May 5, 2009
You are dancing around the edges of short selling. What needs to be accomplished is transparency for the stock purchaser. If I purchase 100 shares of company xyz, then I expect to own 100 shares of xyz. If my broker buys from a person who is a short seller, then I only own 100 IOUs to own company xyz. I may not know until the following year when I don't recieve the proxy material that I have never taken possion of company xyz. In effect, the brokerage has committed fraud by not explicitly telling me of the nature of my transaction. (I don't count fine print on boiler plate agreements as explicit information.) If the SEC required brokerages to advises clients that their money has not been spent as requested and give the client the option to demand delivery of purchased stock, then there would be much greater transparency in the market.
Rule 2. If a brokerage firm lends out stocks to short sellers, then the owners should collet the interest. It is the individuals equity that is being placed at risk (for the propose of reducing the value of the equity) and they should get reimbursement for the risk.