As best as I can understand from the wiki article and this Motley Fool piece , Shorting stock is when one sells stock they do not have in hopes that the value of the stock will go down. Normally, the person desiring to short the stock will approach a broker and borrow the shares usually for a small fee. Then when the time comes to cover the short, i.e. deliver the stock to the purchaser, the person holding the short buys the shares to cover the borrowed stock at a lower price (he hopes) than what he sold it for. So shorting allows a person to bet against a business.
Naked shorting is when one sells a stock short without first borrowing the shares to sell. The individual with the short has three days to cover the naked short according to the wiki article (here’s where I am unclear and would like to have the process explained). As I understand it, if after three days the short isn’t covered the situation is considered to be a “Failure to deliver”. (And here’s where I’d like someone to explain the process some more). As best as I can tell from the articles, the individual shorting the stock effectively has 13 days to cover the stock, at which point the broker has to buy back the stock.
In the Motley Fool article Sen. Robert Bennett (R-UT) is quoted. Below is the excerpt from the article.
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‘Nearly as I can tell from my constituents who feel victimized by this,’ said Bennett, ‘it’s not working.’ Summarizing how abusive practices might continue under Reg SHO, Bennett said: ‘I’m told that the way it works is that one brokerage house sells short, has 13 days under your rule under which to acquire the shares, and in that 13-day period hands the whole transaction off to another brokerage house. They just keep moving it around and nobody ever has to settle.’ "
Motley Fool,3-24-2005
Having little knowledge of the topic, I almost posted in GQ. Any clarification of the process would greatly be appreciated.
For debate: How is naked shorting good for the market? Isn’t it effectively allowing brokerages to create shares out of thin air? For instances, Regions Financial (symbol RF) volume of trades have been about 21 million/day for the past three months, cite. 21 million shares/day for 90 days is 1.89 billion shares traded. RF only has out about 700 million shares. I know not all of those trades would represent different shares, that is, much of the trades should be the same shares changing hands many times. But the number traded seems fishy. Doesn’t naked shorting effectively lower the value of the stock for the shareholder?
In the Motley Fool article, Robert Simpson is alleged to have purchased all of the common stock (1,158,209 shares) for a particular corporation (GLKCE). He is then alleged to have put his entire purchase into storage. Yet over the next 2 days 60 million shares were traded. How is this legal?
I won’t post further to this thread because I have next to no understanding of the process. But I look forward to having my ignorance fought.
Mod’s: if this is more GQ than GD please move it. Thanks.