Excellent response to Mark Cuban siding with the "trust us" crowd.
Posted Apr 17, 2005, 4:37 PM ET by Bob O'Brien
Well now Mark, there you go again.
First off, let me say that it is refreshing to see you airing your views. I am a little surprised by a few of the comments, but then again, I live in a constant state of wonder, so it is not necessarily meaningful. To your points and observations:
1) Notwithstanding the use of pejorative language like “cult” and “slogans” etc, you offered a spectacular admission of being ignorant of all the permutations that can result in a fail to deliver. It is no surprise, then, that you arrive at an erroneous conclusion as to what the SEC was referring to W/R/T long sales resulting in fails. Your scenario is one possibility. Another, more obvious one, is that the seller fails to indicate they are selling short. Simple. They just don’t differentiate the sale correctly. Same result, no issue with having to wait for an uptick, and it is only at T+3 that the failure becomes obvious – by that time the damage to the stock price is usually done. Given that there has never been an enforcement action or prosecution for doing this, you can probably appreciate why it is done all the time, with impunity, by unscrupulous hedge funds.
2) My personal favorite bit of vitriolic hyperbole from your latest entry, simply oozing with venom and erroneous mis-statement: “Bob O Brien and his buddies have done an admirable job of gaining attention to a problem that doesnt (sic) exist…”
Now Mark, you aren’t a stupid guy. Not dumb, done well, looked up to and idealized by a certain subset of the population, no doubt. So how can your statement reconcile with the actual statements in the SEC doc you claim to have read? I did a little deconstruction of the SEC’s fine work at ncans.net which I believe highlights some of the cognitive problems and contradictions in that document.
While reading the SEC’s piece, you probably saw the following statements, which contradict your facile and glib assertions that there is no naked short selling problem:
A - “The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions. The Commission will continue to monitor whether grandfathered open fail positions are being cleaned up under existing delivery and settlement guidelines or whether further action is warranted.”
B - “The fails statistics of individual firms and customers is proprietary information and may reflect firms' trading strategies. The release of this information could be used to engage in unlawful upward manipulation of the price of the securities in order to "squeeze" the firms improperly.”
Now, Mark, help me out here. You say it isn’t a problem, and yet the SEC in the document you reference says in quote A above that it is "large," that there are pre-existing positions, and that the reason that the SEC pardoned (grandfathered) the positions was because they were afraid it would cause volatility for those who broke the rules and hold the fails. Never mind the question of whether the SEC has the legal authority to pardon prior illegal acts. Let’s focus here on two items: the SEC admits that there were (and still are due to the grandfathering) large fail (naked short) positions, and that it chose to give the lawbreakers a get out of jail free pass in order to not cause undue discomfort or inconvenience to them.
Tell me, Mark, does that sound like the job of a regulator who is supposed to be protecting investors and companies from illegal predation? Pardoning past instances of what it admits are large violations of the rules, and using as justification the fact that it would cause problems for the violators? If so, how does that help and protect investors and companies? The point is, they admit it is a large problem, large enough to require a unilateral pardon or cause disruption in the marketplace. How did you get “…a problem that doesnt (sic) exist…” out of reading that? Break it down for us all. I’m genuinely interested in how the above first quote led you to that conclusion.
Now to B. In this statement, the SEC is trying to articulate why it won’t tell anyone how big the problem is. They won’t tell how many fails there are. Why? Well, because, again, they are afraid that the information could be used to cause discomfort for those who use strategically failing to deliver as a trading strategy – more simply put, they don’t want to cause pain or financial inconvenience to those illegally naked shorting as a trading technique, as it could squeeze the naked shorts, as well as presumably raise embarrassing questions like “how did the problem get that big,” and “why aren’t the rules being enforced,” and “why is protecting a group of illegal corporate marauders more important than making transparent disclosure of important information about a corporation’s actual outstanding float?”
Again, you aren’t a dumb guy. So help me understand the logic here. If it isn’t a significant problem, then why keep it secret, admittedly for fear of harming criminals - unless it was large enough to cause a mushroom cloud in the hedge fund/broker sector? And why admit in writing that the reason you pardoned the past large fails is because, well, because it IS A LARGE PROBLEM? Perhaps you were able to read some nuance or hidden message in this that I missed.
I also agree that if a CEO complains about short sellers hurting the price of a stock, it could be a sign of a problem. Since Dr. Byrne hasn’t ever done that, I presume you are referring to other CEO’s, as well as advancing and perpetuating the prevailing wisdom that the best defense to being gang raped by mountain men is to lay back, think of England, and above all, don’t fight or complain – the rapists don’t like that. Always nice to see that the mindset which has provably been so inefficient for so many companies is being advocated anew. You might want to check out my latest blog on exactly that topic titled “Casinos, Markets and the Philosophy of Manipulation” at bobosrevenge.blogspot.com
As always, it’s been a slice. I await your response with considerable anticipation. |
