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Salt Lake City, UT 84121
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Naked Short Selling – Are We Buying-In on “Failure to Deliver”
The stock market is a risky business. Shareholders, buyers, sellers and traders know this but they continue to risk the big money in hopes for a large payout.
With the advanced trading system of short selling, traders have discovered a new way to trade on the stock market: pessimistically. Short sellers hope for the decline of price on a certain stock so they can sell back the stock at a cheaper price than they sold it and pocket the difference.
Because short selling deals with borrowed securities, securities lending has become a huge business. To learn more about it, check out Naked Short Selling: The Illegal Hacking of the U. S. Financial System, an informative E-book that will help clarify the entire system.
However, a large risk has entered the stock exchange when it comes to short sellers: naked short sellers. Naked short sellers sell the stock short; however, they do not in fact own the borrowed stock and thus are selling their clients nothing but ‘naked’ (non existent) stock.
Basically what happens is when a short seller sells the borrowed securities to a client, he has three days to deliver the goods. However, if the short seller is selling ‘naked’ stock, then the goods are never actually delivered because they are never in the short seller’s possession.
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So now what? A naked short seller has failed to deliver leaving the buyer with nothing.
What happens next?
This is where the term ‘buying-in’ comes into action.
Due to the outburst of naked short sellers, the process of securities lending is bombarded with ‘failure to deliver’ issues. Therefore ‘buy-in notices’ are a regular occurrence.
Buying-in is the process where an investor is forced to repurchase the shares because the seller did not deliver the stocks. It is unfortunate for the buyer as he got ripped up. However, it is also unfortunate for the short seller as he will be forced to pay the difference in goods.
This is how it works: Once the allotted time for the goods to be delivered is past overdue (usually 10 days), then the unsatisfied buyer will notify the exchange about this issue, requesting a ‘buy-in’. During this time, a ‘buy-in’ notice will be sent to the seller of the borrowed securities who failed to deliver. If the seller fails to answer, then the broker will have to pay on their behalf. The seller will have to pay the broker back at whatever the shares are then worth.
Make sense or still confused? If so, for a better understanding check out Naked Short Selling: The Illegal Hacking of the U. S. Financial System.
Here’s an example. Say Dave bought 10,000 shares on XPY for $1.00 each from John. John claimed to borrow the shares from FRD but did not. When Dave does not get his shares, he puts in a buy-in notice. John does not answer this buy-in notice which means his broker, Bob must pay. Dave purchases 10,000 shares from Bob at $1.10 per share. John will be forced to pay this difference.
‘Buying-in’ is a hassle, yes. However, it is a needed due to the illegal process of naked short sellers. This is just one of the many issues caused by these abusive short sellers.
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Facts on Securities Lending and Naked Short Selling
Securities lending happens in all aspects of finance from banking to exporting to the exchange of stock. In fact, because securities lending is an over-the-counter market it is hard to put an accurate number to the industry. However, it has been suggested that the balance of securities on loan in the year 2007 alone exceeded 3 trillion dollars.
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Who are these Securities Lenders?
There are hundreds of companies around the world who are security lenders. Often called sec lenders, these corporations range from banks such as the Bank of New York and CitiBank to specific security lender companies such as eSecLending and Wachovia. Financial corporations such as Pension Financial Services and Jefferies and Company also provide sec lenders. Furthermore, these companies are based globally, big name lenders in London, Tokyo, Hong Kong, Germany, Netherlands, Canada and all around America.
Why do People use Securities Lenders?
Securities lenders will increase the overall performance of the borrowed stock. By borrowing securities, traders can take place in strategies such as pairs trading and risk arbitrage thus making a higher income. They are able to take place is higher risk trading with the cover of shorts and the prevention of fails. Securities lenders also help to manage balance sheets and finance inventory. Furthermore, security lenders act as a middle man, helping the traders along the way.
How Does Securities Lending Actually Work?
Security Lending is often used in short selling on the stock market. A trader will deliver the borrowed stock to another party in order to satisfy the order they agreed on. The sec lender will charge an annual fee for the lending of the stock. The trader will return the borrowed stock at a later time, hopefully when the stock price is down. That way they can re-sell the borrowed stock at a lower price than they initially borrowed it at and pocket the extra money.
Unfortunately, short selling has been taken to a whole new level called naked short selling. It has already had a horrible impact on our market in recent weeks and now the SEC has had to ban short selling altogether for a short while. However, the media speaks of the short selling ban because of corruption in security lending, but they do not mention naked short selling. Why is this?
This is probably due in part to the fact that the first words that come to mind when naked short selling is mentioned is “terrorist attack.” Naked short selling is an attack on the market because it is intentional. Those who initiate the attack know what they are doing and what effect it is going to have on the market. The market is going to tumble, which is exactly what has happened in recent weeks.
There is a very interesting report that explains security lending in detail and how naked short selling has a horrible impact on the securities market. This report is called Wall Street Under Attack: Naked Short Selling and the Illegal Hacking of the U.S. Securities Market.
The U.S. has an incredible financial system, but there are individuals trying to ruin it by taking advantages of loopholes and hurting individuals and companies. America must become educated on this and how it ties into our existing financial crisis so that a stop can be put to it.
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