Naked short selling.

[Dinner]

I had never heard of this but it makes sense. I watched this slide show about stock market loop holes and was interested in finding about fraud in the US stock markets. I really don't know if this really happens but this is still an interesting slide show. Can anyone in the know make an intelligent comment on this?

http://www.businessjive.com/

[Dinner]

I'm just curious if this can be taken for real or not.

[MarkG]

no naked photos?

[Vanguard]

Yes, naked short selling appears to be a real problem for financial firms, because they require very high credit worthiness to keep their borrowing costs low.

It looks like financial firms have been sent into stock death spirals by naked shorting---- shorting with large numbers of fictional shares, which drives down the price, which reduces the credit worthiness of the financial firm, which drives up their borrowing costs, which makes their shares less attractive....etc. The result is almost certain bankruptcy.

In theory, the financial firms should have been less heavily leveraged. But regardless of this, there is certainly no reason to let people game the short selling rules to destroy companies.

[Ben Kenobi]

Naked shorts are awesome.

If done right, it looks like you aren't wearing anything at all.

[LotC]

It's teh invisible hand of the market doing its magic. Only the strongest survive.

[Whoha]

Originally posted by Oerdin
I'm just curious if this can be taken for real or not.

As WorldCom was going down I think there were more shorts then there were shares outstanding at one point.

[edit]
Having looked at it it looks sort of like a bucket shop. [/edit]

[Vanguard]

Originally posted by Whoha


As WorldCom was going down I think there were more shorts then there were shares outstanding at one point.

[edit]
Having looked at it it looks sort of like a bucket shop. [/edit]

Yeah, probably there were. But naked shorting is only a major danger for highly leveraged financial firms. In this sense it is a sort of "karmic retribution" for their high leverage.

What leverage amounts to is creating fictitious money to buy real shares. Naked shorting is the flip side of this: it creates fictitious shares to sell for real money.

Leverage is "gaming the system" as much as naked shorting is. Buying stock with fictitious money is just as much an advantage as shorting with ghost shares.

Leverage is an accepted method of cheating however, probably because it doesn't destroy companies----- not in the short run anyway. Long term it is theoretically just as economically destructive as shorting.

But investors and regulators are incapable of thinking long term.