Shorting - another attempt to understand it all. I apologize to those of you who have already been through this. But I'm not perfectly clear on all of it. So let me try again and if I get something wrong, please set me straight.
Undeclared shorting - done by MMs (and who else?) No limit to how many "virtual" shares they can sell. Some have complained to the SEC about it, but nothing really can be done to stop it. Why not? Is it illegal or not? If it's illegal, there should be a paper trail to follow, and the perps fined and/or jailed. If it's legal, let's get it out in the open so we know what we're up against.
Declared shorting - it's the only kind of shorting we small guys are allowed. Shorted shares must be "backed" to some degree by eligible long shares. Long shares in a cash account, or which are "in street name", or for which you have the certificate in your hot little hands, are not eligible. All other long shares are eligible. Your brokerage calculates the ratio of short shares to eligible long shares (S/L). What is the maximum S/L? Is it regulated, or purely at the discretion of the brokerage? If the S/L is allowed to be greater than 1, then I'd say declared shorting is only different from undeclared shorting in degree, not in kind. But at some point, when the S/L ratio exceeds the maximum permitted value, the brokerage "calls in" enough short shares to bring the ratio back down. When the RedHotStocks article about undeclared shorting mentioned protecting yourself by having the certificate sent to you, I did not understand this to mean it prevents undeclared shorting, but rather that it reduces the supply of eligible long shares for declared shorting. Thus, declared shorting can be reduced by the little guy making his long shares inelligible, and by so doing, that makes undeclared shorting more dangerous.
P.S. Herb, Thanks for the following items which I had not previously known or considered:
< The short seller becomes responsible for any dividends that may occur during the period that the shares are sold short . Both parties can vote the increased number of shares on a prorata basis thru your broker , if this makes sense . >
The dividend part makes sense. But wouldn't the company object to more shares being voted than they issued? Otherwise, the whole thing sounds dangerously close to inventing a company out of thin air. Or do you mean something like this: Say our brokerage has only 100 shares of IOM. First, I long the 100 shares. Then Rocky shorts them, then you long them. Now with only 100 real shares in existance, there are 200 long shares and 100 short shares. Are you saying that when we longs vote, we only vote 50 shares apiece? That should be illegal since we paid full price but only get half the voting power. Perhaps a voting proxy should be sent to Rocky and his vote subtracted from the total vote. <g> |
