Normally, when a person sells a stock short, he must borrow it from a broker, who lends him the stock, which he then sells short with the understanding that it must be returned upon demend by the lending broker. "He who sells what isn't his'n -- must give it back, or go to prison."
'Naked' shorts sell fictitious shares, either never borrowed or borrowed (wink, wink) with the understanding that they were never really loaned and needn't be returned. These non-existent shares are sold into the market, driving the price down, and the seller collects the price from the sale of the fictitious shares, but since the shares he sold never really existed in the first place, he never has to return them.
All of this is of course illegal, but the SEC for years turned a blind eye, despite complaints, because BIG money was involved, including that of the Depositary Trust Corporation (technically a part of the Fed, and 'governed' by big names of many of the fat-cat firms of Wall Street). Finally, last year the SEC passed a rule saying that the lender of a stock must be able to prove that he could reclaim that borrowed stock on demand within 4-5 days -- UNLESS the stock was listed on another exchange, in which case, "for arbitrage purposes", the rule did not apply. BIG loophole, which was immediatedly used by surreptitiously listing companies, without their knowledge or consent, on a foreign exchange (the Berlin-Bremen Bourse, for one). The SHORT SELLING is not necessarily done there -- it just continues, selling imaginary shares through the old crooked channels, either in the US or abroad.
Nastech has been listed for years on German exchanges, and was just recently listed on the Berlin-Bremen Bourse. Mr. Weaver is aware of all of this, and Nastech's attorneys are, I am told, pursuing the matter of de-listing. What progress is being made to that end is not known. There are many fish to fry, Bill Donaldson, who was a year behind me at the Harvard Business School (I only knew him to nod to in the hallways) being one of them.
Another naive question, since I have seen the perils of naked short selling invoked on a number of Yahoo biotech message boards in the last few months.
If a stock is subjected to naked shorting via the Berlin-Bremen Bourse, would you see the correspondong volume of those short sales on that exchange, or is it truly "invisible" as the shares were never truly "borrowed" in the first place?
I ask as for almost all small market cap American biotech stocks the volume traded on European exchanges is pathetically amall, and it would not account for all the price swings some people blame on naked short selling.
I expected mere morsels, but what I got was a seven-course meal. Thank you for taking the time for a detailed answer. Of course, now my curiosity has turned into anger, as in "how can something like that can still go on unheeded?" What amazes me is the fact that any foreign exchange seems to be able to list a stock without the company's knowledge or consent. And that is happening in an EU nation?! I'd figure it can happen in, say, the Burmese Stock Exchange, or some other obscure place. Don't the German gov or the EU have rules that govern listings? I wonder if the same is happening to foreign companies, here on the NASDQ, NYSE, or some of the other US exhanges?