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Three Questions on Naked Short Selling

December 1, 2006 • Posted in Cartoons, Short Selling

Is naked short selling a problem? The incentives for it seem direct and strong, while both regulation and enforcement against it seem weak. Just getting the facts about its extent is problematic. Here are three relevant questions:

Why does the SEC foster information asymmetry regarding true supply and demand by requiring Freedom of Information Act (FOIA) requests before releasing specific daily data (not just threshold breaches) on failures to deliver individual stocks? (According to their Freedom of Information Act Annual Report for the Fiscal Year Ending September 30, 2005, the SEC has “an average response time of 142 days” for FOIA requests.)

How diligent is the SEC in measuring whether owned shares > loaned shares by company at the prime brokers?

Why should the SEC continue to allow options market makers to act as naked shorting proxies for aggressive speculators (via the speculators’ synthetic short positions)?

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