Blog - Investing Notes
March
14, 2005 – The Naked Truth?
If you own or are considering purchase of a stock on
either the NASDAQ
or the NYSE Regulation SHO threshold security list, you
may want to read the Overstock CEO Patrick Byrne's summary of naked shorting,
the selling of shares one neither owns nor arranges to borrow. He
addresses such points as:
- Naked short selling, selling shares without delivering
a borrowed share within specified timeframes (Fails-to-Deliver - FTDs),
is essentially the creation of counterfeit shares. The number of shares
available to borrow limits legal short selling, but not naked short
selling.
- This increase in supply of stock tends to drive
down the price, depressing the value of legal shares. In extreme cases,
naked shorting could significantly damage a company's access to capital
(via secondary offerings, for example).
- The regulatory environment is too flimsy to prevent
naked shorting, and the rewards of naked shorting (either from circumvention
of tight supply of stock available to borrow, avoidance of stock borrowing
costs or manipulation of stock prices) are potentially great.
- Naked short selling may be widespread and, for some
stocks, substantial. The organizations that administer and regulate
stock borrowing will not release information essential to determine
its scope.
Mr. Byrne notes that NASDAQ and the SEC
have refused to tell him how many "fail-to-deliver" short shares there
are for Overstock.
In summary, naked short selling is a
potentially serious regulatory issue with effects similar to counterfeiting.
See the National Coalition
Against Naked Shorting web site for additional (advocacy) information
about naked shorting.
For related research, see
Blog Synthesis: Short Selling and Short Interest.
