short selling

• Short Selling

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Stock market - Short selling

1 Hence most markets either prevent short selling or place restrictions on

when and how a short sale can occur


Australian Securities Exchange - Short selling

1 Short selling of shares is permitted on the ASX, but only among

designated stocks and with certain conditions:



1 Many brokers do not offer short selling to small private investors. LEPOs can serve as an equivalent,

while Contract for difference|contracts for difference (CFDs)

offered by third-party providers are another alternative.



1 In September 2008, ASIC suspended nearly all forms of short selling due to concerns about market stability in the ongoing

Financial crisis of 2007–2010|global financial crisis.[http://www.asic.gov.au/asic/asic.nsf/byheadline/08-

204+Naked+short+selling+not+permitted+and+covered+short+selling+to+be+disclosed?openDocument Naked short selling not

permitted and covered short selling to be disclosed], ASIC, 19 September

2008[http://www.asic.gov.au/asic/asic.nsf/byheadline/08-205+Covered+short+selling+not+permitted?openDocument

Covered short selling not permitted], ASIC, 21 September 2008 The ban on covered short selling was lifted in May

2009.[http://www.asic.gov.au/asic/asic.nsf/byheadline/09-94+ASIC+lifts+ban+on+covered+short+selling+of+financial+securities?openDocument ASIC lifts ban on covered short selling of

financial securities], ASIC, 25 May 2009


Overstock.com - Naked short selling campaign

1 The company has received attention stemming from CEO Patrick Byrne's battle against alleged naked short

selling of his company's shares


Overstock.com - Naked short selling campaign

1 SEC Chairman Christopher Cox called abusive naked short selling “a fraud

that the commission is bound to prevent and to punish.”


Overstock.com - Goldman Sachs documents Naked Short Selling

1 In May, 2012, Matt Taibbi of Rolling Stone wrote an article, Accidentally Released -

and Incredibly Embarrassing - Documents Show How Goldman et al. Engaged in

'Naked Short Selling' [http://www.rollingstone.com/politics/blog

s/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-

naked-short-selling-20120515]


Overstock.com - Goldman Sachs documents Naked Short Selling

1 The material released purports to show that at the highest levels within Goldman Sachs, naked short selling

was known, facilitated, and encouraged, and that Goldman Sachs would reveal non-public information about the overall positions of naked

short selling on specific businesses to its large hedge fund partners.


List of Dutch inventions and discoveries - Short selling (1609)

1 Financial innovation in Amsterdam took many forms. In 1609, investors

led by Isaac Le Maire formed history's first bear syndicate to

engage in short selling, but their coordinated trading had only a

modest impact in driving down share prices, which tended to be robust

throughout the 17th century.


Naked short selling

1 'Naked short selling', or 'naked shorting', is the practice of Short (finance)|short-selling a financial

instrument|tradable asset of any kind without first Securities lending|

borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale


Naked short selling

1 Short selling is used to anticipate a price fall, but exposes the seller to

the risk of a price rise.


Naked short selling

1 In 2008, the U.S. Securities and Exchange Commission|SEC banned what it called

abusive naked short selling in the United States, as well as some other jurisdictions, as a method of driving down share prices.

Failing to deliver shares is legal under certain circumstances, and naked short selling is not per se illegal. In the United States, naked short selling is covered by

various SEC regulations which prohibit the practice.


Naked short selling

1 Critics, including Overstock.com's Patrick M. Byrne, have advocated for

stricter regulations against naked short selling.


Naked short selling

1 Effective September 18, 2008, amid claims that aggressive short selling had played a role in the failure of

financial giant Lehman Brothers, the SEC extended and expanded the

rules to remove exceptions and to cover all companies, including

market makers.


Naked short selling - Normal shorting

1 Short selling is a form of speculation that allows a trader (finance)|trader to take a position (finance)|negative

position in a stock of a company


Naked short selling - Naked shorts in the United States

1 Naked short selling is a case of short selling without first arranging a borrow. If the stock is in short supply, finding shares to borrow can be difficult. The seller may also decide

not to borrow the shares, in some cases because lenders are not available, or because of the costs of lending. When shares are not borrowed within the clearing time period and the short-seller does not tender shares to the buyer, the trade is considered to have failure

to deliver|failed to deliver.


Naked short selling - Naked shorts in the United States

1 Fail reports are published regularly by the

SEC,[http://www.sec.gov/foia/docs/failsdata.htm SEC Fails-to-Deliver Data] and a sudden rise in the number of fails-to-deliver will alert the SEC to

the possibility of naked short selling


Naked short selling - Extent of naked shorting

1 The reasons for naked shorting, and the extent of it, have been disputed for several years before the SEC's

2008 action to prohibit the practice. What is generally recognized is that

naked shorting tends to happen when shares are difficult to borrow.

