SEC Extends Order Limiting Naked Short Selling Through August 12

The FTD problem represents a decent chunk of change. Josh Galper, managing principal of Vodia Group, said an analysis revealed $9 billion of FTDs in 2007. Susanne Trimbath, chief executive and chief economist of California-based STP Advisory Services, calculated that FTDs in the U.S. equity market cost investors $2 million daily in lost earnings last year.



The above from the Washington post.

I don't think 2 million daily is a lot of money. What's the daily market volume in dollars per day?

 

She said "costs". 9 billlion divided by 300 days is a bit more than 2 million, and I don't know where she got that figure. I know Susanne; havent' heard from her for a while. But that number makes no sense.

 

pffftttt. Probably someone in editorial dept did the math.

 

be sure to hit the link, and see the 'compilation'. It's very telling, and makes the case of a captured media.

http://www.deepcapture.com/media-herd-lassoed-by-a-lie/
Media Herd Lassoed by a Lie

August 19th, 2008 by Mark Mitchell

In the middle of last week, a previously unknown professor in Switzerland published a report that purported to show that the SEC’s emergency order preventing naked short selling in 19 financial companies had been a mistake. By the end of Friday, that report had become the basis for stories by reporters at the Wall Street Journal, the Financial Times, the Economist, TheDeal.com, Dow Jones Newswires, Reuters, and Hedgeworld.

So much for the notion that our financial media is comprised of independent thinkers, all busily analyzing data and asking probing questions in the sacred pursuit of “truth.” Far easier to copy straight from the press release (or, more likely, the email sent around by some short-seller or lobbyist).

“The 19 stocks lost 3.83 percent of value…compared with their peers,” reported the Financial Times.

“The…shares affected by the order lost about 3.8 percent of their value, compared to their peers,” reported Reuters.

“Shares covered by the order lost 3.8% of their value compared with their peers,” reported Dow Jones Newswires.

“Shares covered by the order lost 3.8% of their value compared with their peers,” reported the Wall Street Journal, which merely reprinted the Dow Jones story.

That this phrase was circulated with such precision is all the more remarkable considering that it makes absolutely no sense. “Compared to their peers”? What does that mean? If I have a hundred bucks, I cannot lose $3.80, “compared to my peers.” Either I lose the $3.80, or I do not.

Aside from being gobbledygook, the phrase is grossly misleading. The 19 shares covered by the emergency order did not lose value. To the contrary, their prices rose dramatically from the day that the order was announced until its expiration (at which point prices plunged).

Yet, to drive home the misperception, the Wall Street Journal’s headline reads: “Stocks Under ‘Short’ Order Fell During Protection Period.”

Reuters reported that “many of the 19 stocks…suffered declines in their share prices.”

The Financial Times proclaimed that the emergency order “had contributed to a decline in the [19 companies'] share prices.”

All according to the professor in Switzerland. But clearly, these reporters did not read the report by the professor in Switzerland. If they had, they would have known that the professor, who is named Arturo, did not claim that the 19 stocks’ prices had fallen. He said only that their “abnormal returns” during the period of the emergency order were 3.8% (or 10%, according to a follow-up report) less than the “abnormal returns” of “their peers” — a sample of 59 financial stocks that weren’t subject to the SEC’s order.

An “abnormal return” is the difference between expected returns (based on previous performance of the stocks and overall performance of the market) and actual returns. It is highly debatable whether it makes sense to look at abnormal returns (as opposed to plain old prices), but even supposing they are relevant, Professor Arturo’s numbers (if not his misleading language) suggest that the SEC’s emergency order profoundly improved the performance of those 19 stocks.

The professor analyzes only one time period prior to the emergency order: June 1 to July 14. He finds that over this period, cumulative abnormal returns for the 19 stocks were negative 12.34%. From June 15, when the order was announced, to June 20, cumulative abnormal returns were positive 12.42%. From the time that the order actually went into effect on July 20 to its expiration on August 8, the abnormal returns were negative 4.57%, still a lot better than the period prior to the emergency order.

Meanwhile, according to the report, the 59 financial stocks that were not directly affected by the order got an even bigger boost. Their cumulative abnormal returns were negative 10.82% over the pre-emergency order period of June 1 to July 14, and positive 5.68% over the July 20-August 8 period when the emergency order was in place.

It might seem paradoxical that unprotected stocks were helped more than the protected stocks, but it is not really surprising when you consider that illegal naked short selling of many of those 59 companies was far more prevalent than in the cases of the privileged 19. Perhaps criminal naked short sellers, guessing that the SEC might extend its protections across the market, began borrowing real shares or decreasing their short positions in all the companies they were attacking. The stocks that had been under the heaviest naked short attacks saw the biggest gains.

The fact that the abnormal returns of the 19 protected stocks were 3.8% lower than the abnormal returns of other stocks is otherwise meaningless. Investors might rather buy the stocks with higher returns, and in that sense the 59 unprotected stocks are more valuable. But this does not mean that the 19 protected stocks “lost value” during the emergency order. It does not mean that their returns (abnormal or otherwise) worsened. It certainly does not mean that their “prices declined.” Not “compared to their peers.” Not any other way.

