspect that few would naked short a Blue Chip as they typically don’t offer much gain in a short. If they did, I suspect they would be naked shorted, and I believe that is the only reason for the SEC announcement on naked shorts as we are watching Fortune 1000 stocks take a dive.
I stopped actively trading a few years ago when the numbers started to not make any sense and I was missing my marks. I would see great news for a company that signaled a major increase in profits only to have the stock shorted and plummet. I saw stock I sold because their numbers were very weak only go through the roof...only to then crash. Manipulation was the only thing I could account for such craziness. I found a pot of gold and silver more of an investment, and it has been, although with stock prices dropping and people running scared, now might be the time to get back into trading. Remember Chrysler’s stock drop and rise to fame.
Perhaps that should have been the first post then. It wasn't so it got the response that it did. You are rude.
Of course.
Over a long term period...I'd agree. Swing trades..on down-trending charts...I'd disagree.
If they did, I suspect they would be naked shorted, and I believe that is the only reason for the SEC announcement on naked shorts as we are watching Fortune 1000 stocks take a dive.
Well...we will never know. I'm just a small time trader...that trades with a loose group of friends. Brokers, lawyer's, hedge fund traders, etc....I only know what's happened to me, and others...when I've tried to short some stocks. And my brokers don't have the shares to borrow.
That being said....who in the heck really knows what the big houses have done?
Thanks-
First of all, the descriptor ‘naked shorting’ is not even used by the SEC in any legal regulatory documents. Yes they are now using this descriptor in the press and in comments. But it not legally defined anywhere. They discuss what it is but they have not made a legal definition accessible.
The SEC refers to a 3-day rule to locate a stock that has been sold short. They do not in any setting say that the practice of selling shares that don’t exist is LEGAL.
Let’s repeat that statement. THEY DO NOT SAY THAT THE PRACTICE OF SELLING NONEXISTENT SHARES IS LEGAL.
The SEC must assume that all shares sold short are registered shares that exist.
The practice of not locating shares is not the same as naked shorting. An analogy would be using my ATM card for a purchase not knowing that my spouse has just used it and there is not enough in the account. The transaction is not abusive and the bank may allow the transaction but with a penalty. In the SEC’s case there is no penalty.
What the SEC has done is to admit that ‘naked shorting’ exists. Naked shorting is not defined into two categories as abusive or nonabusive. There is no legal definition one way or the other. They are using the phrase ‘naked shorting’ without first defining what it is. The reason they don’t define it is because they know it will lead to lawsuits. So instead they have decided to use it without legal definition and to obscure its usage with ‘abusive’ versus something else.
So do not try to obsure the meanings of what we are talking about here. It is true that a brokerage may allow shares to be sold without first locating them as long as they have an understanding that the shares do in fact exist or can be borrowed from another brokerage if need be. But this is not the same as naked shorting. Naked shorting is where the brokers allow their hedge funds to sell whatever amounts of stock they wish regardless of whether the stock exists or not.
There is no such thing as legal naked shorting. Either the stock exists or it does not. If a broker knows the stock exists but does not precisely locate it, that is not naked shorting. If they allow a hedge fund to short whatever amount without limitation, that is naked shorting. The Ibanks are guilty of the latter.
Smart brokers have seen this scandal coming and they go out of their way to locate stock before allowing it to be sold short.
But the idea that ‘naked shorting’ is legal in any sense is a smoke screen. They won’t get away with it and we will see the SEC dismantled and replaced with an updated enforcement body that is not operating as if it were the 1930s. This new body will be established under the McCain-Palin administration. To confirm it just take a look at the recent Palin interview with Hannity.
Naked shorting is not the process of allowing the short sale of stock without locating it first. That is not ‘naked shorting’.
NAKED SHORTING = SHORT SALE OF STOCK THAT DOES NOT EXIST.
The SEC is trying to confuse the meaning and they have not even yet defined it legtally. The SEC lawyers know what ‘naked shorting’ is, but the phrase has no legal meaning.
The phrase ‘naked shorting’ was born out of incidents involving abuses of counterfeit stock. It is not used legally by the SEC. They do not have a definition of it and they will not legally define it because once they do so, there will be lawsuits and they know it.
If you are a lawyer, you know that each material word or phrase must have a clear definition. None exists for ‘naked shorting’. Using the CAP description I gave above, if that is used as a definition, the the SEC would be guillty of allowing the practice of naked shorting and they want to avoid that at all costs. So they have resorted to obscuring the meaning with ‘abusive naked shorting’ versus something else. They are trying to change a street definition to suit their purposes and cover their rear ends,
Again, naked shorting is not the same as failing to locate. Naked shorting is the conscious act of selling short knowing that the stock may not exist. It is a crime and the SEC will not worm their way out of it by obscuring meanings.
