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Getting naked in short selling

The practice of short selling has been blamed for the collapse of several major companies' shares during the financial crisis. What is short selling? Marketplace Senior Editor Paddy Hirsch returns with another in his series of videos explaining the complexities of the markets.

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Your explanation forgets to say the Naked Short Selling breaches SEC ACT of 1934 sec 17A and it is stealing allowed under SEC REG SHO loop hole. See www.deepcapture.com for a real explanation of the problem. REFCO was caused by this and it starts by allowing non regulated entities (today controlling 2 Trillion in capital) to breach the system. SEC the US Treasury and President Bush need to take responsibility and allow transparency on all short selling just like we have with long purchases everyday. The system has allowed the selling of insurance (CDS and PUTS) on assets that are then destroyed in terms of GAAP Book Value. SEC and CBOE have been aware of this for many years and their failure since compliance date has assisted this crisis.

Thx for the informative vid. Nice to understand a bit better how it works :)

Whilst in some ways this simply gives me more questions, I just wanted to say thanks for the clear, well explained vid!

Imagine how different the US economy would be if you were *REQUIRED* to hold a stock for at least 10 days after its purchase. Right now, there is so much happening so quickly, both up and down, that no one knows what "level" might be.

Hi A Chen
You're right, there is no penalty incurred by Sam if he doesn't get those shares to Caitlin (unless the parties draw up a contract that specifies a penalty, which I believe does happen in some cases). But what if Sam doesn't pay up? Caitlin will sue for breach of contract, if only to get her money back, and Sam's reputation would be badly damaged, if not irreparably.

Hi Bryan
You're right, the US initially banned naked shorting, and followed up, along with the UK, with a ban on all short selling for a time. The US lifted that ban early this month. But neither shorting or naked shorting are illegal. In fact, naked shorting has a long history. What's illegal is manipulating the market to profit from short selling. Just as manipulating the market to gain from upward movements in shares is illegal.

Could someone please explain (in clear, concise terms) the reasoning behind short selling and the other complicated vehicles by which our economy is being run? Why does the monetary industry have to be so complicated? Is it to keep ordinary folks confused while less-than-honest manipulators skeedaddle with our investments?

Interesting video.

In the naked short selling case, it didn't really explain *why* Sean wouldn't sell Sam the shares for $5. It would seem that in a market like ours *someone* would sell Sam the shares $5. Why would they not?

Maybe because Sean believes $5 is artificially low because of all the short selling?

Short selling manipulates the Market. The stock is trading at $10. You say to people, "I'll sell you a million shares at $9 and deliver in X days. Pay me now." People won't pay $10 or more now because they know you're offering at $9, even if they don't take you up on the offer. It pushes the stock down. Naked short selling just lets you do it without any investment, which is dangerous as hell to other investors. I think all short selling should be illegal.

I got the impression from the news that:
1. Some countries including the US banned all short selling (naked or not) in some shares.
2. Naked short selling is apparently always of dubious legality, and the SEC was making inquiries as to whether some organizations had done this, and perhaps done it in a manipulative way.

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