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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 - lat

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.

mcgoo 6y ago
If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.
- oa335 6y ago
  Last I checked they were still subject to delivery requirements, but had a substantially longer time to find the shares (10 days iirc).
  - fapjacks 6y ago
    Twenty-one days versus three for everybody else. But it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share).
    - totalZero 6y ago
      > it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share) This is called a reset transaction, and it is not permitted. Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the shares in the market, Trader A might next enter into a trade that gives the appearance of satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain its short position without ever delivering on the short sale. Most often, this is done through the use of a buy-write trade, but may also be done as a married put and may incorporate the use of short term FLEX options. These trades are commonly referred to as “reset transactions,” in that they have the effect of resetting the time that the broker-dealer must purchase or borrow the stock to close-out a fail. The transactions could be designed solely to give the appearance of delivering the shares, when in reality the trader has no intention of meeting his delivery obligations. The buy-writes may be (but are not always) prearranged trades between market- makers or parties claiming to be market makers. The price in these transactions is determined so that the short seller pays a small price to the other market-maker for the trade, resulting in no economic benefit to the short seller for the reset transaction other than to give the appearance of meeting his delivery obligations. Such transactions were alleged by the Commission to be sham transactions in recent enforcement cases. Such transactions between traders or any market participants have also been found to constitute a violation of a clearing firm’s responsibility to close out a failure to deliver. https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf https://www.sec.gov/about/offices/ocie/options-trading-risk-... (Start at the bottom of Page 7)

mcgoo 6y ago

If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.

oa335 6y ago
Last I checked they were still subject to delivery requirements, but had a substantially longer time to find the shares (10 days iirc).
- fapjacks 6y ago
  Twenty-one days versus three for everybody else. But it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share).
  - totalZero 6y ago
    > it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share) This is called a reset transaction, and it is not permitted. Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the shares in the market, Trader A might next enter into a trade that gives the appearance of satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain its short position without ever delivering on the short sale. Most often, this is done through the use of a buy-write trade, but may also be done as a married put and may incorporate the use of short term FLEX options. These trades are commonly referred to as “reset transactions,” in that they have the effect of resetting the time that the broker-dealer must purchase or borrow the stock to close-out a fail. The transactions could be designed solely to give the appearance of delivering the shares, when in reality the trader has no intention of meeting his delivery obligations. The buy-writes may be (but are not always) prearranged trades between market- makers or parties claiming to be market makers. The price in these transactions is determined so that the short seller pays a small price to the other market-maker for the trade, resulting in no economic benefit to the short seller for the reset transaction other than to give the appearance of meeting his delivery obligations. Such transactions were alleged by the Commission to be sham transactions in recent enforcement cases. Such transactions between traders or any market participants have also been found to constitute a violation of a clearing firm’s responsibility to close out a failure to deliver. https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf https://www.sec.gov/about/offices/ocie/options-trading-risk-... (Start at the bottom of Page 7)