Eliminate Naked Short Selling

To effectively put an end to naked short selling and restore market integrity:

  • Institute comprehensive daily or weekly reporting of all short positions to increase transparency.

  • Enforce stringent financial penalties for any failure to deliver securities, encouraging compliance.

  • Reduce settlement periods drastically to T+1 or even same-day T+0 to limit the time for manipulation.

  • Require brokers to secure a ‘hard locate’ or actually borrow shares before initiating a short sale, ensuring no sale without possession.

  • Regularly review and strictly regulate exemptions for market makers to prevent their use in manipulative practices.

39 Likes

Agree 100%. I’m a DJT and RUM shareholder and the naked shorting has been outrageous - let the market do its thing without allowing all the fraud and manipulation. Too many (criminals in my opinion) printing money from air and controlling markets for their own gain.

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It not only hurts investors, but also the people who work for these companies and their customers are devastated. Many of us have examples where it seems painfully obvious this is what’s going on, but it’s a crime that’s difficult to prove given the current state of the regulatory capture which is why I would advocate for these specific changes. I might also suggest consideration of more stringent laws regarding employment within the industry for past regulators to prevent revolving doors which misalign incentives for the industry participants.

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While Regulation SHO currently targets naked short selling, enforcement and compliance often lags or is missing altogether, leading to persistent issues with naked short positions. Additionally, there are exceptions for market makers to provide liquidity which need to be tightly regulated to prevent abuse. Here are some specific details of requirements that should be implemented to address these shortcomings:

  1. Enhanced Transparency and Reporting:
    -Mandatory Reporting: Require brokers to report short positions more frequently and with greater detail. This could include daily or weekly disclosures of short positions to regulatory bodies, which could then be aggregated and published to increase market transparency.
    -Fail-to-Deliver (FTD) Tracking: Implement stricter monitoring and reporting of FTDs, where the seller does not deliver the securities to the buyer within the standard settlement period. Persistent FTDs could be a red flag for naked shorting.
  2. Tighter Settlement Regulations:
    -Shorten Settlement Cycles: Reduce the standard settlement time frame (currently T+2 in many markets) to T+1 or even same-day settlement (T+0). This reduces the window during which a naked short could remain unresolved.
    -Penalties for Settlement Failures: Impose significant fines or sanctions for failures to deliver securities on time, which would discourage attempts at naked short selling.
  3. Locate Requirement Enforcement:
    -Pre-Borrow Requirement: Strengthen the ‘locate’ requirement where brokers must have a reasonable belief that the equity can be borrowed before allowing a short sale. This could involve a pre-borrow mandate where the shares must actually be borrowed before the short sale is executed.
    -Hard Locate: Introduce a system where a “hard locate” must be confirmed, meaning the shares are not just located but are actually set aside for borrowing.
  4. Technology and Surveillance:
    -Real-Time Surveillance Systems: Utilize advanced AI and machine learning systems to detect patterns indicative of naked short selling in real time. This could help in early detection and prevention.
    -Blockchain or Distributed Ledger Technology: Explore the use of blockchain for stock trading to ensure a transparent and immutable record of transactions, which could virtually eliminate the possibility of selling something you do not own or have borrowed.
  5. Global Coordination:
    -Since financial markets are global, there should be an effort to coordinate these regulations internationally to prevent regulatory arbitrage where firms might engage in naked short selling in less regulated markets.
  6. Education and Awareness:
    -Educate investors about the risks and mechanics of short selling, including the illegal aspects of naked shorting. Informed investors can also act as another layer of market surveillance.
  7. Legal and Regulatory Enforcement:
    -Strengthen legal consequences for violations, including criminal charges for severe or systematic abuse. Enforcement agencies need the resources and authority to pursue cases effectively.

By implementing these measures, regulators can aim to eliminate or significantly reduce the practice of naked short selling while maintaining market fluidity and efficiency.

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I would suggestion more than a “financial penalty” for FTDs. For a lot of these big hedge funds… that’s just “the price of doing business” for them.

Criminal charges would be better.

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They are rigging the system and keeping the middle class down. We need to ban naked short selling in its entirety!

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The problem is not the naked shorts. The problem is the FTDs. Why in 2024 is it even still possible to Fail-To-Deliver on an securities transaction?

All Naked shorts are FTDs while not all FTDs are naked shorts.

While Naked short selling is not the crux of the issue we cannot overstate the need to completely get rid of the “Madoff Exemption”. It’s unacceptable and needs to be gone.

T-0 trading settlement technology is already available and being used. It must be implemented.

If we want common sense legislation we need common sense fixes.