Studies have shown that naked short selling also increases with the cost of

borrowing .https://store.theartofservice.com/the-short-selling-toolkit.html


1 In recent years, a number of companies have been accused of using naked shorts in

aggressive efforts to drive down share prices, sometimes with no intention of ever

delivering the shares. These claims argue that, at least in theory, the practice allows an unlimited number of shares to be sold short. A Los Angeles Times editorial in July 2008 said that naked short selling enables speculators to drive down a company's stock by offering an overwhelming number of shares for sale.



1 Before 2008, regulators had generally downplayed the extent of naked shorting in the

US. At a North American Securities Administrators Association (NASAA) conference

on naked short selling in November 2005, an official of the New York Stock Exchange stated

that NYSE had not found evidence of widespread naked short selling. In 2006, an

official of the SEC said that While there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without

incident.https://store.theartofservice.com/the-short-selling-toolkit.html


1 Of all those that do not, 85% are resolved within 10 business days and

90% within 20. That means that about 1% of shares that change hands daily, or

about $1 billion per day, are subject to delivery failures, although the SEC has

stated that fails-to-deliver can occur for a number of reasons on both long and short

sales, and accordingly that they do not necessarily indicate naked short selling.



1 In 2008, SEC chairman Christopher Cox said that the SEC has zero tolerance for abusive naked short-selling

while implementing new regulations to prohibit the practice, culminating in the September 2008 action following the failures of Bear Stearns and Lehman

Brothers amidst speculation that naked short selling had played a contributory

role.[http://www.sec.gov/news/press/2008/2008-204.htm SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses], Press release,

Securities and Exchange Commission, September 17, 2008 Cox said that the rule would be designed to

ensure transparency in short-selling in general, beyond the practice of naked short-selling.


Naked short selling - Claimed effects of naked shorting

1 Short selling helps prevent “irrational exuberance” and

bubbles



1 However, the SEC has disclaimed the existence of counterfeit shares and

stated that naked short selling would not increase a company's

outstanding shares



1 Robert J. Shapiro, former undersecretary of commerce for

economic affairs, and a consultant to a law firm suing over naked shorting, has claimed that naked short selling has cost investors $100 billion and driven 1,000 companies into the

ground.



1 Securities and Exchange Commission chairman Christopher Cox said there was no unbridled naked short selling

in financial issues.


Naked short selling - Regulation SHO

1 The SEC enacted Regulation SHO in January 2005 to target abusive naked short selling by reducing failure to deliver (finance)|failure to deliver securities, and by limiting the time in which a broker can permit failures to deliver.

[http://www.sec.gov/spotlight/keyregshoissues.htm Key Points About Regulation SHO], Security and Exchange Commission In addressing the first, it stated that a broker or dealer may not accept a short sale order without having first borrowed or identified the stock being sold


Naked short selling - Regulation SHO

1 The Motley Fool, an investment website, observes that when a stock

appears on this list, it is like a red flag waving, stating 'something is wrong here!' However, the SEC clarified that appearance on the

threshold list does not necessarily mean that there has been abusive

naked short selling or any impermissible trading in the stock.


Naked short selling - Developments, 2007 to the present

1 SEC Chairman Christopher Cox called naked short selling a fraud that the commission is bound to prevent and

to punish



1 Burns, [http://online.wsj.com/article/SB1204

68499197912561.html?mod=googlenews_wsj SEC Proposes Teeth for Short-Selling Rules], Wall

Street Journal, March 5, 2008[http://www.reuters.com/article/etfNews/idUSN0446331920080304 SEC proposes tougher 'naked' short

selling rules], March 4, 2008, Reutershttps://store.theartofservice.com/the-short-selling-toolkit.html


1 But even with respect to those stocks the SEC soon thereafter announced there would be an exception with

regard to market makers.Ivy Schmerken,

[http://www.wallstreetandtech.com/advancedtrading/showArticle.jhtml?

articleID=209101993cid=RSSfeed_WST_News SEC Short Sale Rule Could Create a Bubble in Financial Stocks], Wall Street Technology, July 20, 2008

SEC Chairman Cox noted that the emergency order was not a response

to unbridled naked short selling in financial issues, saying that that has

not occurred



1 As a result, options market makers will be treated in the same way as all

other market participants, and effectively will be banned from naked

short selling.[http://www.sec.gov/news/pre

ss/2008/2008-204.htm SEC Issues New Rules to Protect Investors

Against Naked Short Selling Abuses], Securities and Exchange

Commission, September 17, 2008https://store.theartofservice.com/the-short-selling-toolkit.html


1 The Securities Industry and Financial Markets Association of Washington and New York said they would take

legal action if the measure passed.Sara Hansard,

[http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20081102/

REG/311039962/1027/HEDGEFUNDS SIFMA to sue if short-sale vote wins; Naked short selling on South Dakota ballot], InvestmentNews, November

2, 2008 The voters defeated the initiative.



