Talk:Naked short selling

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Article probation

Restrictions...Editors are directed:

(A) To edit on these from only a single user account, which shall be the user's sole or main account;

(B) To edit only through a conventional ISP and not through any form of proxy configuration;

(C) To edit in accordance with all Wikipedia policies and to refrain from any form of advocacy concerning any external controversy, dispute, allegation, or proceeding; and

(D) To disclose on the relevant talk pages any circumstances (but not including personal identifying information) that constitute or may reasonably be perceived as constituting a conflict of interest with respect to that page.

Do not remove this notice — Rlevse • Talk • 22:09, 13 March 2008 (UTC)

A word.

So one can't move on this project these days without discovering that this article may or may not be a problem. I've come to have a look myself. It has problems. Here are the problems:

• Far too much dependence on financial journalism. The "media coverage" thing dominates the end of the article, and is least encyclopaedic. It should be cut down drastically. Since there are several complaints about it, and a recommendation from the Business and Economics Working Group already on this page suggesting as much, it beggars belief that it has not been done as yet.
• Nowhere near enough reliable academic sources covered in the "studies" section. I am not an expert, but have some small knowledge of theoretical financial economics, and the current section is clearly underweighted, outdated and unrepresentative. Here are a couple of relevant studies:
  • Finnerty, John D. (Fordham): Short Selling and Death Spirals, SSRN no 687282.
  • Boni, Leslie (Anderson SoM) :Strategic delivery failures in U.S. equity markets, JFinMar 9:1.
  • Angel, Christophe and Ferri (Georgetown and GMU): A Short look at Bear Raids.
  • Culp and Heaton, (Chicago GSB): Naked Shorting, SSRN no 982898.
  • Knepper, Zach (Berkeley): Future-Priced Convertible Securities & The Outlook For “Death-Spiral” Securities-Fraud Litigation, Berkeley Legal Press. This last has a decent survey of the litigation.
• It also dramatically fails to provide a worldwide perspective; there are several other countries with much stiffer approaches to this than the US, including the PRC, Singapore and Spain (IIRC) and although there are academic studies of all those approaches, none are in here. I notice the content on the Indian regulation has been unjustifiably pruned back.

Relata refero (talk) 11:01, 14 February 2008 (UTC)

I did a little more reading on this specific subject, and am going to rewrite this article shortly so that it finally complies with policy. Relata refero (talk) 12:16, 15 February 2008 (UTC)

Questions

• Are "traders", who are not market makers, required to identify shares before selling them short, or may they "use naked shorts in the case where they felt there was a reasonable opportunity to make the borrow some time during the settlement period"?
  • Per my reading of Regulatory Circular RG07-87 (and a lack of response on this question), I have decided to remove this. As the circular states, "Only options market-makers that are engaged in bona-fide options market-making may utilize the exception to Regulation SHO's "locate" requirement when effecting a short sale in the underlying security as a hedge."
• Is it undisputed that fails to deliver are "a bothersome but relatively benign clerical problem under normal conditions"? If not, is there a source which this can be attributed to? http://www.fool.com/investing/high-growth/2005/03/24/the-naked-truth-on-illegal-shorting.aspx doesn't seem to say that, as far as I can tell.

Anthony (talk) 23:39, 20 February 2008 (UTC) 17:14, 2 March 2008 (UTC)

The article is US centric

The article in the current form is US centric. I think "globalize" tag should be added. --Doopdoop (talk) 21:34, 5 March 2008 (UTC)

• Is a tag really going to do any good? I agree that the article could use a lot more information about naked short selling outside the US, but I'm not sure that just adding a "globalize" tag will attract anyone capable of doing that (personally, I don't even know where to begin to research it). I also think once we get that global perspective, if not sooner, Regulation SHO should be split back out to its own article, and most of the US-centric parts can be moved there. What do you think? Anthony (talk) 01:36, 6 March 2008 (UTC)