Those common sense fixes are as follows:

• Complete ban of Fail-To-Delivers with possible JAIL TIME penalty for habitual offenders.

• T-0 settlement for all equity transactions

• The need for exchanges like the NASDAQ/NYSE to use IEX like traits to combat the predatory behavior of High Frequency Trading firms

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check out the video on this reddit post with Dr. Susanne Trimbath former director/operations manager at the DTCC and author of “Naked, Short and Greedy” explaining the problem with FTDs and why it’s so crucial that we fix this crisis

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Everything they all said here. Get em!

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This is great and I agree with everything listed. Maybe missed it but would add no more dark market order execution - it is an enemy to true price discovery.

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As an Ivy-League-trained Master of International Affairs and Financial Management, I do confidently report: that continuing to allow for market makers, banks, and hedge funds to nakedly sell stocks short would be equivalent to allow clear violations of economic fairness in our markets. The exploitation of Failure-to-Deliver (FTD) policy under SEC’s REG SHO, the creation of synthetic shares, the borrowing to short without locates, and/or the utilization of the share creation mechanisms of ETFs- allow for economic supply to become a falsified representation of what should be a much lower, true supply. If fake supply, then is substantially greater than the routine economic demand, then the price will be suppressed of any good or stock. This suppression of price allows the perpetrator, or the violator, to profit based on the inside information that only they have.

Failures to deliver a stock is insider trading. The reason it is insider trading, is because it allows only a select group to have particular information about a stock’s excess supply. Because the perpetrator is the only one who knows who failed to deliver, and that information is not accessible by the public, then any closure or settlement of such fail to deliver constitutes a criminal action of insider trading. Thus, there is a conflict between current SEC policy, which enables such fails to deliver under rule 204 as well as ETF fails, and insider trading laws which call for criminal penalties against those who trade on inside information.

Further, participants of the above exploitations to nakedly sell stocks short can therefore play ‘God’ in the stock market. If enough capital is employed in this conduct (which it is, especially by the well-known bad actor known as Citadel Securities) then the conduct can act as a tidal wave of relative power over small businesses, mid-size institutions, and retail investors across the world. Further, this conduct of playing God in our markets can dictate what companies survive and what companies fail. Which is a conflict of not only the constitution, but of antitrust law.

And, additionally, the other issue with naked short selling is that it leads to a falsified representation of voters and proxy voters for company policy. This definition of fraud constitutes falsified company action, and can lead to differences between what true shareholders actually want, and what companies are actually doing. This fraudulent business practice is a dangerous result of naked short selling.

And finally, I want to shed some light on the problem of tokenization of shares. Tokenization of shares is one mechanism that is used to fraudulently authorize the fake locates that participants use as justification for nakedly shorting various stocks. Whether the tokens are created in switzerland, or elsewhere, is a violation of securities laws. Thus tokenization should be heavily scrutinized regarding stocks, until policy was created on the matter.

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Agreed 100% - this would eventually solve a number of the other economic issues cited/voted on within this very category. The amount of money siphoned out of the system to preserve bad short sales and toxic derivatives is beyond criminal. It’s become a blackhole for liquidity.

It was allowed to happen so recklessly that the window to resolve this via any conditional means is closing.

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Make it something egregious, fine them triple the amount of the total sum of money/assets/securities involved in the transaction.

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Personally I am still at no cell no sell. And I intend to stay that way.

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Yes we need this!!! The amount of money that naked shorting has stolen from American people (look up cellar boxing) is astounding.

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I %100 agree with this proposal. This is supposed to be a free and fair market where your average Joe can make some money. Well apparently not! With all the advantages and loopholes, its just a rigged game. We need a more level playing field…

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  1. ONLY Daily reporting. A week is too long
  2. FTDS. Penalty should equal the value of the FTD X 2, with 50% going to the shareholder
  3. in todays digital market (let’s face it, there are NO real shares, everything is digital) there is NO Reason to have anything but T-0. In fact, is should be IMMEDIATE Settlement
  4. Locates should be illegal. Either you have the share to lend, or you don’t and don’t lend. The concept of infinite liquidity is just Fraud by another name.
  5. Exemptions. Agree. And I will ADD, ANY illegal practice by a MM results in a FINE = Value of the fraud X 10. 10% going to the RETAIL shareholder if one is involved, 50% going to the Federal Debt Relief Fund. 40% to increased enforcement.
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Great suggestions

How do we merge ours as one topic? I can’t believe that stocks/SEC isn’t a category?

Started a Merge Proposal here. I believe the admins have to get around to reviewing them all which may take some time.

Eliminate Naked Short Selling in U.S. Stock Market

1 Like