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Mechanics of short selling, naked short selling and synthetic short selling

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  • #16
    Re: Mechanics of short selling, naked short selling and synthetic short selling

    Originally posted by skidder View Post
    "The extra supply of stock created by the naked short seller is the same amount created by the regular way short seller and has the same depressive effect on the market as regular way short sales (whatever that is)."

    This isn't my line of work and I admittedly am not a trader but this comment doesn't ring true to me.

    First, there is no limit to the number of shares that a determined and well capitalized naked short seller can sell into the market to depress the price. The normal short seller is limited by the number of shares he can borrow. As the number of shares available to borrow dries up, the cost to borrow them goes up and would be self correcting, at least that is my understanding.
    Therefore, a well capitalized naked short seller can absolutely destroy a small company (that depends on stock pricing to attain access to capital) even though the majority of shareholders don't sell. That doesn't seem fair at all to me.
    In addition to that, how about the sharpshooters starting one of those offshore LLC's that default to the new owners of these false shares? How is that fair?
    Also, how about voting rights?
    How about naked short selling ETF's like SLV where there is supposed to be physical metal backing each share? I think the whole mess stinks and should be illegal. I'm surprised this guy is giving his stamp of approval to this activity by not pointing out these issues in the article. The difference between shorting borrowed shares and naked shorting is night and day, IMO.

    Agree. If you can't borrow it, you shouldn't be able to short it.

    Comment


    • #17
      Re: Mechanics of short selling, naked short selling and synthetic short selling

      Originally posted by FRED View Post
      John Olagues replies:
      The short seller does not have to pay a tax until he buys the stock back. He can remain short as long as he wants without a tax on the gain. He can even buy calls or sell puts to hedge the short position with out incurring a tax liability, unless the buying of the calls or selling puts constitute a substantially identical position to a purchase of stock.

      If the company becomes bankrupt, the short seller could possibly be required to report the gain.

      John Olagues
      Truth In Options
      www.optionsforemployees.com
      phone 504-305-4449
      Hmm. Never thought about that; just hold the options to expiry and there's no tax liability at all. Why isn't the shorted amount taxed as a capital gain/loss? In the example given, the $7m is considered a capital gain and, if there's no buyback, then it's all taxable as a gain; if there is a buyback, the difference is a loss/gain.

      Comment


      • #18
        Re: Mechanics of short selling, naked short selling and synthetic short selling

        Originally posted by seanm123 View Post
        Little Visual for the Sheeple.
        John Olagues writes in:
        Dear Sir,

        I would like to make a reply to a comment made to my article which attached a video by Jeff Bagley and a comment that followed.

        The movie claims that Bear Stearns and Lehman were brought down by "naked short sellers" and rumor mongers acting in concert. They point to hedge funds that apparently specialize in short selling and suggest that they were involved in the "naked short selling" that lead to the demise of Bear Stearns and Lehman.

        The video was obviously well made and presented. The movie gives 85% truth but its purpose lies in the 15% omitted.

        I will concentrate on Bear Stearns as that is one that I am most familiar with.

        It can not be denied that prior to and during the Bear Stearns collapse massive short selling of Bear Stearns took place in the form of regular short sales, "naked short sales", buying of puts, selling calls, conversions, reverse conversions, bearish spreads and on and on.

        The movie admits that put buying and naked shorts took place but does not claim that put buying caused the crash nor did any other form of bearish trades or positions caused the collapse (other than naked shorts). The movie claims that "naked short selling" is the only culprit as far as the cause.

        The movie uses an invalid logical arguement called "post hoc ergo prompter hoc". Which means that if B follows A, then B is caused by A.

        But if B (the collapse) followed A (the naked short sales) and therefore was caused by A, then since B (the collapse) followed C (put buying and regular shorts), C must also be the cause of B (the collapse). But the movie does not say that put buying and regular short sales should be made illegal. Why?

        If a company has 100 million shares outstanding and there are 10 million "naked shorts" and 10 million regular way shorts, the pressure on the stock is the same. The only difference is to whom the newly created fathom shares are owed.

        If puts with 100 deltas are bought on 10 million shares, the pressure on the stock is the same as the 10 million naked shorted.

        The idea that naked shorts caused the collapse is similar to claiming that massive buying of a stock by tipees prior to the announcement of a take-over caused the takeover. And that's pretty silly.

        The cause of the collapse was something else which I will not speculate on here. The buying of the puts and shorting of the stock (naked or regular way) was done mostly by persons who had inside information substantially prior to the week of March 10, 2008, in my view.

        But Mr. Bagley completely ignores that far more pervasive element of market cheating. Why?

        I am sure that in some situations naked short selling in collusion with false analysts reports and the promulgation of the contents of those reports subsequent to the naked short sales caused the ruin of many a poor boy and some smaller companies. However, in the Bear Stearns case, Macavity was not there.

