>> BTW, I have not seen anyone post anything that suggests that MM's are doing something "illegal" when they "naked" short. It would appear that from a post that Ellen recently made (and wouldn't respond to my question) that by being a MM, you can legally short a stock without being sure of your ability to cover that short. <<
You may want to re-read the post of mine you are referring to. Here is a portion of it from:
Message 4430916
In your letter you request interpretive advice as to whether "registering as a Nasdaq CQS market maker" would permit your firm "to short securities without borrowing the stock to assure delivery". We assume this means not having to do an affirmative determination as to stock availability prior to execution of a short sale. In addition, you represent that your firm would be engaging in short selling activity to hedge the firm's issuance of over-the-counter put and call options (non-listed options). Further, you understand that the firm would be subject to buy-in risk for non-delivery.
This part of the NASD response is the clarification of the original question(s) asked. The "interpretive advice" assumes the original question was asking IF the market maker would or would not be required to "do an affirmative determination as to stock availability prior to execution of a short sale." I took this to mean that it is normally required. **Note that the NASD response states the firm would be subject to buy-in risk for non-delivery.**
Rule 3370(b)(2)(B) states that "[N]o 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 ... bona fide market making transactions by a member in securities in which it is registered as a Nasdaq market maker...". Therefore, a member who is registered as a Nasdaq market maker and is involved in bona fide market making activity is not required to make an "affirmative determination" prior to selling short the securities in which the firm is registered.
It clearly states no short sale should be made unless the "affirmative determination" is made that the security can be delivered by the settlement date. It does, however, bring up the issue of whether "bona fide market making" provides an exemption to the requirement. Now, my question would be, is illegal naked shorting considered to be "bona fide market making"? Doubt it.
Based on the above, the relevant question is whether the activity contemplated by your firm would qualify for the "bona fide market making" exception. In this connection, to the extent that a registered market maker engages in short selling activity solely to hedge an option position, such short sale would not constitute bona fide market making activity in the security in which the market maker is a registered market maker, and, thus, would not be exempt from the affirmative determination requirement. Accordingly, if your firm were to effect short sales solely to hedge a conventional option position, such short sales would not be exempt from the affirmative determination requirement.
The response here clearly states the short sale here is not exempt and the determination must be made that the security can be delivered by the settlement date. |
