Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a “failure to deliver” (“FTD”). The transaction generally remains open until the shares are acquired by the seller, or the seller’s broker settles the trade.
Paper: Counterfeiting StockPaper
The Creation of Counterfeit Shares — There are a variety of names that the securities industry has dreamed up that are euphemisms for counterfeit shares. Don’t be fooled : Unless the short seller has actually borrowed a real share from the account of a long investor, the short sale is counterfeit. It doesn’t matter what you call it and it may become non–counterfeit if a share is later borrowed, but until then, there are more shares in the system than the company has sold.
The magnitude of the counterfeiting is hundreds of millions of shares every day, and it may be in the billions. The real answer is locked within the prime brokers and the DTC. Incidentally, counterfeiting of securities is as
It is estimated that 1000 small companies have been put out of business by the shorts.
PDF (12 Pages): Paper Counterfeiting Stock
Testimony: Statement of Robert J. Shapiro The Economic Costs of Tolerating Equity “Failures to Deliver”Testimony
Statement of Robert J. Shapiro: The Economic Costs of Tolerating Equity “Failures to Deliver”
11 September 2007
I am Robert J. Shapiro. I am chairman of Sonecon, an economic advisory firm in Washington, D.C., and former U.S. Under Secretary of Commerce for Economic Affairs under President Clinton. I am also a Senior Policy Fellow at the Georgetown University Center for Business and Public Policy and a Senior Fellow of the Progressive Policy Institute. I have served previously as a fellow of Harvard University, the National Bureau of Economic Research, and the Brookings Institution.
PDF (3 pages): Statement of Robert J. Shapiro: The Economic Costs of Tolerating Equity “Failures to Deliver”
Article: Games Short Sellers PlayArticle - Media
Bloomberg, 1 September 2006
Traders who sell shares they don’t own—and haven’t even borrowed—are driving down prices. More than 425 companies a month may be the victims of these schemes.
Paper: 500 Million Shares of Stock Are Missing A Report on the Impact of Allowing Stock Sales to Go Undelivered for Long PeriodsPaper
500 Million Shares of Stock Are Missing: A Report on the Impact of Allowing Stock Sales to Go Undelivered for Long Periods
Robert J. Shapiro
Sonecon, March 2006
It has been well established that every day, millions of shares of stock in U.S. companies that are sold go undelivered. In November 2004, an SEC visiting economist, Dr. Leslie Boni, reported that on any given day, there are some 120 million to 180 million shares of companies listed on the NYSE or NASDAQ and some 300 million to 420 million shares over-the-counter (OTC) or unlisted public companies – a average total of 510 million shares – that have been sold and gone undelivered for at least 3 days. Her conclusions came from official data of the DTCC, the organization that clears and settles all U.S. stock sales and purchases, and holds most of these assets in electronic form.
PDF (19 pages): 500 Million Shares of Stock Are Missing: A Report on the Impact of Allowing Stock Sales to Go Undelivered for Long Periods
Web: The Death of a Thousand CutsWeb
Sanity Check via Wayback, 2 February 2006
During my undergraduate studies, I read of an historical method of execution known as the Death of a Thousand Cuts. I have come to see that as a metaphor for how guerrilla wars (like ours) are won and lost.
Whether any of us have fully realized it or not, we have been engaged by an insidious enemy whose sole desire was to steal what was not theirs from others they viewed as their inferiors, rather than earn it legitimately. When a person was executed by the infliction of a thousand small cuts, the pain was enormous, eventually killing the subject by shock and loss of blood, but very, very slowly.
Article: Strategic Delivery Failures in U.S. Equity MarketsAcademic
Strategic Delivery Failures in U.S. Equity Markets
Journal of Financial Markets, 1 February 2006
Sellers of U.S. equities who have not provided shares by the third day after the transaction are said to have “failed-to-deliver” shares. Using a unique data set of the entire cross-section of U.S. equities, we document the pervasiveness of delivery failures and evidence consistent with the hypothesis that market makers strategically fail to deliver shares when borrowing costs are high. We then show that many firms that allow others to fail to deliver to them are themselves responsible for fails-to-deliver in other stocks. Finally, we discuss the implications of these findings for short-sale constraints, short interest, liquidity, and options listings in the context of the recently adopted SEC Regulation SHO.
PDF (40 pages): Strategic Delivery Failures in U.S. Equity Markets
Paper: The Concentration of Undelivered Shares Among Threshold Securities: Prospects of Stock Manipulation Using Naked Short SalesPaper
The Concentration of Undelivered Shares Among Threshold Securities:
Prospects of Stock Manipulation Using Naked Short Sales
Robert J. Shapiro
Sonecon, 14 November 2005
American public companies and their shareholders face a significant threat. Last year, researchers determined that naked short sales – short sales in which the shares are credited to buyer, but the short seller fails to borrow and deliver those shares – occur on a large scale, often extending for months at a time. New data now suggest that these “failures to deliver” or “fails” are concentrated in a relative handful of companies. This raises the prospect of naked short sales being used to manipulate some companies’ stock prices. The enormous extent of naked shorting and its likely use in stock manipulation could threaten the integrity of our financial markets and international confidence in them.
PDF (13 pages): The Concentration of Undelivered Shares Among Threshold Securities: Prospects of Stock Manipulation Using Naked Short Sales
Paper: Boni Analysis of Failures-to-DeliverPaper
Boni Analysis of Failures-to-Deliver
Sonecon, November 2004
A new study documents that significant failures to promptly deliver shares sold short (“fails” or “failures”) are not, as many market participants assume, rare, brief and inadvertent, but rather pervasive, extended and deliberate. The analysis was done by Dr. Leslie Boni, recently a visiting financial economist at the SEC and now economics professor at the University of New Mexico. Boni’s data show that failures-to-deliver affect almost all public companies and usually last several weeks. On any day, there are 180 million-to-300 million shares involving more than 10 percent of public companies that have gone undelivered for at least two months. Failures of these dimensions can seriously distort the normal economic operations of U.S. equity markets.
PDF (2 pages): Boni Analysis of Failures-to-Deliver