21 ms·

Naked shorting: The curious incident of the shares that didn't exist (2005)

359 points by anaphor 6y ago

tristanj 6y ago
Non-archive.org version: https://www.euromoney.com/article/b1320xkhl0443w/naked-shorting-the-curious-incident-of-the-shares-that-didnt-exist https://www.euromoney.com/article/b1320xkhl0443w/naked-short... The "self-replenishing pool" missing image is available here: https://web.archive.org/web/20201104113520im_/https://cdn.euromoney.psdops.com/ad/0c/0b4c7fc9df63f8cfee8dcff3cf3d/cover-02.gif https://web.archive.org/web/20201104113520im_/https://cdn.eu...
- anaphor 6y ago
  Thanks, maybe a mod can edit the url in the original post?
  - setr 6y ago
    Especially needed here because the way back link is broken into 6 pages, and page 2 wasn’t captured (didn’t check 3-6, since it doesn’t matter)
    - jrochkind1 6y ago
      Especially because the subsequent info off of page 2 gets increasingly wacky. I hope readers see this and make it to the rest of the article. It makes me think... okay, the SEC closed that loophole, but the fact that it existed for years show how abstract and weird and unmoored the stock market is, financial games built on as much clouds as ground.
- dang 6y ago
  We've changed to that URL above from https://web.archive.org/web/20160215135645/https://www.euromoney.com/Article/1001047/Naked-shorting-The-curious-incident-of-the-shares-that-didnt-.html https://web.archive.org/web/20160215135645/https://www.eurom.... Thanks!
harikb 6y ago
Very interesting indeed.. > The stock borrow programme at the DTCC, they allege, enables the naked shorting of shares to the extent that the number of shares in circulation of some companies is now several times in excess of that issued. Even companies listed on the NYSE, could have been affected. As Wes Christian, partner in law firm Christian, Smith & Jewell in Houston, and lead lawyer on several of the cases, explains: "With the revelation of the Regulation SHO Threshold Securities list and the Leslie Boni report, published in November 2004 [see glossary], it is now crystal clear that this problem of naked short selling is systemic in Wall Street, and virtually impacts every business sector on every exchange including numerous billion-dollar companies listed on the NYSE and other companies listed on the Amex."
- crb002 6y ago
  When I was in PFG Marketer Services I saw million dollar double payout fuckups all the time and a shady SQL Server database for "manual over-rides" on commissions to brokers that seemed like an un-audited slush fund.
  - d0mdo0ss 6y ago
    off topic, but I'm curious what would've been a typical workday there.
    - yourapostasy 6y ago
      Someone reading that might be wanting to ask the same hoping to hear salacious "hookers and blow" Wolf of Wall Street legendary stories, but usually the reality is pretty mundane. Corruption is endemic to highly successful niche adaptations, but their yields rarely give rise to outlandish behavior. We see that a lot in breathless news stories, but that's just what sells ads. Most corruption happens in a matter-of-fact, business-as-usual, we're-all-in-this-together atmosphere. And the proceeds don't usually lead to blowout lifestyle extravaganzas, as most participants are clever enough to realize that draws unwanted scrutiny. That is what makes corruption so insidious and difficult to root out. The rot spreads slowly, and inspection is commonly asymmetrically more difficult and costly to mount than undertaking the corruption act itself. The most reliable way of rooting out corruption I've seen is an organizational culture that nurtures trust between leadership and organizational members, equitable gains sharing (so members feel they have skin in the game), and fiercely protecting whistleblowers (where the vast majority of human organizations utterly fail). Personally, Dunbar's Number appears to be some kind of (hopefully) local optimum but I'm curious how Geoffrey West's findings of scaling square with corruption incidence and scale.
fractionalhare 6y ago
Should have a [2005] in the title. This is probably showing up on HN because naked short selling is topical, but the information in the article might be misleading if it's out of date.
- cheschire 6y ago
  Honestly when I saw this link prior to the edit it was less interesting due to how topical it was. Now it’s more interesting and carries an historical aspect.
  - dalbasal 6y ago
    I expect that ongoing events are actually more historically significant than this one.
- dalbasal 6y ago
  This is basically a crosspost from reddit. /wallstreetbets are, in their own insane way, doing research into the most extreme tactics that short sellers have employed in the past.. expecting the entire arsenal to be employed tomorrow when trading begins.
  - airstrike 6y ago
    Good old DD
- dang 6y ago
  Year added. Thanks!
eloff 6y ago
Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into his account shortly afterwards. Yet the following day 37,044,500 Global Links shares were traded on the bulletin board. The next day, 22,471,000 shares were traded. On neither day had Simpson traded a single Global Link share, he insists. And events surrounding Simpson's investments became yet more confusing. Global Links had only ever issued 1,158,064 shares. Simpson had managed to acquire 126,986 shares that did not exist. How he had managed to be sold more shares than were in issuance is exactly the question Simpson hoped his foray would raise.
