August 12, 2008
If SEC allows naked short selling, it should allow NAKED LONG BUYING to create a level playing field.
A Naked short sells securities that do not exist. Effectively he creates shares out of thin air thereby increasing the float. A Naked Long Buyer should be allowed to buy stock without money i.e. out of $$s created from thin air. He guarantees the broker to pay the difference between buying and selling price with real money—but the initial purchase is effectively made with $0.0 i.e. non-existent money.
Imagine how the money-supply will increase if Naked-Long-Buying is allowed. Of course the SEC will never allow traders to trade with non-existent money because of the havocs that it will create with the nations economy. Unfortunately it is very happy to allow traders to trade non-existent shares despite the havocs it creates on share price by increasing the float.
Mind it Naked-Long-Buying is not same as buying on margin because when buying on margin, you are still paying 100% cash – part of which is lent to you by the broker.
Imagine what shorting stock does. It increases the available float of shares. Even with legal short selling, the float of companies stock can increase 100% i.e. a physical block of 1000 shares can be held by 2 owners: one the original owner and two the owner who buys the borrowed shares. Thus by allowing brokers to trade borrowed shares SEC has allowed the float of shares to double. With naked short selling, the available float can effectively increase infinitely—not just 100%. The same block of 1000 shares can theoretically be bought and sold millions of times—as long as the borrowers are allowed to do naked short selling.
What a pathetic state of affairs. I am surprised this kind of thing is allowed in the United States of America – the bastion of fairness and justice—supposedly at least.
I hope SEC wakes up at least now. The following steps should be implemented to curb naked short selling:
1. Brokers should get an explicit approval from the stock owner before lending their out to short sellers. Currenly there is no provision whereby they can control if their shares can be lent out or not if the stock is not held explicitly in their name.
2. Upon failure to deliver, the broker should be required to buy-in the shares within 24 hours or be levied a hefty fine.