ULTIMATE HYPOCRISY: You can't 'naked short' certain equities, but 'Market Makers' can

You are not listening to me. Naked short selling is not illegal. As long as you get a locate within 3 days!!!!

If you can't locate the stock, it can't be sold!!!! This is basic math!!!

Think about it. If you have 1 million shares in the float and some hedge fund could sell 50 million shares short. That stock is going to ZERO!!!!! Supply and demand. This is why the law clearly states that there must be a locate. If the locate does not happen, the stock must be bought in. There is absolutely no ambiguity to this law. The catch was there was just too much money to be made on the stock loan desks on hard to borrow issues. Brokers make a killing on their stock loan desks. In theory, they can charge whatever they want for a locate. It's like robbing a bank. Listen, you don't understand how this business works and you obvously don't have a clue how brokers make money.

 

EXACTLY!!!!!! Now you get it. That is exactly what I just posted! Finally you are seeing the forest through the trees.

 

Those brokerage firms are market makers.

 

No, they are not. The market makers are broker dealers on the floor. Brokers trade with MM's. Oh my god man, You really are green aren't you. Do you know anything about this business or do you just post on ET 100 times a day and don't trade?

 

You are the naive one.

You act as if you know, make false statements (e.g. "naked shorting is illegal, period"), then attempt to clarify them in an attempt to save grace ("three day clearing").

Goldman Sachs IS a market maker. Any broker-dealer that agrees can act as a market maker, and many of these firms have investment arms.

I'm not going to waste time arguing with you.

The ultimate irony is you accusing me of being 'green.'

I didn't even give you the rope. You supplied it yourself and hung yourself with it.


http://trustedadvisor.com/trustmatt...-Market-Makers--Brokers--and-Trusted-Advisors

Charles H. Green's Trust Matters


Ben Stein vs. Goldman Sachs: Market-Makers, Brokers, and Trusted Advisors
by Charles H. Green on Tuesday, December 4, 2007

ben stein bueller - Yes, that Ben Stein. Bane of Ferris Bueller. Droll protagonist of Comedy Central’s Win Ben Stein’s Money. Pitchman for beachball eyeball medication. And—lest you forget—economist.

In this Sunday’s NY Times, Ben Stein let fly with an article—The Long and Short of it at Goldman Sachs —that must have raised a few hackles even at that above-it-all Wall Street institution.

Stein’s breezy style is to write—as he would put it—all ‘round Robin Hood’s barn, until he ends at a very sharp point. So he does here; but he pulls his punch.

Background. Alone among Wall Street players, Goldman Sachs not only didn’t lose money in the subprime debacle—they made a great deal of money, by going short, or betting against, the very packaged subprime mortgage-backed securities they were selling to customers. (See Allan Sloan’s excellent Fortune article on a sample Goldman offering .)

Stein reminds us of Merrill Lynch analyst Henry Blodget in the last overdone market; Merrill hyped tech stocks to investors, while Blodget privately called them “junk” to his friends. In 2003, he was permanently disbarred from the securities industry.

Then he pulls the trigger.

“How different would [the Blodget situation] be from selling short the junky stock that your firm is underwriting? And if a top economist at Goldman Sachs was saying housing was in trouble, why did Goldman continue to underwrite junk mortgages into the market? …

It is bad enough to have been selling this stuff. It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets…

Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster...

Bracing stuff, that—simultaneously calling Goldman Sachs a bunch of salesmen, questioning the moral rectitude of the Secretary of the Treasury, and calling for an investigation of the investment banking industry.


If you like that sort of thing, you’re probably woo-wooing and high-fiving Ben Stein. But the truth is, by demonizing Goldman Sachs, Stein lets everyone off too easily.

Here's what I mean: What’s the difference between a market-maker, a broker, and a trusted advisor?

A market-maker is socially and legally authorized, even required, to take the other side in a transaction in order to maintain liquidity in trading.

A trusted advisor has your best interests at heart—gives you advice based on what is best for you, not necessarily best for the advisor.

