Is my broker engaging in Naked Short Selling? What will the new rules mean?

S

stoneface

I was sent a message from my equities broker informing me that some of my shorts may have to eb closed out by force after 3 business days. Does this imply that my broker has been engaging in naked short selling? What do these new SEC rules mean?

Quote from broker:

We also know that some of you apply short selling to your trading strategies so we
wanted to alert you to new requirements adopted yesterday by the Securities and
Exchange Commission (SEC). The SEC expressed concern "about the possible
unnecessary or artificial price movements based on unfounded rumors regarding the
stability of financial institutions and other issuers exacerbated by "naked" short
selling." SEC Release No. 34-58572.

In order to allay some of these concerns, the SEC imposed enhanced delivery
requirements on short sales of equity securities. What this means for you is that
if you sell an equity security short, and you fail to cover the short position by
settlement date (Trade Date + 3), we may have to buy in your position no later
than the beginning of the regular trading hour of the next business day (T + 4).
Any losses suffered or lost opportunities realized as a result of our actions will
be your financial responsibility. We strongly recommend that you read the SEC
Release and Rule <http://www.sec.gov/news/press/2008/2008-204.htm>
and incorporate the limitations associated with this new rule into your trading
strategies and decisions.
 
Your broker's feet are held to the fire now and are now accountable under penalties of law and otherwise to see that each client account is in compliance.

Your responsibility to cover your naked shorts... if you fail to do so they will do it for you.
 
Yes it certainly appears like their feet are over the fire. However, there is no button in my software for "Sell Short (Naked)".

How would I even accomplish such a task?
 
Someone who knows far more than I can clarify, but it sounds to me like you merely have to close your position within 3 days or they'll do it for you.
 
Thanks for the feedback on this subject. I have a friend who received notices on some of his more esoteric shorts today that they must be covered. The shares were being "recalled". I believe his broker was naked short on those plays.
 
Quote from stoneface:

What this means for you is that
if you sell an equity security short, and you fail to cover the short position by
settlement date (Trade Date + 3), we may have to buy in your position.
More...

I assume they are covering themselves. If the borrow fails for any reason, then you will be bought in. They can no longer turn a blind eye to the fails.
 
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