Naked Short Selling

Well it’s taken catastrophe and carnage across Wall Street but maybe, just maybe the SEC plans on doing it’s job. There appear to be plans to strengthen action against naked short selling – sadly there are already regulations against this on the books but they appear to be so loose and very few respect it. There are entire lists of stocks on each exchange filled with stocks that are targets of this ploy, but nothing is done about it. We’ll see if there is any teeth to this new plan – but without regulation rules are meaningless.

Again, short selling is fine, dandy and fair. Naked short selling is supposed to be against the rules, but on Wall Street the rules are bent often. Only when it appears to bring down the system do "regulators" wake up.

• U.S. securities regulators plan to take action on abusive short selling of stock before the end of the week, a source briefed on the matter said on Monday.
• The Securities and Exchange Commission will likely adopt proposals to strengthen its short-selling rule, including one that deems it fraudulent for customers to deceive broker-dealers about their intention or ability to deliver securities in time for settlement.
• The SEC will also move forward with a plan that would shorten the time in which traders must buy back stock if they fail to deliver a security by the settlement date.
• A "naked" short sale occurs when an investor sells stock that has not yet been borrowed. Broker-dealers will sometimes accidentally fail to deliver stock to investors who have arranged to borrow it. If this is done intentionally, it is illegal. (it’s amazing how many "accidents" happen on a daily basis over millions of shares)

WSJ take

• Securities and Exchange Commission Christopher Cox assured Wall Street chiefs amid a series of frantic weekend meetings over the fate of Lehman Brother Holdings Inc. that the SEC would institute protections soon, this person said.
• The SEC is expected to move up the timeline for finalizing two rules as soon as this week, up from late September. The rules, which require the approval of the SEC commission would stiffen requirements on certain players involved in short-sales and make it illegal for a trader to mislead his broker about locating stock to short and then failing to deliver it within three business days, this person said.
• The idea behind the rules is to rein in traders who borrow stock to short and then are late or never return it. Market participants say that can have a cascading effect on a company’s stock.
• Many traders want the SEC to institute a rule that allows traders to short only on an uptick in the stock’s price. The SEC removed that rule recently and traders blame it for recent volatility and record levels of shorting.

Again, if you are just a no name small cap stock who is being relentlessly naked short sold in this market – we don’t care. But if you are a financial, you have the ear of every government official in D.C. – when you are targeted the same way…. then it matters. But even then, only after much of the damage has been done. The government at it’s normal finest.