You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Naked short selling question
- Thread starter bidask
- Start date
Quote from bidask:
flytiger, i don't understand your answer. i think i'm asking a simpler question. in my example below, it seems that phantom shares are not created if the hedge fund simply buys 100 shares in the open market for delivery. is this correct?
Ex clearing. Instead of the DTCC, they 'clear ' between each other, and create massive numbers of shares that float between brokers. Read. Read!!!
Quote from bidask:
i still don't understand how phantom shares are created when a naked short sale happens. here's the scenario.
a hedge fund naked shorts 100 shares of Company A at $10 per share. the buyer of these shares is a mutual fund.
a few days pass and the hedge fund needs to deliver the shares.
why can't the hedge fund deliver by simply buying 100 shares in the open market? where are the phantom shares in this case?
It is understandable that you could be confused. In your example, when the hedge fund buys the shares back in the market they are no longer short, of course. They have covered their short position at that point. But that's usually not their intention if they are into naked shorting, which simply means selling shares you don't own without borrowing them. It really boils down to a book keeping problem. You are supposed to have to borrow shares that you sell short. If the clearing and accounting is done correctly, shares borrowed by a short seller are not supposed to be borrowed again until they are delivered back to entity they were borrowed from (all done electronically of course). The culprits here are broker dealers who have not been made to "deliver" borrowed shares, and so in practice the same shares may be borrowed many times over. In the extreme case, it is possible to have more shares sold short than exist. It's a ridiculous situation that the SEC should have put a stop to long before now.
Quote from piezoe:
It is understandable that you could be confused. In your example, when the hedge fund buys the shares back in the market they are no longer short, of course. They have covered their short position at that point. But that's usually not their intention if they are into naked shorting, which simply means selling shares you don't own without borrowing them. It really boils down to a book keeping problem. You are supposed to have to borrow shares that you sell short. If the clearing and accounting is done correctly, shares borrowed by a short seller are not supposed to be borrowed again until they are delivered back to entity they were borrowed from (all done electronically of course). The culprits here are broker dealers who have not been made to "deliver" borrowed shares, and so in practice the same shares may be borrowed many times over. In the extreme case, it is possible to have more shares sold short than exist. It's a ridiculous situation that the SEC should have put a stop to long before now.
Well I'll be!! Congrats!!! You have it right. You can do a lot of damage like this, especially having reporters and lawyers in your pocket. You'll be seeing more of this in deepcapture with some big names. One famous money manager, who has not appeared on CNBC since Joe Kernan lathered him up for his magnificent 'performance' is famous for this tact.
This is the difference between a locate and a hard borrow. Oh, there are other tricks - lending restricted stock, miss marking longs........... But you're now seeing it in the true nature of Samberg/Mack, Ken Lewis, John Thain. It's not mystery anymore. Like any good Agatha Christie, you're in the third reel. The good part is right in front of you. And I'll be damned if it didn't take Barack O'Bama to bring it.
Thx Fly and Cjones.
I didn't think I could frontrun this. Bios I know I cant do. If it werenât for all the merger talk they would be my short number one. We have a situation where credit is incredibly hard to come by, and an industry that lives off debt. How are many of these companies going to be able to roll their debt? Imo they aren't. If any industry had BK written all over it, it is this one. Once the big guys are done buying pipelines, I really want to be short some weaker players.
And yea I totally agree, that Palm phone is trash heh.
Which may bring up an easier way to play. Let them squeeze then short. Thx again.
I didn't think I could frontrun this. Bios I know I cant do. If it werenât for all the merger talk they would be my short number one. We have a situation where credit is incredibly hard to come by, and an industry that lives off debt. How are many of these companies going to be able to roll their debt? Imo they aren't. If any industry had BK written all over it, it is this one. Once the big guys are done buying pipelines, I really want to be short some weaker players.
And yea I totally agree, that Palm phone is trash heh.
Which may bring up an easier way to play. Let them squeeze then short. Thx again.
i understand that they are not borrowing the shares first before they short. however, in my example, you can see that as long as they simply buy the shares back in the open market, no new shares are created.
before the naked short, there were 100,000 shares outstanding.
after the naked short but before buying the shares back in the open market for delivery, there are 100,100 shares outstanding.
after the hedge fund buys the shares back in the open market for delivery, there are 100,000 shares outstanding again.
in the case, there are no phantom shares remaining. the only problem is that the stock may have been driven down by the phantom shares that were temporarily created when the hedge fund naked shorted. is this correct?
i'll have a few more follow up questions after i get this part straight.
before the naked short, there were 100,000 shares outstanding.
after the naked short but before buying the shares back in the open market for delivery, there are 100,100 shares outstanding.
after the hedge fund buys the shares back in the open market for delivery, there are 100,000 shares outstanding again.
in the case, there are no phantom shares remaining. the only problem is that the stock may have been driven down by the phantom shares that were temporarily created when the hedge fund naked shorted. is this correct?
i'll have a few more follow up questions after i get this part straight.
Quote from piezoe:
It is understandable that you could be confused. In your example, when the hedge fund buys the shares back in the market they are no longer short, of course. They have covered their short position at that point. But that's usually not their intention if they are into naked shorting, which simply means selling shares you don't own without borrowing them. It really boils down to a book keeping problem. You are supposed to have to borrow shares that you sell short. If the clearing and accounting is done correctly, shares borrowed by a short seller are not supposed to be borrowed again until they are delivered back to entity they were borrowed from (all done electronically of course). The culprits here are broker dealers who have not been made to "deliver" borrowed shares, and so in practice the same shares may be borrowed many times over. In the extreme case, it is possible to have more shares sold short than exist. It's a ridiculous situation that the SEC should have put a stop to long before now.