Naked Shorting Needs to be Stopped

By: ispeculatornew
Date posted: 09.16.2008 (1:25 pm) | Write a Comment  (0 Comments)

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I read a story that the SEC is going to implement some new rules that are intended to curb naked short selling and I think the SEC should have passed tougher rules long ago.

I believe hedge funds and institutions have been using naked shorting to manipulate stock prices for quite a while, especially among small caps. I think this has gotten more pronounced in the last couple of years.

I don’t know how many times I have seen a small cap take a pretty significant drop without any news. It has also become commonplace for small caps to get slaughtered after earnings if they don’t report results that blow away expectations. I think naked shorting is a big reason for both of these events.

It wouldn’t be hard for a hedge fund to use naked shorting to force down a small cap to make a profit, especially among stocks with low floats. All they would need to do is force down the stock price and induce some panic selling among jittery longs and then cover. While hedge funds may potentially be able to do this with regular shorting they can put a ton of pressure of stocks with the ability to naked short. Naked shorting gives them a theoretical infinite amount of shares to short.

I believe naked shorting is currently acting as a catalyst for the demise of troubled financial institutions. I don’t blame the sell-off of financial institutions on naked shorting, they caused their own problems, but I believe naked shorting is going to force some of these companies into bankruptcy. Hedge funds know these companies are on the ropes and naked shorting gives them the ability to continue to pressure the stock prices of the these companies down. I guarantee there are hedge funds and other investors that have sold troubled financial institutions short even though there were no shares actually available to short.

The SEC needs to hurry up and pass much tougher rules against naked shorting. They also need to grow a backbone and actually enforce their rules. 

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