SEC makes emergency rule targeting ‘naked’ short-selling permanent WASHINGTON (AP) – Federal regulators on Monday made permanent an emergency rule aimed at reducing abusive short-selling, put in at the height of last fall’s market turmoil. The Securities and Exchange Commission announced that it took the action on the rule targeting so-called “naked” short-selling, which was due to expire Friday. Short-sellers bet against a stock. They generally borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender – pocketing the difference in price. “Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale. The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale. At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices. Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market’s downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority. The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans. One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves – actions that battered the stocks of banks and other companies over the last year. Another approach would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more. In addition to making the “naked” short-selling rule permanent, the SEC and its staff are working with major stock exchanges to make data on short-sale transactions and volumes publicly available through the exchanges’ Web sites, the SEC announcement said. It will result in “a substantial increase” over the amount of information currently required, the agency said. “Today’s actions demonstrate the (SEC’s) determination to address short-selling abuses while at the same time increasing public disclosure of short-selling activities that affect our markets,” Schapiro said in a statement.
Maybe this is a dumb question: As it stands today, you can sell without owning or borrowing a stock. Isn’t it possible for there to be more shorted shares outstanding than actual shares outstanding? Let’s say there are a million shares outstanding of Firm X. Could speculators collectively short 5M shares of Firm X? If not, what mechanism/regulation prevents them from doing so? Thanks.
Wouldn’t that just drive the price all the way down to zero? Such a large amount can’t be shorted, I’m guessing, since only a certain percentage of stock is held by the public and the rest is owned by the co./employee stock options, right? Plus, if you short all the existing outstanding shares, and then some, wouldn’t demand for that stock be eliminated and thus price = 0 ?
buyicide Wrote: ------------------------------------------------------- > Maybe this is a dumb question: > > As it stands today, you can sell without owning or > borrowing a stock. Isn’t it possible for there to > be more shorted shares outstanding than actual > shares outstanding? Let’s say there are a million > shares outstanding of Firm X. Could speculators > collectively short 5M shares of Firm X? > > If not, what mechanism/regulation prevents them > from doing so? > > Thanks. The “market” should regulate this on its on. Think about it: there are 10 mil shares of XYZ outstanding. HF1 borrows 1 mil shares from State Street and sells them in the open market. Now there are 11 mill shares on the long side and 1mil shares on the short. Now, the folks that bought the 1mil borrowed shares go out and loan those to HF2 who immediately proceeds to sell them in the open market. Now there are 12 mil long and 2 mil short. Proceed with this for another 10 cycles and you have 12 mil short and 22 mil long – a total 12 mil that are borrowed. Now good news breaks out in the stock and everyone wants to get out of their short position. Bad news is the only way to get out is to buy your way out. Unfortunately, there are 12 mil shares that need to be covered and only 10 mil true shares outstanding (this doesn’t even count the fact that probably somewhere in the neighborhood of 80% of the float is held by institutional investors that never lent there shares in the first place i.e. 2 mil shares of the float where multiplied into 12). So now the cycle that took place in the first paragraph has to be repeated in reverse. The shorts have to buy from the small pool of stock to cover their position, thus, delivering shares to the person that originally lent them, that person then proceeds to dangles his extremely over priced shares to the next short who can’t wait to cover his short and stop the bleeding (or has to be enticed to do so with huge premiums). And on and on and on we go. Take a look at VW in Germany last fall – this exact scenario took place. Now if the stock has bad earnings, the shorts are happy because they have to cover their positions with worthless penny stocks.
In theory yes, it’s possible, but in practice no. What would happen is that there would be a massive short squeeze at settlement and stock would skyrocket as clearinghouses would buy shares (with their clients money) overnight, which would typically amount to the naked shorter paying about a 10% premium to cover, over the already inflated price due to the short squeeze. The other reason this probably won’t happen is that most of the people who engage in naked shorting are market makers/flow traders who get short the stock to facilitate a customer order, with the expectation of covering by either borrowing stock or buying stock soon after. Someone can correct me if I’m wrong, but I think it’s rare to see a naked short in a truely prop trade. As such, the supply/demand won’t push the stock to a point where there isn’t enough stock outstanding to cover shorts.
i agree with ahahah. the vw situation cannot happen in the u.s. or any country outside of germany really. porsche bought 31.5% of volkswagon without anyone knowing about it. not only did they buy 31.5% of the company, but that 31.5% of the company gave them majority control. not only did porsche then own 66.5% of the company, they simultaneously announced their intent to purchase another 8.5%. another unique part of the situation is that the frankfurt region owns ~20% of volkswagen. in the end, after all porsche’s dealings, from the view of the average investor, the free float shrank from 45% to 5% overnight. there are an insane number of regulatory steps that must be taken in most normal countries. but i think this is becuase germany’s trading is fragmented and these regulatory rules only govern companies who call frankfurt their home, or something like that. i can’t remember it to a T, but this is the jist.
Thanks a lot ahahah
Short positions can (and do, see Overstock.com) exceed total float and it can happen without naked short selling. In fact, NSS doesn’t have as big of an impact on this as you would think.
Particularly since funds aren’t required to report their short positions it can happen very easily and often does happen that short interest exceeds float even without naked shorting. For each short position there is a corresponding long who in turn can lend out their shares to be shorted. The higher the institutional ownership in a company the larger teh potential inventory of shares that are likely to be available to be lent.
Another question: Its common to hate on shorting right now (Speculators artificially depressing prices, etc.) Won’t shorting eventually place UPWARD pressure on prices? If there is s**tton of short interest outstanding on a stock, don’t the shorts initially drive prices down (lots of sellers in the market) and then drive it up when they cover (Lots of buyers)? Thanks again
I love you all to pieces, but the info by posters on this thread is about 97% wrong. If you want a history lesson, maybe start with reg SHO and then move to reg 204T. the landscape for shorting has changed dramatically in the last year. this goes for both customers and market maker exemptions.
Reg SHO and reg 204T deal with fails to deliver and close out provisions for naked short positions; we’re talking about situations where short interest exceeds floats and whether it’s possible. Buyicide is correct in saying instituational investors don’t have to report positions. Well he’s is somewhat correct: I wouldn’t say it’s hard coded in the rule that they don’t have to report, but I can say with 100% certainty that many HFs don’t report their short interest and it’s perfectly legal.
bannisja I’m asking questions. Any statements made are only intended to illustrate my thought process
to get a stock to short, you need to obtain a locate and your broker needs to settle the trade. pre 204T, you naked short sell a stock, you on T+3 don’t settle, oh well… you might eek out for days, weeks, months if nobody on the other side was pressing the issue in CNS or broker to broker. in today’s world, you short a stock (legit or naked), T+3 rolls around, your broker fails in DTC for US stocks, you are forced buyin at no later than the open on T+4. market maker exemptions and this loophole, gone- this has crushed the conversion/reversal market somewhat. so while maybe the system still isn’t perfect and you could see a short interest on a name get fairly high still depending on the amount of lendable shares and/or HF’s or any longs participating in lending programs, the abuses to naked shorting have decreased dramatically since 204T. a short interest should never exceed the float of a security in today’s regulatory environment. while nobody today must report their exact shorts yet, they still have to borrow the security in order to short it and there is a strong obligation now to settle the trade. borrowable shares should not exceed the float ever, and 204T tightens the belt on this a ton.
bannisja I’m asking questions. Any statements made are only intended to illustrate my thought process