A repost (already on Mish's board) - but here are some issues I have looked at in regards to the short/naked short debate.
Short sales, naked or not, distort the real market for any stock. While small retail shareholders are hard pressed to make money selling short through their brokers much of the time, when the large institutions and market makers sell short they make huge unjustified gains at almost no risk and naked short selling on top of "legal" short selling is used to manipulate prices, maintain a "float" of free money and eliminate risk for the big players.
Look at CDE as an example...
Shares issued 550 million. Short position 66.5 million (plus an unknown number of naked short sales which don't get counted)
That short position has been in place for years and most would have been placed at much higher prices. My estimate is about $4 a share average.
That means the short sellers have $266 million in their coffers as a free, no interest loan from the longs. While small retail short sellers get no benefit from the money in their account from short sales until they close the position, the broker dealers have no such restriction. To them it is all free money for as long as they can resist covering the short.
The additional 66.5 million short sales effectively raise the traded float by the same amount and so there are at least 616.5 million shares of CDE in long shareholders accounts. While the MC by the book is $1.35 billion there are long shareholdings of at least $1.52 billion of CDE stock (more if the naked sales were included). (at Fridays closing price)
Under current rules as allowed by the SEC, market makers have no need to carry any inventory and can operate a no cost, cash positive book by permanently running a naked short stock balance on every stock for which they are making a market. Most MMs are provided with stock by the company as a "float" and are expected to maintain a balance of stock in order to "smooth out" trading fluctuations. That simply isn't happening. MMs are making out like bandits and the SEC, naked short selling and Reg SHO is greasing the path for them.
The way that the SEC rules are now interpreted, MMs can permanently operate with a deficit of stock which they can maintain indefinitely for as long as they can use the free cash float generated by their naked short sales. They can generate more free cash at anytime simply by selling more of what they don't own and don't borrow. Their interests are always better served by depressing and lowering the stock price of the issues they are supposed to be working for as that route maximises their profits.
No wonder that they are forever coming forward with their mindless experts declaring that short selling is an essential part of the market. It is, for them to continue to make their obscene profits, but it is not for the investing public.
The fact that in these days of purported transparency, short selling statistics are some of the most difficult to obtain except so far after the event that they are useless. In fact every L2 quote screen could display the status of every order and real time trading figures of short and long buys and sales could easily be made available. It isn't done, not for any technical reason, but because after a few days of seeing how the market is really being run by the MMs and specialists the public would revolt! |
