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.
If illegal naked short selling can become legal for market makers such as Citadel and Virtu, are the markets rigged?
Market Makers and Halts
Patrick McConlogue, an ex-Citadel Data Scientist appeared on Fox Business during the ‘meme stock’ frenzy of 2021 when retail investors created one of the biggest scares in Wall Street history.
GameStop and AMC shareholders were able to create panic on Wall Street by heavily buying shares of the overleveraged shorted stocks.
As share prices soared, short sellers experienced massive losses.
GameStop was able to put Melvin Capital out of business, but Patrick McConlogue says other hedge funds were able to make back billions in losses during the halt.
The halts allowed hedge funds to enter AMC and GameStop knowing shares would plummet, allowing them to capitalize on the deflation of the price.
Patrick says the rules of the game also heavily favor hedge funds, something retail investors have urged SEC Chairman Gary Gensler for years to change.
“The game is not fair and it never has been. Individual investors, even when operating in a swarm, are destined to lose. How do I know? I helped design the game,” says McConlogue.
“I respect many of my colleagues, the problem isn’t the people, it’s the rules of the game which heavily favor the funds,” he continued.
Could ‘naked short selling’ explain why certain stocks trade sideways despite heavy buying volume?
Or perhaps why certain stocks seem to continuously get beat down to the ground despite positive fundamental developments?
I’d love to hear your thoughts on this — leave a comment down below.
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