Naked Short Selling - SEC new regs
The SEC put out new regs today on naked short selling, basically banning the practice. Which is interesting, because for years they claimed it did not exist and it was not an issue.
In essence, short selling is borrowing something, selling it now while agreeing to buy it back at a later date and give it back to the person you borrowed it from. Except, under US regs previously, you could actually just sell something you did not own, and then you had to find it in three days (T+3 settlement in the US). But a lot of hedgies or brokers did not really bother with the finding part, they just sold. This of course had a pretty big effect, as it created "fake shares" basically due to the way the DTCC works, and created artifical negative pressure on naked shorted securities.
Today, the SEC put out new rules making this hard to do. If you dont settle properly on t+3, the broker handling the short sale is not allowed to short any more of that security unless it has a firm pre-locate (already borrowing the stuff) for each sale: tying their hands behind thier backs. It also gets rid of the option market maker exemption, a loophole which had yet to be closed.
This is, overall, a very good thing, and will help curb actual market abuse while having very little impact on those who are not abusing the system.
In essence, short selling is borrowing something, selling it now while agreeing to buy it back at a later date and give it back to the person you borrowed it from. Except, under US regs previously, you could actually just sell something you did not own, and then you had to find it in three days (T+3 settlement in the US). But a lot of hedgies or brokers did not really bother with the finding part, they just sold. This of course had a pretty big effect, as it created "fake shares" basically due to the way the DTCC works, and created artifical negative pressure on naked shorted securities.
Today, the SEC put out new rules making this hard to do. If you dont settle properly on t+3, the broker handling the short sale is not allowed to short any more of that security unless it has a firm pre-locate (already borrowing the stuff) for each sale: tying their hands behind thier backs. It also gets rid of the option market maker exemption, a loophole which had yet to be closed.
This is, overall, a very good thing, and will help curb actual market abuse while having very little impact on those who are not abusing the system.
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