They will repeal Grandfathering, and they don't want to. Tremendous opportunity for traders coming up. OPEN MEETING - WEDNESDAY, JUNE 13, 2007 - 10:00 A.M. The subject matter of the open meeting scheduled for Wednesday, June 13, at 10:00 a.m. will be: 1. The Commission will consider whether to adopt amendments to the grandfather provision of Rule 203 of Regulation SHO and the market decline limitation of Rule 200(e)(3). 2. The Commission will consider whether to re-propose amendments to the options market maker exception to the close-out requirement of Regulation SHO and the marking requirements of Rule 200(g) of Regulation SHO. 3. The Commission will consider whether to adopt amendments to the short sale price test of Rule 10a-1. In addition, the Commission will consider whether to adopt an amendment to the "short exempt" marking requirement of Regulation SHO. 4. The Commission will consider whether to adopt amendments to Rule 105 of Regulation M that would further safeguard the integrity of the capital raising process and protect issuers from manipulative activity that can reduce issuers' offering proceeds and dilute security holder value.
DOW JONES NEWSWIRES June 13, 2007 11:23 a.m. By Judith Burns Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--The Securities and Exchange Commission voted Wednesday to approve a change to tighten rules intended to curb manipulative short sales, including so-called "naked" short sales. The change eliminates a controversial exception that shielded existing short positions from requirements to deliver hard-to-borrow shares within 13 days of settlement. Once the change takes effect, short positions previously protected by the grandfather clause must be closed out within 35 days. SEC Chairman Christopher Cox said persistent failures to deliver shares sold short seem to be due to the grandfather protections, which the SEC included in 2004 to prevent stock-market volatility. Critics complained the protections undermined efforts to clean up abuses involving "naked" short sales. Short selling involves sales of borrowed securities, producing profits when prices decline. The practice is legal, but the SEC's Regulation SHO sought to prevent "naked" short sales, in which short sellers don't borrow securities they sell. SEC officials said delivery failures have declined about 35% overall since Regulation SHO took effect and have fallen about 53% for hard-to-borrow stocks defined as "threshold" securities. -By Judith Burns, Dow Jones Newswires, 202-862-6692; Judith.Burns@dowjones.com
Wall Street got a reprieve from more restrictive trading rules Wednesday as the Securities and Exchange Commission voted to put off any decision on whether to take away certain exemptions for options market makers. But the SEC did eliminate a controversial "grandfather" rule that many critics have said allowed rogue traders to manipulate certain stocks through naked short sales. It also eliminated the prohibition on selling short on a downward tick in price. At a hearing Wednesday on proposed amendments to a 2004 regulation on short sales, SEC Chairman Christopher Cox said the tightened rules "are aimed squarely at abusive short selling and market manipulation and promoting fair, efficient and orderly markets." The SEC has been considering amendments to its 2004 Regulation SHO to close loopholes that encourage manipulation, but the proposed amendments have not been without controversy. More than 900 letters poured into the agency since July from a wide assortment of commentators, including broker/dealers, hedge fund managers, ordinary investors and state securities regulators. One vocal critic of the rules is Overstock.com (nasdaq: OSTK - news - people ) Chief Executive Patrick Byrne, who has been waging a self-described "crusade" to stamp out abuses on Wall Street. "This is an encouraging development and the SEC is to be commended for taking this step," Byrne said in an e-mail Wednesday. The grandfather exemption, repealed by a unanimous vote Wednesday though the date for implementation has yet to be set, made an exception to the 2004 Regulation SHO that hard-to-borrow securities sold short had to be delivered within 13 days of the settlement date. Reg SHO exempted trade failures that existed before the rule was implemented in January 2005, and it exempted failures that occured in a five-day window before a stock is added to threshold lists kept by the major stock exchanges. Those exemptions are now eliminated though the close-out requirement was reset to 35 days from 13, giving short sellers more time to find shares to cover their open positions. Cox has said Reg SHO helped reduce trade delivery failures, but hasn't been as effective as hoped, as evidenced by stocks that have languished on the threshold lists for months and years. (Overstock.com, for example, has been on Nasdaq's threshold list for over 500 days.) These longstanding delivery failures are linked to the grandfather exemption for trades and by the options market maker exemption, which allows an options market maker to maintain an open short position to hedge his options position. High and persistent trade delivery failures can be a sign of deliberate naked short selling, "and that can be used as a tool to drive down a company's share price," Cox said. The grandfather exemption was put in the 2004 regulation out of concerns that forcing the close out in hard-to-borrow stocks would lead to a short squeeze--a trading term to describe what happens to short sellers when a stock rises instead of the hoped-for decline, and the short seller has to cover by buying more expensive shares. But the SEC commissioners acknowledged Wednesday that concerns about extra volatility and short-squeezes were overblown and that the benefits of eliminating the grandfather exemption outweighed the downside. Also part of the changes proposed Wednesday was a plan to publish two-month delayed trade delivery failure data on individual stocks that appear on the threshold lists. That data comes from the Depositary Trust Co. The SEC is also going to increase the frequency of short-interest reporting to twice a month from once a month. That change is slated to go into effect by September. But the matter of the exemption for options market makers is left open for now, something that is bound to cause consternation for those who wanted all the loopholes shut. The SEC will open a new comment period on amendments to market maker rules. "We look forward to a comparable reform closing the market maker exemption loophole, which is currently an avenue of great abuse," said Overstock's Byrne. "There is a bank being robbed in two ways: some crooks snatch a teller's cash drawer and sprint out the front, some saunter in the back door and loot the vault. What the SEC did today was put bars up in the tellers' windows. I applaud that. But tomorrow there will be twice as many crooks going around back."
