When a seller “naked short sells a stock” they do not own the shares they are selling and therefore are selling artificial shares. This is like counterfeiting a stock. This process creates an obvious unfair advantage to the seller and an imbalance in the market as the sell side is now increased with more shares – many of which are counterfeit. There is a time limit on how long the seller can sell these shares and be naked on the trade and the time limit is 3 days. This is where the RegSho rules come in and the data we track. If the sellers broker-dealer has not located a borrow to cover this short trade within 3 days they will need to purchase back the shares they have sold on the open market. This process is referred to as a “Buy In”.
“When it comes to illicit short selling, the shorts win over 90% of the time”
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
Alexis Stokes, Texas State University
Journal of Law and Business 5/1 (Spring 2009)
This article explores the origins of naked short-selling litigation; considers
the failures of significant naked short-selling lawsuits in federal court;
surveys the obstacles erected collectively by constitutional standing requirements, the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act, brokerage firms, death spiral financiers, and the Depository Trust and Clearing Corporation; examines the efficacy of Regulation SHO, SEC rule 10b-21, and new FINRA rules; discusses recent state legislation and state court litigation; and identifies non-litigation options to curb naked short-selling. Ultimately, this article seeks to answer the question: If manipulative naked short-selling is more than a mythological scapegoat for
small cap failure, what remedies are, or should be, available?
PDF (62 Pages): Article In Pursuit of the Naked Short
James W. Christian, Robert Shapiro, John-Paul Whalen
The Houston Law Review, 10 November 2006
Regulation SHO is a start, but in order to guarantee a fair market place, the SEC must close the loopholes in Regulation SHO and institute comprehensive reforms to the clearing and settlement system. Until the SEC makes these necessary reforms and addresses the DTCC’s mismanagement of the Stock Borrow Program, investors will continue to be exposed to the manipulative potential of naked short selling.
PDF (58 Pages): HLR Naked Short Selling 2006-11-10
Forbes, 25 August 2006
Suspicious trading last year in shares of Global Links, a small Nevada real estate holding company, was far more intense than previously thought.
Data released to Patch earlier this month had shown trade fails of 10 million shares starting in mid-April, a time when 4 million shares of Global Links were issued and outstanding.
TheStreet, 29 August 2005
It all started when the company completed a 350-to-1 reverse stock split — an unusual step in itself, but one that paled alongside what came next. With 5.43 million shares outstanding and a float of 1.15 million shares, Global Links saw trading volume of 143.5 million shares in the first four sessions of February, driving the stock as low as 8/100ths of a penny.
The Motley Fool cited by RGM Communications via Wayback, 24 March 2005
It’s amazing how the word “naked” can liven up a discussion. Take naked short selling, for instance. The addition of this saucy little word turns the mundane act of borrowing and selling shares of stock in hopes of buying them back later at a lower price into a raging controversy fraught with conspiracy, secret identities, public recriminations, foreign intrigue, sports team owners, and now some of the top regulators in the land.
How can one word cause so much trouble? While legal short sellers must borrow the shares they sell, naked short sellers sell shares of stock they haven’t borrowed, have no intention of borrowing, and that may not even exist. Not surprisingly, this activity is illegal and has been since the Securities and Exchange Act of 1934. But for a number of reasons, regulators have overlooked it in the past.