- fractionalhare 6y ago
  It was noticed. The SEC even had data supporting Global Links' claims. This incident is almost 16 years old and was later investigated by the SEC.
  - eloff 6y ago
    So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?
    - fractionalhare 6y ago
      I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm https://www.sec.gov/news/press/2009/2009-172.htm. It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis. As far as outcomes go, there is this testimony from the SEC chair circa 2010: http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010-01-14%20Mary%20Schapiro%20Written%20Testimony.pdf http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010... > In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of 2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.
jkhdigital 6y ago
The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).
- beefield 6y ago
  1. Fractional reserve banking is by definition decentralized. 2. Cough, Tether audits, cough.
  - ryebit 6y ago
    Not OP, but USDT / Tether is an example of something which exists as a proxy for something off-chain; so auditing the chain is obviously not going to work to see how much USD they actually have. Though it is possible to provably audit exactly how many USDT are in circulation at any point. I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly there (rather than as a proxy for real shares tracked somewhere else). In that frame, a better example is something like the DAI stablecoin, which is backed by assets that are on-chain. So at any block, you can audit exactly how many DAI there are, exactly which assets exist to back it, and exactly what the last reported oracle prices are for those assets.
    - ryebit 6y ago
      Just to expound on that point here. While Tether's bank accounts being private is a problem for auditing, even if that were removed, you'd still have to somehow "snapshot" all the bank accounts an transactions, freezing things in time so you could ensure there wasn't a shell game going on while you audited. This just isn't feasible with a federated system where each bank has their own ledger, and asynchronously tries to align it with a bunch of other ledgers. Blockchains overall reduce throughput compared to this model, because they enforce a single ledger. But they do this while still preserving decentralized control, resulting in a tradeoff where you lose some scalability, but also remove need for a trusted mediator(s), and now anyone can audit a snapshot of the state at their leisure.
deleted 6y ago
[deleted]
nabla9 6y ago
Note: Shorting more than 100% of shares outstanding does not imply that there is naked shorting happening. You can re-borrowing the shares someone shorted and it happens.
- deleted 6y ago
  [deleted]
- dalbasal 6y ago
  It's times like this that common sense definitions of terms like "naked short selling," "market manipulation" and such turn out to be very different from the operable ones.
  - kevinmchugh 6y ago
    How does the common sense definition of "naked short" differ from the technical one?
    - dalbasal 6y ago
      "Common sense" may have been an overstatement... but what I meant was: Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.
      - nabla9 6y ago
        >Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible. That is wrong assumption. More than 100% of a company’s shares can be shorted without naked short. Matt Levine explains. https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops?sref=1kJVNqnU#footnote-3 https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga... >There is no special limit on shorting at 100% of shares outstanding! There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.
jeffbee 6y ago
Basic rule of thumb is any company where the management is whining about shorts, and about naked shorts in particular, is garbage. The reason companies get shorted over 100% of outstanding shares is because everybody agrees they are garbage. Not a conspiracy. Go look at the stock of the absurd company in question after you read this article.
- jeffbee 6y ago
  Here's what Robert Simpson of ZANN Corp. was doing at the time: using his position in company A to buy his side gig company B. Whenever you dig into these guys for even 5 minutes they always turn out to be sleazy. https://www.lawinsider.com/contracts/Xj9WHIykaxCDFh0BX4XNQ/zann-corp/0/2005-05-03 https://www.lawinsider.com/contracts/Xj9WHIykaxCDFh0BX4XNQ/z...
- dtech 6y ago
  How can you legitimately short a company for more than 100% of all shares in the market? The short has to be covered by a real share.
  - jeffbee 6y ago
    I borrow a share and I sell it and the buyer lends it to someone and they sell it. Now two borrowers owe two lenders the same share of stock. It's real straightforward when you think about it. Also has nothing to do with "naked shorting" which is when you sell the share before you are able to borrow it.
- imtringued 6y ago
  Why risk a short squeeze if it is easy money?
- valuearb 6y ago
