04.14.09
Naked shorting is dead
You will not see Patrick Byrne or any other idiot who rails against naked short selling say this, but naked short selling is for all intents and purposes dead. The Reg SHO threshold list of stocks with persistent fails to deliver is getting quite short. As I write this only three NYSE firms are on the list versus dozens in mid-October 2008. There are only 23 Nasdaq or OTC BB firms on the threshold list (and only 8 of those are Nasdaq stocks). Even though stocks have gone up over 20% recently (with the most-shorted stocks rising the most) and short interest in the market has increased, fails to deliver have not increased from low levels of a month ago.
The current decline in fails to deliver (and therefore in naked short selling) can be traced to the SEC’s tightening of Reg SHO last summer. Short-biased traders like myself have definitely noticed the increasing difficulty of holding long-term short positions over the last year (I just received a forced buy-in today, in fact).
Naked short shelling conspiracy theorists should find a new conspiracy about which to obsess.
John Hunter said,
April 14, 2009 at 3:03 pm
Good, it should be dead (though it needs to have ). I don’t have a problem with covered short selling, but I do think naked short selling is bad for the market.
Nightly (Value) Investment Links #123 | Simoleon Sense said,
April 14, 2009 at 4:37 pm
[...] (UTX) Dividend Stock Analysis – Via Vinvesting 13. Sources Of Volatility – Via Barel Karsan 14. Naked shorting is dead – Via Good Value Investing Blog 15. THE IMPORTANCE OF RETURN ON CAPITAL – Via Magic Diligence 16. [...]
Patrick Byrne said,
April 14, 2009 at 10:23 pm
Maybe you’re right or…. maybe you’re not. Here is a crazy idea I like to use when I cannot decide between those two possibilities: let’s see the data. Not data of the form, “Here’s how long the list is of companies whose stock meets some arbitrary definition set by the SEC, and no one else, and you can trust us about that.” Data in the form of fails data, from all brokers, Stock Borrow Program, fails to deliver and receive in CNS, and ex-clearing. Oh… what? We cannot? It might destabilize the market? Should that tell me something?
Oh, and the Managed Funds Association is out there with a lobbying position that holds, “We’re not doing that thing you say we’re doing, but it will destroy the market’s liquidity if we stop doing the thing we’re not doing.”
Hmmm. That also sounds a bit funny. So I repeat: let’s just see the data.
Patrick Byrne
michael said,
April 20, 2009 at 11:10 am
Patrick — first, let me apologize for taking so long to approve your comment. For some reason I didn’t get the email from my blog saying there was a comment awaiting moderation. As to your point, I generally agree that more data is better. I would also like to see FTD information that indicates how many FTDs resulted from short sales and how many from long sales. From my understanding of the DTCC’s continuous settlement process that might be difficult to do.
I think we could do a lot better than our current system of clearing. One simple change would be to require end of day settlement … ignoring the issue of short selling there is no reason it can’t be done and it would mean cash account investors would not have to wait between making trades.
michael said,
April 20, 2009 at 11:30 am
Getting back to the question of naked short selling and fails to deliver, one thing I would suggest is for all short sales to be prohibited once a stock gets on the Reg SHO threshold list (excepting maybe only options market makers). This of course would eliminate speculative naked shorting. Conversely, the SEC should require brokers not to force buy-ins of existing shorts but rather fine them something like LIBOR + 10% for as long as the stock remains on the threshold list. This would enable the earliest and most convinced shorts to hold onto their short positions while decreasing the fails to deliver over a period of time. It is important to reward those shorts because they are the ones who add value by doing the research and finding problems with companies. Also, this system, rather than the current system of buy-ins, will result in fewer and weaker short squeezes (which benefit no one but a few day-traders).
I think the above system would be great for minimizing fails to deliver and short squeezes which both distort the market. Also, the SEC should establish a market for long-term borrows so that fundamental short sellers can borrow stock and not have to worry about buy-ins or penalty borrow rates. Again, this would encourage fundamental research and reward the most knowledgeable shorts sellers.
Patrick Byrne said,
April 23, 2009 at 1:15 pm
Mike,
“first, let me apologize for taking so long to approve your comment. For some reason I didn’t get the email from my blog saying there was a comment awaiting moderation.”
No worries at all.
As for the rest: you sound like you get it. it really is all about failures. They could be short sales or long. Also, fails to deliver AND fails to receive (which sound like they should be symmetric, but they are not). T+0 settlement would be tough, say some, but I won’t argue there either.
Best,
Patrick
Arthur Martinson said,
July 27, 2009 at 4:56 pm
When I was 16 I read “Heads You Win, Tails You Win” by Ray Dirks. I learned 2 valuable things (among others): Never sell short and never buy on margin. No more naked short selling allowed? Good!