Naked short-selling.
In some circles, those are fighting words. There are companies that blame all their problems on that kind of trading, which is illegal if it is intended to manipulate the market. There are claims that it has destroyed thousands of public companies, although those making the claims have trouble naming any such companies.
But now, it appears, naked shorting — the practice of selling shares short without borrowing them — is almost gone. The Securities and Exchange Commission’s hurried changes of short-selling rules last fall appear to have all but eliminated the number of companies where such selling seems to be occurring. This appears to be an example of regulation working.
The primary example of the decline in naked short-selling is in the shares of Overstock.com, an Internet retailer whose chief executive, Patrick M. Byrne, has for years been on what he called a “jihad” against such trading. Overstock has sued many Wall Street firms for facilitating such trading, as well as a hedge fund and a research firm that it believes acted illegally in spreading negative information about the company. The suits have not yet gone to trial.
The primary evidence of naked short-selling is a large number of trades where shares were not delivered on time, causing a “fail” in Wall Street jargon. Naked short-selling can save a trader the costs of borrowing shares, or can make it possible to short a stock where borrowing is very difficult because so many others want to sell it short. A large number of fails does not prove naked short-selling, since there are other reasons for trades to fail, but such a number does indicate it is likely. (more)
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