Short seling: The T+3 Close-Out Requirement

[patchie]

Quote from luckybastard:

I'm selling a stock today that I don't own. On settlement date (T+3) my BD has to deliver the shares to the guy that I've sold them to. If my BD doesn't have any shares, they must borrow them somewhere. If they don't have any shares and can't borrow them, they 'fail to deliver' and now under these new rules, are in deep trouble.

But now let's say, I'm selling a stock today and I'm covering 2 minutes later. Which means that on T+3 my BD has to deliver the shares I sold to the buyer I sold them to. However, my BD also receives shares on T+3 from the guy I've bought them from. So, technically, as long as I'm flat end of day, the sale isn't even a short sale and my BD doesn't have to deliver 'borrowed' shares, they can just deliver the shares i've bought. Or am I missing something ?

Luckybastard, it is the activities you speak of that has been the cause for concern at the SEC. With no uptick rule in place and with distress in a market, day traders selling short are manipulating the markets and doing so in a process violating the spirit of the short sale.

1. You and 10 others are using the same located share. That means that 9 of you are trading without opportunity to settle regardless of when you plan on settling. this creates excess of short sales above what would be normally accepted. Many times the same locate is used multiple times in one day by the same short seller

2. The short seller trading through a day trade is using a share as collateral for the trade. Their should be a premium paid for that collateral. The share used to execute the trade must come with a value to the individual or firm who put that marker out there.

3. You are automatically assuming that you net out at the end of the day. Sometimes you can't net out. then what?

There should be no free rides in Wall Street. the free rides and the conflicts that arise from them is what creates the future problems. Short sellers today are pissed at the EO because it tied their hands. this came about because the short selling community was willing to protect the abusers because they too profited from it. The response was a response where the baby was thrown out with the bathwater.

The mandatory pre-borrow resolves that. It guarantees a commitment of one locate per short sale and it guarantees a settlement.

 

[luckybastard]

Quote from patchie:

Luckybastard, it is the activities you speak of that has been the cause for concern at the SEC.

Although I didnt start this thread to start an 'anti/pro' shorting discussion, I'd like to comment on this. I disagree here. The SEC is worried about hedge funds 'abusing' short selling by having no intention to deliver the shares. Eg, they don't have any plans to buy the stock back. This is TOTALLY different from what we, daytraders do. We short but cover the same day. One sell equals one buy, resulting in a net impact of 0. In fact, all we did is make the market more efficient with our added volume

3. You are automatically assuming that you net out at the end of the day. Sometimes you can't net out. then what?

I guess this indeed is the problem with the current rules. It would be dead easy to make them just a bit more flexible but I doubt the SEC even cares. They indeed threw out the baby with the bathwater. But by doing so, they made the situation just worse. Without daytraders, volume will dry up and markets will become less efficient, which means the investor will get worse prices. Besides: less trades = less jobs = less money in the whole industry

 

[patchie]

Quote from luckybastard:

This is TOTALLY different from what we, daytraders do. We short but cover the same day. One sell equals one buy, resulting in a net impact of 0. In fact, all we did is make the market more efficient with our added volume

Lucky, you are a daytrader of small proportion as I am as a long investor. We do not move markets. we are the noise

That being said, Jim Chanos is a rapid trading short seller who trades EXACTLY as you do on a daily basis but does it with rapid succession, and huge volume intent on creating market chaos not market efficiency. He admits such in his memo to the SEC. Chanos also gets added "benefits" from BD's that you would not get.

What I have learned is that traders like Chanos will break up a strategic short position amongst multiple BD's and give them all the same locate such that they really did not locate 1 for 1. Chanos admits that as well in his comment memo to the SEC.

I suggest you go back to the day the United story came out regarding a bankruptcy. The sell off in the airline sector was created by rapid trading (day trading) short sellers with significant capital to create the chaos before the real story evolved. These are the daily "bear raids" that have become our market for targeted companies.

I have no problem with short sellers who trade above board. I do have issue with short sellers that use property they do not own as collateral without paying for such collateral whether it be for a day, a month, a year. You do not own the vehicle you used to sell, if you want to profit off somebody elses (the located share) you should be borrowing it as collateral the same way my broker expects me to have the money in my account when I buy stock.

Bottom line: There will always be this battle until they close down the loopholes that players much bigger than you or I use to manipulate stocks.

 

[psytrade]

interesting point patchie-

are offshore funds and their offshore brokerages being held to the same standards as US brokers and funds are?

The confusion and lack of transparency leaves something to be desired.

