Post by fastwalker on Apr 26, 2005 15:59:38 GMT -5
The following is a quote directly from the SEC web page referenced above:
Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security4 generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks such as securities quoted on the OTC Bulletin Board,5 as there may be few shares available to purchase or borrow at a given time.
Post by fastwalker on Apr 26, 2005 16:01:53 GMT -5
... it's not that complicated.
Assuming the naked short actually exists, the DTCC has a MM SELL record (but no actual certificate to go along with the sell). So, the MM's/hedge funds/naked shorts are creating a BUY record (with no actual certificate to go along with the BUY).
Subsequently, the DTCC now has a BUY record that can be "matched" with SELL record thereby eliminating the naked short SELL transaction from their BOOKS.
It's really just a book-keeping entryz:
For example, the DTCC shows a MM SELL at $0.0001 and an MM buy at $0.00006. Since a "share" was sold and then bought back, the DTCC doesn't need to account for an actual share of stock because the MM sold then bought it back. The DTCC has the transaction records to prove that it isn't holding the share. Thereby eliminating the "naked share".