Posted on 07/27/2008 10:12:33 PM PDT by Fred
Wall Street executives expect the Securities and Exchange Commission to extend the temporary limits it has placed on short-selling and expand them to cover additional stocks beyond the 19 financial companies it targeted two weeks ago.
The limits are set to expire Tuesday, and executives, lobbyists and hedge-fund representatives of the Managed Funds Association, the biggest hedge-fund industry group, have been talking throughout the weekend, trying to come up with possible approaches to asking the SEC to reconsider expanding the rules, according to people familiar with the talks.
A call with regulators on Friday gave the funds group "a fair degree of certainty" that the SEC intends to seek an extension of the emergency period, these people said. Regulators said an extension could be for as short as 60 days and could involve insurance, housing-industry and a broader range of financial stocks, according to these people. SEC Chairman Christopher Cox indicated last week the rules might be extended to all stocks.
In a short sale, a trader sells borrowed stock in a bet the price will decline and the stock can be profitably repurchased at a lower price. The new rules require specific arrangements to borrow shares in short sales rather than the existing rules, which allow a looser assurance the shares can be located.
The rules appear to have had their intended effect of halting the slide in shares of financial companies such as Fannie Mae, Freddie Mac and Lehman Brothers Holdings Inc. Combined with falling oil prices and encouraging earnings reports from some banks, shares in some of these names have doubled.
(Excerpt) Read more at online.wsj.com ...
The gov’t is ramping out lie after lie. Up until 2 weeks ago the SEC was denying naked short selling was even an issue and refused to investigate it. Then the market in financials tanked and naked shorts are the scapegoat. The cause isn’t naked short selling, which should be eliminated, and has been(a la the 25% financial rally). The issue is there are gobs of financials that are insolvent...from small ones to big ones...Washinton Mutual, Wachovia, Lehman Bros, Fannie, Freddie etc. etc. Now, stock cannot be borrowed to short...why? Cuz Goldman, Morgan Stanley, and every other big brokerage are short. If you ask to borrow stock to short, they won’t lend any to you, because they’re doing the shorting. You’ll never hear this in any congressional hearing. I agree that the market is poised for a possible major decline.
A typical naked short sale scenerio on these exchanges will be:
When investors call a broker to arrange to borrow stock to short, they are aware that short sales are subject to a standard three-day settlement period. This means the sell-side broker has three days to deliver the shares to the investor.
The broker is supposed to locate shares available to short prior to executing a short sale and make a determination that the shares will be delivered to the investor within the three- day settlement window. However, there are certain exceptions to that rule.
Some shares are on an “Easy to Borrow” list. For a stock on that list, investors can execute a short sale and the broker does not specifically have to locate, or contact the source of the shares that are being shorted. The broker has a “blanket” assurance about the borrowing capability for that security.
The naked short seller will sell the stock and then buy it back quickly before the two-day window closes. That way, there’s never a need to deliver the securities or prove they were available.
You get enough people with deep financial resources to cordinate such heavy naked short selling and a heavy increase in volitility, volume, and dramatic swings in stock prices can occur almost instantly.
They are in, and then out very quickly. Rinse, lather, repeat. They don’t sit around with the same positions for weeks or months.
The emergency rule from the U.S. Securities and Exchange Commission would require a short seller to borrow securities before executing a short sale for certain financial institutions. It would also require the investor to deliver the securities by the settlement date.
Selling stocks short is close to being a basic right. It is a simple outgrowth of stock ownership and the right of individuals to contract with one another.
The public has no legitimate interest in preventing short selling. Of course, that has not prevented our intrusive, overreaching, moronic, self-righteous, impudent government from interfering in the past.
It’s not about stopping short selling, it is about ensuring that short sellers
1) have a bona-fide borrow
2) have a T+3 settlement (preferably, imho, a pre-borrow/pre-settle)
2) are not re-shorting shares already borrowed and shorted
To allow short sellers to sell into a market without a real and unique borrow is tantamount to market fraud because it increases the supply of “shares” (which they are actually not, they are ‘share entitlements’ which are not registered securities according to the letter of the law). Economics 101 teaches that the result of increased supply of a commondity without a commensurate increase in demand usually results in a declining price. So as long as the shorts do not cover, or settle their borrow, or do not secure bona-fide and unique borrows, they succeed in creating inflation for ‘shares’ in the which in almost every case results in devaluation of the stock price.
Short sell is a really good thing, I do not think anyone disagrees with this... As said over and over and over again on this post, it is NAKED SHORT SELLING that is the problem...
