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 ShareIntel’s 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.
“Regulators aren’t in tune as much as they should be,” 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.
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 SEC’s 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.
“Naked shorting is impossible to do when securities are issued natively on a blockchain.
Had Uber’s 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 shorting–however large or small it was in the Uber case–simply could not have happened,” said Forbes.
Naked Short Selling is Legal for Citadel
That’s right, the illegal practice of selling shares that have not been determined to exist, otherwise known as ‘naked short selling‘, is legal for Ken Griffin’s Citadel as well as other market makers.
Yahoo’s Senior Markets and Data reporter Jared Blikre says most of the time it’s illegal.
“If 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 don’t 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 Exchange– Citadel is one. They can engage in naked short selling, and it’s perfectly legal. It’s part of their market-making duties to provide liquidity for a stock,” reports Blikre.
“Sometimes there are fails to deliver, and a fail to deliver is when you don’t have the ability to prove that you borrowed the stock legally before you actually shorted it,” he continued.
“The 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 there’s two hundred shares in Nasdaq and New York, we fill at a thousand shares at that inside price. That’s meaningful liquidity,” said Virtu Financial CEO Doug Cifu last year.
But it’s not meaningful liquidity, these shares simply don’t 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.
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