Post by 3bid on Jan 28, 2021 22:28:42 GMT -5
Regulation of Naked Short Selling
March 30, 2005 – July 31, 2009 RS22099
Short sellers borrow stock, sell it, and hope to profit if they can buy back the same number of shares later at a lower price. A short sale is a bet that a stock’s price will fall. A short sale is said to be “naked” if the broker does not in fact borrow shares to deliver to the buyer. When executed on a large scale, naked short sales can constitute a large portion of total shares outstanding, and can put serious downward pressure on a stock’s price. Critics of the practice characterize it as a form of illegal price manipulation. The Securities and Exchange Commission (SEC) in 2004 adopted Regulation SHO, a set of rules designed to control short selling abuses, focusing on small-capitalization stocks where the number of shares held by the public was relatively small.
Until the current financial crisis, the SEC did not view short selling of large, blue-chip stocks as a problem. In July 2008, however, the SEC temporarily banned naked short sales of the stock of Fannie Mae, Freddie Mac, and 17 other large financial institutions. On September 18, 2008, the SEC banned all short selling of the shares of more than 700 financial companies in an emergency action that expired on October 8, 2008. On October 1, 2008, the SEC adopted an interim rule requiring short sellers’ brokers to actually borrow shares to deliver to buyers, within one day after the expiration the normal three-day settlement time frame. The rule was made permanent on July 27, 2009, and it applies to all stocks. This report will be updated as events warrant...
www.everycrsreport.com/reports/RS22099.html
Commentary: The Truth About Naked Short Selling
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Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed before they sell it short. Due to various loopholes in the rules, and discrepancies between paper and electronic trading systems, naked shorting continues to happen.
These short sales are almost always done only by options market makers because they allegedly need to do so in order to maintain liquidity in the options markets. However, these options market makers are often brokers or large hedge funds who abuse the options market maker exemption.
www.investopedia.com/articles/optioninvestor/09/naked-short-selling.asp
‘Sad billionaire’ slams ‘LOSER’ GameStop investors – then laments Biden taxes he voted for as ATTACKING THE WEALTHY
29 Jan, 2021
A hedge fund manager who famously cried over a Democrat tax proposal – then voted for Joe Biden anyway – slammed Robinhood investors buying GameStop stock as “losers” spending government stimulus money to gamble on the markets.
People “sitting at home getting their checks from the government, trading their stocks” are the problem, Leon Cooperman said on Thursday.
In a lengthy appearance on CNBC’s Fast Money: Halftime Report, the CEO of the New York-based Omega Advisors took aim at the small investors buying up stocks the “more knowledgeable” short-sellers had undervalued, blaming the Federal Reserve’s low interest rates and even the government’s coronavirus stimulus checks.
GameStop is overvalued because there are “speculators playing around,” said Cooperman, who added his hedge fund was not involved with the company one way or another. The Robinhood investing is a “losers’ game,” he added, and the people involved “have no idea what they’re doing.”
For the past week, small investors have been using brokers like Robinhood to buy stocks of GameStop and several other companies, having discovered that hedge funds had been “nakedly” short-selling them – borrowing over 100 percent of the company’s stock to bet on its failure – to make a profit. As a result, the hedge funds have taken over $70 billion in losses so far.
Earlier in the day, Robinhood actually blocked further purchases of GameStop and several other stocks, while leaving the option to sell them open – triggering a class action lawsuit in New York accusing the brokerage of “manipulating” the market.
Later in the show, Cooperman griped about the market conditions that led to this situation, denouncing calls from the ruling Democrats for the rich to pay a “fair share” in taxes.
“I hate that expression with a passion!” Cooperman said. “What does fair share mean?” He said he was willing to accept a marginal tax rate of 50 percent, but in places like California, Connecticut, New Jersey and New York “you’re already well past that.”
This fair share is a bullshi* concept! It’s just a way of attacking wealthy people.
Listening to irate New York hedge fund billionaire Leon Cooperman on CNBC right now lamenting people "sitting at home getting their checks from the government, trading their stocks."“This fair share is a bullshi* concept," he shouts. "It’s a way of attacking wealthy people." pic.twitter.com/zFW6o1MFND
— Jake Offenhartz (@jangelooff) January 28, 2021
Cooperman famously cried in another CNBC performance, back in 2019, when he objected to the wealth tax proposed by Senator Elizabeth Warren (D-Massachusetts) as part of her primary presidential bid. Sen. Bernie Sanders (I-Vermont) even featured the segment in a campaign ad, which called Cooperman a “sad billionaire” unwilling to pay more in taxes.
Bernie 2020 literally released a video that put the words SAD BILLIONAIRE over Leon Cooperman. pic.twitter.com/9CdTpjHNsk
— People for Bernie (@people4bernie) January 28, 2021
Ironically, in the same appearance Cooperman had denounced President Donald Trump for not being “presidential” even as he praised his economic policies. On Thursday, he revealed he had voted for Democrat Joe Biden, whose administration is now contemplating a Warren-like tax plan.
