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Strategies & Market Trends : Shorting stocks: Mechanical aspects -- Ignore unavailable to you. Want to Upgrade?

To: Polartee who wrote (163)	2/21/1999 8:28:00 PM
From: Daniel Chisholm	Respond to of 172

Could this be the infamous "naked shorting" we hear so much about, yet no-one seems to be able or willing to answer direct questions about it? I know, I've asked a lot of those questions! Here's my understanding of what's happening (I also live in Canada and deal with a Canadian broker). You make a declared short sale, even though you have not been able to make arrangements to borrow the shares. Because you have declared it as such, it is a legal short sale. Come settlement day, your broker is (obviously) unable to deliver the shares and therefore settle the trade. This causes a discrepancy to be noted, however it does not (as I understand it) cause an automatic buy-in. It does however leave you open to an immediate buy-in at any time and without notice, at the option of the buyer (who is owed shares which you have not delivered). So what's the risk? I suppose the greatest risk is if the counterparty is unscrupulous, they could perhaps jack the price up and then buy you in. It sounds to me like this sort of thing might have happened with OTC-BB:AENG. Or, a completely honest counterparty could simply insist on you delivering on your obligation, even if it might not be convenient for you to do so (i.e. buy you in at a market price above your original short sale). In theory all short sales are subject to the risk of being bought in. I suppose that in the case where you have been unable to borrow the stock, this risk is simply magnified (perhaps greatly). Does anyone on this thread have a good understanding of the stock settlement mechanism and process? I'd really like to understand how normal trades work, and how exceptions are handled. I think the answer to the "naked shorted" Urban Legend (is it a UL?) could probably be discovered there. - Daniel