1 In July 2009, the SEC, under what the Wall Street Journal described as intense political pressure, made permanent an interim rule that obliges brokerages to promptly buy or borrow securities when executing a short

sale. The SEC said that since the fall of 2008, abusive naked short selling had been reduced by 50%, and the number of

threshold list securities (equity securities with too many fails to deliver) declined from

582 in July 2008 to 63 in March 2009.


Naked short selling - Regulations outside of the United States

1 Several international exchanges have either partially or fully restricted the

practice of naked short selling of shares



1 In March 2007, the Securities and Exchange Board of India (SEBI),

which disallowed short sales altogether in 2001 as a result of the

Ketan Parekh affair, reintroduced short selling under regulations

similar to those developed in the United States. In conjunction with this rule change, SEBI outlawed all

naked short selling.https://store.theartofservice.com/the-short-selling-toolkit.html


1 The ban was subsequently extended through October 2010.Japan to

extend naked short selling ban to Oct



1 In August 2011, France, Italy, Spain, Belgium and South Korea temporally

banned all short selling in their financial stocks, while Germany

pushed for an eurozone-wide ban on naked short selling.


Naked short selling - Regulatory enforcement actions

1 SHO for options market makers to impermissibly engage in naked short

selling.[http://www.amex.com/atamex/regulation/discipline/2007/BArensteinALA_Decision_072007.pdf Amex Discplinary Decisions, ALA Trading]

[http://www.amex.com/atamex/regulation/discipline/2007/SArensteinSBA_Decision_072007.pdf

Amex Discplinary Decisions, SBA Trading][http://www.amex.com/atamex/news/press/sn_re

gAA_073107.htm American Stock Exchange announcement of disciplinary action, July 31,

2007]


Naked short selling - Regulatory enforcement actions

1 In May 2013, lawyers acting for Goldman accidentally released an unredacted

document revealing compromising internal discussions regarding Naked Short Selling.

e.g. Fuck the compliance area – procedures, schmecedures,

http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-

embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-

selling-20120515


Naked short selling - Litigation and DTCC

1 The Depository Trust and Clearing Corporation (DTCC) has been

criticized for its approach to naked short

selling.[http://www.dtcc.com/news/press/releases/2007/wsj_response.php?lpos=3lid=3 DTCC response to Wall Street Journal Article], Press release,

July 6, 2007



1 DTCC has been sued with regard to its alleged participation in naked

short selling, and the issue of DTCC's possible involvement has been taken up by Senator Robert Foster Bennett|Robert Bennett and discussed by the

NASAA and in articles in the Wall Street Journal and

Euromoney[http://www.euromoney.com/Article/1001047/Naked-shorting-The-curious-incident-of-the-shares-

that-didnt-.html Naked shorting: The curious incident of the shares that

didn't exist], April 2005



1 Senate floor that the allegations involving DTCC and naked short

selling are serious enough that there should be a hearing on them with

DTCC officials by the Senate Banking Committee, and that banking

committee chairman Christopher Dodd has expressed a willingness to

hold such a hearing.[http://bennett.senate.gov/press/record.cfm?id=279519 Senator

Bennett Discusses Naked Short Selling on the Senate Floor], website

of Senator Bennett, July 20, 2007, accessed 2009-02-21



1 A suit by Electronic Trading Group, naming major Wall Street

brokerages, was filed in April 2006 and dismissed in December 2007.

