There was a strong outcry last year: "Stop the short selling. It's killing the market." Short sellers were blatantly selling short and then "failing to deliver the stock."
So what exactly was happening? First of all, in order to sell short (sell something you don't have) you must first borrow it from someone else. Usually there are willing lenders at large brokerage houses. What you are trying to do is to sell the stock first and replace it a lower price later on (that is if the market goes your way -- down).
Last year we saw traders selling short without first borrowing the stock. Then, when the buy trade to replace it was executed, there was no stock to deliver. Remember, they were supposed to borrow it first. This is called a "fail to deliver" trade. Former SEC commissioner Roel Campos wrote a letter and posted it on the SEC's website saying: "these companies are instead targets of illegal and manipulative trading with intentional failures to deliver used by traders to extract profits as the share price plummets."
It seems that the SEC knew all about this way back in 2005 with the implementation of Regulation SHO, which mandates "threshold securities" lists daily by the exchanges of stocks that have suffered at least five consecutive days of delivery failures totaling at least 10,000 shares and at least 1/2% of their outstanding shares each day. Once a stock hit the threshold list, traders were required to close out 'failed deliveries' by the 13th day after the trade." These lists normally ran 300 stocks a day. Last year amid the outcry against short selling, the SEC tightened it rule requiring short sellers close out their "fail to deliver trades on the fourth day. Also last fall the SEC restricted short selling in certain stocks. To date it is not clear whether or not the SEC has abolished Regulation SHO.
Can you imagine that the SEC even allowed "failed to deliver" trades in the first place? Whoever dreamed up this scheme of making lists and waiting 13 days before closing out "failed trades" should be summarily fired. In fact, there needs to be a complete housecleaning at the SEC. For goodness sake, stop this madness! First the SEC allows "fail to deliver" trades and then says that you have 13 days to close out these trades. This is sheer folly. When the SEC looked at Lehman's "fails to deliver" trades, there were an astounding 38 million shares of these trades. Where is the investigation of who did this and why are they not brought to justice? Meanwhile brokerage houses were making huge sums of money from short sellers.
Do you have any comments on the SEC rules permitting "fail to deliver" trades?
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Reader Comments (Page 1 of 1)
4-07-2009 @ 3:39PM
beachpaul said...
What are you, a communist?
4-07-2009 @ 7:38PM
Dave said...
No monetary transaction should be so complicated or convoluted that an average 6th grader could not do it.
4-07-2009 @ 4:05PM
wdmurphy said...
So who's surprised at this? Just another reason to eliminate all present represenatives in congress and the senate. They are supposed to be representing the American public not certain interests.
4-07-2009 @ 4:48PM
bitasno said...
this is astounding hasnt the sec ever seen eddie murphy in trading places as those two old farts sceaming sell sell well this shows how the sec takes care of it own again the whole market stinks of rich have one justice and the little guy is mostly excluded or at a great disadvantage . fail to deliver shit why dont we all just sell stock we dont own and piss on the delivery date shit this is the best plan anyone could have thought of even bernie madoff couldnt top this one . and the sec shows us how to "f" UP AGAIN I thought selling something you didnt own was fraud . not to the sec i guess . looking good billyray !!!
4-07-2009 @ 5:53PM
John Huckleberry said...
Short selling has been the markets and hundreds of companies down fall this past year. Ban it. MHO.
4-07-2009 @ 7:38PM
winslow said...
We needs a complete cleaning-out of Congress AND most CEO and Board of Director's positions.
We need individuals that are ethical.
A limit needs to be put on salaries, benefits, and bonuses along with restrictions on politicians "other" avenues of income.
4-07-2009 @ 6:11PM
Iridium said...
Sellign short is fine as long as you actually intend to own the stock. To sell it without even borrowing the stock in the first place and never taking delivery is outright financial fraud.
Wow it is no wonder the stock makret has risen and fallen by 20 years of growth and decline in a few short months. People are making money without ever having to own anything in the first place.
This is another thing that proves that the current trading system needs to be scrapped. Wall Street is a playground of the corrupt and unethical. Sanity and common sense needs to be brought back.
4-07-2009 @ 6:27PM
Bill P said...
There are a lot of problems with the SEC, but they are like our government and don't care. First of all there shoud never have been all these different kinds of trading created in the first place. The stock market today is nothing but gambling, which is supposed to be illegal except in Nevada and certain other states. What ever happened to investing in companies which is what the stock market was a vehicle to do? You pick a company because of their product portfolio and invest in it hoping it did well and maybe produced a dividend or increased in value. Today with all the convoluted buying a selling deals, it is pure gambling. The big brokerages and hedge funds control the market swings every day and the average investor is not in on what they are doing and how they manipulate the market, so we are at their mercy and hope for the best. What a crock of sh-t this SEC has created all in the name of themselves making billions at our expense and with no oversight by government.
4-07-2009 @ 9:17PM
william lindblad said...
Shorts have been around for a long time and like so, the tactics of Jay Gould. Trying to regulate human nature is difficult. It's Biblical, what happened when Moses went up the mountain? Party time.
When someone finds an answer, let me know.
4-08-2009 @ 11:24AM
matt said...
There is an answer, it's called justice and retribution. The human excrement that executed these types of trades are, as was noted in this post, get to flit away on yachts and beautiful women while they write checks to government agencies that protect them.
Moses has indeed left the building.
4-09-2009 @ 10:41AM
Doug T said...
And the economic crisis ramifications continue. Any chance the sec and these brokerage houses will be held accountable? Not likely....
See my web page for accountable investment strategies that work and more.
Doug T....The mutual fund guy
http://www.mutualfundwealth.com/