South Korea now speaks on the impact of illegal short selling after the illicit practice accounted for 20% of daily transactions.
Financial watchdogs have vowed to continue rooting out the malpractice in the markets.
“The FSS found that the violation rate exceeded 20% in some cases, which suggests that illegal transactions have a big impact on a certain stock,” the financial regulator said in a statement late Tuesday.
“It’s necessary to consider the impact of illegal short sales on an individual stock as such trades hinder fair pricing and increase short-term volatility,” it said.
Bloomberg reports the South Korea’s financial watchdogs derived the 20% figure by dividing the amount of violated orders on a certain stock by its daily trading value.
The FSS did not identify the equities that saw illegal trades and declined to say how frequently the trades exceeded that ratio.
In November, South Korea imposed a ban on short selling through mid-2024, a decision that drew big celebration from retail investors in the country.
Professional investors on the other hand are skeptical, seeing the move as being politically motivated ahead of the election.
Financial authorities have defended the decision, describing illegal trades such as naked short selling — an act of selling shares without borrowing them first — as “rampant” and hurting fairness in the market, reports Bloomberg.
Furthermore, Bloomberg reported on Monday that investigators have turned up just 110 billion won worth ($83 million) of alleged naked short selling by four global investment banks.
In the U.S., naked short selling continues to be a big problem.
Two massive banks are now getting fined for illegal short selling (naked short selling), according to a new Bloomberg report.
South Korea regulators are seeking $7.67 million each from HSBC and BNP Bank for naked short selling, people familiar with the matter told media outlets.
The five-member commission led by Financial Services Commission (FSC) Vice Chairman Kim So-young discussed the fines during a meeting on Wednesday but could not reach a conclusion, the report said, adding that the final amount may change during discussions later.
Naked short-selling of stocks – in which an investor short sells shares without first borrowing them or determining they can be borrowed – unlike in the United States, is banned by the Capital Markets Act in South Korea.
“We are investigating financial companies involved in naked short-selling, but we cannot comment whether fines have been finalized,” an FSC official said.
Last month, South Korea reimposed a full ban on short-selling until the end of June 2024 to create a “level playing field” for retail and institutional investors.
In the United States, several petitions have been shared online in efforts to ban short selling as well.
Unfortunately, naked short selling in the U.S. continues to be a big problem.
According to the SEC’s order, for a five-year period, it is estimated that Citadel Securities incorrectly marked millions of orders, inaccurately denoting that certain short sales were long sales and vice versa.
“Compliance with the order marking requirements of Reg SHO is a key component of regulatory efforts to curtail abusive market practices, including ‘naked’ short selling,” said Mark Cave, Associate Director of the SEC’s Division of Enforcement.
A new company now seems to be targeted by naked shorts, at least that’s what a CEO and former AMEX Vice President are alleging.
Collective Audience (CAUD) stock has had a rather steady share price since 2021.
Shares of the advertising company rose to more than $27 per share on Wednesday, October 25th before getting halted and crashing to its current $1.20 levels.
CEO Brent Suen has since purchased 190,000 shares of CAUD stock but claims there seems to be a high probability of fraud at play here.
“NASDAQ halted trading on October 25 due to a non-qualified float below 500,000 shares.
However, on Nov 3 and 6 the float was still 61,000 shares and the price had fallen from $27 to $5.31 down 80%.
NASDAQ did not halt the stock during that time,” Suen told Frank Nez.
Collective Audiences’ partners are now on the radar as suspects, though an official investigation has yet to be announced by the company.
One scenario states that CAUD’s partners may have sold company shares at the top and began shorting the company as prices began to plunge, causing further devaluation.
The second scenario sheds light on the possibility of naked short selling.
The CEO has a strong concern that hedge funds may have collectively shorted the company ‘naked’ after the surge on October 25th.
Tony Forte, former Vice President of the Trading Analysis Division at AMEX reached out to Frank Nez to confirm irregularities in the trading of Collective Audience stock.
“Over the last few years I have closely followed the trading activity in LGIQ, prior to and after the spinoff of DataLogiq into the Arbi SPAC.
I strongly believe at least two thirds of the floating supply is held by shareholders who have no intention of selling any of their shares until CAUD is trading at much higher prices. That conclusion would reduce the current floating supply to under 1.2 million shares.
The substantial and continuous selling in CAUD appears to be the result of computerized trading based on sell side algorithms accompanied by short selling, most likely naked, by marketmakers and large investors,” Forte shared with Frank Nez.
“The computerized trading was particularly evident on December 7th: At 10:10 am, the last sale in CAUD was 2.10.
