The New York Stock Exchange (NYSE) is commenting on naked short selling in a new response to the concerned public.
On Thursday, the official NYSE Twitter page shared SEC key points relating to short sales as well as an explanation on the Threshold Securities List and ‘naked short selling’.
The announcement coincidentally follows the statement AMC CEO Adam Aron made on Wednesday 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.
The NYSE is now making a public announcement for concerned investors.
“In response to public inquiries, a particular stock’s inclusion on the threshold securities list — which involves the clearing of transactions — is based on specific criteria dictated by the SEC’s Regulation SHO.
Securities cannot be added to or removed from the list in any other way — it is not at the Exchange’s discretion.
The SEC has a public document explaining Reg SHO, which includes a detailed discussion of the threshold securities list. It also provides contact information at the SEC for related questions,” the NYSE stated on Friday.
AMC shareholders argue that the SEC has violated its 13-day threshold securities list rule, which states that once a ticker has remained on the NYSE Threshold Securities List for 13 consecutive days, the broker-dealer must immediately close out all fail-to-deliver positions by purchasing shares in the open market.
Here’s what the NYSE and SEC say about naked short selling.
Regulators Comment on Naked Short Selling
The SEC’s investor Reg Sho states that although the vast majority of short sales are legal, abusive short sale practices are illegal.
In a “naked” short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard settlement period.
As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a “failure to deliver” or “fail”).
Failures to deliver may result from either a short or a long sale.
There may be legitimate reasons for a failure to deliver.
Human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the standard settlement period.
A fail may also result from “naked” short selling.
Regulators state that “naked” short selling is not necessarily a violation of the federal securities laws or the Commission’s rules but rather in certain circumstances, “naked” short selling contributes to market liquidity.
“For example, broker-dealers that make a market in a security generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers.
Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market.
This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time.
Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares.
This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time.”
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.
If illegal naked short selling can become legal for market makers such as Citadel and Virtu, isn’t this a conflict for biased trades taken on their end?
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