July 15, 2011
I believe there is a place for short selling in the markets. However, I believe there should be full disclosure of the firm selling shares short and tighter rules as far as locating shares in a timely manner is concerned. There are far too many instances in which the failure to deliver shares in a timely manner causes temporary oversaturation of inventory and manipulates share prices in a negative manner for the gain of the shorting firm.
When I buy a stock, I cannot sell the said stock until it settles (3 days) without it being considered a "free ride." How is it that investment houses can short shares that they hope to be able to locate with no repercusions if they fail to locate the shares within the same 3 day time period? The field is tilted in favor of the investment houses and enables them to flood the market with naked positions, thus temporarily and sometimes permanently, driving the share price of the stock down. Meanwhile, the average retail investor is having his or her hard earned money being robbed in plain view of all.
One example I can give in which this is a problem is with LDK Solar (LDK). The failure to deliver rate is rising and the number of short positions is astounding when compared to the relative percentage of outstanding shares. With some due diligence, it is easy to see that many of these positions are naked positions as far as LDK is concerned. LDK's metrics have done nothing but improve, yet it trades at a PE of slightly above 2 in large part due to the shorting, failure to deliver and locate shares by investment houses, and quite possibly because it is a Chinese stock (which most seem to be the favorite target of short sellers).
In closing, my request is that the failure to deliver rules be tightened. If there are no shares that can be located within the 3 day time period, that investment house should have the ability to trade the given shares stripped for a certain period of time to offset the time that the extra shares are floating around on the market and diluting the value of existing shares. If the rules are not going to be changed then the rules for retail investors need to be tweaked to allow a more competitive playing field.