"Here's how it works. Short selling is supposed to involve borrowing the stock, then selling the borrowed stock on the market, anticipating a drop in price. It's "good" because it moves information more quickly. It's "bad" because someone with a lot of time and money on their hands can just dump the stock and then buy it back at a cheaper price. Like all things valued by people over the age of 12, there are goods and bads in it.
Where it gets egregious is if the stock is not borrowed at all, and simply "sold" on a promise. Now, if you are a big bad player and you can "not borrow" enough of it, and "sell" enough of what you don't have, then the price has to go down. Supply and demand, and all that. Then you can "buy" it on the cheap, transfer a few things around in the accounts, and end up with a profit.
Having the actual stock on hand is supposed to put a brake on this practice. And, when the DTCC - the single depository and clearing agency in the US - set up its stock lending facility, it was quite popular, as it was relatively easy to just borrow the shares from DTCC, and dump them on the market.
All supposing that DTCC had acquired them from somewhere. Now it transpires that DTCC took a fee for this activity, and worked out that they could over-lend. That is, they could simply counterfeit the shares. It's alleged by the lawsuit that DTCC turned off its governance, and turned on the equity tap. Anyone who wanted to borrow, presumably could - even if there were none to borrow.
"The Stock Borrow Program was purportedly set up to facilitate expedited clearance of stock trades. Somewhere along the line, the DTCC became aware that if it could lend a single share an unlimited number of times, it could collect a fee each time, according to Burrell. "There are numerous cases of a single share being lent ten or many more times," giving rise to the complaint that the DTCC has been electronically counterfeiting just as was done via printed certificates before the Crash."
"Such re-hypothecation has in effect made the potential 'float' in a single company's shares virtually unlimited and the term 'float' meaningless. Shares could be electronically created/counterfeited/kited without a registration statement being filed, and without the underlying company having any knowledge such shares are being sold or even in existence." ...
But, says the cunning governance observer, what happens if the price moves against the naked short seller? Surely he's then caught with his pants down? No. Here's the game: DTCC, instead of taking a clearing agency role as they are supposed and covering the particpants, simply refers the dispute to arbitration between the parties! And, they leave an open position book until it has been resolved.
If true, this makes a mockery of governance, regulation, the system, and any sense of investment. What is the point in investing in shares in a small company if the big players are naked short selling it out of existance, simply to transfer wealth from your pocket into their pocket?
The mutual funds scandal was pretty rude - big players conspired with insiders to strip out percentage points worth of value every year. This sort of salami scam works as long as the amounts taken out don't appear too large. 1% per annum is fine ... always remembering that we are talking about 1% of a 7 trillion dollar amount here.
But stockgate is a whole other ballgame, as the Americans would say - here, broker dealers and investment banks were conspiring allegedly to transfer the *whole* value of small companies to them. One expert claims that 7,000 public companies and from one to three trillion dollars have been raided."
www.financialcryptography.com/mt/archives/000157.html...Flying Moose(cmkxunofficial)
