SEC, stop naked short selling!

Posted Apr 8th 2009 5:00PM by Connie Madon
Filed under: Market Matters

Short selling has gotten a bad rap lately. If you look at the markets with an open mind you will see that there are people who believe that stock XYZ is going up and Joe the investor wants to buy it to make money. Yet if you talk to a dozen people there will be those among them who say that stock XYZ is no good, that earnings are bad and that the stock will drop further. Here is where the notion of short selling comes into play. If you allow an investor to buy XYZ stock, it is not fair to prevent an investor from selling XYZ stock. Markets are always two sided. There are buyers and there are sellers, otherwise... why have a market?

Short selling by itself is not wrong nor is it illegal. What is wrong is naked short selling. SEC regulation SHO permits naked short selling. Short sellers were supposed to first borrow the stock, usually from a brokerage house before selling it so they would have something to sell. They would then buy it back (hopefully at a lower price) and give that stock back to the lender. That has been the rule as long as we have had short sales. However the SEC enacted regulation SHO the permits naked short selling. Naked short selling is where you just sell the stock without first borrowing it from a lender. This is called a "fail to deliver" trade. The downfall of Lehman Brother was caused in part by the excessive naked short selling of an astounding 38 million shares and the SEC has done nothing to bring the naked short sellers to justice. Now you know damn well that a short seller knows if he/she has first borrowed the stock before making the short sale. If not they shouldn't be trading.

So the first order of business for the SEC is to abolish regulation SHO that permits naked short selling. To restore public confidence the SEC must conduct a thorough investigation or who sold 38 million shares of Lehman stock and "failed to deliver" the stock after buying it back and prosecute these persons for securities fraud.

Should SEC regulation SHO be abolished?

Tags: naked short selling, NakedShortSelling, regulation SHO

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Reader Comments (Page 2 of 2)

4-16-2009 @ 10:39PM

dgreese said...

Come on guys. There is nothing wrong with short selling and especially naked short selling. How do you think I got so rich?

4-23-2009 @ 4:27AM

matty said...

I love it! Come to America! The land of the free. Free to face a life full of selfish bastards only concerned with how to selfishly exploit others for their own gain. Waah! Get off your pitty soap boxes and off your ass and take your compaints to your local senators, government, newspapers, etc. Spend just half your time that you spend being a spenster online and typing out all of this nonsense and DO something about it. Tired of all this pussy wining and crying. Shut up and dance - if you are american - then you are part of the reason this has been allowed to begin with! BTW the SEC is a total f***ing joke. But what do you expect - look at who heads it all the way down to the douhebags that answer their phones. Its all corrupt! So like I said earlier - Shut up or put up - stop playing the "intellectual-loud-mouth" puss