Finally, Someone Says Something
Chuck Ponzi April 10th, 2007
This is not a political agenda and has nothing to do with the Housing Bubble popping, but I’m glad someone finally said something about the deceptive, destructive, and unfair practice of Naked Short Selling.
For those of you who complain about the federal deficit, we could pick off the low-hanging fruit of this problem and recover as much as $1T (Yes, trillion) in taxes. Think it doesn’t happen? You haven’t seen enough of what Wall Street does, then. I have heard estimates as high as 50% of all trades on Wall Street are naked short and FTD related. What a deceptive piece of crud! Preventing a fledgling company from being able to offer open market issuances to raise funds is choking off small cap America.
To be more specific, this loophole benefits market makers, hedge funds and maybe even the funding of terrorist cells. Our national debt and the Iraqi war could have been paid for with the elimination of naked short selling or a mandated stock buy-in after shorting.
Naked Short Selling is Anti-American!
Back to our regularly scheduled program.
I’m assuming this is a joke because the press release about “naked short selling” is so terribly ignorant and uninformed.
OK, what exactly is uninformed?
Attacking the problem from another angle is perfectly fine in my opinion.
Tell the public how they directly lose out from naked short selling.
BTW, we are talking about Naked Short Selling.
This paragraph from the press release made me laugh out loud:
“To be more specific, this loophole benefits market makers, hedge funds and maybe even the funding of terrorist cells. Our national debt and the Iraqi war could have been paid for with the elimination of naked short selling or a mandated stock buy-in after shorting.”
These days invoking “terrorist cells” is a pretty good trump card, I guess.
I’m pretty ignorant about naked shorts in particular, but it always seems dumb when a CEO blames the shorts for his company’s under performance. There are just so many better weapons at his disposal than the bully pulpit. I’m not sure about the naked variety, but paying a dividend literally takes money out of regular shorts’ accounts, for instance.
In any case, it seems like getting rid of naked shorts (and simultaneously easing other shorting restrictions like the up-tick requirement) would be good reforms, if only to remove this PR arrow from fraudsters’ quivers.
Naked short selling is nothing more than a bet that a certain stock will go down rather than up. A person sells a stock knowing that he/she will have to buy it back later either at a higher or lower price. Unless that person shorts a stock and then spreads negative misinformation about it (illegal) in order to make the stock go down, then the act of selling a stock short has no affect on the price of the stock. The only net affect is that the shortseller has added liquidity to a stock.
The idea that shortselling makes stocks go down is a common misperception. The truth is that everyone who shorts a stock will, at some point, have to purchase the shares. As a consequence, the higher the net short interest is in a stock, the greater the built in future demand for the shares actually is.
You’re not properly informed about what naked shorting is. What you’re describing is traditional short selling, a legitimate trade. Look below, or find out what FTD’s are.
Again… figure out what something is before you offer an opinion about it.
Chuck Ponzi
Also, the idea that short selling is somehow used by people to avoid taxes is incorrect. If anything, the government gets MORE taxes from short selling because a whole new class of investors is making money, which is taxed. Further, these short sellers are making money (taxable gains) when everyone else is losing money - i.e. watching their taxable gains evaporate. Think about it, if someone believes that a stock is going down but he’s not allowed to short it, then his money will stay on the sidelines. But if he’s allowed to short it and the stock goes down, then when he covers, he’ll have to pay a capital gain (and most short seller gains are short term, adding an additional 10% to gov’t coffers). So in other words, the government is one of the primary direct beneficiaries from short selling.
The guy who wrote that press release is a CEO who obviously has a company that is doing poorly. When someone is betting against you, you have a tendency to hate them. I’m sure actors hate it when people speculate that their movies will flop. CEOs point the finger at short sellers because they have to point at someone. CEOs know that the vast majority of people have no idea how shorting works, and so blaming short sellers (people who are benefitting from the shareholders’ pain) is a convenient diversion, though very cynical because all CEOs know the truth. And the truth is that short sellers can’t make a stock go down. The only thing that can do that is a company’s poor operating results.
Drew,
You’re obviously confused about the difference between short selling, and naked short selling (FTD’s). There’s a big difference that you’re not yet seeing.
Market makers who naked short sell can in acutality send down the share prices by placing more shares on the open market than are rationally available. That’s not a “supposed action”, that’s actual. When you make the market, it’s effective share dilution without actually selling them.
By some estimations as many as 25% of all shares on the NYSE are FTDs. That’s significant.
You’re just not talking about naked shorting.
Hey, I’m all for shorting. I think it’s a viable way of predicting stock movement, and perform it with regularity. However, my broker tells me when they do not have shares to short and have to limit it.