        John Olagues
        Truth In Options
        www.optionsforemployees.com
        phone 504-305-4449
        Ed.

        Comment


        • #19
          Re: Mechanics of short selling, naked short selling and synthetic short selling

          Originally posted by don View Post
          To me it's not the criminal behavior- we all know this isn't against the law.

          The pisser is this is what's running our country.

          That's a pisser.
          If we were all able to get behind a third party (Liberterian, Constitution, whatever) who would we want to be our Presidential candidate? If we can get the right person in the White House that's a good first step. Who's got the backbone, the intelligence, the belief in the Constitution, and the (financial) independence to do what is best for the future of the U.S.?

          Who is our great-American-in-waiting? What do you guys think of Newt Gingrich?
          "...the western financial system has already failed. The failure has just not yet been realized, while the system remains confident that it is still alive." Jesse

          Comment


          • #20
            Re: Mechanics of short selling, naked short selling and synthetic short selling

            Originally posted by leegs View Post
            There is lots of talk on these pages about 'revolt', if only enough people knew what was going on.

            Is 'enough' the key word here - are numbers simply the catalyst? What will ignite the masses, and toward what end will they be led? If revolt is called for, why aren't we iTulipers inspiring it already, since we know so much? Are we all just pussies who fritter away all of our energy on the internet?

            These are not meant as rhetorical questions. I really wonder - why aren't we doing something? What should we be doing, if anything?

            I'm plenty disgusted with the situation, pissed off even, but I'm not feeling motivated to take up arms against anyone. And I have the arms to take up if I were so inclined.

            Its hard to disagree with BrianLs comment

            Where is that third leg in the balance of power; the judicial branch? The only one I've heard making a stink about any of this is NY Attorney General Andrew Cuomo. If we wanted to, maybe our "revolt" could come in the form of organizing for the purpose of getting some of these FED, Treasury, and other actions brought before the Supreme Court as being unconstitutional. Who would need to initiate that? Can Cuomo? Maybe we get a hired gun like a Guiliani to bring cases on behalf of the People vs these institutions?
            "...the western financial system has already failed. The failure has just not yet been realized, while the system remains confident that it is still alive." Jesse

            Comment


            • #21
              Re: Mechanics of short selling, naked short selling and synthetic short selling

              Originally posted by rjwjr View Post
              Where is that third leg in the balance of power; the judicial branch? The only one I've heard making a stink about any of this is NY Attorney General Andrew Cuomo. If we wanted to, maybe our "revolt" could come in the form of organizing for the purpose of getting some of these FED, Treasury, and other actions brought before the Supreme Court as being unconstitutional. Who would need to initiate that? Can Cuomo? Maybe we get a hired gun like a Guiliani to bring cases on behalf of the People vs these institutions?
              The oppressed never free themselves - they do not have the necessary strengths. - Clare Boothe Luce
              Ed.

              Comment


              • #22
                Re: Mechanics of short selling, naked short selling and synthetic short selling

                Originally posted by FRED View Post
                The oppressed never free themselves - they do not have the necessary strengths. - Clare Boothe Luce
                LOL...Anyone got anything more uplifting and motivational?
                "...the western financial system has already failed. The failure has just not yet been realized, while the system remains confident that it is still alive." Jesse

                Comment


                • #23
                  Re: Mechanics of short selling, naked short selling and synthetic short selling

                  Someone needs to visit Eritrea...

                  Comment


                  • #24
                    Re: Mechanics of short selling, naked short selling and synthetic short selling

                    Originally posted by BrianL View Post
                    What would people rally against? Whose vision of a replacement are they backing? I might be naive, but I don't anything pushing towards a revolt or anything like that.
                    Wall Street and the Banksters have engaged in high-stakes gambling . . . and lost. The government takes taxpayer money and bails out the gamblers' companies. Will the government bailout you or me if our businesses go bad or we lose money through our investments?

                    Wall Street and the Banksters keep their big profits, their bonuses and their jobs, even though they screwed up terribly . . . while unemployment and the foreclosure rate for the rest of us climbs higher and higher because of problems in the ecomony caused by these gamblers' excesses. Retirement nest eggs and pensions evaporate in escalating inflation, and more and more old folks are forced to move in with their children.

                    Unlike past times, people know -- or will soon know -- what's really going on. They will organize effectively through modern communication technology. When everyone knows someone who is homeless or out of work, when a critical mass of economic pain is felt, profiteering by the financial elites at the expense of the masses will no longer be tolerated . . . and the People will demand justice.

                    The worse the economic pain gets, the madder people will become. Look for increasing demostrations and isolated acts of violence directed against perceived culprits of the financial world. Then, everything will get rapidly more intense. Police and soldiers will be sympathetic to the people, because they all have friends and family who are victims of the economic miasma.

