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 AMCâs exceedingly high number of FTDs.
âMany of you are incensed by the high number of âFail to Deliverâ 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,â said the CEO.
More and more companies are now taking naked short selling seriously.
In 2023, weâve 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 ânaked short sellingâ 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.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,â commented Forbes on Uberâs 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.
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., âbona fide market makingâ) generally do not violate securities regulation.”
Yahooâs Senior Markets and Data reporter Jared Blikre says most of the time naked short selling is 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.
Also Read:Â âThe Game is Riggedâ, Says Ex-Citadel Data Scientist
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There is nothing new here. Naked short selling by market makers is (and has always been) legal to the extent that it allows them to maintain a market. But the levels of FTD shares we have seen of $MULN and some others definitely indicates illegal activity.
And you can’t legally buy back shares the next day or two days later to satisfy the settlement requirement, they must be borrowed before the sale. I suppose you could borrow them after the sale on the same day but a legit broker would not allow it, especially when the shares are known to be hard to borrow.
Bottom line is that $MULN is clearly a poster child for what can happen when a stock is shorted illegally, and the company (and long investors) have been injured by it, both directly in terms of the stock price and because the dilution is far worse than it would have been otherwise.
Stealing or what they call investing. So many people have lost money on the stock market and it’s all rigged for the common investor to lose because they are given no information. Investors are investing blind. And why is AA not picking up the phone everyday and bitching about the threshold problem. And why is he not paying off debt today? Pay the debt make the call get off your ass. Regards
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