Bye Bye naked shorting. 

"US regulators will take emergency action to stop abusive short-selling of stock in financial institutions such as mortgage financiers Fannie Mae and Freddie Mac and investment bank Lehman Brothers.

Christopher Cox, Securities and Exchange Commission chairman, told legislators on Tuesday that the agency would issue an emergency rule to stop so-called "naked" short-selling of shares in significant financial entities. The SEC will also consider new rules to extend those trading limits to the rest of the market." 

Follow the link above for the full story.

Too little to late.   The SEC ( and Christopher Cox for that matter ) are lame ducks.

While agree that this action should in no way deflect attention from the real problems caused by the companies themselves, I do think "naked shorting", at least my interpretation of it, is detrimental to the markets as a whole.  As I understand it, this is shorting shares that your broker may not even have at the time to give with the idea that they'll become available "later".  If this is how it works, I can see how this can really mess with the valuation of shares of a company.  I have no problem with traditional shorting.  I'm also a little peeved they didn't see a problem until these institutions were involved.

Cheers,

G 

Mpc220 - Nake short selling is not illegal

From the SEC Website

http://www.sec.gov/spotlight/keyregshoissues.htm 

 D. Are short sales legal?

Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.
II. "Naked" Short Sales

In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. 3 As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").

Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period. A fail may also result from naked short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.

Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security4 generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks such as securities quoted on the OTC Bulletin Board,5 as there may be few shares available to purchase or borrow at a given time.

If you want to see how naked shorts can affect a company.  Take a look at the history of Overstock.com

http://www.overstock.com/Patrick-Byrne-and-naked-short-selling.html 

This suit alleges that the defendants, most of Wall Street's major brokerage houses, participated in a massive, illegal stock market manipulation scheme of selling short the company's stock with no intention of covering such orders with borrowed stock, as they are required to do, causing what are referred to as "fails to deliver" (in effect, the creation of fake stock in the marketplace). The suit asserts that a persistent large number of failures to deliver have been generated and may, at times, have come to exceed Overstock's entire supply of outstanding shares. 

If there are more shares of a company being shorted than their total number of outstanding shares,  that's just ridiculous.  

UPod: I'm not sure that that's determinative.  From what I understand, if you engage in naked shorting with no intention to go out and actually borrow the shares, then it's illegal.  The examples of legal naked short selling in that SEC excerpt seem to be when technical factors prevent the broker or market maker from immediately borrowing the shares.  The illegality comes when you can borrow the shares but have no plans on doing so, or when you know you can't borrow the shares and you just don't care. 

I may be wrong though. 

I was aware that naked short selling was legal, but I also fully believe that stock price manipulation through naked shorting is a common, everyday occurence.  However, most of what I consider price manipulation, the SEC considers "legal" naked shorting by big institutions.  The small caps that I follow are especially vunerable to manipulation.  A large instituation simply selling a stock, or even naked shorting, is not inherently "evil", but I'm of the firm belief that naked shorting that is supposedly "legal" according to the SEC often has substantial manipulative effects on a stock's price.  Of course, usually when someone sells or buys millions of dollars of stock, some price change would be expected, but I feel pretty confident that manipulative naked shorting is an common occurence, and I've always been mystified as to why the SEC takes very little action to investigate situations that appear obviously illegal.  I mean, some companies on the "naked short list" are on there for months upon months, and their short ratio even increases to ridiculous levels.  I've even seen naked shorting help push companies into bankruptcy (--granted, companies that weren't doing so well anyway, but still, the naked shorts were sure to put the nail in the coffin). 

Anyways, I'm glad to see that (supposedly) they're going to crack down on this stuff a bit. 

Will,  I didn't say it was illegal, I just said it was detrimental, and I really don't think retail investors are the problem or derive the most benefit from naked shorting.  I think hedge funds are considered to be the real culprits.

I'm just worried about it's effects on the financial markets for reasons Danny and Upod eluded to.

Cheers,

G 

Mpc220:  I'm not sure if that's determinative either.  I agree that engaging in naked selling with no intention of covering is illegal and would fall under abusive short sale practices ( I assume it would anyway).    The rule seems to be written in such a way that it doesn't have to be uniformly applied or enforced until the SEC decides the want to.  There's a lot of grey area in there.

Same old story over and over again

If hungry man steals a bagel - he goes to jail, if GS or MER or LEH are not able to steal anymore - our great corrupt incompetent government will help them

Just wondering  - what Fast/Mad/Kudlows of the world are going to say tonight - they were about to attend market funerals yesterday. Building wealth on poor suckers.

Actually barring the exceptions for market makers and unforeseeable delays it seems that is against Regulation SHO or "the law" as it pertains to Naked Short sales.

III. 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.6 This "locate" must be made and documented prior to effecting the short sale.

• "Close-out" Requirement: Regulation SHO imposes additional delivery requirements on broker-dealers for securities in which there are a relatively substantial number of extended delivery failures at a registered clearing agency7 ("threshold securities"). For instance, with limited exception, Regulation SHO requires brokers and dealers that are participants of a registered clearing agency8 to take action to "close-out" failure-to-deliver positions ("open fails") in threshold securities that have persisted for 13 consecutive settlement days.9 Closing out requires the broker or dealer to purchase securities of like kind and quantity. Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions (for example, an introducing broker)10 may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as the "pre-borrowing" requirement).

• Temporarily suspending Commission and SRO11 short sale price tests12 in a group of securities to evaluate the overall effectiveness and necessity of such restrictions. The Commission will study the impact of relaxing the price tests for a period of one year.13

• Creating uniform order marking requirements for sales of all equity securities. This means that orders you place with your broker-dealer must be marked "long," "short," or "short exempt."14