Keep this site free and open for all to read. “The practice of naked shorting largely was curtailed by SEC mandate years ago.” “Hedge funds have to borrow shares to short sales,” Griffin said. Kenneth Griffin, CEO of Citadel Securities, which handled GameStop trades for the internet company Robinhood, downplayed the problem. Business Insider reported that “$359 million in stock was in limbo, with buyers lacking cash or sellers not having the shares to settle trades, according to data from the Securities and Exchange Commission.” In fact, more than one million GameStop shares were deemed “failed-to-deliver,” meaning buyers never got the shares they ordered, according to a Bloomberg report. Ed Perlmutter (D-CO) asked if sellers were in a naked position. How do you make sure you are first locating to borrow?” Rep. And it can massively disrupt the market, as GameStop showed.
In other words, large numbers of “locates” or “borrows” were fake, making the shorts “naked.” Why does it matter? Because naked short selling causes the number of shares in the market to increase, which normally makes their value drop more shares equals less value. They can sell and even loan those digital entitlements. They were phantom shares that didn’t exist but that were posted in buyers’ accounts as “entitlements.” The buyers have no idea they don’t have real shares. Why isn’t that manipulation?” She meant that short sellers sold 40 percent more shares in GameStop than existed. Nydia Velazquez (D-NY) asked about the dangers of short selling. It’s a scam central to the stock trading system, enabled by the Securities and Exchange Commission, the market regulator.Īt the House hearing, Rep. DTCC is owned by the prime brokers, such as Goldman Sachs, JPMorgan, and Citi, and run in their interests. The SEC has long been run by revolving-door officials who move between it and Wall Street trading houses and law firms. (DTCC), the stock clearinghouse, to benefit the big players. It’s a scam central to the stock trading system, enabled by the Securities and Exchange Commission (SEC), the market regulator, and the Depository Trust and Clearing Corp. So prime brokers, who carry inventory of stocks for high-volume short sellers, simply lie about the borrows, to assist their favorite clients. It’s costly to big hedge funds to locate hard-to-borrow shares. Naked short selling is when the trader does not find those shares to deliver. This accounts for as much as 50 percent of daily trading. The trader is supposed to locate (or have a “reasonable belief” he can locate) or borrow the shares in brokerage accounts, and then transfer them to the buyer within two days. Short selling, effectively betting that a stock will go down, involves a trader selling shares he does not own, hoping to buy them back at a lower price to make money on the spread. The Securities and Exchange Commission could create a system to identify and enable punishment of illegal trading activities, including naked short selling.Īt the House Financial Services Committee hearing last week on the GameStop debacle, there was an elephant in the room: naked short selling.