                    The financial elite have gone too far this time . . . Off with their Heads !!!!!!!!!!!!!!!!!!
                    raja
                    Boycott Big Banks Vote Out Incumbents

                    Comment


                    • #25
                      Re: Mechanics of short selling, naked short selling and synthetic short selling

                      Originally posted by rjwjr View Post
                      ...

                      Who is our great-American-in-waiting? What do you guys think of Newt Gingrich?
                      The same hypocrite Newt who was having an affair the same time as giving sermons denouncing Bill Clinton?

                      Comment


                      • #26
                        Re: Mechanics of short selling, naked short selling and synthetic short selling

                        Originally posted by FRED View Post
                        John Olagues writes in:[INDENT][INDENT][COLOR=DarkSlateGray]
                        The cause of the collapse was something else which I will not speculate on here. The buying of the puts and shorting of the stock (naked or regular way) was done mostly by persons who had inside information substantially prior to the week of March 10, 2008, in my view.

                        But Mr. Bagley completely ignores that far more pervasive element of market cheating. Why?
                        Fred, thanks for sharing these very informative dispatches.

                        Comment


                        • #27
                          Re: Mechanics of short selling, naked short selling and synthetic short selling

                          Originally posted by skidder View Post
                          "The extra supply of stock created by the naked short seller is the same amount created by the regular way short seller and has the same depressive effect on the market as regular way short sales (whatever that is)."

                          This isn't my line of work and I admittedly am not a trader but this comment doesn't ring true to me.

                          First, there is no limit to the number of shares that a determined and well capitalized naked short seller can sell into the market to depress the price. The normal short seller is limited by the number of shares he can borrow. As the number of shares available to borrow dries up, the cost to borrow them goes up and would be self correcting, at least that is my understanding.
                          Therefore, a well capitalized naked short seller can absolutely destroy a small company (that depends on stock pricing to attain access to capital) even though the majority of shareholders don't sell. That doesn't seem fair at all to me.
                          In addition to that, how about the sharpshooters starting one of those offshore LLC's that default to the new owners of these false shares? How is that fair?
                          Also, how about voting rights?
                          How about naked short selling ETF's like SLV where there is supposed to be physical metal backing each share? I think the whole mess stinks and should be illegal. I'm surprised this guy is giving his stamp of approval to this activity by not pointing out these issues in the article.

                          Well, I think you are partially right. The extra supply of stock created by the naked shortseller is unbound. In theory in a Goldman-style market a naked short seller can sell any amount of stock.

                          For naked shortselling a player doesn't have to be very well capitalized. A well connected hedgie can use naked short selling as a short term revolving credit line paid by the sheeple who buy that nonexistent stock. Remember what happened few months ago with the trillion or so of naked shorted treasuries.
                          Plus there is a issue of dividends and voting rights. For example this seems to me a surreal situation where the system tolerates fraud:
                          http://thesanitycheck.com/BobsSanity...5/Default.aspx

                          Originally posted by skidder View Post
                          The difference between shorting borrowed shares and naked shorting is night and day, IMO.
                          I'm not sure that is true any more. For example high frequency players (in fact glorified day trading funds) can naked short sell as much as they want even if a T+3 rule was strictly enforced (compared to the wink given by the current unenforced T+13)

                          In an age of instantaneous communication it is strange we don't have also instantaneous confirmation that a short selling operation has not created securities out of thin air. We have currently the technology for a T+100 ms confirmation that would make naked short selling impossible.

                          There is another aspect that I would be interested to learn more from a specialist in the field. I'm talking about synthetic trading through dark pools, especially the so called dark short selling or virtual short selling. There are not the options we are all familiar with

                          For example if a pension fund wants to buy shares in a company and goes through a dark pool (in order to lower the costs of a block trade) they can be hooked (without their knowledge) with a hedgefund and the transaction never makes it to DTCC... because it is internalized and never leaves the dark pool (and there are ways to hide this on the records). This not only that artificially lowers the recorded share price volume on the open markets (making them easier to manipulate) plus in some cases it can be construed as front running. And if the owner of that dark pool of cross platform is also one of the pillars of DTCC ... good luck in getting the SEC to investigate it.

                          Comment


                          • #28
                            Re: Mechanics of short selling, naked short selling and synthetic short selling

                            Originally posted by FRED View Post
                            John Olagues writes in:
                            If puts with 100 deltas are bought on 10 million shares, the pressure on the stock is the same as the 10 million naked shorted.
                            Are synthetic shorts reported as traded shares? Because a part of Bagley's argument rests on the fact that a positively gigantic amount of shares were traded in the days leading up to the Bear and Lehman collapses.

                            Those shares need to be accounted for and the thing is, the supply of naked short shares is infinite.

                            Comment

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