For all their talk about standing up for the little guy against billionaires and bankers, both Sanders and Warren approved Biden’s nomination of former Fed chair Janet Yellen to head the Treasury. Yellen had pocketed over $800,000 in speaking fees from Citadel, the very same hedge fund that may have influenced its client – the brokerage Robinhood – to stop the buys of GameStop stocks on Thursday to stem the hedge fund losses.
Janet Yellen received $810,000 in speaking fees in 2019 and 2020 from Citadel, the hedge fund wrapped up in the GameStop saga. Citadel has spent $240k per year lobbying Congress and the Treasury Department. t.co/nf5gHJ18o3
— Chuck Ross (@chuckrossdc) January 28, 2021
www.rt.com/usa/513969-sad-billionaire-hedge-game
Another report, but no mention of 'naked' short selling.
GameStop saga exposes deep hypocrisy from elite investors and proves US financial market is detached from reality
Bradley Blankenship | 28 Jan, 2021
The destruction of a short-selling hedge fund by investors on Reddit was a formidable display of people power. It exposed the US stock market’s feet of clay – and the panicked elites are sure to retaliate.
American video game retailer GameStop has made a splash in the news this week after a showdown took place between hedge funds attempting to short sell the company’s stocks and Redditors attempting to fight back. After a hard-fought battle, the folks over at r/WallStreetBets scored a victory when a heavily battered Melvin Capital closed out its short position in Gamestop, putting several things plain on display – mainly, the utter absurdity of the US financial market.
The stock market is relatively simple: you buy a stock and if the stock goes up in value then you make money since it's worth more than what you paid for it. Short selling, however, operates on the exact opposite principle. Instead, under this scheme, short sellers make money when stocks go down in value.
In a nutshell, short sellers borrow another’s stock and then sell them, betting that they will go down in value so they can buy them back later for cheaper and then return the share to its original owner while keeping the difference for a profit. It’s a fairly straightforward process that happens all the time on Wall Street.
Hedge funds believed that with brick and mortar shops closing up all across the world because of the Covid-19 pandemic, GameStop would be no different. After all, large online retailers like Amazon are where the real growth potential is because of the overhead involved with physical stores. It’s merely a consequence, hedge fund managers would say, of a process that started well before the global pandemic.
So hedge funds moved to drive GameStop’s stock (GME) down, profiting as they continued to short sell before Redditors took notice and mounted a pushback. They purchased as many GME shares as possible to drive up the price, knowing that these hedge funds still had unaccounted shares to buy back. It meant that these hedge funds would be left paying huge sums for GME shares and hemorrhage cash without a choice.
This is exactly what happened. According to data from S3 Partners, short sellers have so far lost more than $5 billion on GME, including huge losses of $917 million on Monday and $1.6 billion on Friday. Melvin Capital, the hedge fund mentioned in the introduction of this article, had to take on a $3 billion bailout from two other hedge funds, Citadel and Point72.
Onlookers have already begun to joke that Redditors have taken “Occupy Wall Street” and made it into “Infiltrate Wall Street,” but it’s not merely a joke. What happened with GME was very clever on the part of these Redditors since they identified an extremely risky investment by these hedge funds and capitalized to essentially transfer billions from these large firms to themselves, ordinary day traders. In essence, they played the market perfectly – fair and square (unless proven otherwise).
Elite investors are definitely afraid when looking at the situation with GameStop as Redditors look to new targets, like AMC. Regular trading leads to fixed losses because your initial investment is what you pay for a stock; however, in short selling the losses could theoretically be infinite because short sellers are obligated to buy back stocks at any price. What may also worry them more is the fact that they will probably have no legal recourse against these Redditors.
Hedge fund managers have already taken to the airwaves to call on a Securities and Exchange Commission (SEC) investigation, and the Biden administration is "monitoring the situation." The GME rally even drew calls for investigation from Michael Burry, the famed investor who helped launch a retail-investor frenzy in 2019 by investing in none other than GameStop. All of them seem to think that the situation was anti-competitive stock manipulation, which would be extremely difficult to prove since, among other things, Melvin knew what Redditors were doing and stayed firm on their short position.
Elite investors and their foot soldiers in Washington are obviously mad about what’s going on and the most likely outcome here is that new legislation or executive action will go through to shut regular people out of trading in some way or another. It’s hard to say right now what might take shape.
In the interim, some in the media are painting this situation in stark political turns. In a column posted on January 27, CNN’s Chris Cillizza blamed the GME rally on Trumpism, which is a lazy analysis that seems similar to the same liberal smugness that assumes anyone who plays video games is a Trump fanatic – and also dismisses that a lot of the online left supports these Redditors in their Wall Street infiltration.
It’s hardly a political issue in the sense of left versus right, but rather ordinary people on the internet versus hedge funds. In my view, however, the real worrisome part here is that these Redditors are juicing certain stocks based on nothing – certainly not valuation – and only out of pure spite against large investment firms.
While that might be a noble thing to do it exposes the utter absurdity of the stock market, the problem the US financial market has with valuations and why I believe there will be an epic financial disaster soon (I have discussed this topic here, here and here). The GameStop debacle shows exactly how foundationless the financial market really is at a time when Wall Street’s performance looks deceitfully rosy.
www.rt.com/op-ed/513839-gamestop-reddit-wallstreet-panic/