  Yes “naked shorting” is a technical failure that hasn’t been a real problem in forever, but us frequently cited by shady CEOs as cover for why their stock price fell. Patrick Byrnes is one famous example. From this very article: “ Alan Sporn, former president and major shareholder of OTC bulletin board company Trident Systems, is suing a group of brokers who, he claims, utilized a number of techniques, including the stock borrow program, to undermine the price of Trident's stock. This attack on the value of the company's stock virtually destroyed the company, both in terms of raising capital for growth, and in depressing the value of the shareholders' investments to virtually nothing, claims Sporn.” Sporn case was so weak the judge ruled for sanctions against him and he had to negotiate an agreement to avoid being stuck with defendants court costs. https://www.siliconinvestor.com/readmsg.aspx?msgid=21558818 https://www.siliconinvestor.com/readmsg.aspx?msgid=21558818
Lazare 6y ago
Summary: Every so often, someone gets very steamed about short selling, often with no real reason. Back in 2005, someone got very steamed about short selling, and then got a journalist to write a somewhat confused article about it. It's not clear anything was actually wrong then, but in any case, the rules have been changed a few times since then, so there doesn't seem to be any obvious relevance to current times. It's also worth noting that there's no real theoretical basis for why naked short selling would be harmful, no real empirical evidence showing it is harmful, no general laws against it, and the structure of the market allows and expects it to take place in some specific cases. If your mental model is that the stock market is a tool to allow people to trade a fixed number of concrete objects back and forth, this probably seems odd, but since that's not really a good model of how the stock market works or is intended to work, it's not clear that means much.
- Tokelin 6y ago
  What would be a better model for how the stock market works?
  - dleslie 6y ago
    When it's not the purchase-a-thing model it's otherwise-disinterested third parties making large bets on possible future outcomes. It has more in common with a bookie's ledger than a warehouse of goods. Why this is often harmful and dangerous is that the financial viability of businesses and individuals are often backing these bets. A person or company expecting financing to be predictable and stable may suddenly find it not so because their lender is desperate to cover their gambling losses.
    - oblio 6y ago
      I still don't understand why these kinds of derivatives are not banned. They're, as you described, basically betting. Except for a handful of folks, everybody loses money on them. The ones that do make money are rigging the game (à la casinos) or are just lucky. Some of the lucky ones have been lucky for decades, some even went bankrupt after being lucky for so long.
PragmaticPulp 6y ago
Recent events have a lot of people confusing high short interest with naked shorting. A stock can have short interest greater than 100% without any naked shorting. How is this possible? The textbook definition of a "short sale" is that someone borrows stock and then, literally, sells it short. The buyer of the stock is free and clear to do whatever they want with the stock, including re-lend it for another short sale. Wikipedia has a good primer on how this works: https://en.wikipedia.org/wiki/Short_(finance) https://en.wikipedia.org/wiki/Short_(finance) This has created a lot of confusion on WallstreetBets, where many participants have come to believe that Gamestop's short interest of 113% means that there are 13% more shares shorted than long positions to cover. It's not true, though, because the long interest is always greater than the short interest.
- Traktor 6y ago
  I dont understand how the new owner of the stock can ”re-short” it. Could you maybe explain? :)
  - PragmaticPulp 6y ago
    The linked Wikipedia page has a graphic that explains it better than I can in text: https://en.wikipedia.org/wiki/Short_(finance) https://en.wikipedia.org/wiki/Short_(finance) Basically, a short sale is a 3-party transaction. The first person lends their shares to the short seller. The short seller then sells the shares to another buyer. The original owner is still owed 1 share, which the short seller must later buy. In other words, you can't have a short sale unless someone buys the shares from the short seller. That new purchaser, who has the stock, is long. The key is that there are 2 people with long interest and 1 person with short interest. The short seller must pay borrow fees to the lender for the privilege of selling the shares short, otherwise there's no reason to do it.
  - jaycroft 6y ago
