More and more companies are now taking illegal short selling, also referred to as ‘naked short selling’ seriously.
In 2023, we’ve seen companies such as Global Tech Industries (GTII), Meta Materials (MMAT), Mullen Automotive (MULN), Genius Group (GNS), and now Hycroft Mining (HYMC) open investigations with findings mainly by ShareIntelâs analysis that determines strong indication of market manipulation and illegal trading activity.
Many of these companies have hired on Wes Christian, who says ‘naked short selling’ is a worldwide problem today.
âRegulators arenât in tune as much as they should be,â said Wes Christian in a Twitter space call.
But the truth is the SEC green-lighted naked shorting of IPOs in 2015.
“Naked-shorting of IPOs by banks, which the SEC green-lighted as recently as 2015, has changed IPO market dynamics by altering the relative power between banks, issuers and investors.Â
To the detriment of investors, banks now have less fear of incurring major losses from pricing an IPO too high because banks now have a tool (naked shorting) to protect their downside risk,” commented Forbes on Uber’s case in 2019.
Forbes says that thanks to the SECâs explicit statement allowing naked shorting during IPOs, banks have a chance to win regardless of what the IPO is priced at, a fear they had prior to getting the green light on naked short selling.
This explains why we see newly listed companies in the market experience an epic price plunge shortly after IPO.
âNaked shorting is impossible to do when securities are issued natively on a blockchain.
Had Uberâs shares been issued on a blockchain rather than through legacy systems, banks simply would not have been able to issue more UBER shares than the quantity of shares outstanding.
The price-suppressive impact of the naked shortingâhowever large or small it was in the Uber caseâsimply could not have happened,â said Forbes.
Also Read: “The Game is Rigged,” Says Ex-Citadel Data Scientist
Naked Short Selling is Legal for Citadel
Thatâs right, the illegal practice of selling shares that have not been determined to exist, otherwise known as ânaked short sellingâ, is legal for Ken Griffinâs Citadel as well as other market makers.
Yahooâs Senior Markets and Data reporter Jared Blikre says most of the time itâs illegal.
âIf a hedge fund releases a short report on a stock, they can short it, but they have to pay a borrowing fee.
They have to borrow it from somebody so they donât engage in naked short selling, which increases the amount of shares and the float of the company.
Now market makers like those at the New York Stock Exchangeâ Citadel is one. They can engage in naked short selling, and itâs perfectly legal. Itâs part of their market-making duties to provide liquidity for a stock,â reports Blikre.
âSometimes there are fails to deliver, and a fail to deliver is when you donât have the ability to prove that you borrowed the stock legally before you actually shorted it,â he continued.
âThe wholesalers are providing infinite liquidity, so if we get an order for a thousand shares in stock that no one has ever heard of and thereâs two hundred shares in Nasdaq and New York, we fill at a thousand shares at that inside price. Thatâs meaningful liquidity,â said Virtu Financial CEO Doug Cifu last year.
But itâs not meaningful liquidity, these shares simply donât exist.
This is how a demand for short sales that have not been determined to exist have the power to tank the markets or how small to mid-cap size businesses become targets of manipulative short selling.
Also Read: The SEC Does Not Look at Legality According to New Hearing
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Companies except AMC are taking it seriously.
Which companies would you like to see tackle naked short selling next?