A broker is usually found somewhere in the middle—making markets, giving advice, and trying to avoid the perception that his own self-interest is driving the position. Which, all too often, it is.

Which was Goldman Sachs?

Some might say market-maker. You can’t be a viable institution if you don’t systematically manage risks. If you’re going to sell $100 billion in CMOs, you might also want to hedge your exposure. Goldman just hedged well.

Some will say Goldman is a trusted advisor. Some customers, perhaps. I suspect Goldman will, anyway. They point out that they were not the only ones to sell CMOs. True. Not much of a proof for trusted advisorhood, but true.

But broker sounds more likely to me. The question is only partly one of transparency. Were Goldman’s short positions really hedges, or separate bets for their own accounts? Did Goldman tell buyers of CMOs that Goldman was net short?

But transparency alone can get reduced to “letter of the law” stuff. Motives matter too. No one would accuse a pure market-maker of claiming that one side of the deal was “better” than the other—the market-maker’s job is devoid of advice.

And no one would accuse a trusted advisor of having shaded advice to suit his own ends—because his trusted advisorhood would be instantly shot.

Life in those cases is clear; there are the black hats and the white hats. And Ben Stein is pretty clear about the black hats.

The question comes when those motives are unclear. When you just can’t tell what role Goldman was playing—when Goldman itself isn’t clear, or sends out weak messages (others sold CMO’s too; we are not a crook)—or we ourselves don't know what role we want from Goldman—that’s when we’ve got a social, institutional, broad-based trust problem.

Now that’s a real problem, Mr. Stein.

 

You have no idea what you are posting do you? You are frantically trying to google everything in sight. You have steered yourself so far off course. You are now trying to compare CDO's with naked short selling? LOL. Later dude. I hope you don't actually trade for a living.

 

Right on, Mav.

The SEC is simply instituting this rule to protect investors from 'higher costs,' as they claim.

I'm sure that your implication that there's no arbitrage opportunities for market makers is spot on, too.

[If you don't even understand that naked short selling is legal, I hope you don't trade for a living.]

 

From the WSJ on the same topic (and a pretty good summary as to the arbitrary nature of the new SEC rule):

July 17, 2008, 1:24 pm
The Financial Short-Selling Spike
Posted by David Gaffen

Annelena Lobb has this report on how short interest in financial shares increased prior to the SEC actions.

http://blogs.wsj.com/marketbeat/

Short interest in shares of Freddie Mac and Fannie Mae, among others, surged last week, according to numbers from London-based firm Data Explorers. It came just before the SEC elected to crack down on naked short-selling — but hardly points to the end of the trouble for financial stocks.

Short interest in Freddie Mac has soared over the last year. The green line represents the stock price; the red represents the percentage of market cap on loan. (Source: Data Explorers).

The firm surveys the extent to which institutional shareholders are loaning shares, which can serve as a proxy for short interest. (In a short sale, a trader borrows stock and then sells it, hoping its price falls. Then she or he buys it back, hopefully more cheaply, and returns what was borrowed, pocketing any difference.)

Bearish bets on Freddie, Fannie and Lehman Brothers were spiking, at least as of the beginning of this week. As of Monday, Fannie had 18.65% of its market cap on loan – a jump of 67.2% since July 7. Freddie had 21.18% of its market cap in borrowers’ hands, a gain of almost 40% from July 7. Lehman Brothers Holdings Inc. had 16.48% of its market cap on loan, a leap of almost 36% from July 7, according to Data Explorers.

The SEC, meanwhile, announced plans Tuesday to curb naked short selling in shares of Fannie, Freddie and 17 financial firms, starting this coming Monday. Naked shorting refers to the practice of selling short without taking steps to borrow the stock.

“I think naked shorting is an abusive practice and shouldn’t happen in general,” said Dan Seiver, professor of finance at San Diego State University. “[But] they… have singled out banks and financials — I don’t see why you should have naked shorting of GM, either.”

 

Shorting FTD florists

 

One of the best conversational debates on the forum - don't let it go off into insults and rude commentary. It was an interesting read. Please.