 

[luckybastard]

Quote from patchie:

Lucky, you are a daytrader of small proportion as I am as a long investor. We do not move markets. we are the noise

That being said, Jim Chanos is a rapid trading short seller who trades EXACTLY as you do on a daily basis but does it with rapid succession, and huge volume intent on creating market chaos not market efficiency. He admits such in his memo to the SEC. Chanos also gets added "benefits" from BD's that you would not get.

So you're saying that if you have enough buying power, you can cause *inter* day market movement, EVEN if you flatten out EOD ? I strongly, STRONGLY doubt that. Take an illiquid stock. Short a million shares. You'll see people join you, you'll see people will start selling too once you break certain levels. However, now you're short a million shares, which you will have to cover before EOD. You start to cover. The people who shorted with you are getting nervous too and will start to cover too. Levels will be thin. If nobody is selling, this will result in a HUGE squeeze. In other words, no, even if you have unlimited BP, you simply can NOT move a market in 1 day if you flatten out EOD. So again, daytrading is TOTALLY different from what those hedgefunds (supposedly) did.

I suggest you go back to the day the United story came out regarding a bankruptcy. The sell off in the airline sector was created by rapid trading (day trading) short sellers with significant capital to create the chaos before the real story evolved. These are the daily "bear raids" that have become our market for targeted companies.

If somebody posts a false 'positive story about a firm, it will rip as hard as UAUA tanked. It's not different. Story gets denied, stock gets halted and stock opens at the 'normal' levels.

 

[patchie]

Quote from psytrade:

interesting point patchie-

are offshore funds and their offshore brokerages being held to the same standards as US brokers and funds are?

The confusion and lack of transparency leaves something to be desired.

The rules today require that a short sale executing offshore through a US firm must come with a viable locate verified by the US Broker. This was the loophole that the NASD closed in 2005 (3370) that was later superceded by Reg. SHO.

Muriel Siebert (First Lady of Wall Street) has lobbied hard for the disclosure of short sales as part of trade volume. Not by firm but by volume. What percentage of a days trading was short sales? That type of transparency allows investors to judge a markets movements based on principles of investors vs. bets.

 

[patchie]

Quote from luckybastard:

So you're saying that if you have enough buying power, you can cause *inter* day market movement, EVEN if you flatten out EOD ? I strongly, STRONGLY doubt that. Take an illiquid stock. Short a million shares. You'll see people join you, you'll see people will start selling too once you break certain levels. However, now you're short a million shares, which you will have to cover before EOD. You start to cover. The people who shorted with you are getting nervous too and will start to cover too. Levels will be thin. If nobody is selling, this will result in a HUGE squeeze. In other words, no, even if you have unlimited BP, you simply can NOT move a market in 1 day if you flatten out EOD. So again, daytrading is TOTALLY different from what those hedgefunds (supposedly) did.



If somebody posts a false story about a firm, it will rip as hard as UAUA tanked. It's not different. Story gets denied, stock gets halted and stock opens at the 'normal' levels.

There is no transparency in a market. What initiated the collapse intra-day? I have done studies where it is clear that market makers use naked short volume to create the selloff necessary to cover prior shorts executed. When you look at a market and watch the volume trading you will see that it takes 10% of the volume to collapse a market as it does to make it recover. It is even worse for illiquid stocks.

In the case of United, only United was halted but the entire sector fell with United. The profits were across the board. You will also note that United never fully recovered. When it re-opened it came up but only to 80 - 90% of original value.

 

[patchie]

Lucky, you are under the impression that a Jim Chanos and Stevie Cohen trade like you do - they do not. They have the capital to protect their investment even when it is a day trade. They also initiate trading expecting to close out EOD but fail to do so because of the run up you cite. too fast a run up they sit on the short. How do you think the FTD's accumulated to $8.5 Billion on any given day?

I have no idea what your book is but it does not sound like you and your friends carry the book or the leverage that big players carry.

To say it again, they move markets, you are the noise. When you play in their markets, they get much better order execution than you do and when you compete to close out, they win over you 100% of the time.


I did not make up these rules these are just the way it is played. You are the baby that got thrown out because the big guys were found to be abusing the system.

 

[luckybastard]

When it re-opened it came up but only to 80 - 90% of original value. [/B]

And wouldn't it be possible that in this huge bear market, the stock would have tanked 10% without the whole scam ?

 

[luckybastard]

Quote from patchie:

Lucky, you are under the impression that a Jim Chanos and Stevie Cohen trade like you do

I'm not under that impression. Compared to a hedgefund, any daytrader is noise. But I wasn't comparing myself or any daytrader to a hedgefund, I was merely saying that the basics of daytrading are the same, regardless of your BP: whether you short a hundred, thousand, a million or 100 million shares, if you cover them the same day, the total net market impact = 0.