  Tags such as {{globalize}} can be good in 3 ways: to alert the reader to possible problems, to act as an incentive for readers to become editors, and to alert current editors (who may be interested in either the topic itself, or the specific problem-type). If the article is severely lacking in global perspective, and thereby misrepresenting the topic as being US-centric, then by all means add the globalize tag, and/or subsection headings with expansion requests. -- Quiddity (talk) 04:04, 6 March 2008 (UTC)

Even the first sentence of the lead is US-centric. I agree Reg SHO might merit a separate article. Let's wait a couple of days for more comments before adding "globalize" tag. --Doopdoop (talk) 20:08, 6 March 2008 (UTC)

Why has the the template {{globalise}} (note the spelling) not been added to this article? For example "Naked shorting is not necessarily a violation of the federal securities laws, and can contribute to market liquidity, but is illegal when it drives down stock prices." which federal? --Philip Baird Shearer (talk) 12:55, 7 June 2008 (UTC)

Blog attention to article

I hope you realize that this article and few others are getting a *lot* of attention in various blogs and on the net. Is that worth mentioning in the article?--Stetsonharry (talk) 22:42, 7 March 2008 (UTC)

No- blog attention is transitory and largely irrelevant. Good of you to point this out here -- it raises the risk of POV editing to the article. John Nevard (talk) 23:08, 7 March 2008 (UTC)

This article and others are a subject of a great deal of talk in blogorhhea. It may be worth my while to take a look at them myself. Sometimes a fresh viewpoint is helpful. Am new here, but already found that an article on a well known book from the 1930s gets everything wrong about it, including the title! If someone can show me how to rename an article, I will do it myself.--Stetsonharry (talk) 15:05, 8 March 2008 (UTC)

See Help:Moving a page. If it's likely to be a controversial or unexpected move, make a note on the discussion page of the article first and wait a day or two. If there is significant opposition but you think it may be possible to obtain consensus with a big enough discussion, see Wikipedia:Requested moves. --Anticipation of a New Lover's Arrival, The 16:32, 9 March 2008 (UTC)

Thanks yr reply. I used the "redirect" technique that I found somewhere. I did not think it controversial because the title of the book was wrong. The correct title was stated in the article on the author of the book. FYI, the book in question is "I am a Fugitive from a Georgia Chain Gang."--Stetsonharry (talk) 16:52, 9 March 2008 (UTC)

Notes

• /Notes 1

These are notea mainly for my own use, but they may be useful as a general reference. Please do feel free to amend. --Anticipation of a New Lover's Arrival, The 16:33, 9 March 2008 (UTC)

India

I've expanded the lead a bit on India, and explained the background a bit. --Anticipation of a New Lover's Arrival, The 04:04, 10 March 2008 (UTC)

I've restored the Indian content to the lead. It was removed by someone who apparently believed the article to be about a US-only phenomenon. --Anticipation of a New Lover's Arrival, The 01:46, 15 March 2008 (UTC)

I missed this interesting though misguided attempt at characterizing my edit as motivated by "someone's apparent belief" that ignored just about everything my edit summary said. You have no way to guess what I believe, you guessed wrong, and in the end what I believe doesn't even matter. I don't believe I have to explain this to you. Avb 14:28, 16 March 2008 (UTC)

Affirmative determination

In the US (and India too) to comply with the regulator's rules short sales must be made either on borrowed stocks or else the dealer must make an "affirmative determination" that the stocks can be borrowed in time for delivery. That's a bit of compliance language introduced, I believe, by NASD in 1990 (see /Notes 1#NASD for details). Just about all descriptions of naked short selling I've found use language that describes the principle of the thing, not the compliance-oriented language. It's a quibble, most likely, but I've decided to remove the "affirmative determination" stuff from the lead [1]. --Anticipation of a New Lover's Arrival, The 04:04, 10 March 2008 (UTC)

