Ap,
W/regard to "legality," what would be needed to make short selling - even w/o affirmative determination (if trading in such a capacity where such is required), on a downtick, etc. - illegal would not be the sale violation itself but some fraudulent, etc. activity in the course of which the short sale was initiated. And that, of course, goes for short sales initiated compliantly and long transactions as well. In other words, even short sales which violate SRO rules are not, alone and in and of themselves, "illegal." No one is doing hard time in Attica for wacking stock XYZ on a downtick. If you're a customer, your brokerage firm can get in trouble and if you're registered, you, your supervisory principal(s), and the firm can receive fines, censure, sidelining, or any combination of those and other punitive measures depending upon the flagrancy or conditions surrounding the
violation(s).
W/regard to your proposal regarding being long in one account and shorting in another at another firm, well, that would solve some problems (delivery) but seems to miss the main focus of the now-expressly violative "straddle" practice as applied to short selling: the time factor. Typically individuals would straddle so that, when a certain issue fell out of bed, they could wack it south on the spot and catch it for a quick move. For one to be long in Brokerage Acc't A and want to short a stock quickly in Brokerage Acc't B, in many cases B will want proof that you are, indeed, long elsewhere, which will require a call to A's box. I'm not sure how many brokerage firms, direct access or web-based, are going to treat this sort of customer request with the urgency that it would situationally require. And, of course, pulling the trigger on a downtick first and asking questions later - if such could be done (technology generally should bar this sort of transaction) potentially puts the executing broker in violation. Yes, even if it turned out after the fact that you had the stock long elsewhere, the firm could get in trouble for not asking and getting proof beforehand.
And that answers another of your questions, namely, "[h]ow...would a remote trader get "caught" doing this?" Well, it's not so much that the customer trader would be "caught" - let alone get in any sort of trouble - so much as the firm that they trade through would: brokerage firms are required to have a "record of original entry" (essentially, an order ticket) covering agency and principal transactions, and when accounts are pulled randomly during an NASD/NYSE/SEC examination, these are sometimes examined. Some firms, in an effort to be extra-compliant, rather than annotating such diligence on the order tickets keep a separate log specifically covering their affirmative determination inquiries in their daily file (which also includes blotters, the "run," that day's short sale list, order tickets & memos to file, etc.).
But how can they determine whether or not there was an uptick at a particular moment? Well, they can, via technological archiving. In addition, the new OATS initiative (Order Audit Trail System) will, as I understand it, permit each and every order, each tick, each print, and each cancellation, in every stock, to be pinpointed at its' exact moment in time, making up for whatever discrepancies (not sure exactly what, if any, there are) in the current historical recordkeeping systems.
Some issues do not require an uptick to sell them short. Also, the aforementioned rules generally reflect the practices and policies of domestically-based brokerage firms.
LPS5
on pig watch) |
