More from Mark Cuban's blog, including some great responses to our very own Jeff Mitchell.
30. Posted Mar 1, 2005, 10:49 AM ET by Bob O'Brien
Jeff:
Huh. Another guy who can't make a distinction between short selling - a legal activity, and naked short selling - an illegal manipulation technique.
JEFF: 1. We Need to Eliminate Naked Short Selling to Level the Playing Field
BOB: We need to enforce the law. It's illegal. Get it? Illegal. Hello?
It is like confusing consensual sex and forced, violent rape. Most know the difference and are clear on it. Plus, it’s illegal. Did I mention that?
Now to the more ridiculous "points" in item 1:
Well, I suppose that if a hedge fund is systematically selling a stock and committing to make an affirmative determination and promising to deliver the shares and then violating all the rules against not doing so, it is inconceivable that they would ignore the no short on uptick rule - why (gasp) that just wouldn't be right!!! And heavens knows they wouldn't use the ECN's to program trade in a flurry so that they could, in the highly unlikely event that they decided THAT was the rule they were going to observe, create a cascade of ever lower asks using the hundreds of thousands of shares in their long accounts and then naked short in between the inevitable upticks. Again, that is unimaginable - unless of course you've looked at some of the hedge funds suspected of doing this and seen the long accounts, and watched the program trading off the ECN's during attacks.
You don't get out much. Read the Compudyne NASD complaint if you are arguing that it can’t happen with our system. It does, all the time – 975 different trades selling over a third of their float short without the system making a peep in the Compudyne case. Your argument that nobody could be driving over 55 because there are rules against it is specious.
JEFF: 2. Naked Short Selling Destroys Innocent Thinly Traded Companies
BOB: 2. It can and does. Most recognize that the ability to sell an unlimited supply of bogus shares of a company for which there is limited demand will result in precipitous price declines. This isn’t rocket science. Even the SEC recognizes it.
From their own sec.gov site:
“Although short selling serves useful market purposes, it also may be used to illegally manipulate stock prices. One example is the "bear raid" where an equity security is sold short in an effort to drive down the price of the security by creating an imbalance of sell-side interest. Further, unrestricted short selling can exacerbate a declining market in a security by increasing pressure from the sell-side, eliminating bids, and causing a further reduction in the price of a security by creating an appearance that the security price is falling for fundamental reasons.”
And
“Many issuers and investors have complained about alleged "naked short selling," especially in thinly-capitalized securities trading over-the-counter. Naked short selling is selling short without borrowing the necessary securities to make delivery, thus potentially resulting in a "fail to deliver" securities to the buyer.
Naked short selling can have a number of negative effects on the market, particularly when the fails to deliver persist for an extended period of time and result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled. At times, the amount of fails to deliver may be greater than the total public float. In effect the naked short seller unilaterally converts a securities contract (which should settle in three days after the trade date) into an undated futures-type contract, which the buyer might not have agreed to or that would have been priced differently. The seller's failure to deliver securities may also adversely affect certain rights of the buyer, such as the right to vote. More significantly, naked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable time period, and they may use this additional leverage to engage in trading activities that deliberately depress the price of a security.“
31. Posted Mar 1, 2005, 10:50 AM ET by Bob O'Brien
Now to your study #1: That proves that the SEC doesn’t prosecute naked shorting much. It doesn’t mean that there isn’t much naked shorting or market manipulation. It means that they don’t really understand it, or that the short side manipulators are more sophisticated. Speaking to friends of mine that are ex-SEC, my take is that they don’t understand it very well – most SEC folks couldn’t even tell you the basic mechanics of a naked short sale, much less be on the alert to prosecute.
Now to your study #2. That is a popular study that compares companies that complained about being shorted, and then concludes that they were likely overvalued – seems reasonable to me. What does it have to do with naked shorting? Nothing. Jeff, again, intermingles naked short selling, an illegal manipulation tactic, and legitimate short selling, as though they are one and the same. Why this cognitive dissonance? Don’t know. Legal vs. Illegal. Or, again, again, consensual sex vs. forced rape. Pretty easy for me to get the difference. I suppose that the ones that don’t are the ones more likely to be rapists. Dunno. It’s one possible explanation, as I’ve never understood the rape thing, but that doesn’t mean I pretend it doesn’t happen with regularity.
After making this egregious fallacy of equivocation, he then goes on to conclude that short sellers have enough impositions and rules reigning them in. Again, at no point does he seem to make any distinction between legal and illegal shorting, and further at no point does he recognize that the only way there could be a Reg SHO list is if the rules on the books were not being observed or enforced. He further misses that what is being demanded is not new rules or regulations, but rather simply the enforcement of the rules that have been on the books for 71 years.
Jeff misses a lot. In fact, the whole point. Now when obviously highly intelligent and capable writers miss by that wide a margin, I have to ask myself whether it is intentional misdirection and intellectual dishonesty, or dimness and a lack of ability to grasp the fundamentals.
You can be the judge.
38. Posted Mar 1, 2005, 5:24 PM ET by Ryan O'Neal
The "failure to delivers" should stop. The entire "delivery" concept was based on paper certificates bouncing around and, in this electronic age, it is ridiculous on its face. Hedgers take advantage of it to de facto counterfeit shares- i.e. money- and screw investors- most of whom don't deserve it.
What moron can possibly defend it?
Question: If short activity expands the share base by 100%, what happens during a BOD election or a proxy fight? Half of the shareholders will not be owners of record, and have no voting rights. |