I've also removed some unsupported material that seemed to be arguing the illegal naked short selling is fraud. While the SEC is considering a declaration of this kind, at the moment it isn't cut-and-dried (it's illegal, so whether it's definitively fraud or not is a technical nicety that can be left to the courts). There was also some unsupported stuff that seemed to argue that there was an "economic justification". Although this gave an argument that may or may not be true, it's not verifiable because it's unsupported, and in face may amount to original research. So also removed. --194.66.226.95 (talk) 17:11, 11 March 2008 (UTC)

Reinsertion within minutes of lede sentence that did not cover the article's content

Tony's revert (diff) did not address the 3 points made in my edit summary. Fourth argument: the lede should be a summary of the article. If anyone wants this in the lede, better make the article less US-centric. The lede now looks like an ad for a detergent. Also note that I did not make the article "less US-centric" (Tony's single argument to reinsert) as I moved the lede sentence into the relevant section. The number of sentences about India remained two. Avb 01:50, 15 March 2008 (UTC)

Sure, we should have something about it in the body (there was at one point, perhaps it got factored out). There is also something about Australian moves at /Notes 1#Non-US_items. The fact that the article body has far too much US material doesn't make the non-US material too unimportant for the lead. --Anticipation of a New Lover's Arrival, The 01:56, 15 March 2008 (UTC)

Please address my four arguments. Here they are again:

1. overemphasized India-related content (single sentence in USA-centric article)
2. differed significantly from that sentence
3. the lede sentence wasn't even about naked shorting
4. the lede should be a summary of the article

Avb 02:05, 15 March 2008 (UTC)

Could you please stop calling this a US-oriented article? --Anticipation of a New Lover's Arrival, The 02:07, 15 March 2008 (UTC)

Why, isn't it? Please address my arguments. <repeated arguments removed> PS Feel free to take your time. I'll be back tomorrow. Avb 02:13, 15 March 2008 (UTC)

I don't think it's wise to start repeating text Wikipedia talk pages in the manner of a parrot. This one is on probation, you know. --Anticipation of a New Lover's Arrival, The

Regarding your response above: Thanks for indicating that you have now seen my arguments. I'll remove the second instance now that they have your attention. Unfortunately you still haven't addressed them, choosing to comment on my behavior instead. We may have different views on article probation. My view is that editors should be on their best of behaviors when editing or discussing such articles. I'll ignore "wise" "parrot" and "you know".

Regarding your removal of the disputed text from the lede "for now": Thanks for that. However, my original edit moved it to the relevant section, where it made some sense. Maybe you had missed that? I'll insert it once again. Avb 11:26, 15 March 2008 (UTC)

This article must not progress as a result of a disagreement between two editors. Accordingly I have accepted your edit (please make further changes if you think my own revert was in error). I don't think your change was problematic except that it seems to be a move in the direction of US-orientation. --Anticipation of a New Lover's Arrival, The 02:56, 16 March 2008 (UTC)

OK, thanks; now you're talking. I quite agree about the number of editors. If others are watching the article but holding back due to the (now closed) MM arbitration, please jump right in. As to US-orientation, the article clearly needs work (as in other areas; maybe it even needs stubbing, tracking more sources, also international ones, and rebuilding from scratch). Avb 14:42, 16 March 2008 (UTC)

I became aware of this and other articles because of blog publicity. Coming here and reading them, I saw some bias but nothing major. I would jump in myself but nothing seems pressing. --Stetsonharry (talk) 16:07, 16 March 2008 (UTC)

Gary Weiss

I have removed a potentially promotional pair of sentences about Gary Weiss. There is substantial evidence that COI editing has occurred involving that writer or his supporters. Jehochman ^Talk 02:03, 17 March 2008 (UTC)

That amount of prominent comment does belong in that section, I think. --Anticipation of a New Lover's Arrival, The 02:36, 17 March 2008 (UTC)

Process Question

The section on the process confuses me. How can it be legal to sell something that you don't own? Maybe it is me, but I find this confusing.--Stetsonharry (talk) 16:10, 19 March 2008 (UTC)

One example of this would be a nominee account (or "Street name security"), in which a shareholder (the nominee) who has legal title to the shares holds them beneficially for a client. The U.S. Securities and Exchange Commission (SEC) has a summary of the advantages and disadvantages of this form of trading and holding in U.S. markets here. To sell the security, the beneficiary instructs the nominee to perform the necessary transactions.