    I borrow your car (and you even give me the title!), promise to return it to you (but not necessarily the same car, just the same make and model), and then I sell what is truly now my car to someone else. That new owner could then find someone else to lend the car to, transfer the title on a promise that they'll eventually transfer the title back, and then let the new borrower sell it, transfer the title, etc. There's only ever one title and one car, but there are a lot of promises to return the car back later. When you explain it with goods it becomes obvious that a fraud was perpetrated if the buyers don't realize that the car might be owed to someone else. Yay for financialization and long impenetrable terms of service agreements with your broker where you automatically allow your broker to "lend" and re-title your shares so that they can earn interest on the lending. This is a simplification though, there's actually like a parking garage involved (broker) who says to trade on his exchange that the broker will keep your title safe for you - it's better than a paper certificate to hold in your safe at home because it can't get lost! But this allows the parking attendant to sell your car hoping you wont notice, and hoping that he'll be able to buy another similar car back before you actually ask for yours back. And of course insurance companies, auto dealerships, etc, but you get the idea. Robinhood's genius is hiding this complexity from their users behind a slick "gambling is fun" style app. TD Schwab ETrade and other "adult" brokerages also don't make it obvious, but at least they make you "read" some documents that explain the details before you get an account.
throwawaysea 6y ago
Note that there are a lot of conspiracy theories going around on WSB, populist leftist Twitter, and populist right wing Twitter. For example, https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_gang_we_need_to_complain_about_naked_short/ https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_... With GME there isn’t evidence of naked shorting. There are legitimate ways for shorts to be greater than the float. See https://seekingalpha.com/instablog/6850771-bachhandel/5549752-why-short-interest-greater-100-of-float-not-necessitate-naked-short-selling-and-why-wall https://seekingalpha.com/instablog/6850771-bachhandel/554975... for an explanation
- rybosworld 6y ago
  The very high rates of failure-to-deliver on GME are in fact, suggestive of naked shorting.
  - vkou 6y ago
    No, they are evidence of people who woke up to find out that they owe you their shirt, in addition to six decades of indentured labour of their children, grand-children, and yet-to-be-born great-grandchildren... Deciding that maybe they aren't going to pay you right this instant. If you're shorting on margin, and the market moves too far before your position gets closed... Your position might get wiped out, your margin might get wiped out, and you may owe an unbounded number of dollars to your counterparty. Generally speaking, your broker will then sue you for that money... But lawsuits take a long time to resolve. And to a bystander, this sort of thing looks just like a naked short falling apart.
    - deleted 6y ago
      [deleted]
    - zaroth 6y ago
      Whether the shorts were naked or not before this started, the shorts are unquestionably bankrupt with GME at or above $300. When shares are traded out from under a short, and there’s no where left to borrow them from, and the hedge funds can’t meet collateral requirements for their short interest, and the broker needs to liquidate their position but they come up about $20 billion dollars short... That’s when you have massive failure to deliver and the whole corrupt organism goes into CYA mode and tries to shut down buying and bring the stock price back in-line with their models.
GizmoSwan 6y ago
I wonder if it is more likely to happen with put options that are rolled over. I don't believe that options are match with number of shares. Block chain type code can prevent the excess being issued.
cccc4all 6y ago
The most important aspect of naked short selling is why it's a thing. Naked short selling is used as a weapon by short sellers. The purpose is to push down the stock price by artificially increasing supply relative to demand, perpetuating the sell spiral. Thereby, the short sellers can further increase their profit on short sales.
pengaru 6y ago
When the number of shares trading is no longer bound by the number of shares issued by the companies they're supposedly shares of, their value and thus price becomes completely meaningless. Perhaps you could normalize the price using short interest %, but that's not even reported real-time and would be an approximate at best estimation of how much inflation fuckery is going on with the # of shares. This whole thing reeks of corruption and manipulation IMHO, I'm shocked this isn't explicitly illegal and it's making me lose all interest in participating.
tecc501 6y ago
BUY THE DIP
tecc501 6y ago
to the moon
tpmx 6y ago
The full article (not just page 1 of 6) is available on the same euromoney.com domain today, but with a different URL: https://www.euromoney.com/article/b1320xkhl0443w/naked-shorting-the-curious-incident-of-the-shares-that-didnt-exist https://www.euromoney.com/article/b1320xkhl0443w/naked-short... Perhaps posting an archive.org URL adds a certain mystique, though?
MrPatan 6y ago
Two days to deliver? Ten days to deliver? Selling what you don't own? What century is this? Since GME, has anybody heard again the old canard "blockchain? What can it do that a database can't?"
ineedasername 6y ago
This seems like it should be easily monitored. You're not allowed to sell short shares that you don't actually have access to. How is that not an easy thing to determine during the transaction?
beezle 6y ago
Current SEC regulations on shorting are at link below along with a few FAQs. https://www.sec.gov/investor/pubs/regsho.htm https://www.sec.gov/investor/pubs/regsho.htm

