SEC limits Naked short selling

Today the SEC put a 30 day moratorium on naked short selling Fannie Mae and Freddie Mac stock. While this is great move for the SEC, it is woefully inadequate.

SEC bans naked short sales of financial firms

Naked short selling is already prohibited by law. To say that they now plan to prohibit it for 30 days on a couple stocks is ridiculous. It is an admission that they have not been enforcing the law and most likely plan to let it continue.

For reference, investors are allowed to sell stock they don't own in hopes that it will go down. This is called selling short. In order to short you are required to borrow the shorted shares from someone who owns them. This is the law. Naked short selling occurs when those who short do not validly borrow shares. In other words they sell counterfeit shares. This increases the number of shares available in the market and ultimately this makes the stock fall due to false supply and demand.

In most cases the naked short selling occurs against companies who need financing and with naked short sellers driving down the stock, financing becomes very hard to come by. If it does come, it comes at a very steep price, which in either event ends up forcing the company into Bankruptcy or a very tough operating enviroment. Most often the loan sharks work in unison with the short sellers so that they can eventually own for themeselves the valuable assets of the company.

Aiding the naked short sellers is the abolishment of the uptick rule. The uptick rule only allowed shorting on an uptick of the share price. This prevented from large scale shorters to short a large number of shares at market prices thus driving down the price of the stock dramatically. The abolishment of the uptick rule by the SEC has made it way to easy to maniplulate stock prices down, especially in an enviroment where there isn't much buying.

So while today's announcement sounds fine, it proves the point that naked short selling is rampant and that the SEC doesn't care and doesn't plan to do anything about it, except on a temporary basis. Given the lack of regulation it would not surprise me if there are actually multiples of the outstanding stock of each company trading in the markets. The brokerages are the ones required to enforce the rules so it is basically on their backs. If they were forced to cover all these short shares the clients wouldn't have enough money and the brokerages would go bust. Thats why they don't enforce it. Instead they let the little guy take it on the chin in their 401k's and IRA's.

I say screw the brokerages. Make them cover. Let them go bust for perpetrating such high fraud.

On a reported basis there are currently 370 stocks currently listed as having naked short positions. Reg SHO List I imagine the real numbers are much higher.

More info on Naked Short Selling
Sanity Check - Naked Short Selling

Check it out and ask your elected officials why Chairman Cox is not enforcing the naked short selling rules for all public companies. Tell them you want the uptick rule reinstituted. Tell them you want some integrity restored to the US Markets. And while you are at it, tell them about all the other things that are wrong with America.

Yay, the SEC is actually going to enforce already existing laws, let's give them more power along with the Fed!

Did you notice that they exempted market makers from the "new" rule/enforcement action? As someone who has been more likely to short than long for a while now, I'm actually for this enforcement (us retail shorts couldn't do it naked anyway). Naked shorting against thinly traded stocks with small floats is a big deal, the CEO of Overstock.com has been screaming about this for a while now, but all the 19 or so stocks (including Fannie and Freddie) that this applies to have large floats outstanding and are very liquid. I've been hearing that this new enforcement has made it near impossible to find shares to short at all for these stocks, and is probably a strong reason why the financials have rallied so hard lately. Like I said I'm not totally against this, but I think it has more to do with stopping the hemoraging of financials than anything else. Want to see what a market that doesn't allow short selling looks like, look at the performance of the Chinese market over the past year. With fewer shorts in the game there will be no floor under stocks. When the price falls and shorts cover to lock in profits it puts some support to the price. Also, you won't see those massive reversals from short covering rallys.

The only consensus I've heard about the removal of the uptick rule is that it has increased volatillity. The uptick rule went away at about the same time that the credit crisis hit so it is real easy to blame its removal for the volatillity since instead of the credit crisis. Anyway, the uptick rule is easilly manipulated all you have to do is put your short order in one account, then in another account at a different brokerage buy a small amount of stock theres your uptick.

If I'm not mistaken, there is also a new rule being debated that large short positions should be disclosed like large long positions are currently. I'm all for that and would love to see who the IB's and hedgies are shorting heavily.

While MM's are allowed the privilege (exclusion), to legally NS as an liquidity measure...an entire thread could be devoted the borderline, and highly suspect games they often play for profit. Please...Somebody Stop Me!

New reg, or not, I'm pretty sure MM's are still bound to comply with the Regulation SHO 13-day rule, ie...if a company has been on the SHO Threshold List for 13 consecutive days...no MM exclusion. While even the gubmn't recently alluded to 1BB FTD's in the system...I side more with Overstock's Patrick Byrne...8 - 10BB...with only a fraction excusable as 'clerical errors'.

The obvious problem with this 'new' anti-NS reg is it's selectivity...affording additional protection/support to badly managed institutions with the weakest fundamentals...while allowing other stocks, or entire sectors...high value JPM's for example, to be repeatedly taken to the woodshed by shadowy entities trading under the alias: Anonymous Broker

One other inconsistency: The SEC re-asserted their condemnation of intentional false 'rumor mongering' to negatively affect share-price...not a word about false 'rumor mongering' to positively affect share price...especially from company CEO's.

MER is one of the 19 banks afforded extra protection...NS Merrill: Go To Jail!

After all the reasurances to the contrary...MER announced a new stock offering today, needing to raise 8.5BB in additional capital (dilution). Tell me folks...do you think the comments below, made by MER's CEO this year, may end-up costing stock-holders more than the lousy $100,000 Martha did time for?

Maybe there outta-be-a-law

FACTBOX: Quotes from Merrill's Thain on capital needs


[edit on 29-7-2008 by OBE1]