EVENT TRADE: SELLING SHORT
Here's some useful info on the subject.
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Thursday, Oct 14 1999 5:12PM ET
To: Triffin (who wrote)
From: Wayne Van Scoyoc
You came up with the best input on the subject of short selling IPOs than anybody on the FDRY board. I went through the NASD Manual today to see what else is there. There are only two ways to sell short. Through a legitimate borrow or naked shorting. I maintain that there is no such thing as a legitimate borrow for an IPO until the issue shows up on a quarterly list published by the Federal Reserve Board of OTC Margin stocks. For naked shorting, the shorter per Nasdaq rules has to make a WRITTEN "affirmative determination" to supply the shares sold short to a buyer by the settlement date of the transaction. You have to supply the shares to the buyer on T+3 PERIOD. So the only way you can sell short IPOs is sell short naked and provide the shares sold short to some buyer by the settlement date--that is to buy-in/cover on the same day as the short sale. If you don't, you cannot produce the shares on T+3 and you are in violation of rule 3370 and subject to the buy-in you talked about-- plus Nasdaq sanctions for violating the rule 3370, "Prompt Receipt and Delivery of Securities". I've cut and pasted that section right out of the Nasdaq Manual for your review. There are exceptions on LONG sales of IPOs-but not short sales. See the stuff on blanket written affirmative determinations. They have to be renewed every 24 hours. Like you said also, I'd be surprised if there are any brokers that will allow naked shorting.
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3370. Prompt Receipt and Delivery of Securities
(a) Purchases
No member or person associated with a member may accept a customer?s purchase order for any security unless it has first ascertained that the customer placing the order or its agent agrees to receive securities against payment in an amount equal to any execution, even though such an execution may represent the purchase of only a part of a larger order.
(b) Sales
(1) Long Sales
No member or persons associated with a member shall accept a long sale order from any customer in any security (except exempt securities other than municipals) unless:
(A) The member has possession of the security;
(B) The customer is long in his account with the member;
(C) The member or person associated with a member makes an affirmative determination that the customer owns the security and will deliver it in good deliverable form within three (3) business days of the execution of the order; or
(D) The security is on deposit in good deliverable form with a member of the Association, a member of a national securities exchange, a broker/dealer registered with the Commission, or any organization subject to state or federal banking regulations and that instructions have been forwarded to that depository to deliver the securities against payment.
(2) ?Short Sales?
(A) Customer short sales
No member or person associated with a member shall accept a ?short? sale order for any customer in any security unless the member or person associated with a member makes an affirmative determination that the member will receive delivery of the security from the customer or that the member can borrow the security on behalf of the customer for delivery by settlement date. This requirement shall not apply, however, to transactions in corporate debt securities.
(B) Proprietary short sales
No member shall effect a ?short? sale for its own account in any security unless the member or person associated with a member makes an affirmative determination that the member can borrow the securities or otherwise provide for delivery of the securities by the settlement date. This requirement will not apply to transactions in corporate debt securities, to bona fide market making transactions by a member in securities in which it is registered as a Nasdaq market maker, to bona fide market maker transactions in non-Nasdaq securities in which the market maker publishes a two-sided quotation in an independent quotation medium, or to transactions which result in fully hedged or arbitraged positions.
(3) Public Offering
In the case of a public offering of securities, paragraph (b)(1) hereof shall not apply during the period from the commencement of the public offering until seven (7) business days following the date of settlement between the underwriter and issuer of the securities; provided, however, that the member believes in good faith that the customer has purchased the securities.
(4) ?Affirmative Determination?
(A) To satisfy the requirements for an ?affirmative determination? contained in paragraph (b)(1)(C) above for long sales, the member or person associated with a member must make a notation on the order ticket at the time the order is taken which reflects the conversation with the customer as to the present location of the securities in question, whether they are in good deliverable form and the customer?s ability to deliver them to the member within three (3) business days.
(B) To satisfy the requirement for an ?affirmative determination? contained in paragraph (b)(2) above for customer and proprietary short sales, the member or person associated with a member must keep a written record which includes:
(i) if a customer assures delivery, the present location of the securities in question, whether they are in good deliverable form and the customer?s ability to deliver them to the member within three (3) business days; or
(ii) if the member or person associated with a member locates the stock, the identity of the individual and firm contacted who offered assurance that the shares would be delivered or that were available for borrowing by settlement date and the number of shares needed to cover the short sale.
(C) The manner by which a member or person associated with a member annotates compliance with the ?affirmative determination? requirement contained in subsection (b)(2) above (e.g., marking the order ticket, recording inquiries in a log, etc.) is not specified by this Rule and, therefore, shall be decided by each member. Members may rely on ?blanket? or standing assurances that securities will be available for borrowing on settlement date to satisfy their affirmative determination requirements under this Rule, provided: (i) the information used to generate the ?blanket? or standing assurance is less than 24-hours old; and (ii) the member delivers the security on settlement date. Should a member relying on a blanket or standing assurance fail to deliver the security on settlement date, the Association shall deem such conduct inconsistent with the terms of this Rule, absent mitigating circumstances adequately documented by the member.
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