This paper by a Fordham U prof is probably not something for the public but it states the case well.
Some of the highlights are the history of short selling, some background of Reg SHO.
footnote 8 was of interest 8 Placing false notices on electronic bulletin boards in Internet chat rooms is an example of the type of manipulative behavior that is difficult for regulators to monitor.
8 and employing trading strategies that impede the price formation process, such as naked shorting, wash sales, matched trades, and painting the tape, all of which
inject misleading trading information into the market, to move market prices in the direction that
benefits the manipulator. Illegal short selling, such as naked shorting, can distort market prices
by creating artificial supply-demand imbalances (Thel, 1994). Consequently, the securities laws
in the United States proscribe various restrictions on short selling that are designed to constrain it
so that it can not be misused to manipulate stock prices below the true asset value (Thel, 1994,
SEC, 2003b, 2004).
SHORT SELLING, DEATH SPIRAL CONVERTIBLES, AND
THE PROFITABILITY OF STOCK MANIPULATION
John D. Finnerty
Professor of Finance, Fordham University
March 2005
Abstract
The SEC recently adopted Regulation SHO to tighten restrictions on short selling and curb
abusive short sales, including naked shorting masquerading as routine fails to deliver. This paper
models market equilibrium when short selling is permitted and contrasts the equilibrium with
and without manipulators among the short sellers. I explain how naked short selling can
routinely occur within the securities clearing system in the United States and characterize its
potentially severe market impact. I show how a recent securities innovation called floating-price
convertible securities can resolve the unraveling problem and enable manipulative short selling
to intensify.
The rest of the article is here: ncans.net |
