This argument would make a modicum of sense, if they weren't breaking the law to start with. 'Changing the Rules' here means, obeying the 34 Act. This is so bizarre, you have to step back and realize what has happened. They have made the unseemly de riguer.
Look at this from an economic standard. A Company goes through an underwriting process, issues a set number of shares. But when it comes to shorting, that number is meaningless. See if you can understand the argument:
Published: July 23 2008 03:00 | Last updated: July 23 2008 03:00
From Mr John Welborn.
Sir, I read with concern Michael Mackenzieâs piece on the Securities and Exchange Commissionâs emergency action to require a pre-borrow for 19 stocks (âOn Wall St: Let the free market be the judgeâ, FT.com, July 18).
As the equity settlement system currently functions, the issue of naked short-selling cannot be resolved by âfree marketsâ. Why not? As all economists know, scarcity is an important component of efficient price discovery. Naked shorting and the failed trades that can result distort supply.
In a perfect world, all failed trades in an equity issue would be disclosed daily. But the SEC does not disclose such failures to the public until one fiscal quarter after the settlement date. Furthermore, only a select group of large institutional investors has the ability to naked short and fail to deliver.
The information asymmetries that result distort prices and take us away from a true, first-best free market. On March 31 2008, aggregate failures to deliver in US equity markets were $8.5bn, with $6.1bn of that in threshold securities â that is, stocks with a high level of fails. Since the SEC enacted Regulation SHO in early 2005, more than 7,000 unique issues have appeared on threshold lists.
In a free society, government has a limited yet vital task to protect citizens from force and fraud. Naked short-selling is fraud. The SEC should extend the emergency order to all issuers and permanently impose a pre-borrow requirement for short sales. Only then, when supply of an issue is fixed, can the free market achieve true price discovery in the stock loan and equity markets. The SEC â or Congress â has a duty to fix our equity settlement institutions once and for all.
John Welborn,
Economist,
The Haverford Group,
Park City, UT 84098, US
Copyright The Financial Times Limited 2008
"As all economists know, scarcity is an important component of efficient price discovery. Naked shorting and the failed trades that can result distort supply."
Pretty basic, isn't it. All you have to do is "settle the trades", and it all goes away. Even HedgeFunds. Because they won't be able to get outsized returns if they have to wait for their shorts to work.
BTW, Freddie and Fannie up 6% this morning. Cox has told acquaintences this rule will apply to all stocks (I just hope in my llifetime.) Should that happen, how would you monetize it? You can already see what happens when the law is obeyed.