Securities Lending Times, 20 August 2013
“Abusive”, “like a form of terrorism” and “funny paper”are three descriptions of naked short selling, given by the Securities and Exchange Committee, a life insurance company CEO, and broker-dealer Jeffrey Wolfson, respectively.
They do not do much to dispel the belief of naked shorting as a practice that is even worse than selling a borrowed security, only to buy it back at a lower price—what we know as covered short selling.
Read full article.
Naked Short Selling: Is it Information-Based Trading?
Harrison Liu, Sean T. McGuire, Edward P. Swanson
SSRN Electronic Journal, 21 June 2013
Citing a widely held belief that naked short selling is not based on company fundamentals, the SEC (2008) has substantially tightened Reg. SHO close-out regulations in an effort to eliminate naked short selling. Contrary to accepted belief, we find that accounting fundamentals are highly significant in explaining naked short sales. Further, naked short sales contain incremental information about future stock prices: Abnormal returns from a long/short trading strategy that buys (sells short) shares with low (high) short interest are more than seven times larger using naked and covered short interest, compared to returns using only covered short interest (15.2 percent vs. 2.1 percent annualized). Our findings show that recent actions by regulators to eliminate naked short sales are likely to impede informed arbitrage and reduce market efficiency.
PDF ( 41 pages): Naked Short Selling: Is it Information-Based Trading?