If the stock is cheap, buy it. All genuine investors WANT stock to fall, so they can buy it cheaper. What is the problem? Please, everyone go out and short 50 times the float all the stocks in my portfolio down to 1 cent. I will then own 100% of the equity of about 30 blue chip corporations for $3.00. I will install my own board, have them declare a special dividend of $10 per share, and you will all get pounded like rented gerbils since you will be forced to pay out 100-1000 times your cost basis in cash. Or I could just wait for dividend time, the yield on a 1 cent stock would be in the tens of thousands of percent - good luck trying to pay that out if you are short from a few cents on 50 billion shares.
Replace "hedge fund" with market maker. Tell me how does the situation change? Imagine a situation where value investor X wants to buy the entire float of a company in 1 day (e.g. a market crash). A market maker ends up long deltas due to the crash, so they hedge some stock without a locate. At the end of the day the value investor has bought the entire float. The market maker is short an additional number of shares that do not exist. What now? The market maker's transaction was just as fraudulent as the hedge fund in your example. Another example - what if a market maker sells calls in a volume greater than the float? That is just as fraudulent, since they could never deliver on the amount if all calls went into the money.
Naked shorting should be totally legal, and failure to deliver should result in criminal conviction. Just like writing a cheque. A cheque is a 3 day promissory note - you don't have to have the money when you write it, but if you don't have it within 3 days then you committed a crime of fraud. Same with shorting a stock IMO. There is no excuse for allowing one class of market participants to commit fraud by shorting stock and then failing to deliver. There is no rationale for calling short selling fraud if the short seller does actually deliver by the settlement date. So it's very simple - make FTD an explicit crime like writing a bum cheque for $X million. By current legal comparables, that would result in 5-20 years jail time for the short-seller in question. That would be a reasonable deterrent.
i understand your point but your example has zero basis in reality. i'm just going to guess that the other 40 million shares traded would be broken because they weren't real. who knows how it would be handled but i would guess the stock would be halted for a few days to figure everything out. there would also be a huge case of market manipulation brought against fund ABC if they were that dumb. further they would be massively underwater in their manipulative position. there are just so many realistic holes to your point that make it worthless to discuss what you are talking about unless you have a specific example.
Calm down Cutten. Daytraders don't have to locate because they buy in before the close. However, interesting that you bring up daytrading. I worked for one of the most notorious daytrading firms on Wall Street and we conducted our fair share of bear raids on stocks intra-day thanks to the good old bullet that allowed us to sell stocks short on a downtick. We absolutely anniliated stocks. It's amazing the amount of damage that can be done even on an intra-day basis with no uptick rule and not having to locate stock on a short sale. In theory, our bullets were suppose to be conversions that had us long stock/long puts/short calls but the transaction was fictional and never existed. Obviously the SEC did away with bullets and for good reason. But it explains how the process works on a micro basis none the less.
AZ / BAC / BCS / C / CS / DB / FNM / FRE / GS / HBC / JPM / LEH / MDTL / MER / MFG / MS / RBS / UBS unborrowable
Example? We did this to thousands of stocks. LOL. We weren't the only ones. Everyone was doing it. It was free money.
1000's eh? how far back are you talking? post-ene? married puts? and you guys never had any compliance issues?