Posted on 07/15/2008 2:54:37 PM PDT by kc8ukw
Also, are you sure it would work? I don't think the idea from yesteryear of keeping your shares for sale at an above current market price ever made a dent.
If you buy your positions on margin, you do not have the right to control them. If you fully paid for your long position, then it is the smart thing, to request to your broker that they not be used in such a way that would drive down the value of your investment. I only play one stock outside the Dow 30, and all these stocks have big floats and are very liquid and can always be shorted. Less liquid stocks often do not have enough shares available to easily shorted. In the last days of Bears Stearns, it was my understanding that there were NO shares left available to shorted.
Thank You.
The up tick rule had been changed June 14th 2007.
As for naked shorts, and it is still illegal, but there is alot of naked shorting going on, and it is not perused by the SEC.
Some speculate that the sudden drops in various commodities is due to illegal shorts of hedge funds trying to clean up their balance sheets for various nefarious reasons having to do with trying to hide the disastrous credit derivatives.
The Securities and Exchange Commission said Tuesday that it will try to limit so-called "naked" short selling of shares in Fannie Mae, Freddie Mac and big brokerage firms
Why leave any brokerages out? ETrade is 25% shorted (as far as we know), same with Washington Mutual - they traded almost twice their float today and got down into the low 3's.
For the fed to move to protect the only two firms that it is also considering purchasing shares in sounds almost as shady as the actions of the characters they're trying to regulate.
This naked short crap (and worse) has been going on for some time, and NOW they decide to act? Where have they been all this time? What, it only matters because it is Fannie Mae and Mac - who likely deserve to fail anyways?
What about investment houses that collude to short raid a stock? I hope the SEC looks into that as well.
Touche! That is precisely what this stinks of!
Save the uber rich, the rest of us can rot.
Ruin them all.
I understand the concept of short-selling. But “naked” short selling is confusing me. If you do not borrow the shares from your broker, then how can you transfer the stock to the “legal” recipient of the sale?
There are actual failures to fill, though only to the tune of about 1/2 of 1% of all short transactions. The counterparty of the trade simply fails to deliver by the settlement date. A broker is left with a tab and needs to make the counterparty whole out of his own capital, while pursuing the non-fill side by attaching other assets, if he can.
But that is a secondary thing. There are also reversals before settlement date. The trader sells short at the open and buys to cover at the close, and on settlement day his two counterparties are matched by his broker - he is out. He can do this every day or two days out of three, whatever.
Then there are clearing fills by a prime broker. Meaning, N different hedge funds enter long and short orders, all being routed to one large broker or investment bank to "clear" their trades, wherever they were first placed. Anyone with that hedge fund's orders forwards it to their prime broker for settlement. The prime broker needs to settle with the world as a whole, but any orders from its own clients that are in offsetting directions, can just "net out".
Securities move from one pocket to another inside the firm. The broker only buys or sells the net change in its client's positions. Maybe it charges for short positions, or maybe it doesn't. Big clients may get the same interest rate on the proceeds of a short sale, as they would pay in broker's call on the borrowed stock - so why bother?
Or take put option settlement. Every put option that ends in the money should in theory be actually exercised and result in a sale by the put holder of the stock against which the put is written - whether they own that stock or not. If they do own it, then the put exercise covers. But in practice they can cash-settle for the difference between the stock price and the strike price. If the clearing houses don't want things handled that way, the broker or bank can just enter a swap contract that explicitly cash settles, but is otherwise exactly equivalent to an exchange traded put. Same with shorts, come to that (equity swaps, etc).
Conventional wisdom before the SEC letter would have said, little of this matters because the system is so flexible, nobody really needs naked shorting. But it would appear from the reaction that an awful lot of it was going on. Very likely it touched off a bigger short covering squeeze - the market was oversold short term anyway, after a near vertical descent over the previous week, options expiration was Friday, etc. Still, 30% daily moves in $100 billion banks are unprecedented, and any plausible explanation has to include shorts being caught out.
I suspect Lehman in particular had already cornered its own stock, and was wondering how it could still go down. Meaning, they could already account for every share available to be borrowed for short-selling, and yet they still had enourmously selling pressure from non-holders. When the Fed's own support operations for Fannie and Freddie were clearly failing on Monday, the regulators were ready to listen to their tale of woe and shennanigans.
It clearly worked. Oil and metals reversed as trend followers caught needing to cover had to sell their winning long positions to raise the money to buy back their shorts, higher. We will probably hear about serious fallout and failures due to it, over the next month. I have it anecdotally from some bankers that some seriously players got absolutely killed.
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