I am just curious how important is it for options market makers to be able to naked short a stock for hedging purposes. If that avenue was not allowed, would it cause option spreads to increase or hurt individuals in some other way?
Who knows, maybe shorting a stock as we know it will end and the primary way to short will be done through the options market. Hedge funds are becoming dominant players in the options market. There won't be short squeezes everything will be arbed out. Too much heat on short sellers re voting shares, paying interest on stock lending, delivery of certs, etc. If the derivative drives the pps of the underlying on expirations week, what would prevent this from happening all the time assuming enough volume. Sometimes it seems as though there is more options trading on a stock on news than what would correlate to the trading volume of the stock at least than in the past. WTFDIK
I might add, if naked short is an issue with options mm's it would seem there should be more cos on the reg sho list. I don't spend alot of time on this issue, although sometimes it ends up being an in your face issue that is hard to ignore just due to my inquisitive nature. The amount of time people spend on this issue and how often it is brought up is amazing but in the larger picture studying naked shorting is not going to make me a better trader. Condense every aspect of a stock prospect into one word and basically, naked shorting is a negative, what is so hard about moving on to the next prospect? Their really aren't any good articles on naked shorting, the entire world of google et al has all been hijacked by bryne, sanity check, etc. no one it seems who would be qualified or ever have worked in the industry has written about it.
What does that tell you? Why do anaylsts totally ignore it in their pieces? Why does Cramer talk about manipulation but never naked shorting. There are many articles by scholars out there. Go to Alabama against fraud. Trimbath has written extensively on the topic. The SEC is totally bought and paid for. Yesterday was a scam on all accounts. It's going to take the States and the US Attorneys to sort it out. The mm exemption? Last week, OSTK was trending nicely when the stock dropped a buck. 1750 puts traded, as did 175000 shares of stock in a stock w/an avg of 324k. The question is, as a company who lists, do you trust mm's to "do the right thing"? Because you know there is no supervision. Go back to the first posts on OSTK CEO. No one even admitted there was such a thing as "naked shorting" . Yesterday, Bush's butt boy Cox said "abusive naked short selling" at least a half dozen times.
Where in the heck you been? Some guy asked about reg sho while you were gone and I had to tell him to call kervorkian. I thought you'd be right on it. Oh well, now you're back, I can get lucnh. (can't spell when i'm hungary.)
This guy was well ahead of the curve with his "investigatethesec.com" web site, and his attention to detail. some of his FOIA stuff is remarkable, as are his posts. He has contended the SEC is breaking the law. It is hard to refute. this piece is well done, and I thought should be here. Patch has been on Insana, who was the only one who had the balls to put him on. I know him to be beyond reproach, sincere, and indefatigible. David Patch: naked shorting is illegal June 15, 2007 Fellow Investors, I received an e-mail last night informing me that this web site lacked the information necessary to make a conscious and informed decision on whether to sign the petition or not. The individual asked that I address specifically whether naked shorting is illegal and if so, what specific laws were being violated. Since the site has been up and running for several years now I have to admit that basic information has become lost in the maze of other commentary and documents. So here are some simple answers: Question: Is naked shorting illegal? Answer: It depends. There is legal and illegal naked shorting and the difference is relative to the foundation of the trade itself à Market Makers making a bona-fide market in a security can legally sell stock they do not have in inventory, nor have they entered into a contract to borrow, in order to provide liquidity in a market where liquidity may otherwise not exist. The SEC defines this as a temporary condition where for example, large and unusual buy side interest comes into a security with only limited sell side interests. Regulators have created the market making exemption to allow the market makers to sell into this demand so as to not over-inflate the stock in this temporary buy side environment. à Market Makers who are shorting a stock in a house account, without meeting the standards of bona-fide market making and use the exemption to avoid a borrow on the short sale are executing an illegal trade. The failed trade is an illegal naked short. à Broker-Dealers who execute client short sale orders without a proper locate and fail to attempt to borrow a share to meet the 3-day settlement window are executing an illegal naked short sale. Question: What specific laws are being violated when an illegal naked short sale is executed. Answer: There are several laws that become involved in the short sale process and the settlement process. à Exchange Act of 1934 Section 17A (http://www.law.uc.edu/CCL/34Act/sec17A.html). This section pertains to the requirements of broker-dealers and clearing firms in the execution and settlement of a trade. It requires that for the safety of the investor and the markets, all trades must settle promptly and accurately. à Exchange Act of 1934 Rule 15c6-1 (http://www.law.uc.edu/CCL/34ActRls/rule15c6-1.html). This rule defines the settlement cycle for a trade execution. The rule requires that a broker or dealer shall not effect or enter into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers' acceptances, or commercial bills) that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction à Exchange Act of 1934 Rule 15c3-3 (http://www.law.uc.edu/CCL/34ActRls/rule15c3-3.html). This rule again applies to the broker dealers and requires that they take all necessary steps to obtain prompt custody of , and thereafter protect, all securities which have been purchased and paid in full