July 24, 2008 2:19PM

Naked Short-sale Rules for all Stocks?

By Alexis Glick

On The Opening Bell today I talked to Bob Greifeld, the NASDAQ OMX CEO, about the acquisition of the Philadelphia Stock Exchange. They have been on a big consolidation binge here in the U.S. and overseas and for the first time in history on Friday traded more NYSE (New York Stock Exchange) listed stocks on the Nasdaq then on the big board (otherwise known as the NYSE).

That’s a huge deal for them. We also talked about the pending SEC short-term emergency naked short sale rules and whether the rule should go into affect for all stocks as opposed to the nineteen. He said it should and that this was the SEC’s first step toward making this pilot program more universal. Take a look.

11 Responses to “Naked Short-sale Rules for all Stocks?”

Comment by Dee Zeviro

July 24th, 2008 at 3:22 pm

YES, the naked short sale rules should go into effect for all stocks now. Make the system fair and watch investors start to have some faith in the market again.

“He (Bob Greifeld) said it should and that this was the SEC’s first step toward making this pilot program more universal.”

This is great news and something Fox Business should make an major issue.
Comment by John Henry

July 24th, 2008 at 5:40 pm

Naked short selling is ILLEGAL!

What part of illegal don’t these people get? Of course(!) the SEC and everyone involved (the NYSE and NASDAQ, FBI,NSC etc) in guarding our financial markets need to be going after these criminals who use this ILLEGAL tactic that destroys industry and steals the American people’s retirement.

Enough already.
Comment by clearthinker

July 24th, 2008 at 5:48 pm

Another great interview. Lenofus earlier suggested that you consider doing a special program on naked shorting (it is really counterfeiting) settlement failures etc…If, in fact, the regulatory tools have been in place for 3 years (Reg SHO), why are there billions of dollars in fails? When Reg SHO was passed, why were fails grandfathered? Concern about volatility? Where was the concern for shareholder value that was reduced from overwhelming demand with artificial supply and resulting DOWNWARD volatility that stockholders had to endure?

It’s important to think about the fact that cleaning this problem up will put money where it is needed most. Into the hands of companies who need capital to finance their development and growth, and into the hands of shareholders who can bolster this sagging economy.

I think a special 1 hour program devoted to this topic, or better yet, a series, is both long overdue and would be very important to cleaning up a very serious problem. If we really want our markets to have credibility and attract capital, we must clean up these problems.

Thanks again for your insights and your coverage of this issue.
Comment by Fred

July 24th, 2008 at 6:44 pm

Another important interview. Someone with a vested interest in cleaning up the problem of undelivered trades. NASDAQ depends on investor confidence, which will erode if stock counterfeiting is not stopped.
Comment by DrDetroit

July 25th, 2008 at 7:55 am

Naked shorting produces no water in the desert.
Comment by DrDetroit

July 25th, 2008 at 8:58 am

As Liz Clayman puts it:

“These are people who make money by, in essence, betting *against* a stock.”

This is in essence - Fox News in a nutshell.

It seeks to win by betting against - frankly any arbitrary abstract media promotion it cares to bring forth from the abyss.

Naked shorting is no different than two people discovering that one has had different intentions from the beginning - say - in a relationship.

Waking up to find out you’ve been lied to, and used ? is a big hit - imagine a company that wakes up to find out it’s been traded out of existence over night.

Imagine a nation state !

It’s all the same- all comes down to integrity -

and you can’t get societal integrity until ? what ? better education ? That’s all I can come up with.

Bah - The concept behind naked shorting is nothing new, it starts off with a lie.

It’s not indifferent than starting a rumor that a company is going to fall.

You know what would be the BEST tool for manipulating naked shorting ?

a major TV news network facading as a business network using the FCC airwaves to bring people unknowingly on board on stock sweeps.

Or wait, did I get that backwards ?

