Don't Sell Short Selling Short (In Defense of Short Selling)

The Fannie Maes had funny math that my husband and I wondered about. If they were such wonderful investments with such high profits, why didn’t they have more returns in dividends or profit?

So we sold a little short as the questionable numbers started to come out of the summer. We used the proceeds to pay off our own house. So we sold short on the big financial crisis and and ended our own personal mortgage in the long run.

Selling at a loss isn’t evil. Sometimes, it’s like Suze Orman has says - leave the loser before you lose everything.

Yes they are sold twice. They are sold once to the buyer who went long, then sold again when sold short borrowed or not. This means that there more sellers than buyers which drives the price down. That means the float has been artificially increased even if temporary. That’s the whole point of shorting. Its not the innocent absorbing the difference in price between the high (sold short) price and the buy back price (cover) that shorts would have you to believe. Sure they buy them back or cover but most times the damage has been done by then. This thing of providing liquidity to the market is a shorts myth. If an investor wants liquidity just buy stocks of companies with a higher float and average daily volume.

Well that’s all well and good - but the problem is NAKED short selling.

Thank you. I was going to say the same thing. There is a big propaganda effort going on on the part of crooked naked short sellers claiming that "short selling is good, there's nothing wrong with short selling". That's not the point.

Naked shorts need to start going to jail.

“I traded stocks for 5 yrs, mostly shorting. I couldn’t tell you how many times I pushed that button and was told....no shares available. If the broker doesn’t have the shares to lend you don’t get them! sheesh”

With all due respect for your 5 years of trading, I must tell you that you are wrong. Sheesh!

I have posted many times about naked short selling and recommended visiting the site www.DeepCapture.com, by Patrick Byrne, CEO of Overstock.com, a company that was victimized by a naked short sale attack.

Read and understand. Naked short selling is an attack on our economy, no less dangerous than a terrorist attack on Wall Street.

Here’s his latest missive:

Overstock CEO Patrick Byrne Comments on SEC’s New Rules Against Naked Short Selling

‘Still no penalties for financial rapists’ declares Byrne

SALT LAKE CITY, Sept 17, 2008 /PRNewswire-FirstCall via COMTEX/ —

Overstock.com, Inc. (OSTK) chairman and CEO Patrick M. Byrne comments on the SEC’s September 17, 2008 press release (see ) 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. Instead of giving the buyer who receives the fail to deliver the right to put it back to the naked short selling participant, the SEC once again opts for no penalties for financial rapists.

“If the SEC were anything but a hedge fund bootlick,” continued Byrne, “it would not have taken the half-measure of a pre-borrow requirement applied only as a penalty for those failing to deliver within T+3, but would have instituted a market-wide pre-borrow requirement (as it did in its July 15, 2008 Emergency Order protecting Upper Caste financial firms), and mandatory buy-ins at T+3.

“Some questions for the SEC:

1. How will the SEC determine whether an institution is in compliance with this rule? The only way to determine compliance is through an SEC audit, something that could only occur months after the fact. In the case of a bear raid, that will be too late.

2. Where is the ‘buy-in’ requirement? Under the new SEC rules a crooked hedge fund can still naked short sell without settlement and keep that short open indefinitely. It appears that only future naked short sales will require a pre-borrow and that there is still no closeout requirement for failed trades.

3. What of manipulative day trading? Chairman Cox has admitted that the financial stocks did not have a significant level of naked shorts, but rather collapsed under day trading activities. The new rule fails to address this, the very activity that generated the need for the July 15, 2008 emergency order. The manipulative day trading short seller never has a position open for three days. However, under the new rules, he can still use a single locate multiple times to create the best leverage possible to drive natural investors out of the market.

4. Where are the penalties? Without meaningful penalties, these rules have no bite. The SEC needs to make sure that the rules are strictly and aggressively enforced — both for failures to deliver that occur within the CNS system and outside the CNS system in ex-clearing trades, where, I suspect, there is naked shorting that makes the object of current SEC concerns look like small potatoes.

“Rule 10b-21, the short selling anti-fraud rule, is a carefully contrived joke. It moves from a low-penalty too-vague-to-enforce rule, to a high-penalty too-vague-to-enforce rule. Without strict and aggressive SEC enforcement (for which the SEC has zero demonstrated record) it will be just more lines of meaningless pabulum in the Federal Register.

“On the bright side, the SEC has eliminated a major loophole in Regulation SHO, the options market maker exception. There was never a good reason why options market makers should have been allowed to naked short and fail to deliver in perpetuity. For taking this long overdue action, I applaud the SEC.

“What is needed is a Congressional investigation into the abortion that is our nation’s stock settlement system, focusing especially on the DTCC. A healthy next step would be to unplug the SEC and move its functions into the DOJ.”

1. How will the SEC determine whether an institution is in compliance with this rule? The only way to determine compliance is through an SEC audit, something that could only occur months after the fact. In the case of a bear raid, that will be too late.

How about requiring that any company selling a stock is expected to, when closing the deal, prove that the stock was possessed at time of sale. If such proof is lacking, the buyer shall have 24 hours to either (1) demand that the price be retroactively reduced to the lowest market price that occurred between the sale and the earliest time seller can prove ownership, or (2) reject the sale outright.

Further provide that sellers who are in default on a trade shall be forbidden from trading until the default is resolved (even if it means they have to use another broker to get the stocks they need to settle the default).

Criminal penalties would apply only if it could be shown a seller had no intention of making good on a sale.

Under those rules, naked short selling would be in every case riskier and/or less profitable than legitimate short selling. Only if the seller faked proof of stock ownership could those limitations be avoided; such faking of proof would be a serious criminal offense.

Short selling is nothing but selling the same shares twice. Yes they do buy them back, but only after they artificially inflate the float, which drives the stock down. Its a myth that they help the market. Did anyone ever meet a short seller that wanted the market or stock that they sell short to go up? I didn’t think so.

Explain why high stock prices are a good thing at any time other than the exact moment when you sell a stock.

If I'm going to dollar-cost average into a stock for 20-40 years and then start taking money out, should I want the stock to go up while I'm putting money in, or should I want it to remain nice and cheap relative to dividends? In what way will having the stock price go higher today allow me to collect more in 20-40 years?

There are only two ways that a speculative market as a whole can make money:

By buying assets at a time of relative surplus, and selling them at a time of relative shortage.
By collecting dividends or other benefits from assets while they are held.

That's it. Dividend profits are of course maximized when prices are low. As for surplus/shortage, speculation can be imagined as a water pipe that moves water from an area in the present to an area in the future. Water must flow from present to future--not backward. Think of the water level as being the inverse of price.

If the water level in the present is higher than in the future, one can collect energy from every gallon that flows. As more speculators enter the market, the "present" level will diminish and the "future" level will rise. If too many speculators enter the market, the "present" levels will be drained below the "future" levels, thus requiring an investment of energy to move the water uphill. The greater the disparity, the more energy is required.

In a sane market, the diminishing "present" water level (increasing price) would be a red flag, telling investors to back off. Unfortunately, bulls that see a red flag tend to charge in instead.

Prices of stock are certainly important when one buys or sells them, but the market price of an asset which one is neither buying nor selling is meaningless. If the vast majority of stock in a company is held by people who intend to keep it until 2015 and then liquidate it by 2020, price fluctuations for the small number of shares that are actively traded won't have any real effect on the value of the non-traded shares. The market may support a bubble when all those trades are on the sidelines, but any bubble is going to burst as soon as anyone tries to liquidate in any major way.