How is the SEC 'Experiment' Working??

Discussion in 'Wall St. News' started by flytiger, Jul 23, 2008.

  1. I think we can assume that since a rule restricting only 'naked short selling' reduced the shorting by 90 %, that most of the shorting in these issues was illegal. that, and the fact some of this stuff has gone up 50%.

    AUSTIN, TX, Jul 23, 2008 (MARKET WIRE via COMTEX) ----According to
    market statistics analyzed by S3 Matching Technologies, the SEC's
    emergency order to enhance investor protections against "naked"
    short selling in 17 financial institution securities has reduced short
    sells by about 70 percent for the targeted symbols, and 90 percent of
    short selling of Fannie Mae and Freddie Mac securities.
    S3, which processes trades for the country's largest brokerages,
    compared short sells of Monday, July 14, prior to the SEC order, and
    Monday, July 21, the first day the emergency rule was implemented.

    "Looking at the data from our clients," said Jack Holt, CEO of S3
    Matching Technologies, "it seems clear the market responded to what
    regulators wanted. Short sells, 'naked' or not, have accounted for a
    little over 1 percent of our clients' total volume. 2/3rds of that short
    sell volume disappeared on the first day the rule went into effect. For
    Fannie Mae and Freddie Mac, it's more dramatic at 90 percent."

    The SEC's emergency rule identified symbols critical to stability of the
    financial markets and ordered that the securities be delivered at the
    time short sells were settled. According to S3's Holt, analysis of his
    company's data shows the emergency rule appears to have all but
    eliminated the short selling of Fannie Mae and Freddie Mac securities,
    two institutions that many analysts feared were at risk of collapse.

    "The short sell slowdown during the first day was very significant
    across the targeted symbols," Holt added. "While there is no way for
    data to reveal if a short sell is 'naked,' there's no doubt the SEC has
    put a rule in place that has drastically reduced short selling,
    especially with regards to the Fannie Mae and Freddie Mac mortgage

    S3 Matching Technologies processes about 15 billion financial
    transactions daily and provides business intelligence reports on more
    than a million securities trade orders and stock options.

    About S3 Matching Technologies (

    S3 is an Austin, Texas-based company focused on providing data quality
    management software for the IT, telecom, financial services, and
    healthcare industries. S3 invented TeraMatch(R:
    67.58, -7.51, -10.00%), an algorithmic matching engine which uses
    rules-based scoring based on industry-specific best practices. S3's
    software may be deployed as a managed solution.

    CONTACT: S3 Matching Technologies James Moore Email Contact

    SOURCE: S3 Matching Technologies
  2. I don't see how they can propose this is accurate. The day the SEC puts a rule into account saying no naked short selling allowed, people are going to assume some people are going to stop shorting and might need to cover. Thus, they aren't going to stand in the way of a freight train moving up by shorting it. Saying short selling went down 90% on a day that was almost guaranteed to be an up day doesn't seem to prove anything to me.

    What am I missing?
  3. EricP


    I disagree. Your conclusion assumes that the SEC restrictions only affect those guilty of naked shorting. If this was true, I would be supportive of the new restriction and the evidence of it's success would be a drastic reduction in the Fail To Deliver (FTD's) for shorted stocks.

    Instead, the temporary new SEC restriction affect <b>ALL</b> traders that want to short a stock by requiring them to pre-borrow shares of the stock before they even place a short order. As a result, the trader is subject to considerable additional costs (today, the cost for me to borrow GS stock for potential shorting was 6 cents per share), in addition to a huge nuisance to work within these new restrictions.

    Today, for example, I borrowed a total of roughly 50k shares of stock, at a cost of $275, just for the right to be able to short four of the restricted stocks at some point during the trading day. Regardless of whether I actually found an opportunity to short those stocks or not, the cost was expended just to keep that option open.

    Note that me and the firm I trade through have never been guilty of naked short, but, as a result of the SEC restrictions, my shorting volume in those stocks has been reduced by over 90% this week, as I have estimated that the cost and trouble of working within the new restrictions were not worth the effort to conduct my normal trading in these stocks.

    The 'problem', as I understand it, is to eliminate naked shorting (as measured by FTD's, for example). Clearly, the temporary restrictions penalize all traders who otherwise would choose to legally trade those stocks in an effort to eliminate 'naked shorting' by the few, which could be better controlled by other means (forced buy-ins for all FTD's, for example).

    The rally in the financials in the past week have been heavily influenced by many factors of government intervention (and in some cases, misguided policy). Certainly, the shorting restrictions cause and upward bias for the affected stocks as virtually all traders have an additional bias against shorting forced upon them. => If a higher stock market was the simple desired goal, then I presume the solution to bear markets would be to permanently eliminate all shorting of stocks, a silly proposition.

    Please note that the sharp drop in oil prices in the past week have also had a heavy bullish influence on the stock market, and the prospect of government intervention (backstops, equity stakes, etc) to the benefit of FNM and FRE has also been a benefit to the financials this past week.

    To conclude... While I fear that the rally this past week will lead to an expansion and/or extension of the temporary SEC restrictions, I believe that the restrictions are a bad idea and unnecessarily impact on the operation of free markets. The implied goal of the SEC can be better realized with other, less drastic restrictions, IMO.
  4. mokwit


    You are missing the fact that the SEC likes to promote itself as being active and doing a good job. Political soundbites seems to be pretty much its main mission these days.
  5. Of course the amount of shorting in those names is giong down. No one I know can get a locate without paying up the ass for shares of GS, FNM, FRE, BAC, etc. Daytraders who jump in and out of those things for millions of shares daily now can't short, which likely lowers the amount of shares shorted.
  6. Choices

    1) Have unlimited no holds barred shorting and destroy YOUR financial system

    2) STFU

    Choose Wisely.

  7. Good, maybe they can find honest work.
  8. in my humble opinion they changed the rules of the game to help financials.

    they obviously were not going to allow them to be destroyed.

    they were too big too fail.

    i think more importantly as history has proven when you try to alter the course of something that fundamentally is trying to do the opposite you may win one or two battles but ultimately you are going to lose.

    maybe they know that and they dont mind if the stocks go down to reflect this but not as quickly as they were.

    given they have rallied back a little/a lot then im probably going to play them again from the short side.

    for me the us investment banks and fannie/freddie are bankrupt on paper.

    for shareholders these companies are doomed to failure.

    paulson has made that perfectly clear.
  9. And that's because the 'locates ' you're getting aren't real. We know that they lend stock out over and over and over. That's why the FBI is on Stock Loan, where Wall St. makes about 20% of their profits. At least they got that going for them.

    You realize, of course, we've never discussed pre-netting, x clearing, offshore fails.............

    You are just getting a flavor of the "settlement system', which we probably should call, 'non settlement' system.

    Just the beginning.
    #10     Jul 24, 2008