Naked shorting has been a serious problem. There was no enforcement. You could have more shares sold short than the float. And it wasn't just one or two companies that got hit by this. I know it is hard to believe that something as blatant as this could go on under the nose of the SEC, but it did. This is Wall Street after all, not Sunday School. http://www.change.org/petitions/cha...llegal-short-selling-in-arena-pharmaceuticals http://en.wikipedia.org/wiki/Naked_short_selling
Accidentally Released - and Incredibly Embarrassing - Documents Show How Goldman et al Engaged in 'Naked Short Selling' By Matt Taibbi http://www.rollingstone.com/politic...et-al-engaged-in-naked-short-selling-20120515 "In this case, that resulted in absurdities like the following disclosure in this document, in which a Goldman executive admits in a 2006 email that just a little bit too much trading in Overstock was going on: âTwo months ago 107% of the floating was short!â In other words, 107% of all Overstock shares available for trade were short â a physical impossibility, unless someone was somehow creating artificial supply in the stock."
If 107% of the shares were short, that means that 207% of the shares were long. So actually, only 52% of the longs had a corresponding short.
This might be a stupid question, but if I borrow 100 shares to sell short from someone who actually holds them, what's to stop them from being re-lent by the buyer I sell to? It seems to me a bit like open interest in futures - it can be really high or really low, depending on how the transactions have gone, who trades with whom, etc. it doesn't seem clear to me that having even 107% of the shares outstanding sold short would be impossible within the law.
Shares are tracked and normally the broker can only let you borrow shares of stock from clients who have an account that are long the stock. Lets assume the company buys back 10% of its shares and some of the shares are ones that you are short, then you will receive a notice from the broker that your shares are being bought in. Also, its important to track the shares since if the company pays a dividend to the longs, you as a short seller are forced to pay that dividend.
Right, but the guy on the other side of my short sale is now long. So his shares can be lent, correct, and so on? I understand this whole thing can be a house of cards if some of the loan shares cease to be available for some reason, and that gives rise to a short squeeze when a lot of people lose their locates and get bought in.
Firstly, the stock has to be " hypothecated" Has to be in a margin account, and paid for. That makes it eligible. That is the only stock that supposedly get lent out. Second, nobody buys in anybody. Because if they did, the loss on the other s ide would be huge, and the contra broker gets the bill. Then, he'd go and buy something in on that guy. It's an honor among thieves thing. Josh Galpin wrote a piece years ago on the loss to pension funds as the big boys circumvented the process. If there's a locate with big neg rebate it, and GS naked shorts it to you, you don't think they wave the vig, do you? I had a UBS guy tell me years ago that on an institutional conf call, the head of the region told them, '............ and if you can't get a locate, you call me. I'll get you a locate." And by the way, Reg 144 stock? They lend that out too, Really. And it's known in the highest of circles. We've told ceos for years take the stock. Why do you think the street wants only electronic entry? It's why they have the shells over the nut on Coney Island.
A very inaccurate description and answer to the question : Quote from MoreLeverage: This might be a stupid question, but if I borrow 100 shares to sell short from someone who actually holds them, what's to stop them from being re-lent by the buyer I sell to? It seems to me a bit like open interest in futures - it can be really high or really low, depending on how the transactions have gone, who trades with whom, etc. it doesn't seem clear to me that having even 107% of the shares outstanding sold short would be impossible within the law. -> Actually the DTCC should be the organization to track. Each security (stock) has a tracking number, and all stock lending ultimately crosses the desks of the DTCC, hence they should make sure that one and only one stock with identical ID is lent out at a given point in time. This has nothing to do with any client or with any broker. Especially client most times have no idea where there stocks are and whether they are lent out. The responsibility lies with the entity that lends out shares, whether it be a large client such as Fidelity, a deposit bank such as State Street or BoNY, or anyone else being in possession of the stocks. In regards to dividends its not that you net pay dividends to the owner of the shares. It is only that you need to pass them them back to the legal beneficiary even though economic ownership has been passes on in the process of borrowing the shares and selling them in the market.