sucking short pukes, the whole motley crew cast....
Short-selling faces clampdown by SEC.
Short-selling faces clampdown by SEC
By John Labate in New York
Published: February 19 2003 22:02 / Last Updated: February 19 2003 23:52
US securities regulators are considering sweeping changes to rules governing "short-selling", a controversial trading practice that has reached record levels during the bear market.
A clampdown could significantly alter the way many stocks are traded in the US and limit the profit potential of hedge funds and other active traders.
Regulators around the world are under pressure to tighten rules on short-selling, in which traders bet a stock price will fall, amid concern that it is used by professional traders to manipulate share prices, particularly of smaller companies.
Staff at the Securities and Exchange Commission, the chief US financial regulator, are expected to present proposals to William Donaldson, the new chairman, as early as next week. Among them could be rules forcing traders to borrow stock to cover their short positions. Under current rules, traders can take out "naked" short positions over an unlimited number of shares, putting huge downward pressure on an illiquid stock.
Regulators are less concerned about short-selling in the most liquid stocks and may even consider loosening the rules for large companies.
Officials also want a consistent set of rules across all US markets. For example, traders are forbidden from shorting a stock quoted on the New York Stock Exchange when the price is falling but Nasdaq stocks operate under a separate rule that does not apply to small stocks in the over-the-counter market.
US regulators say they are being pressed to clamp down on short-selling by politicians who complain the practice hurts companies. Allied Capital, MBIA and mortgage lender Farmer Mac are among those claiming their shares have been manipulated by short-sellers."The time has come to address what to do about short-selling but it is going to be political, controversial and complex," said a securities regulator.
Much will depend on the interest of Mr Donaldson, who was sworn into office on Tuesday. SEC officials pressed Harvey Pitt, his predecessor, to take up the issue but without success.
Short-selling is a trading technique in which one party typically borrows shares from another and then sells them into the market, betting that the price of the stock will fall in the near future when he must buy the same number of shares to repay the original loan. If the share price has fallen by that time, the short-seller has made money.
Any attempt to limit short-selling activities will be criticised by traders and some economists who argue that it should be less restricted because it makes for a more efficient and liquid market. "Short-selling should not be equated with manipulation," said one head trader in New York.
Market professionals argue that short-selling is an effective way to add legitimate negative sentiment to the market and keep wayward corporate management in line, but others say it is too often abused to corner small companies by controlling most or all of a company's publicly traded shares.
The SEC interest in short-selling is separate from a probe into hedge funds and would apply to all types of investors.
it's my understanding that shares in a cash account cannot be loaned out for shorting, only shares in a margin account
but if you buy shares on margin, the shares technically belong to the broker since you borrowed money from the broker to pay for them
and if the broker wants to sell the voting rights to his/her/its shares then that's between your broker and the buyer
I guess I understand your position, but I can't agree with you on the "all shorting should be stopped". The traditional short is an essential part of risk management IMHO. The active equity loan market exists because there is tremendous demand for it. Just think of the IPO and merger/acquisition activities of brokerages and you see how they have a need every day to have some "negative" equity exposure somewhere. With CUSIP numbers you can separate "naked" from "traditional" shorts easy enough, I think. But I agree 100% that "naked short selling" is simply unauthorized dilution, essentially counterfeiting, and needs to be outlawed. Just my view but there it is.
Have a good one,
Here is what I wrote to justabroker_2000:
"My position is that any kind of shorting should not be allowed. It is hard to define a naked short or a legitimate short. As an example, if person B shorted stock (100 shares) which the broker borrowed from person A, everyone would agree that it was not a naked short. Next, if person C shorted the stock (100 shares) which were borrowed by the broker from person B's account, it would still be considered a "non-naked" short. However, note that the same 100 shares have been shorted twice and the float increased three-fold. This is the same as printing your own shares or money. This should be illegal as hell. I believe that the concept of borrowing shares and lending them to a shorter is just a smoke cover for the underlying crime. It is also un-enforceable in the real world. IMHO"
In this scenario, how can you keep track of what shares are borrowed and what shares are naked? I can't see how any system can keep track. Therefor, I believe shorting shares are the same as printing them. The 100 shares in the scenario can be shorted over and over again. That is why I think the "borrowed" idea is just a smoke screen.
