SEC Bans Naked Short Selling

As an old market hand, I find this hard to believe, but they are certainly working themselves in the right direction. They may pull it off.

Naked short selling has been a plague on the market for the last decade in particular, but it was simply extending practice already prevalent forever at the desk of the market makers who happily borrowed stock for delivery from their positions with the clearing houses.

Before someone wishes to tell me that I am wrong, I want someone to explain when was the last time they received a fee for lending stock to anyone. And believe me if you have stock lodged, it generally can be lent, especially if you have anything that looks like a margin account. Even a trivial debt is enough to supply a whole portfolio.

Naked short selling avoids all the niceties. The trader sells short and forgets about it. If the price rises it then can get dicey, but he is packing several positions to play around with.

Ten years ago, you could count on the OTC market makers to each sell you perhaps a quarter million shares or more of anything. Usually ten or so would pile on. Since it cost money to attract an audience, the supporters of a company are out of pocket a lot of cash before this is waded through. In the meantime, recall that a long position rarely gets margin and the full dollar is needed to acquire a position. A short position margin requires fifty cents per dollar except that you are also holding the cash from the sale. And let us not talk about how much you can lose. The advantage is in the hand of the short seller in this game because it is expensive and hard to attract third party buying while merely a function of capital to supply a naked short.

The fact is that naked short sellers are systematically diverting equity money away from the companies raising it, and have been doing this for decades. They only leave a target alone if that target finds a way to hurt them badly enough that they stay away. Nothing else works. So finding a method to end their depredations is grossly overdue.

This has been the street’s dirty little fiddle that got out of hand so long ago that the crooks think it is good business. By the by, a market rarely gets manipulated unless the naked short sellers are caught and they are trying to directly break confidence by upping the volatility.

I have not been tracking markets as closely these past several years, so I am likely dated as to magnitudes , but certainly not as to how it is been played. I found it amusing that the major firms only discovered naked short selling could be bad, when their flagship companies started getting heat last fall.



Jul 27, 2009, 2:11 p.m. EST

SEC makes temporary short-selling rule permanent

By Wallace Witkowski

SAN FRANCSICO (MarketWatch) -- The Securities and Exchange Commission on Monday made permanent a rule designed to curtail abusive "naked" short selling. "The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale," the SEC said. A temporary rule meant to curtail the practice was set to expire on July 31. The SEC said it is also working together with several self-regulatory organizations to make short sale volume and transaction data available