# If I know a company is going out of business, can I lose by Short-Selling? **URL:** \ **Category:** Factual Questions\ **Created:** [August 24, 2009, 2:30pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501 "2009-08-24T14:30:37Z")\ **Posts on this page:** 9\ **Page:** 2
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [August 25, 2009, 3:09pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/21 "2009-08-25T15:09:09Z")
> [@Trom](#): > > Options market makers. > > Options market makers that wish to sell short the underlying stock in order to hedge themselves directionally have special exemptions that allow them to be “naked” short the stock. They can sell short without having to borrow shares. There are limits to this, of course. You likely couldn’t find anyone writing put options on stocks that aren’t widely traded. ---
**Author:** ![IAmNotSpartacus](https://avatars.discourse-cdn.com/v4/letter/i/cc9497/32.png) [@IAmNotSpartacus](https://boards.straightdope.com/u/IAmNotSpartacus)\ **Post date:** [August 25, 2009, 3:12pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/22 "2009-08-25T15:12:11Z")
> [@Trom](#): > > Options market makers. > > Options market makers that wish to sell short the underlying stock in order to hedge themselves directionally have special exemptions that allow them to be “naked” short the stock. They can sell short without having to borrow shares. There are limits to this, of course. [Say wha?](http://news.yahoo.com/s/ap/20090727/ap_on_bi_ge/us_sec_short_selling_7) ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [August 25, 2009, 3:36pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/23 "2009-08-25T15:36:20Z")
> [@IAmNotSpartacus](#): > > [Say wha?](http://news.yahoo.com/s/ap/20090727/ap_on_bi_ge/us_sec_short_selling_7) [http://www.dechert.com/library/FS\_34\_10-08\_Regulation\_SHO.pdf](http://www.dechert.com/library/FS_34_10-08_Regulation_SHO.pdf) (pdf) > [@](#): > > Separately, the Final Rule also provides guidance regarding what constitutes “bona-fide market making activity” for purposes of complying with the “locate” requirement of Rule 203(b)(1) of Regulation SHO. Rule 203(b)(1) requires a broker-dealer to “locate” a security before engaging in a short sale transaction, but provides certain exceptions when a market maker is engaged in “bona-fide” activities. The Final Rule further clarifies bona-fide market making activity to include situations where the market maker is: 1) taking on economic or market risk with respect to the security; 2) engaging in a pattern of trading that includes both purchases and sales in roughly comparable amounts; and 3) issuing continuous market quotes that are both accessible to the general public and at or near the market on both sides of the transaction. The Final Rule reiterates that to determine whether or not a market maker is engaging in bona-fide market making activity depends on the facts and circumstances of the particular activity. Rules for market makers are different that rules for everyone else. They are provided limited exemptions from the locate requirement. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [August 25, 2009, 3:39pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/24 "2009-08-25T15:39:52Z")
> [@LonghornDave](#): > > You likely couldn’t find anyone writing put options on stocks that aren’t widely traded. True, many stocks don’t have an activity quoted market. If you really wanted to, you would probably have to speak directly with someone on the floor of the Chicago Board Options Exchange and ask for them to make you a market. ---
**Author:** ![IAmNotSpartacus](https://avatars.discourse-cdn.com/v4/letter/i/cc9497/32.png) [@IAmNotSpartacus](https://boards.straightdope.com/u/IAmNotSpartacus)\ **Post date:** [August 25, 2009, 3:55pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/25 "2009-08-25T15:55:31Z")
> [@Trom](#): > > Rules for market makers are different that rules for everyone else. They are provided limited exemptions from the locate requirement. I see that now, and it looks like it’s not just limited to options MMs, but all MMs? It appears they get [6 trading days](http://www.sec.gov/rules/final/2009/34-60388.pdf) (see page 37) to close out the naked short before they have to buy shares on the open market to return to the original borrower. ---
**Author:** ![Never\_Say\_Dice](https://avatars.discourse-cdn.com/v4/letter/n/ee59a6/32.png) [@Never\_Say\_Dice](https://boards.straightdope.com/u/Never_Say_Dice)\ **Post date:** [August 25, 2009, 4:15pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/26 "2009-08-25T16:15:39Z")
Right now the old GM is still selling, for under a dollar a share, despite warnings that it is foolish. Everyone involved tries to tell buyers that it’s not the new GM, and that soon the shares will disappear, but apparently it’s still legal to sell if you find a confused buyer. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [August 25, 2009, 5:41pm UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/27 "2009-08-25T17:41:03Z")
> [@IAmNotSpartacus](#): > > I see that now, and it looks like it’s not just limited to options MMs, but all MMs? > > It appears they get [6 trading days](http://www.sec.gov/rules/final/2009/34-60388.pdf) (see page 37) to close out the naked short before they have to buy shares on the open market to return to the original borrower. There are exemptions for market makers in stocks, as well. I make my living as a trader at a trading firm. It’s not uncommon to see what appears to be naked short selling by market makers. An example: Illiquid stock XYZ has an average daily volume of 2000 shares. It’s priced at $5. Overnight, some huge positive news comes out. At the open there is an overwhelming imbalance of buy orders. Because the stock is extremely thinly traded the buy orders spike the stock violently up to $10 - there is no stock offered. I see this happening and ask our stock loan desk to see if they can locate shares for me to sell short into the buy orders. They check their inventory and call around to other institutions. They can’t find anyone that has any to lend, and I’m out of luck. Sooner or later [Knight](http://www.knight.com/index.asp), [Citadel](http://www.citadelgroup.com/), or [Hudson](http://www.hudsonsecurities.com/What_we_do_Market_making.htm), etc. will show up offering large amounts of stock. This means that they either had large amounts of stock in their own inventory, they were able to locate and borrow a large block, or they are naked shorting. That is the kind of situation for which the exemption exists. ---
**Author:** ![Saint\_Cad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saint_cad/32/18907_2.png) [@Saint\_Cad](https://boards.straightdope.com/u/Saint_Cad)\ **Post date:** [August 26, 2009, 4:35am UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/28 "2009-08-26T04:35:38Z")
A variation on the question: Suppose I get some put futures (lets say $10/share) and the corporation goes kablooie like Enron and the banks. Do you make $10 x # of shares? ---
**Author:** ![cletus](https://avatars.discourse-cdn.com/v4/letter/c/f08c70/32.png) [@cletus](https://boards.straightdope.com/u/cletus)\ **Post date:** [August 26, 2009, 4:49am UTC](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501/29 "2009-08-26T04:49:22Z")
> [@smiling\_bandit](#): > > Just as the title says. I know of a company going out of business. It’s public knowledge, so no insider-tradingl. The stock is still worth about 5 cents a share, as there still should be some payout. Still, it’s going away, they’re liquidating, and so forth. Can I just short-sell every share I can borrow? If there a reason it would be a bad idea? I was going to mention GM but Dances with Dice beat me to it. GM stock stayed above 1 for the longest time even though everyone KNEW it was going to become worthless. It dipped to ~.70 after the bankruptcy announcement then rocketed to ~$1.20 the day after. If you had tried to short sell that stock you would have probably lost all your money. Be careful betting against the stupidity of idiots. I had heard there was a 50% charge to borrow the shares but I could never locate any to borrow (I was curious) so I don’t know personally. [Previous page](https://boards.straightdope.com/t/if-i-know-a-company-is-going-out-of-business-can-i-lose-by-short-selling/507501.md?page=1)