This is remarkable news, since naked short selling is already illegal. With the minor exception that the Regs allow for limited naked short selling by market makers. Here are the 2005 technicals from the SEC on the banning of 'naked' short sales.
From the SEC, Key Points About Regulation SHO:
Regulation SHO
Compliance with Regulation SHO began on January 3, 2005. Regulation SHO was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938. Some of the goals of Regulation SHO include:
Establishing uniform "locate" and "close-out" requirements in order to address problems associated with failures to deliver, including potentially abusive "naked" short selling.
Locate Requirement: Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.
This "locate" must be made and documented prior to effecting the short sale...
Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price. This manipulative activity, in general, would violate various securities laws, including Rule 10b-5 under the Exchange Act. . ....
Second, there is no indication at all that this crisis in anyway was caused by naked short sellers, or short sellers with their clothes on, for that matter.
Bottom line, Cox is a poseur.
UPDATE: The SEC has issued a Press Release saying that it has "enhanced investor protections against naked short selling." It includes this somewhat deceiving statement from Chairman Cox, which is probably where the wire services picked up the idea that Cox says he was going to ban naked short sellng. It doesn't say that, but it comes mighty close, and certainly implies a much bigger step than the SEC actually took:
"The SEC's mission to protect investors, maintain orderly markets, and promote capital formation is more important now than it has ever been," said SEC Chairman Christopher Cox. "Today's Commission action aims to stop unlawful manipulation through 'naked' short selling that threatens the stability of financial institutions. We will continue our vigorous commitment to investors by working within the SEC and in close cooperation with our regulatory counterparts to promote the continued health and vibrancy of our markets."
The difference between the old rules and the new ones. With the old ones:
Regulation SHO...requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.
The new order says:
The SEC's order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement.
Basically, the SEC is turning brokerage firms into fast food joints. Pay before you eat (Borrow the stock before the order goes in.), as opposed to paying after you sit down and eat (Borrow the stock after you place your order). Not a big difference, since brokers almost always check to see that there is stock to borrow.
Further, you always still had to pay, i.e. deliver borrowed stock, and naked short-selling to 'manipulate' a stock was always illegal.
Oh yeah, this is really the clincher that would have stopped the mortgage crisis, the Bear Stearns crisis,the Freddie and Fannie crisis, Global Warming and the Madonna/Alex Rodriguez Crisis. I'm real glad Cox thought of it. I never would have.
Hi there,
ReplyDeleteYour assertion that naked short selling is already illegal is incorrect.
Naked short selling is simply selling stock (or options, or futures) that you don't own and have not borrowed. At some future date, such a short must be 'covered' by buying back the stock that you sold short.
What is illegal is FAILURE TO COVER; if you sell stock short, with a due date for delivery (a short sale is a promise to deliver stock to your counterparty), and you fail to provide the buyer with the stock on the due date, you may be guilty of securities fraud.
There is a saying that dates from the Livermore era about short sellers...
"Themn that sells what isn't his'n
must buy it back or go to pris'n."
In any case, of COURSE the head of the SEC is a poseur - all bureaucrats are poseurs. All this falderol about short sellers (of which I am unabashedly one) is so much eyewash for idiots.
It is much like the garbage being spewed lately about 'speculators' driving up the price of oil. Onions are far more volatile than oil, and speculation in them is illegal.
This is typical bureaucratic eyewash - the government wants there to be some excuse as to why markets are falling (hint: dont go around the planet blowing up big chunks of oil rich real estate... run a prudent iscal policy...see how that works for a while). AS far as politicans are concerned, it can't POSSIBLY be due to their mismanagement, malfeasance and drunken-sailor spending habits, coupled with the tail end of a speculative bubble fuelled by Easy Al Greenfarb (or Blausplatt, or whatever the idiot's name is) and continued by Ben Gedanke.
Cheerio
GT
Cheerio
GT
Generally, names in the index are always easy to borrow, so for banks stocks it probably would make a big difference in a rumor-induced panic.
ReplyDelete@GT
ReplyDeleteWhat is illegal is FAILURE TO COVER; if you sell stock short, with a due date for delivery (a short sale is a promise to deliver stock to your counterparty), and you fail to provide the buyer with the stock on the due date, you may be guilty of securities fraud
You almost sound like Cox, Wenzel's point is that if you short a stock and donit deliver at settlement that is illegal according to the the SEC based on rule 1ob-5
@annonymous
ReplyDeleteSince they are easy to borrow, it means the change in the order by the SEC won't have any impact.
It might matter if a stock was hard to borrow, since it might not be there to borrow---which occurrs most of the time with thinly traded stocks, not the stocks Cox is concerned about.
Further, most brokerage firms almost always check to make sure there is stock before they execute a short sale.
Cox's order s useless.
Memo to Cox: Little late there buck. No point applying bandaid to femoral artery after it is severed. It isn't like the wasn't a planned collapse. Wealth is never lost....just transfered.
ReplyDeleteThey're "easy to borrow" under normal market circumstances. But perhaps he's anticipating a panic, during which much more could be shorted than is really available (or in extreme cases, more than really even exists).
ReplyDeleteSpeaking from personal experience (in Japan), brokerages don't check availability in real time unless it's required by law (it's not here).
Failing to cover or otherwise settle a transaction is, btw, an everyday occurrence, and there are mechanisms set up to cope with it.
In the U.S. brokers check all the time.But perhaps he's anticipating a panic, during which much more could be shorted than is really available (or in extreme cases, more than really even exists).
ReplyDeleteWhat broker wouldn't make sure there is stock during such a volatile period. He would never expose himself to such high risk.