359 points by anaphor 6y ago

Non-archive.org version: https://www.euromoney.com/article/b1320xkhl0443w/naked-shorting-the-curious-incident-of-the-shares-that-didnt-exist https://www.euromoney.com/article/b1320xkhl0443w/naked-short... The "self-replenishing pool" missing image is available here: https://web.archive.org/web/20201104113520im_/https://cdn.euromoney.psdops.com/ad/0c/0b4c7fc9df63f8cfee8dcff3cf3d/cover-02.gif https://web.archive.org/web/20201104113520im_/https://cdn.eu...

anaphor 6y ago
Thanks, maybe a mod can edit the url in the original post?
- setr 6y ago
  Especially needed here because the way back link is broken into 6 pages, and page 2 wasn’t captured (didn’t check 3-6, since it doesn’t matter)
  - jrochkind1 6y ago
    Especially because the subsequent info off of page 2 gets increasingly wacky. I hope readers see this and make it to the rest of the article. It makes me think... okay, the SEC closed that loophole, but the fact that it existed for years show how abstract and weird and unmoored the stock market is, financial games built on as much clouds as ground.
dang 6y ago
We've changed to that URL above from https://web.archive.org/web/20160215135645/https://www.euromoney.com/Article/1001047/Naked-shorting-The-curious-incident-of-the-shares-that-didnt-.html https://web.archive.org/web/20160215135645/https://www.eurom.... Thanks!

harikb 6y ago

Very interesting indeed.. > The stock borrow programme at the DTCC, they allege, enables the naked shorting of shares to the extent that the number of shares in circulation of some companies is now several times in excess of that issued. Even companies listed on the NYSE, could have been affected. As Wes Christian, partner in law firm Christian, Smith & Jewell in Houston, and lead lawyer on several of the cases, explains: "With the revelation of the Regulation SHO Threshold Securities list and the Leslie Boni report, published in November 2004 [see glossary], it is now crystal clear that this problem of naked short selling is systemic in Wall Street, and virtually impacts every business sector on every exchange including numerous billion-dollar companies listed on the NYSE and other companies listed on the Amex."

crb002 6y ago
When I was in PFG Marketer Services I saw million dollar double payout fuckups all the time and a shady SQL Server database for "manual over-rides" on commissions to brokers that seemed like an un-audited slush fund.
- d0mdo0ss 6y ago
  off topic, but I'm curious what would've been a typical workday there.
  - yourapostasy 6y ago
    Someone reading that might be wanting to ask the same hoping to hear salacious "hookers and blow" Wolf of Wall Street legendary stories, but usually the reality is pretty mundane. Corruption is endemic to highly successful niche adaptations, but their yields rarely give rise to outlandish behavior. We see that a lot in breathless news stories, but that's just what sells ads. Most corruption happens in a matter-of-fact, business-as-usual, we're-all-in-this-together atmosphere. And the proceeds don't usually lead to blowout lifestyle extravaganzas, as most participants are clever enough to realize that draws unwanted scrutiny. That is what makes corruption so insidious and difficult to root out. The rot spreads slowly, and inspection is commonly asymmetrically more difficult and costly to mount than undertaking the corruption act itself. The most reliable way of rooting out corruption I've seen is an organizational culture that nurtures trust between leadership and organizational members, equitable gains sharing (so members feel they have skin in the game), and fiercely protecting whistleblowers (where the vast majority of human organizations utterly fail). Personally, Dunbar's Number appears to be some kind of (hopefully) local optimum but I'm curious how Geoffrey West's findings of scaling square with corruption incidence and scale.

fractionalhare 6y ago

Should have a [2005] in the title. This is probably showing up on HN because naked short selling is topical, but the information in the article might be misleading if it's out of date.

cheschire 6y ago
Honestly when I saw this link prior to the edit it was less interesting due to how topical it was. Now it’s more interesting and carries an historical aspect.
- dalbasal 6y ago
  I expect that ongoing events are actually more historically significant than this one.
dalbasal 6y ago
This is basically a crosspost from reddit. /wallstreetbets are, in their own insane way, doing research into the most extreme tactics that short sellers have employed in the past.. expecting the entire arsenal to be employed tomorrow when trading begins.
- airstrike 6y ago
  Good old DD
dang 6y ago
Year added. Thanks!

