Selective Enforcement: (Re)Introducing Regulation SHO

This is a followup to posts SEC Restricts Shorting 19 Financial Stocks and Tossed To The Dogs?

I hinted at this before but I am going to spell it out explicitly in response to several questions I have received. There is already a restriction on naked short selling. The restriction is called Regulation SHO.

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").

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.

III. Regulation SHO

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.

Here is the shorting curb list of the emergency SEC action.

Shorting Curbs

BNP Paribas Securities Corp

Bank of America Corp

Barclays PLC

Citigroup Inc

Credit Suisse Group

Daiwa Securities Group Inc

Deutsche Bank Group AG

Allianz SE

Goldman Sachs Group Inc

Royal Bank ADS

HSBC Holdings Plc ADS

JPMorgan Chase & Co

Lehman Brothers Holdings Inc

Merrill Lynch & Co Inc

Mizuho Financial Group Inc

Morgan Stanley

UBS AG

Freddie Mac

Fannie Mae

Who Is Missing?

Where is Washington Mutual (WM)? Wachovia (WB)? Were they tossed to the dogs?

What about Corus Bank (CORS), Bank United (BKUNA), National City Corporation (NCC)?

It is beyond all belief that naked short selling is affecting Goldman Sachs (GS) more than Washington Mutual, Wachovia, Corus Bank, Bank United, and National City Corporation.

One only needs consider all facts above to figure out what is going on.

Except for Fannie Mae and Freddie Mac, that list contains the broker dealers and investment banks most responsible for naked shorting.

Selective Enforcement

As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to

selectively

enforce the existing regulation.

Comments

[QUESTIONABLE:]

ALL transactions on the market should be restricted to verification/documenta... of actual capital/ownership in hand.... whether it is short selling or just plain borrowing money from a bank on a personal loan to buy stock.. This liquidity is of no benefit when compared to the artificial infaltion it creates and how it devalues currency..... If person "A" has $50 and he loans it to person "B", and person "B" loans it to Person "C", and you keep this cycle up, but each loan is agreed to upon the basis of interest and with penalties..... the Market records each of these transactions as individual $50 purchases.... after ten people you have a total transaction history of $500.... but $450 is hypothetical.... it doesn't exist except on the Market..... then, you have the SPECULATIVE Interset that is to be gained added in for a higher dollar amount.... This is pure and simple Loan Sharking...... These very methods of transactions have left numerical imprints upon the Market as a whole that there is more American Dollars in Circulation than is actual, since 2000, it looks like the Fed has increase the number of dollars into circulation by 70%, thus a devalued dollar, Artificial Inflation.... that means that stock that went up to $175 per share, then split to $87.50 per share, has only an actual value of $26.25...
this is why I advocate that those in the business of Finance and Markets be themselves more regulated more restricted, and the same restriction that would follow along the lines of the American Bar Association, or states' Bar associations.... Use of the Media be totally Prohibited, companies can only advertise a specific product without mention of the company as a business except to make historical notes of achievements, No mention on the News, Internet, or any media of a Company's Financial holdings (SEC requests for information screened and limited to licensed persons and with fees - no one company to be able to hold an umbrella license to cover all it's employees down to the receptionists), operations, stock, etc... through any form of media... those employed in the profession be licensed with stringent testing and continued education requirements as Attorneys are, without licensing all other person's restricted from giving opinions, or performing anything more than paperwork and records keeping....... Yes, Hundreds of firms would close tommorrow, thousands would loose their jobs, oops, American's retirements/investment... would be safer, and these firms and people that would be gone.... they need to be gone anyway, it would just be a taste of the job loses they've caused in their mismanagement and ruthless illegal deeds... the cream would rise to the top... Click on my Name "QUESTIONABLE" and read the posts I have made to other articles.... everything going on can be traced back to a group of less than ten people....this usually is a sign of a conspiracy....could it be treasonable????? to a specific set of dates.... Now we will watch the barrel of oil fall to $100, and HOLD..... just like they did before, when Congressional Investigations are hot on the their heals, they retreat a little bit to quell the angry masses, then when it's quiet they surge past where they were, only to do this again and again.... HOLD at $100...??? Let's see?????

2008 Jul 17 04:18 PM

[Ames Tiedeman:]

People are sick of Hedge Funds creating false rumors and then taking down a company and making billions doing it..Good for the SEC.

2008 Jul 17 09:53 PM

[Gaucho:]

GREAT POST THANKS

THe rally the last two days was caused by the naked shorters trying to cover their asses. This porblem is much larger than most investors suspect.

THis is a must listen for stock mrket investors.
www.financialsense.com...

You may want to take all your money out of the market!

2008 Jul 17 11:13 PM

[Tom B. Guest:]

Yes it is true that fast moving markets (Electronic Trading Where Momentum Is Beyond Human Ability to Process) decimates the old process of the floor specialist maintaining an orderly flow of "actual stocks" (those that exist in their account and which are not wished into existence by way of Electronic-Hide-and-Go... see: www.sec.gov/news/speec... a tutorial on record keeping.). The question is one of speed. The speed of electronic trading has made the markets a bit of a shell game.

2008 Jul 17 11:21 PM

[fxtrader07:]

Great article. the most obvious and blatant display ever of whose interests the SEC is really protecting. The SEC ought to be abolished. the exemption reasons given in reg SHO for naked shorting may apply for a day or two. But HOW can they justify that stocks stay for months and years on Reg SHO lists? for market making purpose? sure.
it's a giant crime and a shame. The usa is more of a developing country and a banana republic type of market when it comes to create a level playing field in the stock markets.

2008 Jul 18 08:04 AM