Fri 30 Dec 2005
Naked shorts are ruining small business. They are moving money from the average investor to hedge funds and their wealthy clientele. It is a great injustice not only to these smaller investors but also to the American Dream, entrepreneurship, and the growth of ideas. Let me explain.
As an investor, when you short a stock, you are selling the shares at the current price, in hopes that it will go down in the future, at which point you will be able to buy it back at a cheaper price. Perhaps you feel the stock is overvalued. Perhaps you think future earnings won’t be as good. Whatever your reason is, selling a stock short is legal.
Naked shorting on the other hand, is illegal. When a stock is shorted naked, what it means is that the shares are sold, but there is no intention of ever buying them back. These shares are sold, but never delivered. That’s great, but what does it mean? This artificially increases the float creating downward pressure on the price. Think about it, you have all these people selling shares short, yet never delivering, never having to cover their position. With enough money, they can technically sell any stock short to the point where the shares are worthless. You don’t see this happening in the large cap stocks because enormous amounts of money would be required. But in small caps, with smaller floats, it can happen quite often.
In 2004, the SEC issued Regulation SHO, which stated that if 10,000 or more shares are failed to be delivered or if the level of fails is equal to at least .5% of the issuer’s total shares outstanding for 5 consecutive settlement days, it must be placed on the Regulation SHO Threshold Security List. Every exchange has its own threshold list. These lists have done nothing other than to provide these illegal trades with a more wide audience. No SEC investigations have taken place, even when it has been acknowledged that naked short selling provides downward pressure on a company’s stock.
The most publicized instance of this has been with the shares of Overstock.com. The abuse is rampant throughout Wall Street. Ironically, the SEC appears to want no part of regulating these actions. It is up to Washington to deliver any regulatory change. There are a few organizations that are speaking out against these illegal actions. Two are the
National Coalition Against Naked Short Selling and Counterfeit America. I strongly suggest joining these groups, and doing anything possible to stop these abusive, illegalactions.
Naked shorting must be stopped. It is taking money out of the public’s hands and placing it directly into the pockets of greedy Wall Street bankers and traders. It is ultimately hindering economic growth and could ultimately be a major factor in a collapse of the US financial markets.