Novel Idea re Shorting

Discussion in 'Order Execution' started by Babak, Dec 15, 2005.

  1. Babak


    Has anyone ever had this idea?

    Allow shorting of any security on the stock exchanges as long as the position is intraday.

    That is, no requirement to borrow as long as you initiate and cover during regular mkt hours.

    Wouldn't it cut through all of the beaurocratic mumbo jumbo? wouldn't it allow traders know, trade?

    Am I missing something or is this a no brainer?
  2. Here's my take. For a market to be trustworthy and reliable, the proper functioning of the market must not depend on the creditworthiness of individual participants. It must be structured so that any participant can fail at any time and the counterparty will not notice. That's why futures markets are cash settled and why the OCC has to act as counterparty on all options trades. That's why Reg T is in place to limit individual leverage.

    If you were allowed to take a short position without borrowing shares, you would be making a promise to the market to either buy back the shares or borrow them before market close. Adverse price movement could prevent you from doing either. No matter how much collateral you have, a sufficiently large adverse price movement on a sufficiently large position could prevent you from covering. The market would break down.

    So, I don't like your proposal. (And needless to say, I do not like naked shorting by privileged market participants, I believe it weakens the markets.)

  3. Well you may believe it but it is not true.

    What are you going to to do when the 'public' wants to buy and there are no natural sellers.

    You gonna shut down trading? Lift the price on a $10 stock to 50 so that even the most bullish are 'forced' to sell. That robs the stupid buyer.

    Think about it. You need naked shorts.
  4. I'm gonna go way out on a limb here and say, the transaction should occur at the natural market clearing price.

    Why do you believe that allowing sellers who neither possess nor are able to borrow a security to participate in its market will produce more informative prices?

  5. 1) Manipulation would be rampant if market makers could not naked short. they cannot carry size inventory in every name.

    2) If you've ever seen a stock that was being squeezed and no one would short, it is not a pretty site. Market clearing my foot.

    It is a naive view that all naked shorting is somehow evil.
  6. I think its a great idea to allow naked shorting as long as the position is intraday. Whether the stock has been "located" for you in advance or not, you would still have to cover if the stock rises a lot intraday, so what real good does "locating it" do? Since its intraday, i think the amount of shorting in the stock may not be so much as to cause a problem as opposed to allowing naked shorting overnight, its not the same. Say on average intraday traders may short 50,000 shares of a particular stock and cover by the close normally, but allowing overnight naked shorting would cause problems because longer term players can accumulate large naked short positions over time

    My questions:

    1. Which software vendors and clearing firms "allow" or "turn a blind eye to" naked shorting currently. (maybe people wont be brave enough to step forward and reveal this)

    2. Whose legal responsibility is it if a naked short position is caught by regulators? Clearing firm, broker or trader ?
  7. alanm


    Forcing people to cover by EOD seems hard to enforce, not to mention issues like trading halts, etc.
  8. Good point. This would only be available to traders who KNOW that they will be out by EOD since that is their strategy or trading style. Traders who may or may not be out by EOD will not have that luxury and would have to go through the normal process of doing a locate. As for trading halts, i think they are quite a rare circumstance, but in those cases there would be complications. I think it should only be necessary to locate shorts if the holding period will exceed the settlement date (currently 3 business days). All comments welcome.