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Strategies & Market Trends : Shorting stocks: Mechanical aspects
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To: peter michaelson who wrote (167)2/22/1999 9:12:00 PM
From: RobbRacer  Read Replies (1) of 172
 
I think I know how the mechanics of naked shorting works enought to explain it. The key is the stock is in street name and thus DTC'd accordingly. Say I short ABCD naked. My broker didn't borrow the shares but executed the trade anyway. You would think shares were not delivered to the counter party but thats not true. Because they have stocjk in street name in ABCD(maybe not a lot) they delivered what they had to clear the transaction. Here the potential problem. They sold someone elses stock (who is long) at thier clearinghouse. That person dosn't know and as far as he is concered has his stock safe with the brokerage house. Now not every person who has stock in ABCD (obviously more than 1 person does) would sell at the same time. So technically, there is a deficit of shares at the clearinghouse but nobody knows that except the clearinghouse. In the event of a very thinly traded security their deficit was about to become actual (because they needed to deliver more shares then they had, they would buy the person short in because they don't have the same claim on the stock that a real owner has who wants to sell. The odds of this happening are rare which is why buy ins do not occur frequently unless targeted by longs.
Rob
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