Understanding Buy-Ins and The Naked Short Rule

I learned something new today that I probably should have known awhile ago, but not being very active in shorting individual names it really never came up until today.

The common wisdom is that a stock that is on the restricted list for 13 consecutive days, ie. cannot be borrowed, has to be bought back. These are also known as naked shorts. Well, after a lengthy call to the SEC, I found out the "little" exemption to that rule: The above is true as it applies to investors - but is not true for market makers.

Thus a market maker can be heavily short a name, causing it to appear on the restricted list, and this "short" does not count. At least it does not count until Oct. 15th. That is when this exemption expires. Well, actually they have 35 days from Oct. 15th to square up. So trying to game a buy-in, especially near a holiday or weekend, is not the panacea it appears.

After Oct. 18th, I think this will be a very interesting strategy. But for now, I guess not.

Comments

[Richie:]

So Andy,

Does that mean all the companies whose shares the hedgies have driven into the floor will now be bought in huge quantities???

Another question --- where stocks don't have market makers but rather are traded electronically, how do their short interest levels reach (in some cases) 40% to 50% or more of the float???

2007 Aug 29 12:04 PM

[calvino:]

Very interesting and informative - I did not understand how some names remained on the reg SHO list for months at a time. Any further information on this subject would be great. I also would like to get an answer to the questions above.

2007 Aug 30 02:35 AM