What is Naked Short Selling?
Before we get into Naked Short Selling let’s understand the basic premises around short selling.
Short selling is the sale of a security that is not owned by the seller.
The motivation for short selling is an investor's belief that a stock's price will decline, enabling the short seller to buy the stock back in the future at a lower price and make a profit.
Normally, when one short sells a stock, their broker will lend them the shares to sell. The loaned stock will come from the broker's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to the short seller's account.
As payment for borrowing the shares, the short seller is charged a fee, quoted as an annualized percentage of the value of the loaned securities - i.e. a borrower of a stock with a 5% stock borrow rate will be charged $5 per year for every $100 of stock borrowed. Stock borrow rates change daily based in large part on the supply and demand to borrow that particular stock.
If the number of shares available to borrow is in short supply and/or great demand (which is often the case in highly shorted stocks), finding shares to borrow can be difficult and expensive.
A frequently asked question
How does naked short selling affect the stock market?
When a seller "naked short sells a stock" they do not own the shares they are selling and therefore are selling artificial shares. This is like counterfeiting a stock. This process creates an obvious unfair advantage to the seller and an imbalance in the market as the sell side is now increased with more shares – many of which are counterfeit. There is a time limit on how long the seller can sell these shares and be naked on the trade and the time limit is 3 days. This is where the RegSho rules come in and the data we track. If the sellers broker-dealer has not located a borrow to cover this short trade within 3 days they will need to purchase back the shares they have sold on the open market. This process is referred to as a "Buy In".
"When it comes to illicit short selling, the shorts win over 90% of the time"
Naked Short – A license to steal?
Naked short selling is yet another creation of the securities industry and is in essence nothing more than a license to create counterfeit shares. When you are inflating the amount of stock that is outstanding in a company, this is considered counterfeiting. The rules justify the practice by saying it helps create smooth, efficient and orderly markets. Same stuff we have heard countless times around high-frequency trading, but in reality we believe this practice leads to shady characters creating unlimited supplies of counterfeit stocks which in turn results in your investment continuing to decline and you wondering why?
I am sure you here because you are a shareholder in a company that just continues to go down, and you have no idea why. Nothing material has happened but the trading doesn’t make any sense. We hear it all the times. Most CEO’s don’t even understand, and are baffled. The worst part is, good luck getting anyone to listen! There is a major epidemic going on right now with naked short selling right now.
It's funny when we hear CEO's say , I will just buy all the shares up and own the whole O/S and they wont be able to short me anymore. Really?
Read about: Global Links Corporation and see what happened when Robert Simpson purchased 100% of Global Link’s 1,158,064 shares. Then you will truly understand how the system is rigged.
How to Detect Naked Short Trades
There are many tell tale signs that a company is being naked short sold. Do you think your company or investment is under attack? Here is what you should keep your eye out on:
1. Has the stock been on a continual downtrend over the past several months with no material events or known reasons for why it has depreciated?
2. Does the stock see downwards pressure anytime the company outs out a press release?
3. Do you notice any unscrupulous posts or new handles popping in bashing the company, it’s story or management? It is common for short sellers – both regular and naked short sellers to hire bashers and deploy them on the stock message boards and social media.
4. Do you ever notice weird uneven trade lots? Example, someone traded 1,172 shares or an odd lot, but frequently? This is sometimes a way that market makers and short sellers communicate with each other in the marketplace without the evidence of a text message, email or recorded phone call.
5. Are you a company that has gotten phone calls from investors who all of a sudden seem curious in investing in your company? Be wary. We have seen this ploy come out of Germany many times in the past. Traders go short, knock the stock down in the process and come calling for a financing to cover their position. Another illegal tactic but it happens!
6. If you are a NASDAQ or NYSE company, rule of thumb is If you see more than 20% of your overall volume initiated short on a daily basis as reported by REGSHO and displayed on our website as per REGSHO guidelines and delivered by FINRA you may be under attack. If you are looking to track naked short selling on OTC companies please visit www.otcshortreport.com
Naked Short Selling and The Destruction it Costs
Death to the Company
Naked short selling kills the value of companies and peoples investments by artificially pushing a company’s stock price down. For smaller companies looking to raise working capital, this causes them to have to raise funds at much lower prices which substantially increases the outstanding share count. This is called dilution.
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