Congress now says not all naked shorts are illegal after it updated its short selling background and policy issues on Tuesday, August 8.
Just last week, the New York Stock Exchange (NYSE) also commented on naked short selling in a new response to the concerned public.
The announcement coincidentally followed the statement AMC CEO Adam Aron made relating to AMC’s exceedingly high number of FTDs.
“Many of you are incensed by the high number of “Fail to Deliver” AMC shares, and that AMC again has been on the Threshold List for multiple weeks. We repeatedly have gone to the NYSE and FINRA, and did so again in July, to put and keep this entire situation on their radar,” said the CEO.
More and more companies are now taking 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.
The SEC green-lighted naked shorting of IPOs in 2015 which 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.
Now Congress and the NYSE are weighing in.
Congress on Naked Short Selling
According to Congress, naked shorting may result in a failure to deliver the shares to the buyer. For example, the short seller, who trades illiquid shares, may have trouble buying the securities when the time for delivery comes up.
“Some naked shorts are in violation of securities laws. But not all naked shorts are illegal.
For example, certain market maker activities that involve broker-dealers making a market by committing to continually buy and sell securities even without other buyers or sellers (i.e., “bona fide market making”) generally do not violate securities regulation.”
Yahoo’s Senior Markets and Data reporter Jared Blikre says most of the time naked short selling is 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.
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