by the client. When a naked short is executed, the purchaser is being denied protection under this rule as their broker dealer has failed to enforce the contracts of 15c6-1 and has failed to obtain the prompt custody of a share paid in full. à NASD Rule 3370. This is the Affirmative Determination rule that requires that in the execution of any short sale the selling broker-dealer representing the short seller or house account, must have engaged in a locate of a share available for borrow before the execution of that trade is made. Once the trade is executed, to be in compliance with rules 15c6-1 of the Exchange Act of 1934 the firm must then borrow those shares to settle the trade. To locate the shares without the intent of the borrow for settlement would be a contract violation of 15c6-1. à Chairman Cox Opening Remarks to SHO Reform June 13, 2007 (http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=67616 ). âFinally, in addition to today's measures, and because abusive "naked" short selling is illegal under the general antifraud provisions of the federal securities laws, I have asked the staff to draft a recommendation for a future rule proposal that would specifically state that abusive "naked" short selling is fraud. Such a rule holds the potential of streamlining the prosecution of this apparently rare form of market manipulation and, if today's measures leave any doubt, would direct still more Commission power to stamping out such abuses.â So the Issue: The SEC has made many statements such as that of Chairman Cox above but the Commission does not walk the walk to the comments made. In 2003 when the SEC proposed the short sale reforms under SHO the SEC never presented an option for a âgrandfather clauseâ to past persistent settlement failures. The public did not have opportunity to vote on such a reform and comment on the legalities of the proposal itself. By all rights these fails raise doubt as to whether they all fall under the âlegalâ standards allowed for a trade to fail settlement. By 2005 the SEC had aided the fraud in the industry, as the grandfather clause became law despite the questionable legality of the law. By allowing a free pass to these large and persistent fails the SEC violated their own laws regarding prompt settlement of securities and the legal terms of a contract in the execution of a trade. Consideration is also being given that the SEC violated shareholder 5th Amendment rights by taking the property of one (shares fully purchased) and giving such property to another (failing broker dealer) without providing compensation for such. The question posed is, does the SEC have the legal authority to decide for all shareholders whether or not each should promptly receive what was fully paid for? The SEC mission is that of investor advocate. Yet taking the property rights of investors and giving them up to protect the financial liabilities of industry members who choose, for financial reasons, not to enforce the contracts required under securities laws is a direct contradiction to such advocacy. During the June 13, 2007 hearings on SHO reforms, members of the Commission staff repeatedly confused forcing the settlement failures with market manipulation through a short squeeze. The SEC feared pricing volatility and upward movements associated with the settlement of these failed trades despite the SECâs admittance that a failed trade can be illegal and can be used to illegally depress the price of a security. Under the Exchange Act of 1934 the SEC does not have the authority to price fix securities in this manner as price fixing is considered stock manipulation. The SEC engaged in price fixing nonetheless and did so to put the interests of those who manipulated our markets with excessive and abusive trades into settlement failures above those who purchased into these trades. It is for these reasons above that we, the administrators of this petition, request your support in asking Congress to look at the possible criminal activities of the members of the SEC. Our nation can only survive and grow if our capital markets are considered fair and safe. Companies will choose alternative to going public and investors will place investments elsewhere if the markets are considered rigged and dangerous. Our communities thrive over a tax based generated by employed citizens and the companies that employ them. Destroying investor portfolios and destroying public companies based on market induced and regulator ignored fraud will have a lasting impact on these communities where such abuse took place. These markets are here for the investing public and not the investing public is here for these markets. The SEC needs to understand this accountability and we seek to enforce it. This is a very complicated issue made so by the political gibberish of the SEC. I hope this simplifies it somewhat. Thank-You Dave Patch For more information and presentation on naked shorting please direct your attention to www.thesanitycheck.com.
The way i see it, the grandfather clause was included at that time, not because forcing everyone to cover their naked shorts immediately would have created "volatility" as the SEC claimed at the time, but rather, the SEC did it to give more time to the naked shortsellers (ie rich people by definition) to cover their naked shorts over a couple of years, quietly and at favorable prices. Now that this period is over, the SEC is now removing the grandfather clause, the rich people are happy having covered their naked shorts at great prices and removal of the clause now will have little impact on prices since there will be no "squeezes"...business as usual. Think of it like a traffic light, it doesnt go from green to red right away, but instead it goes from green to yellow and then to red... Think about it this way, if you were the SEC, would you want to risk upsetting the rich people, the elite that make markets and run this whole thing, or would you appease them and give them time to unwind their positions quietly and therefore keep the markets running smoothly. What would be more important to do: Stand up for the little guy and risk collapse of the whole thing, or appease the big bully and keep things running smoothly? just my humble opinion