Short selling madness is sanctioned by the SEC Posted Apr 7th 2009 3:00PM by Connie Madon Filed under: Bad news, Management, Short stories, Market matters
There was a strong outcry last year: "Stop the short selling. It's killing the market." Short sellers were blatantly selling short and then "failing to deliver the stock." So what exactly was happening? First of all, in order to sell short (sell something you don't have) you must first borrow it from someone else. Usually there are willing lenders at large brokerage houses. What you are trying to do is to sell the stock first and replace it a lower price later on (that is if the market goes your way -- down).
Last year we saw traders selling short without first borrowing the stock. Then, when the buy trade to replace it was executed, there was no stock to deliver. Remember, they were supposed to borrow it first. This is called a "fail to deliver" trade. Former SEC commissioner Roel Campos wrote a letter and posted it on the SEC's website saying: "these companies are instead targets of illegal and manipulative trading with intentional failures to deliver used by traders to extract profits as the share price plummets."
It seems that the SEC knew all about this way back in 2005 with the implementation of Regulation SHO, which mandates "threshold securities" lists daily by the exchanges of stocks that have suffered at least five consecutive days of delivery failures totaling at least 10,000 shares and at least 1/2% of their outstanding shares each day. Once a stock hit the threshold list, traders were required to close out 'failed deliveries' by the 13th day after the trade." These lists normally ran 300 stocks a day. Last year amid the outcry against short selling, the SEC tightened it rule requiring short sellers close out their "fail to deliver trades on the fourth day. Also last fall the SEC restricted short selling in certain stocks. To date it is not clear whether or not the SEC has abolished Regulation SHO.
Can you imagine that the SEC even allowed "failed to deliver" trades in the first place? Whoever dreamed up this scheme of making lists and waiting 13 days before closing out "failed trades" should be summarily fired. In fact, there needs to be a complete housecleaning at the SEC. For goodness sake, stop this madness! First the SEC allows "fail to deliver" trades and then says that you have 13 days to close out these trades. This is sheer folly. When the SEC looked at Lehman's "fails to deliver" trades, there were an astounding 38 million shares of these trades. Where is the investigation of who did this and why are they not brought to justice? Meanwhile brokerage houses were making huge sums of money from short sellers.
Do you have any comments on the SEC rules permitting "fail to deliver" trades? |