Talk:Naked short selling
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[edit] Reasons for Version 14:10, 6 October 2006:
I thought I should state my reasons for reinstating the above-mentioned version.
1. Definitional section, Line 1: Overall, there is no change in substance here, but I think there is definite improvement in clarity.
2. “The Practice”, Line 6: Again, no major substantive changes, merely an improvement in clarity. I would disagree that the addition of “and then failing to deliver it to the buyer” is accurate in order to have a naked short sale of a security, however the addition is probably necessary because the current discussion among regulators and participants focuses upon the insidious results of naked short selling. It might help to clarify this aspect of the Wikipedia page by elaborating upon the history of the bear raids precipitating the stock market crash of 1929, which directly led to congressional curtailment of shorting, specifically naked shorting, in the Securities Act of 1933.
3. “Does Naked Shorting Drive Stock Prices Down?”, Line 18: I think that the additional paragraph after the large blocked paragraphs could be simplified. I am not sure it adds anything. it is factually accurate although it is unsourced. Naked short selling is often accompanied by dissemination in the media of distortive misinformation or disinformation. (See also Wikipedia’s page on media bias.)
4. Under “Controversy”, several suggested edits to the Mantanmoreland version appear to have improved the clarity of this section, but perhaps there is still room for improvement.
4.a. The prior version began “Some investors....” The latest version change this to “Some traders....” I would suggest “Some market participants....” but have not made this change. Others may be inspired to do so, however.
4.b. The prior version then proceeded to state: “Naked short-sellers claim that they are enacting market pressure against overpriced and undertraded small-cap stocks.” The proper word is “exerting,” not “enacting.” Enactment has to do with laws or with acting out, as on a stage. The subsequent description under “Controversy” of the prior Mantanmoreland version has engendered the most significant edits from other readers. In full, it read as follows:
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- - In the bubble of the 1990s, they argue, regulations against short-selling would have caused an even greater boom and bust.[business week cite]
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- - Penny stock brokerages urge all investors to keep their stocks in cash accounts so that no shares can be shorted. The penny stock fraudsters can then illegally hype the stock to very high prices allowing the penny stock fraudsters to pump and dump their shares.
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- - Naked shorting keeps the penny stock brokerages from driving prices above the true value of the stock. The free market in this case could prevent the crime of pumping and dumping without any additional police or raising taxes.
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- - Pump and dump organizations sometimes are run by the Mafia (see Gary Weiss's true story of Hanover Sterling in the book Born to Steal, published in 2003).
- Critics contend that the naked shorting is fraud, and that it constitutes "taking a buyer's money and not delivering the product." However, the SEC denies that occurs, saying that a fail to deliver "does not mean that the customer's purchase is not completed." [cite to SEC's brief filed in the Nanopierce litigation]
- This campaign has drawn criticism. Financial columnist Floyd Norris of the New York Times observed that "Investors who own [allegedly shorted] shares might do better to try to understand why some think the shares are overvalued, rather than simply rail about unfair short selling." [cite to NY Times article]
- Critics of the naked shorting campaign contend the practice is not harmful and its prevalence exaggerated. Opponents include Wall Street Journal, which criticized the naked shorting allegations in an editorial, and columnist Joseph Nocera of the New York Times. Author and journalist Gary Weiss criticized the anti-shorting campaign in his book “Wall Street Versus America," as a diversion of regulatory resources from more pressing issues.
4.c. What is the purpose of the foregoing? The above definitely expresses its preference for a particular “side” of the controversy and therefore falls (far) short of the standards Wikipedia requires for an unbiased presentation of both sides of an issue. For example, the following statement – “Penny stock brokerages urge all investors to keep their stocks in cash accounts so that no shares can be shorted. The penny stock fraudsters can then illegally hype the ...” – is fallacious for a number of reasons. Following the preceding sentence (“In the bubble of the 1990s, they argue, regulations against short-selling would have caused an even greater boom and bust”), the first declaration that follows is a non sequitor and fails to explain why this should be so. If this declaration is to be retained, it should explain the theory behind why keeping stocks in a cash account (as opposed to a margin account) is supposed to curtail misappropriation (by one’s broker, I might add) of one’s shares. Second, it appears to be a statement of fact, and as such it incorrectly assumes that naked shorting is only a problem of so-called penny stocks and incorrectly presumes that a broker (and by extension the DTCC) will abide by regulation and not abuse an investor’s securities that are held in street name. The extent to which certain brokers are abusing their custody of investor assets is precisely a large part of the controversy surrounding naked short selling. Next, the second statement of the prior version, “...penny stock fraudsters...”, is, in addition to also being a non sequitor, is unnecessarily laden with bias and innuendo. It serves only to confuse or divert the focus away from what should be a Wikipedia (encyclopedic) explanation of naked short selling. Its proper interpretation is not possible, because the statement is inherently inconsistent or incoherent. Does it mean that all penny stocks are “frauds”? If penny stock “fraudsters” are to be distinguished from legitimate penny stock “promoters,” then the addition of “illegally” is redundant. US courts of law mandate that an allegation of fraud must be plead with “particularity” or the allegation will be tossed out, so to toss around “fraud”, “fraudulent” etc. willy-nilly, without any specific context, is to commit the combined fallacies of argumentum ad ignorantiam, circulus in demonstrando, dicto simpliciter, petitio principii, post (and/or cum) hoc ergo propter hoc, red herring, and straw man all at the same time.
4.d. As for the rest of the prior version’s summation of the “Controversy,” I think more need not be said about it here, except that others have repeatedly pointed out spamming some obscure author’s biased opinion as the “definitive” authority on the subject has no place under a heading entitled “controversy.” Furthermore, there is no Wikipedia entry for “Joseph Nocera,” and the continual kneejerk reversions to older version(s) which perpetuate that error are becoming irritating. The latest version merely reads as follows:
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- Critics contend that naked shorting is fraud, and that it constitutes "taking a buyer's money and not delivering the product." However, the SEC denies that interpretation, saying that a fail to deliver "does not mean that the customers purchase is not completed." [cite to SEC’s brief filed in the Nanopierce litigation.] The SEC doesn't articulate how a purchase is concluded absent delivery of the product purchased, however.
- Harvey Pitt, the former Chairman of the SEC from 2001 to 2003, formalized his understanding of the practice's damaging impact in a recent Forbes Magazine editorial [cite to Forbes article].
- Regulation SHO requires the timely close-out of securities that linger on Regulation SHO, but it is not enforced, as there are stocks that have been listed for over 1 year. Every day there are new stocks that exceed the 13 day closed-settlement date. The fact that there are securities on Regulation SHO for more than 13 days has led many observers to comment on the inadequacy of the regulation.
In general, I think the above is a vast improvement over the prior version, and I am certainly not alone in that regard, but there is probably still room for further improvement. Avoiding the contraction “doesn’t” springs to mind. If others see fallacy or error in the current “Controversy” summation, then they should state their reasons HERE, and not engage in ad hominim attacks and immediate reversions (to prior versions) without considering the evolution that this page has had to date.
5. “Regulators Respond”: As with the prior section, I think the way the current version reads is an improvement over the prior version, both in clarity and for succinctness. Ocham’s Razor, and all that....
6. “Recent Developments”: The changes between the versions are minor. But again, to “wipe out” the latest edits with a knee-jerk reversion to a much older, discredited version of this page is irresponsible and disrespectful to the person(s) who took the time and effort to make a contribution to this project.
Sincerely and respectfully,
UB