eloff 6y ago

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into his account shortly afterwards. Yet the following day 37,044,500 Global Links shares were traded on the bulletin board. The next day, 22,471,000 shares were traded. On neither day had Simpson traded a single Global Link share, he insists. And events surrounding Simpson's investments became yet more confusing. Global Links had only ever issued 1,158,064 shares. Simpson had managed to acquire 126,986 shares that did not exist. How he had managed to be sold more shares than were in issuance is exactly the question Simpson hoped his foray would raise.

fractionalhare 6y ago
It was noticed. The SEC even had data supporting Global Links' claims. This incident is almost 16 years old and was later investigated by the SEC.
- eloff 6y ago
  So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?
  - fractionalhare 6y ago
    I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm https://www.sec.gov/news/press/2009/2009-172.htm. It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis. As far as outcomes go, there is this testimony from the SEC chair circa 2010: http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010-01-14%20Mary%20Schapiro%20Written%20Testimony.pdf http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010... > In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of 2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.

jkhdigital 6y ago

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).

beefield 6y ago
1. Fractional reserve banking is by definition decentralized. 2. Cough, Tether audits, cough.
- ryebit 6y ago
  Not OP, but USDT / Tether is an example of something which exists as a proxy for something off-chain; so auditing the chain is obviously not going to work to see how much USD they actually have. Though it is possible to provably audit exactly how many USDT are in circulation at any point. I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly there (rather than as a proxy for real shares tracked somewhere else). In that frame, a better example is something like the DAI stablecoin, which is backed by assets that are on-chain. So at any block, you can audit exactly how many DAI there are, exactly which assets exist to back it, and exactly what the last reported oracle prices are for those assets.
  - ryebit 6y ago
    Just to expound on that point here. While Tether's bank accounts being private is a problem for auditing, even if that were removed, you'd still have to somehow "snapshot" all the bank accounts an transactions, freezing things in time so you could ensure there wasn't a shell game going on while you audited. This just isn't feasible with a federated system where each bank has their own ledger, and asynchronously tries to align it with a bunch of other ledgers. Blockchains overall reduce throughput compared to this model, because they enforce a single ledger. But they do this while still preserving decentralized control, resulting in a tradeoff where you lose some scalability, but also remove need for a trusted mediator(s), and now anyone can audit a snapshot of the state at their leisure.

deleted 6y ago

[deleted]

nabla9 6y ago

Note: Shorting more than 100% of shares outstanding does not imply that there is naked shorting happening. You can re-borrowing the shares someone shorted and it happens.

deleted 6y ago
[deleted]
dalbasal 6y ago
It's times like this that common sense definitions of terms like "naked short selling," "market manipulation" and such turn out to be very different from the operable ones.
- kevinmchugh 6y ago
  How does the common sense definition of "naked short" differ from the technical one?
  - dalbasal 6y ago
    "Common sense" may have been an overstatement... but what I meant was: Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.
    - nabla9 6y ago
      >Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible. That is wrong assumption. More than 100% of a company’s shares can be shorted without naked short. Matt Levine explains. https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops?sref=1kJVNqnU#footnote-3 https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga... >There is no special limit on shorting at 100% of shares outstanding! There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

jeffbee 6y ago

Basic rule of thumb is any company where the management is whining about shorts, and about naked shorts in particular, is garbage. The reason companies get shorted over 100% of outstanding shares is because everybody agrees they are garbage. Not a conspiracy. Go look at the stock of the absurd company in question after you read this article.

jeffbee 6y ago
Here's what Robert Simpson of ZANN Corp. was doing at the time: using his position in company A to buy his side gig company B. Whenever you dig into these guys for even 5 minutes they always turn out to be sleazy. https://www.lawinsider.com/contracts/Xj9WHIykaxCDFh0BX4XNQ/zann-corp/0/2005-05-03 https://www.lawinsider.com/contracts/Xj9WHIykaxCDFh0BX4XNQ/z...
dtech 6y ago
How can you legitimately short a company for more than 100% of all shares in the market? The short has to be covered by a real share.
- jeffbee 6y ago
  I borrow a share and I sell it and the buyer lends it to someone and they sell it. Now two borrowers owe two lenders the same share of stock. It's real straightforward when you think about it. Also has nothing to do with "naked shorting" which is when you sell the share before you are able to borrow it.
imtringued 6y ago
Why risk a short squeeze if it is easy money?
valuearb 6y ago
Yes “naked shorting” is a technical failure that hasn’t been a real problem in forever, but us frequently cited by shady CEOs as cover for why their stock price fell. Patrick Byrnes is one famous example. From this very article: “ Alan Sporn, former president and major shareholder of OTC bulletin board company Trident Systems, is suing a group of brokers who, he claims, utilized a number of techniques, including the stock borrow program, to undermine the price of Trident's stock. This attack on the value of the company's stock virtually destroyed the company, both in terms of raising capital for growth, and in depressing the value of the shareholders' investments to virtually nothing, claims Sporn.” Sporn case was so weak the judge ruled for sanctions against him and he had to negotiate an agreement to avoid being stuck with defendants court costs. https://www.siliconinvestor.com/readmsg.aspx?msgid=21558818 https://www.siliconinvestor.com/readmsg.aspx?msgid=21558818

