So who and what is responsible for creating all the naked shorts? Market makers abusing their short-selling exemption? Brokers in foreign markets where naked shorting is legal? Hedge fund managers manipulating the market? Has this been facilitated over the last couple of decades, by the shift to the vast majority of shares being held in street name? The creation of, flaws in, or abuses of, the DTCC's stock-borrow program?
In case you weren't aware of it, the SEC is in the process of phasing out paper certificates, totally. In a 2004 Concept Release: Securities Transactions Settlement, the SEC called for comment on methods to improve the safety and operational efficiency of the U.S. clearance and settlement system and to help the U.S. securities industry achieve straight-through processing. You can read the resulting comments here.
The SEC's paper blithely assumes they are trying to shorten the settlement time for a trade from 3 days to 1 or even less. It does not address the fact that the present system sometimes fails totally and any new system should be designed to eliminate the flaws in the old one.
Read more via the links, below.
For recent developments and discussion, go to the CEO Council website and click on "Council Initiatives", then read the section on "Predatory Trading".
Key Points About Regulation SHO from the SEC. Includes links to Threshold Security Lists.
Buyins.net -- compiles the data on the Threshold Lists and expands upon them. Finds out at what prices these stocks have been shorted, what amounts have been shorted and with enough investigation, who is illegally shorting the stocks.
Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation by John D. Finnerty, Professor of Finance, Fordham University. Note: This paper is in PDF format.
To get more information that that included in Reg. SHO, Pink Sheets petitioned the SEC to cause the amendment of NASD Rule 3360 and require NASD broker dealers to maintain a record of total "short" positions in all customer and proprietary firm accounts in all publicly traded equity securities as well as report this information to the NASD for public dissemination of the short positions by security. (At the present time OTCBB and Pink Sheet companies are not included in this type of reporting.) Here is the letter from R. Cromwell Coulson, Chairman of The Pink Sheets, asking you to support the petition. Subsequently the SEC did, indeed, propose such a rule change.
Regulation SHO and the New Short Sale Locate and Delivery Requirements By the National Society of Compliance Professionals. Spells out the SEC regulations. Note: This article is in PDF format.
National Coalition Against Naked Shorting (NCANS).
Online PetitionAgainst Naked Shorting.
Investrend's FinancialWire Search Page where you can type in "naked" to get the many articles Gayle Essary has written on the subject. And here's a quick link to the reason you won't see these articles at Yahoo Finanance, MarketWatch, or Investor's Business Daily. (Note: to access FinancialWire archives you'll have to do a free sign-up.)
The DTCC Responds on Naked Short Selling.
You can see a summary of key legislators concerned about the issue at America Needs To Know.
Here is a position paper from the Advanced Small Business Alliance (ASBA).
Links to more articles on the subject at RGM.
Below are extremely truncated excerpts from a very interesting conversation posted on a discussion board. An investor decided to experiment by trying to buy a shorted stock from 2 different sources. Here's what happened. Read the whole exchange for many more details.
Dennis Smith Posted: "I thought it might be interesting to prove a short position first hand by purchasing shares in (GLKC) a company that reportedly already had over 100% of it's shares sold (and "legally" documented).... Just after settlement date (three days later), I requested certificates from both brokers. The cert ordered through Ameritrade appeared in three weeks....
Getting the Wells Fargo cert however has become predictably (and almost amusingly) problematic....":
From Wells Fargo: ...We are researching your request and will contact you directly as soon as we have completed our investigation....
From Dennis Smith: ...It's been five days. What kind of "investigation" are you doing?
From Wells Fargo: ... We were awaiting full delivery of the shares from the transfer agent. Unfortunately, due to some unusual circumstances, this took longer than we expected.
From Dennis Smith: What exactly are the "unusual circumstances"?
From Wells Fargo: ...The broker/dealer from whom your shares were purchased is short 5,000,000 shares versus the street. A broker/dealer is allowed to sell shares which they do not own, which they will buy at a later date and deliver.
From Dennis Smith: Exactly how later is "later"? Is not a 5,000,000 short position cause for alarm? Who is the subject "broker/dealer" from whom you acquired my "shares" and what is that dealer telling you about his apparent failure to deliver? As I understand it, a shareholder is entitled to physical certificates in every event, assuming the buy was legitimate.
From Wells Fargo: ...The other broker/dealer who is short shares of your security is E*Trade. Though this type of activity makes it difficult to issue physical certificates, it is legal and within regulations. There is no definite date by which E*Trade would have to purchase the shares.... According to our trading desk, E*Trade was the only broker/dealer offering shares of GLKC yesterday. This has been the case since you originally requested your certificate.
From Dennis Smith: You stated there is no definite date by which E-Trade has to purchase the "short" shares that they sold you and that in turn you sold me. How can this be "legal"? What is to prevent them from continuing to sell what they don't own while subsequently refusing to buy the shares back if there are no time constraints?...
My bottom line is this. I demand the physical GLKC certificate(s) representing the shares I purchased.
From Wells Fargo: ...We have received your request for physical certificates. As soon as we are able to order a physical certificate for you, we will do so.
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