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

To: Daniel Chisholm who wrote (169)	2/22/1999 9:59:00 PM
From: Q.	Read Replies (1) \| Respond to of 172

Suppose I want to sell you the Hope diamond, but I don't own it. I could just sign a deal with you to sell it to you, and take your cash. You accept my receipt saying that you own it now. I hope that you don't ever ask me to physically deliver the stone, until I feel like buying the stone from the guy who actually owns it. That would be a naked short sale, right? Somebody has to keep track of the fact that I need to eventually buy the diamond from its rightful owner so I can deliver it to you. That would be the clearing house, right? Note that two people think that they own the stone: you and the real owner. Now suppose that I borrowed the hope diamond, and the clearing house stores it in their vault, and I do the same trade with you. The clearing house still has to keep track of the fact that I should deliver the stone to you if you ever demand the physical thing. They have the stone (which they borrowed) in their vault, but otherwise it's just the same as before. And the same two people think that they own the stone. That would be like a short sale of the normal variety, where you borrowed the stock, isn't it? If my understanding of this is correct, the clearing house doesn't do anything differently for a naked short sale except that they don't bother to borrow the shares. I'm just trying to figure this out, and I might be all wrong.

To: Daniel Chisholm who wrote (169)	2/22/1999 10:17:00 PM
From: RobbRacer	Respond to of 172

Daniel, I'll answer your questions for clarification as best I can. I want to reiterate that I'm talking about "naked" shorting which is primarily done offshore and done in the states onshore all the time by daytraders. This is still a naked short because there were not shares secured in advance for your short sale.in the states there are type 1,2 and three accounts. 1=cash,2=margin, and 3=short account. I am not sure but don't believe they are segregated in the same matter in Canada. they are segragated in the states because of Reg T requirements. So offshore I don't think the issue of cash vs. margin plays the same role as it does in the states. Remember in the states a common misconception is a security has to be marginable in order to short it. this is not true. >>>Perhaps I don't actually understand what you're saying: So technically, there is a deficit of shares at the clearinghouse but nobody knows that except the clearinghouse. Why would the clearinghouse know this? Wouldn't it only be Jane's and Bill's broker who would be aware of this? The broker has nothing to do with this. The clearing house is responsible for actual settlement. As long as Jane and JIM don't want to sell what John aready shorted its OK. But if Jane and JIm want to sell what the clearinghouse aready delivered to another firm to complete Johns short (to settle the transaction) there is a shortfall. there is not enough shares for everybody. So the clearinghouse will "buy in John" to deliver the shares they already sold onbehlf of John.. >>>>>In the event of a very thinly traded security their deficit was about to become actual I must admit I don't understand the scenario you're describing here. Could you elaborate a bit? What do you mean by "...about to become actual"?The clearinghouse knnew they would not have enough shares to deliver when Jane and Jim decided to sell so they had to buy the shares on the street with John being the victim. This would be common with an obscure security. If you short Dell offshore there will always be a customer at the clearinghouse who is long, so even though there might not be enought shares to account for everybody who is long and short the deficit does not matter. on a thinly traded issue it could becaom a problem because there simply might not be any stock left. Think of a run on the bank by all the customers at the same time. the bank made loans with customer money because it knew everybody would not ask for their money at exactly the same time. hope that helps, Rob P.s. if anybody with more knowledge about this wants to correct me on anything feel free. But this is how I understand it.