The Naked Short-Selling Truth

By Dian Vujovich

There’s something decidedly sexy about naked short-selling. I mean, how can you not think that it is risky? And it is. So risky that when markets are rapidly falling, naked short-sellers often help in that downward calamity.

But now, all of that nakedness has come to a halt.

If you’re a short-seller of stocks, you’re betting that the price of a stock is going to fall. The strategy requires borrowing stock from a company at one price, returning it to the lender at a lower price and your profit comes from the difference between those two prices.

The “naked” part happens when a short-seller doesn’t borrow the stock before they sell it.

Last fall, when the market was tumbling downward, there was a lot of nakedness on Wall Street as hedge funds and other big-time investors played the naked short-selling game. Yesterday, however, the SEC made permanent an emergency rule put in place last fall to reduce the abusive short-selling that was going on.

The new SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale

As you might expect, the rule has plenty of ah-hums in it. For instance, it creates more disclosure from traders like hedge funds, but delays the information necessary to report it by a month.

To learn more about the new naked truths of short-selling here are two sources: http://tinyurl.com/mm3tj6 and http://tinyurl.com/km5rrx. In the second URL from a New York Times.com story, click on “planes to require more disclosures” and you’ll be able to download, then read, 100 pages of copy from the SEC regarding this subject.