In fact, NORMAL SHORTING has been show to be a stabilizing factor in futures...
http://www.businessjive.com/nss/darkside.html
This is a little more direct about naked short seling....but I couldn’t get the site to load just now when I tried it. But it is EXCELLENT.
Oh, I absolutely agree. Naked shorting is without any question an insider gaming of the system that is destructive to everything it touches except for the perps.
You obviously don't know Chanos and his recently purchased US Congressman Richard Baker that he hired away mid-term as the Chairmam of the House Financial Services Committee on Capital Markets to lobby for hedge-fund swine. Chanos also kept also housed a high-price whore that serviced Eliot Spitzer.
Google him. While you're at hit, google Stephen Cohen, Marc Cohodes and David Rocker as well and see deepcapture.com
Gains from a short sale are due when a stock becomes worthless, cover or not, and are always ST gains regardles of holding period.
It doesn't matter what the law says. Billion dollar hedge funds are above the law. That's why John Mack is walking around free instead of doing time for insider trading and Gary Aguirre was fired from the SEC.
Shorting with no intention of delivering the shares from T+3 is already illegal under the 1934 Securities act.
If I short a put or a call and the put expires worthless, I never cover, right? Think the IRS will let get away with collecting the premium tax free?
Not the same. The bankrupt companies usually end up on the pink sheets and trade OTC as penny stocks, which the hedge funds continue to report as a short position and don't pay tax on.
That's one of the sources of the huge systemic risk. If the SEC required all of the naked-shorts to cover, there isn't enough money remaining in the system to cover all of the naked short shares at even pennies on the dollars. It's all been used to buy mansions in the hamptons, private jets, porsches, high-priced whores, and government officials.
You think hedge funds follow the law and don't cheat the IRS? Google UBS and see why they're in so much trouble. Not only does UBS break the law, but they have the audacity to help other rich Americans hide income from the IRS.
Apologies: The second link I sent you IS Deep Capture...which I profoundy reco you view. (About 1.5 hours)
Good post.
One way in which “naked short selling” occurs is that a large hedge fund manager who is short the common stock desperately wants the price to go down. So he will buy for example 1000 put contracts, which is the equivalent of 100,000 shares. The market maker sells him the puts, but does not want the risk associated with being short puts, so at the same time the Market Maker forces the hedge fund manager to buy 100,000 “shares” from his “inventory” — which in fact is nothing more than a ledger entry. The market maker does not have to have stock to sell the stock they are obliged to make a market and they are entitled to sell “naked” in the course of their duty in making the market.
So the hedge fund manager now has 100,000 “shares” which he can sell into the market to either undermine rallies, or ‘pile on’ on down days, or to churn, or to cover without disrupting the intraday market trading.
This is called “renting the market maker exemption” and is used quite a lot once a stock reaches its threshold in terms of the amount of legitimate shares available for borrow.
This is how shorts can get the upper hand especially over mid-cap stocks with modest sized floats. The supply of shares is artificially increased, and the companies targetted for short sellers are the types of companies that don’t get widespread coverage, have high growth, or large investment backing by long funds and institutions. There just aren’t enough interested longs to drive the shorts out.. in fact in a lot of cases the hedge fund has more cash than the entire market cap of the companies they target.
The vultures are getting ravenous...
Interesting, I wasn’t aware of that mechanism, at least in such size.
That would be because you're mistaken. You don't understand the role of markets or of short sellers.
By far one of the dumbest things I've ever read.
The market cuts both ways, don’t worry. These are commodity futures, and people are making investment decisions based on future supplies. All we have to do is talk about higher production, (as Bush did when he lifted the offshore Executive Order) and the market responds. Once Congress gets off thier obstructionist asses, oil will tank fast.
So it's your allegation that everyone involved in the hedge fund industry is a crook?
I didn't know they made idiots that big.
In reality, naked short or no naked short, no single hedge fund player has enough money to "push" the market in any direction for more than a few seconds and that few seconds wont be enough to recoup profits on a big directional position.
This is the kind of thing that high school kids believe drive markets... the back rooms... the secret deals... but none of it exists in reality. It's the fodder of conspiracy theories, but it's all bunk. Oswald acted alone, and none of this bull has an impact on market prices.
Equity being created 'ex nilo', just like a money supply expansion from bank lending.
The issue here is whether this is worse than a legal prohibition spreading more government restrictions into the market. Many argue (falsely) that bank lending always causes inflation. The fact is that deflation can even happen during money creation from bank lending, just like 'naked shorts' can occur with increasing stock prices.
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