The practice of short selling has been blamed for the collapse of several major companies’ shares during the financial crisis. What is short selling? You will learn all you need to know about naked short selling in this video from Senior Editor Paddy Hirsch.
We thought that this was one of the most informative videos on how naked short selling works.
Enjoy,
Adam Hewison
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The way this presentation is presented seems to suggest to me that the only reason for banning naked short selling is to give the "Market" a way of monitoring the Shorts on stocks. After all, isn't the market liquid enough to permit a short seller to buy back his positions especially on declining shares? Mr. Shaw's explanation earlier seems a bit more plausible.
Naked shorts have bankrupt more companies than any other group in the USA. Naked shorts have coused millions of workers to lose jobs. Naked shorts pick on small growing companies. These are the companies that create jobs.
All you need is three hedge funds. The 1st hedge fund starts the naked shorting. Before the 3rd day they transfer the all the naked shorts to the 2nd hedge fund. Then the 1st hedge fund starts naked shorting again. Only to transfer the naked short to the second hedge fund again.
The second hedge fund transfer the short to the 3rd hedge fund, which then transfer it to the 1st hedge fund. Since none of the hedge fund hold any naked shorts for more than 2 days, they never have to buy the shares. It is possible that they may even have more naked shorts than the toll float of the share outstanding.
The company goes bankrupt, the workers loose their jobs and the hedge funds never have to buy the shares.
This is only possible with the help of the SEC.
We need to 'close the loop' here, rather than leaving the discussion hanging at the end.
When a cash-and-carry commodity contract, like Orange futures, is left naked but is required (by the purchaser of the naked shares), it results in one of two outcomes: the naked contract seller starts raising his bid until he finds a seller, which then drives the price back up, or there is a market "default."
At which time everybody freaks out and the price starts to rocket upward faster than anyone could have foreseen.
THAT is the other danger of allowing legal naked short selling in a commodity market...it is possible, such as the situation right now in Silver, for many times more Silver to be naked-sold-short (on paper) than what EXISTS in refined form on the planet.
They've only been getting away with it due to the market allowing them to default...but call it a "delay" instead...until they can cover their delivery on the contract.
With stocks, you can easily see the large impact on the price of a small cap or penny-stock if anyone is allowed to 'get away with' selling naked short shares that don't exist. They still have to 'cover,' but can more easily depress the price long enough to buy back lower priced shares en-masse, and often combine this with negative campaigning or market rumors...kind of the opposite of long-side pump & dump.
Hi Adam, Great explanation. Thanks! I have been told that buying a put is the same as naked short selling. I also have been told that if you buy a put you can only loose what you invested, i.e. if you buy 5 puts for a total of $1,000 you can only loose $1,000. Which is correct?
Thanks again.
isnt this a bit kind of wrong? after all naked short sellers can amost always buy the shares that they have shorted to cover losses (strange that the presenter says that the problem is when they cant find shres to buy) especially if the price is going down!
i thought the problem with naked shorting is that it gives the big guys the power to drive down prices by selling unliited amounts of shares onto the market, shares that dont really exist because they havent bothered to actaully borrow or locate them
the way this guy describes it it doesnt seem like it would be a problem, but if traders are selling squillions of shares they dont have then you can see a problem
anyway doesnt short selling create opportunities for longs as the price bottoms out and short sellers have to buy to cover? why ban it?
only if they are naked is this a problem for the share concerned (or at least thats how i understood it)
the presenter also says that when someone is Long a share this means that they have lots of stock which isnt quite right, it means he is betting on the share price going up
or perhaps im missing a few things
thanks for the video though 🙂
Now for the real problem. If you have enough resources, such as a hedge fund and the hedge fund sells a stock short. A naked short sell. To creat the panic they continue to sell short creating more fear to cause others to sell. They pick up the shares from the open market and they are fat and happy and the average stockholder does know waht has hit them. The hedge fund allows the stock to recover and bam do it again. This is wrong and must be controlled. Any hedge fund or institution having enough power to impact the market must be transparent to the public. The black box must have light focused on it. If not the small investor must dump stocks as a trusted way to make money. We as small investors must rise up and make our concerns be heard by the SEC
Adam,
THANKS!! This is by far one of the most complicated issues that's being discussed on a daily basis...with no explanation! This should clear a lot up for our members.