Post by jannikki on Jun 22, 2006 23:42:43 GMT -4
I feel so dirty…Naked Shorts
www.blogmaverick.com/entry/1234000230033533/
I short stocks. I make money shorting stocks. Some of my best friends are the stocks that became worthless over the years and I never had to cover.
I short stocks because I’m a firm believer that in a universe of more than 10k public companies, not all of them are well operated. I also believe that since short selling is rarely if ever offered as an option by traditional brokers to their customers, there is always going to be a bias towards demand trying to push the price of a stock up. That in turn creates an opportunity for short sellers who get to take advantage of that upside bias.
Of course there are risks to short selling. If you don’t fully understand what you are doing, you can lose more on the short side since a stock can only fall to zero, but it can go up to any price. To me, that just gives me reason to do more homework, not to shy away.
I thought this blog entry would be timely because the SEC has recently taken steps to stop abuse of the rules of shorting. One of which is that you have to actually borrow shares before you can sell them (if you don’t know what this means, just ask your broker). Some short sellers abused the process by giving sell orders to their brokers for stocks they don’t own, or have not borrowed. The SEC decided to finally enforce the rule and make brokers confirm that the shares have been borrowed and delivered. Some short sellers don’t like that this rule is being enforced. I actually like it.
I like it because it balances the playing field. Sometimes when I, or anyone, borrow a stock in order to short it, we have to pay a fee to borrow that stock. If a stock is heavily shorted, and as a result, difficult to borrow, the owners of the shares will only lend them to you if you pay them some percentage of the stocks value. It may be 2 pct, or go as high as 15 pct on an annual basis. The “VIG” becomes part of the cost of doing business. If I’m paying the VIG because I think the companies prospects are so poor it’s worth it, then I want everyone playing by the rules.
Why? In case I’m wrong about the stock. If by chance I’m wrong (and honestly, it doesn’t happen very often), naked shorts increase the demand for shares of stock in the company beyond what it legally should be. How can that be? Because even naked shorts have to cover sometime. Particularly if the stock is moving up. Even though they didn’t play by the rules, their brokers will still apply the margin rules against the short sellers accounts. If a stock moves hard against them, they will cover. Their covering stock, moves the stock price higher, which in turn hurts my short position.
I also want them playing by the rules in case I own a stock that is heavily shorted. Sometimes the shorts are wrong. If the demand to short the stock is high, and I think the shorts are wrong, forcing the shorts to borrow the stock first, can increase the demand to borrow the stock I own and push the VIG higher. Nothing better than owning a stock that other shorts have wrong. I can be the one charging 10 pct or more VIG , and make money on the long side.
So mark me down as a short seller who thinks naked short selling is wrong.
www.blogmaverick.com/entry/1234000230033533/
I short stocks. I make money shorting stocks. Some of my best friends are the stocks that became worthless over the years and I never had to cover.
I short stocks because I’m a firm believer that in a universe of more than 10k public companies, not all of them are well operated. I also believe that since short selling is rarely if ever offered as an option by traditional brokers to their customers, there is always going to be a bias towards demand trying to push the price of a stock up. That in turn creates an opportunity for short sellers who get to take advantage of that upside bias.
Of course there are risks to short selling. If you don’t fully understand what you are doing, you can lose more on the short side since a stock can only fall to zero, but it can go up to any price. To me, that just gives me reason to do more homework, not to shy away.
I thought this blog entry would be timely because the SEC has recently taken steps to stop abuse of the rules of shorting. One of which is that you have to actually borrow shares before you can sell them (if you don’t know what this means, just ask your broker). Some short sellers abused the process by giving sell orders to their brokers for stocks they don’t own, or have not borrowed. The SEC decided to finally enforce the rule and make brokers confirm that the shares have been borrowed and delivered. Some short sellers don’t like that this rule is being enforced. I actually like it.
I like it because it balances the playing field. Sometimes when I, or anyone, borrow a stock in order to short it, we have to pay a fee to borrow that stock. If a stock is heavily shorted, and as a result, difficult to borrow, the owners of the shares will only lend them to you if you pay them some percentage of the stocks value. It may be 2 pct, or go as high as 15 pct on an annual basis. The “VIG” becomes part of the cost of doing business. If I’m paying the VIG because I think the companies prospects are so poor it’s worth it, then I want everyone playing by the rules.
Why? In case I’m wrong about the stock. If by chance I’m wrong (and honestly, it doesn’t happen very often), naked shorts increase the demand for shares of stock in the company beyond what it legally should be. How can that be? Because even naked shorts have to cover sometime. Particularly if the stock is moving up. Even though they didn’t play by the rules, their brokers will still apply the margin rules against the short sellers accounts. If a stock moves hard against them, they will cover. Their covering stock, moves the stock price higher, which in turn hurts my short position.
I also want them playing by the rules in case I own a stock that is heavily shorted. Sometimes the shorts are wrong. If the demand to short the stock is high, and I think the shorts are wrong, forcing the shorts to borrow the stock first, can increase the demand to borrow the stock I own and push the VIG higher. Nothing better than owning a stock that other shorts have wrong. I can be the one charging 10 pct or more VIG , and make money on the long side.
So mark me down as a short seller who thinks naked short selling is wrong.