A good explanation of short-selling and naked shor
Post# of 86956
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Posted On: 08/18/2021 12:06:32 PM
Re: LegendayGoat #53938
A good explanation of short-selling and naked shorting and why it's kept quiet (i.e. they don't want the public to know that brokers are making money off of their shares and driving the price of their shares down)
Re: Naked Shorting and FTD: Failure to Deliver Shares:
In the US markets, a T+2 failure to deliver is initially the broker’s problem. They assured the short seller that the shares were easy-to-borrow OR if not easy-to-borrow the brokerage has charged the short-seller a fee to locate shares. Either way, the brokerage is complicit in the FTD. Ultimately, the SEC will force a buy-in but that takes some time to occur and in the meantime the brokerage can redress the FTD in many ways, such as borrowing shares from a clearing-house (they own ample shares of many stocks) at a cost. These loans are a source of revenue for clearing-houses so they are usually accommodating. If the clearing houses cannot accommodate the FTD then the problem gets kicked upstairs to the attention of the SEC, the stock will get labeled hard-to-borrow or none-to-borrow, suppressing further short-selling altogether.
The SEC will let the FTD situation persist for some time because in the normal course of trading shares usually become available and the situation resolves itself. However, this is then what is called a naked-short and is a temporary dilution of the outstanding shares. Sometimes unscrupulous trading firms, usually overseas, will engage this faux-dilution effect as a strategic attack to cause the target stock to go bankrupt. However, there is a substantial amount of time (60 days last I checked) available to naked-shorts before they are forced to buy-in, and when a forced buy-in occurs the short-seller stands to lose a large amount of money, potentially an unlimited amount of money - a very risky business indeed.
The real question is why all this leniency for short-selling - why aren’t shares always located first!? First of all, clearing-houses and brokerages generate revenue loaning shares. They want to make that revenue stream be invisible to the trading public. No retail investor wants to know that someone else is making money from their stock ownership, especially if it is at their expense. Finally, short-selling helps the market keep from forming asset bubbles, or at least keeps the asset bubbles from inflating too fast, so it is ultimately good for the market to facilitate short-selling, within reason.
What happens to a short seller who can't deliver the shares?
https://www.quora.com/What-happens-to-a-short...the-shares
Re: Naked Shorting and FTD: Failure to Deliver Shares:
In the US markets, a T+2 failure to deliver is initially the broker’s problem. They assured the short seller that the shares were easy-to-borrow OR if not easy-to-borrow the brokerage has charged the short-seller a fee to locate shares. Either way, the brokerage is complicit in the FTD. Ultimately, the SEC will force a buy-in but that takes some time to occur and in the meantime the brokerage can redress the FTD in many ways, such as borrowing shares from a clearing-house (they own ample shares of many stocks) at a cost. These loans are a source of revenue for clearing-houses so they are usually accommodating. If the clearing houses cannot accommodate the FTD then the problem gets kicked upstairs to the attention of the SEC, the stock will get labeled hard-to-borrow or none-to-borrow, suppressing further short-selling altogether.
The SEC will let the FTD situation persist for some time because in the normal course of trading shares usually become available and the situation resolves itself. However, this is then what is called a naked-short and is a temporary dilution of the outstanding shares. Sometimes unscrupulous trading firms, usually overseas, will engage this faux-dilution effect as a strategic attack to cause the target stock to go bankrupt. However, there is a substantial amount of time (60 days last I checked) available to naked-shorts before they are forced to buy-in, and when a forced buy-in occurs the short-seller stands to lose a large amount of money, potentially an unlimited amount of money - a very risky business indeed.
The real question is why all this leniency for short-selling - why aren’t shares always located first!? First of all, clearing-houses and brokerages generate revenue loaning shares. They want to make that revenue stream be invisible to the trading public. No retail investor wants to know that someone else is making money from their stock ownership, especially if it is at their expense. Finally, short-selling helps the market keep from forming asset bubbles, or at least keeps the asset bubbles from inflating too fast, so it is ultimately good for the market to facilitate short-selling, within reason.
What happens to a short seller who can't deliver the shares?
https://www.quora.com/What-happens-to-a-short...the-shares
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