Normally, I would be inclined to sympathize with the journalists. Financial statistics are a little bit complicated. Deadlines are tight. And never in history have journalists been more overworked. Often, reporters just don’t have time to do the research, or crunch the numbers themselves.

But the problem here is not just that journalists misread, or chose not to read, a report about a complex issue. No, what horrifies is that an entire pack of journalists failed to make the simplest of all calculations. They failed to compute the difference between good and bad.

Illegal naked short selling is one of the biggest financial swindles of our lifetimes. That is bad.

The SEC took a small step towards preventing this crime. That is good.

Rather than demand that the SEC take a bigger step to protect all of the hundreds of companies affected by illegal naked short selling, a bunch of important financial journalists published a slew of nearly identical stories suggesting that the SEC shouldn’t have acted at all — and their only excuse for writing these stories was that somebody sent them an email misrepresenting a skewed report by some guy in Switzerland named Arturo.

That is bad. Really bad.

Click here for a compilation of these bad stories.

 

This confirms there were substantial FTD's in these names. The only reason to create an FTD is to super charge the decline.

U.S. SEC to propose new short selling rule in weeks
Tuesday, August 19, 2008 12:38:39 PM (GMT-04:00)
Provided by: Reuters News

WASHINGTON, Aug 19 (Reuters) - The top U.S. securities regulator plans
to propose new short selling rules in the next few weeks.
U.S. Securities and Exchange Commission Chairman Christopher Cox said on
Tuesday that the proposal "will focus on market-wide solutions" but is not
intended to have any impact on the direction of prices.
Cox also said fails to deliver "were reduced substantially" for the
stocks covered under the SEC's recent emergency short selling rule.
"It was a very effective order from that standpoint," Cox told reporters
after a news conference.
The SEC enacted an emergency rule on July 21 that required short sellers
to pre-borrow stock in mortgage finance giants Fannie Mae <FNM.N> and
Freddie Mac <FRE.N> and 17 Wall Street firms such as Goldman Sachs <GS.N>
before executing a short trade.
Investors who bet on falling stock prices also have been required to
deliver the securities by the settlement date -- obligations that forced
Wall Street to change the way they traded those stocks.
Short trading in those 19 stocks reverted to rules governing other
shares on Aug. 13 as the SEC experiment against abusive short selling
expired.
(Reporting by Karey Wutkowski)
((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8399)) Keywords:
SEC/SHORTSELLING


(C) Reuters 2008. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks

 

The SEC rule did nothing to decrease the number of naked short sales in the 19 stocks over the period of time it was in force.

First of all, Cox himself repeatedly stated that the rule was "prophylactic". There was no increase in naked short selling in those shares before the new rule and the short interest in those stocks did not change during the rule either. Moreover, the interest rate for borrowing the shares remained positive and did not change with the advent of the rule - which means, as Cox said, there was no crisis to begin with.

Second, market makers (including options market makers) were still exempt from so much as locating the stock. In effect the only thing that changed was which market the volume went to. You all may have noticed a decrease in trading volume in the stock market for these shares and an increase in the options market. The shorts bought horrendously expensive puts, sold to them by options market makers who then sold stock to hedge their short put position. The stocks immediately began trading much lower in the options market than in the stock market and anyone smart enough to know that a short put + long call is a synthetic long position in the stock established long positions in the options market instead of the stock market.

Cox, feeling the warmth of the spotlight planted firmly on the Fed and Treasury, implemented this rule as a way to elbow his way back into the headlines. He wants to be a crusader too. The markets be damned.

 

the last two days were very good days on the short side.

hopefully these measure will continue to be a "band aid" thus creating more downward pressure building up.

too many rules and controls seem to eventually lead to larger and quicker moves

we can profit from this either way

 

This could be a good long. I'll look later.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20080819/REG/823590&template=printart



Pitt to work with Alabama on naked shorting

By Dan Jamieson

August 19, 2008

Harvey Pitt, former chairman of the Securities and Exchange Commission, has been named deputy attorney general of Alabama.



He will assist the state in its investigation of naked short selling — in particular, negative rumors reported by The Colonial BancGroup Inc. of Montgomery, Ala., about the short selling of its stock.



Mr. Pitt will continue to serve as chief executive of Kalorama Partners LLC, a Washington consulting firm.



“He will be coming in [to Alabama] on a regular basis,” said Joseph Borg, director of the Alabama Securities Commission in Montgomery.



“I went to our [attorney general] and said, 'I want Harvey; he knows his stuff,'” Mr. Borg said.



With the appointment as deputy attorney general for Alabama, “we can share all our investigative materials with him, and it's protected” legally, Mr. Borg said.



Mr. Borg said Colonial BancGroup had approached him about false rumors regarding short selling of its stock.



“We want to see where these rumors start,” he said.



Naked short selling is selling short without borrowing the stock to be sold, and failing to deliver it.



In Alabama, spreading false information about a financial institution can be a criminal offense, Mr. Borg said.



He added that he has contacted other firms known to be subject to naked shorting, but most don't want it known that they are the targets of short sellers.

 

You know what saved Alabama from the Enron fiasco? The couldn't spell derivative so they didn't buy any. Nakeed shorts eeehhhhaaaawww!

 

37 days on Reg sho. This is a good trade candidate. I don't expect them to give up easily, but I expect them to give up.