[http://money.cnn.com/news/newsfeeds/articles/djf500/200712201132DO

WJONESDJONLINE000859_FORTUNE5.htm US Judge Dismisses Naked Short Selling Suit Vs. Brokers], Dow Jones

News Service, Dec. 20, 2007https://store.theartofservice.com/the-short-selling-toolkit.html


1 Two separate lawsuits, filed in 2006 and 2007 by NovaStar Financial, Inc.

shareholders and Overstock.com, named as defendants ten Wall Street

prime brokers. They claimed a scheme to manipulate the

companies' stock by allowing naked short selling. A motion to dismiss the

Overstock suit was denied in July 2007.[http://www.bloomberg.com/ap

ps/news?pid=conewsstoryrefer=conewstkr=O

STK:USsid=aPgnC8667Qbo Overstock Shares Rise on Court

Ruling in Broker Suit], Bloomberg News, July 18, 2007



1 The suits also challenged DTCC's stock-borrow program, and were dismissed.Court Rules Against

Company Claiming Illegal Short Selling by Carol Remond, Dow Jones

News Service, March 11, 2009


Naked short selling - Studies

1 A study of trading in initial public offerings by two SEC staff

economists, published in April 2007, found that excessive numbers of fails

to deliver were not correlated with naked short selling. The authors of

the study said that while the findings in the paper specifically concern IPO trading, The results presented in this

paper also inform a public debate surrounding the role of short selling

and fails to deliver in price formation.


Naked short selling - Studies

1 A Government Accountability Office study, released in June 2009, found

that recent SEC rules had apparently reduced abusive short selling, but

that the SEC needed to give clearer guidance to the brokerage industry.


Naked short selling - Media coverage

1 Some journalists have expressed concern about naked short selling, while others contend that naked

short selling is not harmful and that its prevalence has been exaggerated

by corporate officials seeking to blame external forces for internal problems with their companies.



1 Others have discussed naked short selling as a confusing or bizarre form

of trading.Alex Blumberg (editor),[http://www.npr.org/blogs/money/2008/09/catch_it_this_weekend_naked_sh.html Catch It This Weekend: 'Naked Short Selling'], NPR, September 12,

2006



1 The Los Angeles Times called the practice of naked short selling hard

to defend, and stated that it was past time the SEC became active in

addressing market manipulation.



1 But it said the emergency order to bar naked short selling won't do

much harm, and said Critics might say it's a solution to a nonproblem,

but the SEC doesn't claim to be solving a problem



1 During a May 2010 discussion on the inclusion of 'counterfeiting' in the

charges filed against Icelandic bankers, the host Max Keiser

speculated that the charge might refer to naked short selling because naked short-selling is the same as counterfeiting, in that it is selling

something that doesn't exist.


Short (finance) - Naked short selling restrictions

1 Naked short selling is the practice of short-selling a tradable asset without

first borrowing the security or ensuring that the security can be

borrowed ndash; it was this practice that was commonly restricted


Short (finance) - Naked short selling restrictions

1 Worldwide, economic regulators seem inclined to restrict short selling to decrease potential downward price

cascades


Short (finance) - Short selling terms

1 If however, shares are being created through naked short selling, fails data must be accessed to assess accurately the true level of short

interest.


Short (finance) - Views of short selling

1 Advocates of short selling argue that the practice is an essential part of the price discovery mechanism. Financial researchers at Duke

University said in a study that short interest is an indicator of poor future stock performance (the self-fulfilling aspect) and that short sellers exploit

market mistakes about firms' fundamentals.



1 Commentator Jim Cramer has expressed concern about short

selling and started a petition calling for the reintroduction of the uptick rule. Books like Don't Blame the

Shorts by Robert Sloan and Fubarnomics by Robert E. Wright suggest Cramer exaggerated the

costs of short selling and underestimated the benefits, which

may include the ex ante identification of asset Stock market

bubble|bubbles.



1 Several studies of the effectiveness of short selling bans indicate that

short selling bans do not contribute to more moderate market

dynamics.Marsh I and Niemer N (2008) The impact of short sales

restrictions


Short selling

1 Historically, short selling is going against the upward trend of the stock market


Short selling

1 Short selling is most commonly done with instruments traded in Financial market|public securities, futures or

currency markets, due to the liquidity and real-time price dissemination characteristic of such markets and because the instruments defined within each class are Fungibility|

fungible.


Manuel P. Asensio - Short selling

1 As an activist short seller, Asensio short selling|sold short companies he believed to be engaging in fraud, and

was noted for publicizing his negative opinions. He made claims of fraud or misrepresentation involving 26 companies as of 2004. According to Asensio, of the 26 companies he publicly campaigned against, the

average decline in value was around 86 percent, wiping out $30 billion in market value, from which he grossed

millions in profits.


Manuel P. Asensio - Short selling

1 His short selling activities and public statements resulted in numerous lawsuits


HBOS - 2008 short selling and credit crunch

1 In March 2008, HBOS shares fell 17 percent amid false rumours that it had asked the Bank of England for emergency funding. The Financial Services Authority conducted an investigation as to whether short

(finance)|short selling had any links with the rumours. It concluded that there was no deliberate attempt to

drive the share price down.https://store.theartofservice.com/the-short-selling-toolkit.html

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