Well, At Least SEC Improved On Its Latest Naked Short-selling Crackdown

Well, the SEC re-instituted its naked short-selling ban. The prior ban was a joke, not because I am against it, but because it limited it to select financial stocks. The new ban is for all stocks.

Short selling is fine and helps markets but I am against naked short selling. Selling more shares than are available impacts firms that depend on capital markets for funding. Typically financial institutions, penny stocks, resource companies, and tech/biotech start-ups are hurt by naked short-selling. This ban should have been instituted many years, or decades, ago. Patrick Byrne of Overstock (OSTK) has been harping for years about how naked short selling was hurting his company. Who knows if naked short selling is the reason for Overstock's struggles but if it wasn't widespread, it wouldn't even be in a discussion.

The cynic in me says that this change is going to have little impact. SEC doesn't have the resources to enforce it. But if someone is ever caught, they will pay a price now.

Comments

  1. AnonymousSeptember 18, 2008 at 1:11 AM

    There's always unintended consequences. Making shorting more difficult will reduce the longs' ability to hedge. This has the possiblity of accelerating the selling.

    ReplyDelete
  2. Sivaram VSeptember 18, 2008 at 10:40 AM

    Limiting naked shorting will increase the cost of shorting slightly.

    As for someone trying to hedge by shorting, well, they should go and borrow a share that actually exists.

    ReplyDelete
  3. AnonymousSeptember 18, 2008 at 1:29 PM

    "Who knows if naked short selling is the reason for Overstock's struggles but if it wasn't widespread, it wouldn't even be in a discussion."

    Oh come on, message board pumpers always complain about "naked shorts" if the stock goes down for any reason. leh and aig were not on the reg sho list

    ReplyDelete
  4. AnonymousSeptember 18, 2008 at 2:41 PM

    As far as I can tell Overstock hasn't made a penny of profit, ever...

    Shortsellers are definitely not their problem.

    ReplyDelete
  5. Sivaram VSeptember 19, 2008 at 11:13 AM

    ContrarianDutch,

    You are correct in saying that Overstock never made any money but that doesn't mean much. Start-ups often don't make money for a while. Amazon didn't make money for something like 4 years. The key point is that these companies depend on the capital markets for funding so naked shorting hurts them. But like I said, I'm not saying Overstock's problems are all due to naked shorts or if even any of them are. But that's the argument of their CEO.

    ReplyDelete
  6. AnonymousSeptember 19, 2008 at 1:55 PM

    But I definitely see the argument in shorting the stock of a company that has never made any profits, does not seem likely to make any in the foreseeable future and is only kept afloat by the unwavering belief of it's devotees. They have been in business for nearly ten years and are hardly a completely fresh startup.

    What is the plan here? Keep issuing new stock again and again forever? Looks like a posterchild for "companies that deserve to be heavily shorted".

    ReplyDelete

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