Think about it - the cost for the network ? would be BEANS if you could come out 100’s of billions ahead? sucking money out of the financials - running countrywide ads all the while like Fox ? It’d be a golden opportunity to cash in and forfeit all integrity - and I say - therefore all meaning in this life.
Comment by Adan

July 25th, 2008 at 1:31 pm

most of the comments above say it all: the needs for integrity, trust, fairness

people are willing and able to suffer more than thought if they aren’t also struggling with doubts we’re all in this together

people are willing and able to contribute more than thought when the good winds of trust and belief are behind their backs

thanks alexis! please follow up more on this as you can
Comment by Dave

July 25th, 2008 at 3:04 pm

Alexis, I understand you spoke with Chairman Cox about this and discussed your time at Goldman and how the systems worked. Let me explain if I may the evolution of change.

Hedge Fund A has a 500,000 share short sale they want executed. They can only locate 100,000. This fund splits teh order 5 ways and gives each executing broker the same 100,000 share locate. On the books in an audit everything looks kosher except 400,000 of that 500,000 fails because there really was only 100,000 available. Present regulatory audits would not pick this up because the audit is only looking at the BD’s individually and not at the originating clients.

This only one of many ways naked shorts now enter our markets illegally and intentionally. It is fraud that has been undetected and ignored.
Comment by chuck

July 28th, 2008 at 12:57 pm

I was watching some more on this issue just this morning in fact.
The Sec is closing in on some specific rumors in regards to Lehman Brothers and DCTCC came to. One thing about this agency if one could call it that that there are so many parts to it. And the explaination it makes hard. But honestly more should be concentrated on this DCTCC. This DCTCC is completely seperate from the SEC. Makes one wonder why is it not a component of the SEC.
Comment by Bob O'Brien

July 28th, 2008 at 1:29 pm

Great interviews today.

What seems to get lost in a lot of the on air discussion, and certainly in the avalanche of NY media-generated stories over the last few days that get their talking points from the Chanos lobbying effort to end the SEC rule ASAP, is one of reasonableness.

It is not unreasonable for a buyer to expect that the seller who he is paying actually possesses that which is being paid for. That is a reasonable expectation. I pays my money, you has the little doggy in the window you offered for sale.

The essence of a naked short sale is the creation of a sales event, which has an impact on price discovery as well as the supply and demand curve, and yet for which there is no possession of that which is being offered for sale.

I think a fair question is, “Is it reasonable to allow ANY investor to create sales transactions and receive payment for the sale, and yet not possess that for which he is being paid?”

Congress obviously felt it wasn’t, hence the wording in the 1934 Act, wherein it requires “prompt clearance and settlement.” Settlement is where the share is delivered.

You asked Patrick why the DTCC is suspect in this. The short answer is that it has created a settlement system where the clearance, and settlement, are divorced from each other - they aren’t relational. Everyone gets paid, before anything is delivered, and if it isn’t delivered, nobody breaks the trade and penalizes the seller for his behavior. By de-linking payment and delivery, the DTCC has created a system that is inherently in conflict with fair market functioning, as well as the express wishes of congress.

Why would this happen? Well, for starters, the DTCC is owned by the same brokers who are failing to deliver. Thus, the DTCC’s owner/members really favor what is most profitable for them, not what is most reasonable or fair, or consistent with Congressional guidance. There are several problems presented by the DTCC. First, it claims to be “powerless” to enforce settlement by it’s owner/members. Why? Because the owner/members created a rule internal to the DTCC that renders the DTCC powerless to do so. And yet the DTCC is an SRO, meaning that it is a self regulatory organization responsible for policing the behavior for it’s owner/members. Now, doesn’t the notion of a SRO who claims to be unable to enforce or monitor federal securities laws on its owners/members seem antipodal to the very concept of SRO?