My final jeopardy answer to your question is this: If you, whose shares have been LENT to another party, DEMAND from your broker the right to vote your shares, your broker will replace your short shares with other new borrowed shares. That is the practice employed. If you don't get a proxy because your shares have been lent, you need to demand it from from your broker. If you don't ask, you won't get it.
I'm not saying this is the way it should be, but it is the way it works these days.
Incidenally, the median duration for short sales is three days. The great majority of people whose shares are lent out never have a clue it happened.
Ms. Short asks Merrill Lynch (ML) to sell 100 shares of Xerox stock which she does not own.
- ML borrows stock from Mr. Owner
and sells it to Mr. Buyer.
- Xerox�s records now indicate that
Mr. Buyer is the stockholder, not
Selling Stock Short
Mr. Owner loses his voting rights.
What if Xerox pays a cash dividend?
- Mr. Buyer receives the dividend
- Mrs. Short must pay the dividend
to Mr. Owner.
the problem with this is that the broker has decided to loan my shares to the seller
how can that arbitrary broker decision keep me from voting what i beleive to be my shares ?
i fully expect to vot emy shares if they are in my account
i have never heard of any broker ever asking whether they can have my permission to loan out my shares
in the margin agreement there is a clause which indicates they may loan out your shares, understood BUT i have never heard of the case where someone has been stopped from voting their shares
i have a rather large position in AVN and if i didnt receive my voting proxy i would raise holy hell with my broker
the only out i could see for the broker is if the shares one owned were purchased on margin and you really "dont own them" given that precondition
Hi Watts, Bo
Here's an article I found on the web on the subject. This says what I've been saying.
I found this by typing in "shorting stocks proxy vote" to the Yahoo search engine.
Subject: Trading - Shorting Stocks
Last-Revised: 9 Mar 2000
Contributed-By: Art Kamlet (artkamlet at aol.com), Rich Carreiro (rlcarr at animato.arlington.ma.us)
Voting of shares is also affected by shorting. The old beneficial owner of a share (i.e., the person who lent it) and the new beneficial owner of the share both expect to cast the vote, but that's impossible--the company would get far more votes than shares. What I have heard is that in fact the lender loses his chance to vote the shares. The lender doesn't physically have the shares (he's not a shareholder of record) and the broker no longer physically has the shares, having lent them to the short seller (so the broker isn't a shareholder of record anymore, either). Only a shareholder-of-record can vote the shares, so that leaves the lender out. The buyer, however, does get to vote the shares. Implicit in this is that if you absolutely, positively want to guarantee your right to vote some shares, you need to ask your broker to journal them into the cash side of your account in time for the record date of the vote. If a beneficial owner whose broker lent out the shares accidentally receives the proxy materials (accidentally because the person is not entitled to them), the broker should have his computers set up to disallow that vote.
watts: The discrepancy in your reasoning is that you CANNOT vote short shares. A short position is a promise to deliver the shares in the future. You do not own the shorted shares. Only the owner can vote. To close out your short position you must buy the shares and deliver them as promised and at the market price unless, of course, you already own them and are hedging your long position. Technically, a naked short position is a broker's position in that he allowed you to short (or did it for his brokerage account) the shares without holding an equal number of shares elsewhere in his or another account that were borrowable! Thus, when a broker allows you to short a stock, you don't know whether the broker is in a naked position (not actually backing the transaction with borrowed shares) or not. Is that clear as mud? Darkness covers all skinny dippers!
i'm with you drstandin
not 50 years though
i'm just trying to understand the mechanics of how short positions don't end up getting voted in a proxy vote
2 parties think they own physical shares, somehow those same shares dont get double counted but how ?
party A owns 100 shares
party B borrows A's shares from a A's broker and sells them to party C and A has no idea A's shares have been loaned
now parties A and C think they own 100 shares each and a proxy is to be mailed out by the company
A and C both get to vote thus the float will be high by the number of SHORT shares, so how does the company resolve this discrepancy ?