Hedgefunds who are market makers do not have to hold shares for shorting. That’s what an FTD is.
Chuck Ponzi
You need to find out what naked shorting is before you offer advice about its legality or morality.
The very vast majority of short sales haven’t actually borrowed them from someone, because the assumption is that they can always be bought in liquid markets, even if it’s 100X the rational price. That’s why when shorts get sqeezed, the rush to buy is so violent. I’ve personally been on the wrong end of that trade and had my broker buy shares for me without even bothering to call me to tell me until after the fact because the shares had to be covered.
If you’re saying that the shares that someone sells short nakedly increase the supply of shares artificially and therefore disrupt the short term supply and demand for shares, then that’s an argument. But the other side of that argument is that the demand is artificially high going forward because the shares have to be bought to cover the trade at some point. In an efficient market, these things should work themselves out.
Ultimately, the affects are all short term. Buffet said “In the short term, markets are a voting mechanism, but in the long term, markets are a weighing mechanism.” Shorting, either naked or with borrowed shares, is nothing that the long term mechanics of the markets won’t take care of. Investors get it, speculators get it, amateurs get burned.
And not that it matters, but I’m an MBA and a CFA who spent 5 years at a hedge fund specializing in microcap stocks, both long and short. And the truth is that when you’re dealing with small iliquid stocks, 5-10% daily price swings are the norm and additional shares on the market make a difference, but if you follow short interst data, you always know that the “artificial” demand is X number of days of avg. daily volume, so the investors are informed. For real investors, shorts are a blip on the radar.
Dude,
If you spent that much of your time as a CFA and you still don’t know that short sales have to be borrowed from someone, only God can help you. You truly are lost when it comes to stock trading.
The fact that you need to borrow short sales is a foregone conclusion; otherwise it’s an FTD (failure to deliver). You’re digging your own grave here on this one.
I as a market maker can drive down the price by naked shorting and flush out just about anyone (retail and institutions) by filling every single buy order that comes up. Since the buy is not a bottomless pit (maybe on 60B companies, but not microcap), it declines the price. That results in panic selling, and margin calls for margined investors. That way, it can push down the executed trades.
Naked shorting creates “shares” out of thin air. They are “borrowed” from the network, but never put back into the network. Once investors have fled, the company’s ability to raise capital on my open markets are severly diminished. This can cause a company to fail. That you don’t see it makes me wonder if you were that successful as a CFA ever… maybe why you didn’t continue along that profession. That’s like a brain surgeon with no clue what a scalpel is.
No biggie, lots of people fail in life. I guess it was just your time to move on.
Perhaps in some alternate universe where the skies are pink, and everyone drives a Prius shorts are “a blip on the radar”, but the rest of us live in the real world.
Chuck Ponzi
As an aside, there is no need for a naked shorting market maker to cover their shorts in the short term. They can wait until the company has capitulated, or they have driven the share price down enough to recoup everything.
Again. Market makers don’t have to cover shorts. That’s exactly what FTD’s are.
Again. Market makers don’t have to cover shorts. That’s exactly what FTD’s are.
I’ll repeat it one more time since you appear slow at learning:
Market makers don’t have to cover shorts. That’s exactly what FTD’s are.
Besides, if they ever get called on their FTDs they can just open up more short interest. Duh.
And if you’re standing by the article you reference, please tell me how short sellers can force a company to fail. That would be an excellent lesson for us all - particularly those of us who understand that stock fluctuations and balance sheets are totally unrelated.
Also, explain where all the lost tax revenues are. Where is this trillion dollar shortfall thanks to shortsellers?
I know that you are a reasonable man, so I thank you in advance for helping me to understand how I can avoid offering an opinion on something I don’t understand.
thanks
Read above.
Criminy, can’t you click on the “Reply to comment” text?
For an MBA, you haven’t got common sense one.
Chuck
Check out what Investopedia says about it:
Bloomberg did a special on illegal short selling:
See the full 28 minutes on Youtube:
http://www.youtube.com/watch?v=7fcre8P2UUY
This is a joke, right? You aren’t seriously making a rational argument based on a Market Wire puff piece by a CEO with an ax to grind?
While we’re at it, let’s catch up on the good Mr. Altomare’s other genius proposals, this one from the high-class journalists at BUSINESS WIRE:
The Coalition for Luggage Security and Richard A. Altomare Call for Barring Luggage from Airports
That’s an ad hominem.
Explain again why mandatory buy-ins are not good again?
Chuck.
Seems like you’ve missed the point completely.
I’m closing this post down.
Seems everyone missed it. Oh, well.
Chuck