Lazare 6y ago

Summary: Every so often, someone gets very steamed about short selling, often with no real reason. Back in 2005, someone got very steamed about short selling, and then got a journalist to write a somewhat confused article about it. It's not clear anything was actually wrong then, but in any case, the rules have been changed a few times since then, so there doesn't seem to be any obvious relevance to current times. It's also worth noting that there's no real theoretical basis for why naked short selling would be harmful, no real empirical evidence showing it is harmful, no general laws against it, and the structure of the market allows and expects it to take place in some specific cases. If your mental model is that the stock market is a tool to allow people to trade a fixed number of concrete objects back and forth, this probably seems odd, but since that's not really a good model of how the stock market works or is intended to work, it's not clear that means much.

Tokelin 6y ago
What would be a better model for how the stock market works?
- dleslie 6y ago
  When it's not the purchase-a-thing model it's otherwise-disinterested third parties making large bets on possible future outcomes. It has more in common with a bookie's ledger than a warehouse of goods. Why this is often harmful and dangerous is that the financial viability of businesses and individuals are often backing these bets. A person or company expecting financing to be predictable and stable may suddenly find it not so because their lender is desperate to cover their gambling losses.
  - oblio 6y ago
    I still don't understand why these kinds of derivatives are not banned. They're, as you described, basically betting. Except for a handful of folks, everybody loses money on them. The ones that do make money are rigging the game (à la casinos) or are just lucky. Some of the lucky ones have been lucky for decades, some even went bankrupt after being lucky for so long.

PragmaticPulp 6y ago

Recent events have a lot of people confusing high short interest with naked shorting. A stock can have short interest greater than 100% without any naked shorting. How is this possible? The textbook definition of a "short sale" is that someone borrows stock and then, literally, sells it short. The buyer of the stock is free and clear to do whatever they want with the stock, including re-lend it for another short sale. Wikipedia has a good primer on how this works: https://en.wikipedia.org/wiki/Short_(finance) https://en.wikipedia.org/wiki/Short_(finance) This has created a lot of confusion on WallstreetBets, where many participants have come to believe that Gamestop's short interest of 113% means that there are 13% more shares shorted than long positions to cover. It's not true, though, because the long interest is always greater than the short interest.

Traktor 6y ago
I dont understand how the new owner of the stock can ”re-short” it. Could you maybe explain? :)
- PragmaticPulp 6y ago
  The linked Wikipedia page has a graphic that explains it better than I can in text: https://en.wikipedia.org/wiki/Short_(finance) https://en.wikipedia.org/wiki/Short_(finance) Basically, a short sale is a 3-party transaction. The first person lends their shares to the short seller. The short seller then sells the shares to another buyer. The original owner is still owed 1 share, which the short seller must later buy. In other words, you can't have a short sale unless someone buys the shares from the short seller. That new purchaser, who has the stock, is long. The key is that there are 2 people with long interest and 1 person with short interest. The short seller must pay borrow fees to the lender for the privilege of selling the shares short, otherwise there's no reason to do it.
- jaycroft 6y ago
  I borrow your car (and you even give me the title!), promise to return it to you (but not necessarily the same car, just the same make and model), and then I sell what is truly now my car to someone else. That new owner could then find someone else to lend the car to, transfer the title on a promise that they'll eventually transfer the title back, and then let the new borrower sell it, transfer the title, etc. There's only ever one title and one car, but there are a lot of promises to return the car back later. When you explain it with goods it becomes obvious that a fraud was perpetrated if the buyers don't realize that the car might be owed to someone else. Yay for financialization and long impenetrable terms of service agreements with your broker where you automatically allow your broker to "lend" and re-title your shares so that they can earn interest on the lending. This is a simplification though, there's actually like a parking garage involved (broker) who says to trade on his exchange that the broker will keep your title safe for you - it's better than a paper certificate to hold in your safe at home because it can't get lost! But this allows the parking attendant to sell your car hoping you wont notice, and hoping that he'll be able to buy another similar car back before you actually ask for yours back. And of course insurance companies, auto dealerships, etc, but you get the idea. Robinhood's genius is hiding this complexity from their users behind a slick "gambling is fun" style app. TD Schwab ETrade and other "adult" brokerages also don't make it obvious, but at least they make you "read" some documents that explain the details before you get an account.

