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Because actual delivery does not happen until settlement time three days later. The seller has until then to acquire the shares. Naked shorting is illegal. To
by koolba 6y ago
Because actual delivery does not happen until settlement time three days later. The seller has until then to acquire the shares.
Naked shorting is illegal. To short the shares the seller only has to perform a “locate” first. That involves contacting someone that has the shares and is willing to lend them. Skipping the locate step is illegal. They just don’t have to actually borrow them until delivery.
Additionally, if the locate fails to materialize then it’s the sellers responsibility to borrow them from someone else before delivery. If not, that leads to a fail to deliver which locks up further transactions for the seller until it’s resolved.
- Swenrekcah 6y agoThanks, that’s a bit clearer now.
- jaycroft 6y ago>Naked Shorting is illegal. Unless you're a market maker and thus exempt from the regulation, because your market making function requires buying and selling lots and lots of unsettled shares in order to provide liquidity.
- a-posteriori 6y agoI'm curious if you have any more information on this, not in a snarky way, just curious.
- jaycroft 6y agoSorry it took so long to get back to you with an answer! Also no snark detected. Here is a nice overview by the SEC but it's really light on the details. https://www.sec.gov/investor/pubs/regsho.htm#_ftn4 https://www.sec.gov/investor/pubs/regsho.htm#_ftn4 You can also look through FINRA's regulations here: https://www.finra.org/rules-guidance/rulebooks https://www.finra.org/rules-guidance/rulebooks The wikipedia article on Regulation SHO is also fairly relevant: https://en.wikipedia.org/wiki/Naked_short_selling#Regulation_SHO https://en.wikipedia.org/wiki/Naked_short_selling#Regulation... It's pretty long and tedious and not really targeted to your question though. I'll try to remember to post a better resource here when I find one.
- jkhdigital 6y agoThat last part is what really confuses me... what if the seller never resolves the failure to deliver? The buyer is walking around believing they own a share that the seller never actually gave them... I understand that the types of institutions that can engage in this behavior will true up their balance eventually, but why allow it in the first place? I can understand playing fast and loose with derivatives, since they are created out of nothing anyway, but securities should be treated in a manner consistent with their name.
- lmm 6y agoSame as if you pay for ten tons of lumber and it doesn't show up. Stock trading grew out of traditional property trading and inherits a lot of its norms from there.
- ArchD 6y agoDoes it have to be that way? Everything is electronic and stocks can move at the speed of the network whereas lumber cannot. There could be some archaic processes that are not electronic but are there inherent good reasons why they cannot be converted?
- lmm 6y agoNot necessarily. But we're talking about a heavily regulated system, run by a lot of very conservative entities, that currently works pretty well on the whole; there's going to be a whole lot of "if it ain't broke don't fix it".
- sooheon 6y agoI guess this is where the sentiment of "let's break it so they fix it" comes from.
- johnrgrace 6y agoThe buyer gets made whole by the broker they bought from, retail you'll never know it happened. The buyers broker makes the sellers broker make them whole, they pay whatever the buyers broker has to pay to buy the shares elsewhere plus more. Brokers