Another way in which one can sell shares which one does not own is by selling shares that one has borrowed, or made arrangements to borrow (see short (finance)).

It is also legal in some circumstances and in some markets for a market maker to sell shares it does not own, has not borrowed, and has made no arrangements to borrow. --Anticipation of a New Lover's Arrival, The 17:43, 19 March 2008 (UTC)

The "no intention of borrowing" is one of the points I've tried to verify. My basic understanding, to Stetsonharry, is that most of this has to do with the loose meaning of the word "sale." We say someone "sells" the stock, but by that we don't necessarily include the transfer of the stock, we just mean an agreement between the parties that this will take place. The general regulations, as I understand, are in turn that a seller has three days to transfer the stock ("deliver" it) after "selling." This is what creates the basic discrepancy where someone could "sell" a stock, quickly aquire it, and then deliver it, even though he didn't have it when he initially made the "sale."

The complaints are in turn that the three day limit isn't well enforced, which is what creates other issues. Thus someone sells the shares, doesn't deliver, and the unfulfilled transaction sits open on the market, "diluting" the float and lowering the share price. Presumably (this is the point I haven't been able to verify) that also means the seller could then simply buy new shares and deliver them directly to the buyer without ever having borrowed anything (and paid the fees, etc.). It's also what creates the situation where you can theoretically sell an unlimited number of shares to different parties, deliver them gradually, and then eventually just buy back from buyer A B and C to deliver to buyer X Y and Z (to over-simplify). Of course, others dispute that this happens or is harmful to the extent it does.

In any case, I think the biggest complaint is that the process can harm a company by preventing it from raising money by issuing additional stock. If the share price is driven down from 10 to 5 dollars by naked short sales, the naked short seller may say this will even out in the end when he eventually delivers, but if the company needs money at that moment, then they're out of luck. Thus, if you naked short enough stock of a company that needs capital, you could end up hurting the company itself in a way that makes the shares cheaper to "cover" (or in this case, buy outright, if I understand correctly). Other than the legality, I believe these are some of the main objections. Mackan79 (talk) 19:12, 19 March 2008 (UTC)

I think the short answer to the "has no intention of borrowing" is "yes, subject to the short sale being part of bona fide market-making activity", which is less than satisfactory I know but due to the complexity of the stock market the SEC seems to deliberately avoid spelling out situations that would be genuine, although it does list some that would not. The exception to Regulation SHO for market makers consists of an exemption from the so-called locate requirement (203(b)(2)(iii)). For this purpose, a market maker is defined as "any specialist permitted to act as a dealer, any dealer acting in the capacity of a block positioner, and any dealer that, with respect to a security, holds itself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and sell such security for its own account on a regular or continuous basis." The SEC FAQ says "market makers may maintain temporary short positions in CNS until such time as there is sufficient trading to flatten out their position." [2] CNS here stands for "Continuous Net Settlement", a settlement system operated by a subsidiary of DTCC, the Depository Trust & Clearing Corporation. Sorry about the alphabet soup.

In practice, "market maker" usually means merchant bank, a company that you would expect to quote a price for any share you would want to buy.

On Mackan79's point about the seller being able to obtain and then sell new shares to fulfil his obligations without paying lending fees, as I understand it this would be legal, but questionable, under the current system. It would for instance be one means by which the short seller would remedy a legitimate fail-to-deliver resulting from failure of his borrow transaction despite due diligence in the locate.