The second problem is that the DTCC has all the data on delivery failures, at least in-system delivery failures. And yet it is as obtuse and opaque in revealing data as any Soviet bureaucracy. Instead, it issues press releases that are deliberately dis-ingenious and which distort fact, in order to advance the position that delivery failures are a small issue. This is not the behavior of an uninterested party, but rather, the act of a facilitator of a practice it knows to be at odds with Congressional guidance, and the functioning of fair markets.

It speaks in percentages. It omits data it dislikes, or which is in conflict with it’s agenda. It downplays and minimizes, rather than reporting accurately. As an example, the CNS netting system handles 96% of all equity trades in the markets on a daily basis. That means that 96% of all trades never make it to where they are reported as a failure, or not. So when the DTCC comes out with a figure like “1% of all trades fail”, what it leaves out of the explanation is that figure uses the total volume of all trading in not only stocks, but also corporate debt - why throw corporate debt into the mix, which grossly inflates the total dollars traded per day? Because the total number is larger, thus fails can be declared to be a smaller percentage of a larger number than is purely stock. That is dishonest. Also dishonest is that it leaves out the effect of CNS netting. If 1% of all trades fail, AFTER NETTING, that is one quarter of the 4% CNS netting doesn’t handle, via the stock borrow program, or by combining fungible bulk of all shares held. That actually means that one quarter of all trading fails, if one extends the percentage to the CNS cleared trading. But we have to guess. Because the DTCC won’t address this, or report in a manner that any responsible financial entity reports in.

So information that would clarify how large an issue the problem really is, is simply unavailable. Not because the information isn’t knowable, or known, but rather because nobody is talking. In this case, that nobody is the DTCC. So a reasonable question is, why is the DTCC treating stock clearing and settlement like a state secret? What is so clandestine in that process that it requires obfuscation and opacity? Has secrecy and opacity EVER served any purpose in financial markets other than to provide cover for those up to no good? Why is transparency a threat to the functioning of the markets? Why is daily reporting of short positions so difficult to achieve, in a fully automated, computer-centric system like ours? Other markets have it. It’s not hard. And yet info that would provide necessary insight is deliberately obstructed. To what end, and who benefits? Obviously, when it comes to lack of transparency into clearing and settlement, those gaming that system benefit, and investors suffer. That’s the short answer, pardon the pun.

So I go back to, what is reasonable? I believe it is reasonable to know a seller has that which he offers to sell. I believe it is reasonable to have symmetry in reporting, for short positions, as well as long. I believe that clearing and settlement must be linked, as the 1934 Act mandates. I believe that opacity is the tool of crooks, and that transparency shines the antiseptic light of reason on practices that currently occur under cover of darkness and secrecy.

I believe we can have reasonable financial markets, that we should have reasonable financial markets, and that until we do, we will edge closer to a financial precipice that threatens the stability of the US economy, as well as large segments of the world economy.

Thanks again for continuing your series on this topic. It’s about time.
Comment by Mike Rechan

August 4th, 2008 at 6:55 pm

Great Post Bob O’Brien. The bottom line is why should short sellers have an unlimited supply of stock to work with? Right now the market is heavilly shorted and I am not sure why the shorts are not beggining to cover their positions in anticipation of looming upcoming SEC action regarding naked short sales on the broad market. I think its coming and I think the shorts are going to get caught in a serious squeeze shortly. If this were ever to be applied broad market in the near future as it was for the select 19 stocks, where they have to actually locate the stocks, I think it could set off a broad market rally (even if short lived) as so many shorted stocks will rise with this policy change and their are many waiting to go long at any sign that the bottom has arrived. I really do not see the SEC just simply lifting the naked short ban on the 19 stocks as they would simply get pummeled by the shorts in the aftermath which would make the SEC look foolish? At the same time why just these 19 targeted, seems somewhat arbitraary, so what is the SEC to do on 8/12? I think they have the authority to simply announce and go with a broad market regulation with some lead time and then tweek the policy in the afteermatch as needed. If this happens the broad market rally could begin shorty.