Incidentally, the reason the SEC has not brought this to the forefront when it has been in their face for years, is because the criminal practice of naked shorting is now eating their own.
What's the problem with naked short selling?
Actually, they do, and very clearly: Division of Market Regulation: Key Points About Regulation SHO
Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules.
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http://www.sec.gov/answers/sec31.htm
http://www-01.ibm.com/software/success/cssdb.nsf/CS/JSTS-79NTFQ?OpenDocument&Site=default&cty=en_us
Good article.
Once had a guy tell me that if this was enforced the financial industry would be very hurt. Takes to long to find the stocks.
It is better seen on a graph, like the Dow graph on google finance. Take it out to max1970 and you’ll see the steep increases start in 1995 that I see.
You linked to ‘Key Points’ which is commentary. Actually it is CYA propaganda and a continuation of the process of obscuring the real story. The person that wrote this distraction has a problem with understanding what ‘naked shorting’ is. It is not the selling of shares without first locating such as Market Makers do. It is the conscious act of selling shares which are known to not exist or are highly likely to be nonexistant. This amounts to counterfeit shares in electronic form.
But I suppose you are one of those that believe anything if it is on a website. I suppose then you would have believed Bear Stearns CEO a few months back when he said the Company’s financial state was strong or even more recently the statements by Lehman executives that there were no liquidity problems in the firm.
Yes indeed, when a person with a suit and a title make a statement, it must be true, right? Especially if they work for the government, right? Have you ever heard of the Ibank-SEC revolving door?
Now here’s how to find the real story. You must look at the regulation, not the yes-person comments. And you must research the history of the regulation and the foundational discussions leading to the regulation. Then you must read the comments from those calling for regulation in response to the REGSHO regulation that was implemented.
REGSHO was not greeted with a sigh of relief but rather disbelief. Those that knew naked shorting was rampant (and still is) also knew that REGSHO was an attempt to deflect real responsibility. You will see that in the comments to the REGSHO draft.
Read the REGSHO regulation.
http://sec.gov/rules/final/34-50103.htm#P69_11847
Do a search on ‘naked shorting’ WITHIN THE REGULATION ITSELF. You will find one solitary reference that indicates it is undefined. If the phrase is undefined in securities laws, then it cannot be used by regulators for enforcement. Enforcement can only occur with respect to statutes and case law. But your attention should be immediately drawn to the question of why ‘naked shorting’ was not defined in the regulation. The regulation’s reference to its undefined status is a red flag in itself.
Commentary and propaganda do not have to abide in a legal framework as does a federal regulation. The lawyers that write and review regulations are not allowed to leave terms undefined in enforceable parts of regulations. Each term or phrase that is material to the regulation must be defined clearly.
In the context of selling short without a locate, the regulation spells out clearly the exceptions to the locate requirement. The regulation further describes that any short sale without a locate must be done with the understanding that the shares exist.
So there you have it. If there is an understanding that the shares exist, and a market maker needs to sell without first locating the shares, then they may do so under strict guidelines of ‘bonafide market making’ and they have a tight window to deliver. This is not the same as ‘naked shorting’.
Your commentator SEC hack got it wrong and that was typical for the year when he wrote the ‘Key Points’. There were many SEC hacks on the defensive and coming up with all manner of twists to meanings and actions for the purpose of defending the SEC’s lack of enforcement and oversight of naked shorting.
See Post #75.
Codetoad is parroting an SEC hack that was propagandizing from 2006 when they thought they could pull it over on the public.
Naked shorting of any form IS ILLEGAL.
Because naked shorting is the act of selling short with the knowledge that the shares sold do not in fact exist. ‘With the knowledge’ goes to motive and intent.
A market maker must have a high, very high expectation that the shares can be located and must deliver in a tight window. this is not the same as naked shorting which is undefined in the SEC regulations. See the link in Post #75.
Memorandums are not regulations. Regulations have the force of law. Memos are commentary, not law. See Post #75.
Naked shorting is a known entity, hence this latest SEC announcement. Trying to be technically correct is impossible in this situation, not to mention downright nerdy.
Admit it, you linked to opiniated and defensive commentary from 2006 that has no force of law. You did not look at the regulation itself. The link to it is in Post #75.
I suggest you improve your research and legal interpretative skills.
“I suggest you improve your research and legal interpretative skills.”
There is no law specifically against stealing Kool-Aid cups but it is illegal. Naked shorting without the ability to close the deal is illegal. I am not going to go through the entire code looking for you as all I have to do is read the SEC published opinion and hear the words of the fed and Treasury chiefs to know its status. You may think that a published opinion by the SEC is weak but I’ll take their words over yours any day. So back at ya: I suggest you improve your research and legal interpretive skills before you get yourself into serious trouble.
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