A First Look At How the SEC's Rules Are Working

For those wondering how the SEC's crackdown on naked short selling has worked, the answer so far is pretty good.   One of the tenets of the new rules was that brokers would be forced to close out trades where a counterparty failed to deliver securities on time.  Based on this plan, we sent out a list to our Bespoke Premium subscribers highlighting the stocks in the S&P 1500 that have been on the Regulation SHO list of fails to deliver for at least 100 days.  As shown by the list provided below, these stocks have averaged a return of over 6% since the time of the announcement.  Over that same period, the S&P 500 declined by 3.3%.

No one can argue that the SEC deserves every bit of criticism for fiddling while Wall Street burned.  However, it appears as though their recent actions, while not addressing the main issues that needed to be addressed, have had at least some impact.  On short selling in general, we believe that it is fine to short a stock if you think a company will likely go out of business.  What's not okay is to short something in order to make it go out of business.

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Comments

[1worldcurrency:]

The SEC does not agree that it is "fine to short a stock". No concern if stock prices reach outrageous bubbles, however.

2008 Sep 19 07:06 AM

[MILESCFA:]

Let's go one further - let's ban ALL selling of stock!

Oh, but we will let you sell to buy a home or pay a mortgage.

And pay medical bills...

And....

And...

And...

2008 Sep 19 08:54 AM

[mariposa:]

I agree not naked short, but regular short important part of market. Also seems good for a cooling off period.
I watched one company I knew a lot about a couple years ago almost go out of business because of greatly exaggerated rumors by shorts. I was in shock they could do it, and being small didn't take that much. It had very little to do with the balance sheet.

2008 Sep 19 09:16 AM

[captainccs:]

>>>On short selling in general, we believe that it is fine to short a stock if you think a company will likely go out of business. What's not okay is to short something in order to make it go out of business.


This is just not a practical approach to the problem unless you have a Thought Police Force that can actually look inside people's thinking (so much for privacy).

There needs be clear rules which, if broken, must bring retribution. Short selling, i.e. selling shares someone lent you, is perfectly legal and valid and there is no reason for interfering with this activity. The problem is NAKED short selling and the SEC has aided and abetted this criminal activity for years.

My solution is to hold both the broker and the short seller to account. If the shares are not delivered in the required time, the sale must be reversed and both the broker and the short seller should pay a file of, say, 25% each of the amount of the sale. That would stop NAKED short selling in its tracks.

The way I see it, not all NAKED short selling is because sellers think the stock is going to go broke. It could well be half of a hedged option trade. Stopping NAKED short sales would hurt many interests, which is likely why the SEC has not enforced the rules, it would hurt their regulated industry and regulation was never meant to protect the public. Anyone who still believes that, well, I have a couple of pretty bridges to sell them.

2008 Sep 19 09:34 AM

[cocomurph:]

Nicely said, Denny!

2008 Sep 19 10:22 AM

[Vzal:]

I wish they would have listened to you, Denny

2008 Sep 19 11:01 AM

[1worldcurrency:]

Are you still allowed to state the truth about a financial institution's finances?

2008 Sep 19 06:30 PM

[d_teller:]

I agree with the views of captainccs, above.

A number of other securities, including some that are represented by pink sheet listings, which are their U.S. equivalents of Cdn (Toronto) listings, have been and are under naked short pressure, to attempt to drive the price down, and create a "fire-sale".

They aren't financials, or investment types, but ATP/UN.TO (ATPWF) is one example. At one point this Spring, it had short positions over 12-fold its total shares available...It's a CanRoy Ute of U.S. power plants. So the company decided to use some of its large cash holdings to buy back some shares at depressed prices.

Until the SEC and their Cdn counterparts get sufficient data, staff and gov't support, this "naked shorting", by which large capitalized groups, such as hedge funds and other private equity groups, as well as Turquoise and other systems set up to avoid scrutiny,...this illegal activity...will continue. The naked shorting actually causes significant problems for those smaller traders, that follow the rules to borrow shares to sell short.

Another issue that comes to my naive mind, is the shorting of ETFs and other large funds...that actually hold the commodities...Such as GLD, IAU, SLV, etc. Not the ones that are futures-based. How could the government regulators be blind to the massive shorting, when physical delivery of the assets has been very difficult...there's been a lot of blogging about central bank or SWF manipulation of these ETFs,
but at some point the inverse Ponzi scheme will detonate.

2008 Sep 19 09:15 PM