throwawaysea 6y ago

Note that there are a lot of conspiracy theories going around on WSB, populist leftist Twitter, and populist right wing Twitter. For example, https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_gang_we_need_to_complain_about_naked_short/ https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_... With GME there isn’t evidence of naked shorting. There are legitimate ways for shorts to be greater than the float. See https://seekingalpha.com/instablog/6850771-bachhandel/5549752-why-short-interest-greater-100-of-float-not-necessitate-naked-short-selling-and-why-wall https://seekingalpha.com/instablog/6850771-bachhandel/554975... for an explanation

rybosworld 6y ago
The very high rates of failure-to-deliver on GME are in fact, suggestive of naked shorting.
- vkou 6y ago
  No, they are evidence of people who woke up to find out that they owe you their shirt, in addition to six decades of indentured labour of their children, grand-children, and yet-to-be-born great-grandchildren... Deciding that maybe they aren't going to pay you right this instant. If you're shorting on margin, and the market moves too far before your position gets closed... Your position might get wiped out, your margin might get wiped out, and you may owe an unbounded number of dollars to your counterparty. Generally speaking, your broker will then sue you for that money... But lawsuits take a long time to resolve. And to a bystander, this sort of thing looks just like a naked short falling apart.
  - deleted 6y ago
    [deleted]
  - zaroth 6y ago
    Whether the shorts were naked or not before this started, the shorts are unquestionably bankrupt with GME at or above $300. When shares are traded out from under a short, and there’s no where left to borrow them from, and the hedge funds can’t meet collateral requirements for their short interest, and the broker needs to liquidate their position but they come up about $20 billion dollars short... That’s when you have massive failure to deliver and the whole corrupt organism goes into CYA mode and tries to shut down buying and bring the stock price back in-line with their models.

GizmoSwan 6y ago

I wonder if it is more likely to happen with put options that are rolled over. I don't believe that options are match with number of shares. Block chain type code can prevent the excess being issued.

cccc4all 6y ago

The most important aspect of naked short selling is why it's a thing. Naked short selling is used as a weapon by short sellers. The purpose is to push down the stock price by artificially increasing supply relative to demand, perpetuating the sell spiral. Thereby, the short sellers can further increase their profit on short sales.

pengaru 6y ago

When the number of shares trading is no longer bound by the number of shares issued by the companies they're supposedly shares of, their value and thus price becomes completely meaningless. Perhaps you could normalize the price using short interest %, but that's not even reported real-time and would be an approximate at best estimation of how much inflation fuckery is going on with the # of shares. This whole thing reeks of corruption and manipulation IMHO, I'm shocked this isn't explicitly illegal and it's making me lose all interest in participating.

tecc501 6y ago

BUY THE DIP

tecc501 6y ago

to the moon

tpmx 6y ago

The full article (not just page 1 of 6) is available on the same euromoney.com domain today, but with a different URL: https://www.euromoney.com/article/b1320xkhl0443w/naked-shorting-the-curious-incident-of-the-shares-that-didnt-exist https://www.euromoney.com/article/b1320xkhl0443w/naked-short... Perhaps posting an archive.org URL adds a certain mystique, though?

MrPatan 6y ago

Two days to deliver? Ten days to deliver? Selling what you don't own? What century is this? Since GME, has anybody heard again the old canard "blockchain? What can it do that a database can't?"

ineedasername 6y ago

This seems like it should be easily monitored. You're not allowed to sell short shares that you don't actually have access to. How is that not an easy thing to determine during the transaction?

beezle 6y ago

Current SEC regulations on shorting are at link below along with a few FAQs. https://www.sec.gov/investor/pubs/regsho.htm https://www.sec.gov/investor/pubs/regsho.htm