Taking it in the shorts
The practice of selling a stock short is somewhat counterintuitive, since you’re basically selling something you don’t own, but it’s long since been accepted as a component of the investor’s tool kit.
In recent years, investors, without SEC interference, have refined a stripped-down version of short sales:
In short-selling, a trader borrows shares and then sells them, hoping to profit by buying them at a lower price later to close out the loan. Under existing rules, traders have to confirm that the shares are at least available for a broker or dealer to borrow (the locate rule), and they are supposed to conform to the conventional three-day window to deliver shares to the trader on the other side of the transaction.
In naked short-selling, the locate rule and the delivery rule go out the window, since the trader doesn’t borrow the shares to begin with. That, and the absence of a rule requiring short sales to be done on a stock’s uptick, gives plenty of ammunition to a trader intent on driving a stock into the ground.
Suspecting that this sort of thing has contributed to the tumult on Wall Street this month, the SEC, starting today, will impose penalties on investors who run afoul of the locate rule or the delivery window. Some people are wondering why they weren’t doing this all along:
[Overstock.com CEO Patrick] Byrne has waged a three-year campaign to get the SEC to tighten borrowing and trade settlement rules and, perhaps more urgently, actually enforce them.
But there’s this:
Until very recently, the whole issue was dismissed by some as the fantasy of small-company chief executives who were trying to pin the blame for their management failures on mythical market forces.
Now that big companies are failing — but never mind, you can see where this is going.
Mel »
18 September 2008 · 6:20 pm
Hey, here’s a proposed SEC rule that’ll never happen:
a) If you want to buy a share of stock, buy the damn thing.
b) If you want to sell a share of stock, then sell it. But first, you must own the friggin thing.
Naked short selling? Short selling a stock that you don’t own and haven’t even borrowed??!?
CGHill »
18 September 2008 · 6:45 pm
Remember margin calls? Nowadays if you’re not leveraged up to your clavicle you’re not a serious trader. I rather expect a lot of them to complain if they’re told they can’t play with Other People’s Money.
McGehee »
18 September 2008 · 6:59 pm
I want to sell short a certain well-known bridge…