The stock borrow program in many cases also provides the setttlement system with a means of making the buyer whole in the meantime. In this scheme, holders of shares register their willingness to loan shares (listing stock, and quantities available, at close of trade) and the settlement system uses these shares to resolve fail-to-delivers, depositing cash in bank accounts held by the lender as collateral. At a later stage in settlement the loan is returned, and capital removed from the lender's account and he keeps the interest. While the shares are on loan the lender foregoes all normal ownership rights, which are temporarily assigned to the buyer until the transaction is properly settled. Unfortunately the shares most likely to result in a fail-to-deliver are those that are difficult to obtain, and thus less likely to be available in sufficient quantities via the Stock Borrow Program to satisfy settlement.

But I don't believe the defaulting short seller (whether legitimate or not) gets away scot-free in this failed transaction. I don't have the details to hand but I seem to recall that the consequences are outlined in the paper by Culp and Heaton (see /Notes 1#Theory). Suffice to say that he doesn't just pocket the proceeds and go on to trade without consequences.

Some people have argued that either naked short selling or the Stock Borrow Program creates "counterfeit shares" but the Securities and Exchange Commission sets out a refutation of this in its FAQ at 'Question 7.1: Do naked short sale transactions create "counterfeit shares?"' and 'Question 7.2: Does NSCC's stock borrow program ("SBP") create "counterfeit shares"?'[3]

The degree to which manipulative traders could use naked short selling in order to profit by shorting a company (for instance, in a so-called bear raid) is undeniable, and this could do serious harm to a company already experiencing solvency problems, but the extent to which this occurs is disputed. As with all regulation, the costs of regulating (which would damp short selling and thus tend to moderate its beneficial effects in restraining share overpricing) must be balanced against this. --Anticipation of a New Lover's Arrival, The 20:31, 19 March 2008 (UTC)

This sounds about right to me. However, the "counterfeit shares" issue may be one that can't entirely be taken at face value. I think from one perspective, any sale without ownership is to sell a share that doesn't "exist," and thus creates a sort of "counterfeit" share. Non-owners are soaking up the buys, thus bringing the price down. You could equally call this "dilution." On the plus side, I think it's also what's called "liquidity" in terms of allowing a short sale today even though the share can't be found until tomorrow. I'm not clear on all the technical aspects of the borrowing, but I think these are mostly different words for the same thing. Mackan79 (talk) 21:46, 19 March 2008 (UTC)

The SEC Regulation SHO basically defines how the short seller is to ascertain that he can cover his sale; similar rules existed (from about 1994) formulated by the NASD (the dealers' trade association now known as FINRA), based on rules initially formulated for long sales. See /Notes 1#History_of_"affirmative_determination"

You document the steps you've made to locate shares that you will be able to borrow, and make sure that the lender is promising to do so within the timescale of delivery. The SEC FAQ I cited before, I believe, addresses the argument that short sales involve a dilution ("counterfeit shares"). --Anticipation of a New Lover's Arrival, The 23:25, 19 March 2008 (UTC)

So, if the real estate market worked the same way, I could sell a house when I don't actually own one, or even rent or lease one, and it's possible the particular house I'm selling hasn't even been built yet, but I did spend some time looking through real estate listings in newspapers and online, and have some hopefulness to the effect that, by the time the closing takes place and I have to turn over possession of the house to the buyer, I'll have managed to actually obtain a house to so transfer. *Dan T.* (talk) 15:27, 7 June 2008 (UTC)

I was wondering the same thing. It seems illogical. I also can't understand how, in ordinary short selling, I could borrow somebody's camera and sell it.--Stetsonharry (talk) 14:49, 8 June 2008 (UTC)