From 10:10 through 10:15 the stock decline to 1.82, down 28 cents, on trading volume of 113,995 shares. During that five minute time span there were 576 trades.
Although the short activity, reported by FINRA, during the October 25 through December 11th period was only between 25-30% it would still indicate that 11-12 million shares were sold short.
In order for the algorithm computerized trading to show a profit in CAUD, which has a very small float, there would have to be at least 4-5 firms utilizing that strategy. That raises the question of “working in concert”.”
CAUD stock is currently down more than -88% this year-to-date.
Christian Attar LawFirm, who is investigating MULN stock, says approximately 5 billion shares in an illegal scheme has now been confirmed.
The firm in partnership with Warshaw Burstein, LLP, in association with forensic investigators, have concluded the magnitude of the spoofing is unprecedented, resulting in over 5 billion shares being issued at artificially deflated prices since Company’s Nasdaq debut in November 2021.
Mullen Automotive, a startup EV company, has been one of the few companies to raise awareness on the predatorial short selling practices seen in its stock.
MULN stock is currently down more than -99% this year-to-date.
On Wednesday, December 6, Mullen Automotive announced the Company has filed a complaint in the United States District Court for the Southern District of New York alleging that UBS Securities, LLC, IMC Financial Markets and Clear Street Markets, LLC (the “Defendants”) engaged in a market manipulation scheme that violated Section 10(b) and Rule 10b-5(a) and (c) and Section 9(a) of the Securities Exchange Act of 1934.
This lawsuit alleges that between Nov. 9, 2021, and Nov. 9, 2023, the Defendants and/or their customers used spoofing to manipulate the market price of Mullen shares.
“FINRA has characterized spoofing as an insidious form of market manipulation that undermines the transparency and integrity of the markets by distorting the true nature of supply and demand,” the company statement said.
“Spoofing involves the submission and cancellation of non-bona fide buy and sell orders that have no legitimate economic purpose and are not intended to be executed.
The actual purpose of these orders is to trick shareholders into placing their own orders at a time, price and quantity that they otherwise would not have.”
“In the 21 years our team has been prosecuting market manipulation cases against Wall Street, I believe this could be one of the largest and strongest spoofing and market manipulation cases we have handled,” said Wes Christian of Christian Attar Group.
“After working with our consulting and investigative experts, I believe the damage model could be in the billions of dollars.”
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The SEC now aims to guide Asia on illegal short selling, which has raised many concerns primarily back in U.S soil.
The Securities and Exchange Commission has failed to tackle the root of the problem back at home, prompting investors to question the SEC’s authority overseas.
Bangkok Post reports that the Securities and Exchange Commission has asked the Association of Securities Companies (ASCO) members to “adjust their short sell guidelines based on the SEC’s instructions.”
Asco has reaffirmed “there is no naked short selling on the Thai exchange.”
Asco president, Pichet Sithi-Amnuai said the Stock Exchange of Thailand (SET) has regularly examined short selling in cooperation with Asco, and has confirmed there is no naked short selling.
SEC Secretary-General Pornanong Budsaratragoon said the regulator asked Asco members to adjust their short selling guidelines based on a notice from the SEC.
Asco on the other hand suggested the SEC look into the low commission fees offered by some brokers back at home to ensure a level playing field among investors.
SET President Pakorn Peetathawatchai said, “the Thai stock exchange will not allow naked short selling to take place.”
“If anyone is found using this method, we will punish them severely.”
Public perception of such trading practices in the Asian nation remains deeply negative, with local retail traders staging protests against these activities from time to time.
In the United States, naked short selling continues to be a big problem.
Companies Affected by Naked Short Selling in The United States
Since the ‘meme stock frenzy’ of 2021, retail investors have raised concerns of naked short selling in GameStop and AMC Entertainment stock.
Ex-Citadel data scientist Patrick McConlogue says Citadel and others were able to make their money back during the trading halts, cheating investors out of their money.
Stocks such as AMC and MULN (Mullen Automotive) have been on the NYSE Threshold Securities List many times over, a clear sign a stock is being manipulated by naked shorts, says Yahoo Finance’s Jared Blikre.
A recent case that has taken regulators by a surprise is that of the MMTLP scandal.
Investors allege the strong probability of illegal short selling in the ticker after transcripts between the FINRA and the SEC were leaked of a fraud investigation that was occurring just moments before the U3 halt and delisting of MMTLP.
Companies such as Genius Group, FingerMotion and Global Tech Industries have also been open about illegal short selling investigations.
As more businesses come forward about the market injustices they are experiencing within their company’s stock ticker, the more we begin to realize just how bad the US fraud in the stock market is.