Much improved version available

Setting aside the slant of the current article, I find its organization to be abominable. Reporting on the opinions of many people is woven at every turn into sections that should merely be expository. I created a Sandbox in which to restructure the current article, finding a way to include all the material, but bringing all the exposition together to the top of the article, then the material that describes what various people and institutions think of the issue. Once that was done, it was clear that there were approximatey 10 times as many links to NSS-denial materials as there were to equally prestigious (or more prestigious) publications who were NSS-critics (that may have been the point of creating such a muddled structure). In any case, this restructuring preserves the original material but makes it a far clearer read, I believe. I respectfully suggest that you should copy it over and making it the new page.PatrickByrne (talk) 01:09, 6 April 2008 (UTC)

Restructured for Clarity

I know this is a controversial article, so I want to explain why today I moved material around to create a structure that I believe makes it far clearer to the newcomer. The former structure had a section regarding the controversy over this issue, with pebbles from both sides of the scale; however, pebbles from one side of the scale were also strewn through the rest of the article, creating a mishmash that was, if nothing else, repetitive (literally, whole sections were repeated). I kept all the pebbles from each side of the scale, so no one could say I was adding or subtracting from either argument. However, I rearranged the sections this way: a description of the issue and the evolution of the regulations which govern it; a section on the controversy, preserving all the NSS-apologist lines but bringing them together into one place (you can see some of the duplicate paragraphs), and nothing added from the NSS-critical side; then a section on the issue vis-a-vis the courts (with all material about enforcement and litigation preserved). If it is the case, as it may appear, that a NPOV is a difficult thing on which to agree when it comes to this subject, then the closest thing would be an article that presents the clashing points of view neutrally. I cannot see how someone could in good faith deny that this structure makes for an article that presents the various points of view most neutrally. PatrickByrne (talk) 02:31, 4 May 2008 (UTC)

As a matter of fact, I believe the structure could be further improved with one additional move along the previous lines: have the section explaining NSS, then the section regarding the controversy (with all arguments from both sides retained), and then the sections on regulation, enforcement, and litigation. In other words, take the current section on regulation, (which is #2, and splits the explanation of NSS from the controversy), and move it after the section on the controversy. This would keep the explanation at the top, followed by the controversy, followed by all sections on legal issues (regulation, enforcement, and litigation) grouped together. This approach has some charm to me, but I will see what others think.PatrickByrne (talk) 02:54, 4 May 2008 (UTC)

'Pervasiveness of naked shorting' intro

The section that begins "Regulators downplay the extent of naked shorting in the US." seems to discuss regulators downplaying the effect, the impact, effectiveness or importance of naked shorting. John Nevard (talk) 06:54, 4 May 2008 (UTC)

Rather than any 'pervasiveness' or 'extent' of naked short selling. John Nevard (talk) 06:59, 6 May 2008 (UTC)

I fixed the Lead, which previously had said inaccurately that naked shorting is illegal That is contradicted by the quotation from "Key Points About Regulation SHO" and the quote further down in the article.--Bassettcat (talk) 13:13, 4 May 2008 (UTC)

Per Wikipedia:COIN#Naked_short_selling

It would seem to be sensible not to restore the version of the article as rewritten by someone with an actual financial interest in promoting a naked short selling conspiracy as a serious problem to honest companies. John Nevard (talk) 03:07, 29 May 2008 (UTC)

Recover useful and relevant external links that were improperly removed

{{editprotected}} I am requesting undo of the removal of several very useful and relevant external links. Those external links were removed in revision 20:40, 17 May 2008, please undo that change. Specifically I want the external link list to go back to the revision right before the removal, which looked like the list below. Silverbach (talk) 06:13, 12 June 2008 (UTC)

• Short Selling FAQ: Securities and Exchange Commission
• Naked Short Selling FAQ: Depository Trust and Clearing Corp.
• Who's behind Naked-shorting? - Fool.com
• AMEX's daily and monthly Regulation SHO threshold security list
• NASDAQ's Regulation SHO threshold security list
• NYSE's Regulation SHO threshold security list
• Failure to deliver data charting for US securities exchanges.

N Edit declined at this time, consensus not yet apparent, see WP:PER.  Sandstein  07:22, 12 June 2008 (UTC)