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New NASD Bulletin on Naked Short Selling

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Posted by:   bobo 4/24/2006 11:00 PM

Here is a link to the recent issuance.

It appears to me that they are saying, "Settle the trades on T+13" - aren't they?

What a novel idea. Actually adhere to the rule of law already on the books for decades.

Wonder what the next bulletin will be? Really, really adhere to the rule of law? Pretty please adhere to it, unless it creates "undue hardship"?

Maybe I'm just too cynical these days. Dunno. Maybe not cynical enough. After hearing Cox dance around, as though the idea of actually enforcing the 1934 Securities Exchange Act were an option requiring years of consideration, let's just say I'm not less cynical.

Maybe that is just me...

---------------

And here, we have the GAO basically saying that the SEC fails in basic administrative ways, and still hasn't cured deficiencies found last year..

A comedy of errors, truly.

http://www.cfo.com/article.cfm/6848948/c_6848213?f=home_todayinfinance

Copyright ©2006 Bob O'Brien
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Comments (8)
Re: New NASD Bulletin on Naked Short Selling By GMM on 4/25/2006 5:27 PM
The link to the New NASD Bulletin on Naked Short Selling is actually this. It is a must read.

http://www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_016418.pdf
Re: New NASD Bulletin on Naked Short Selling By bburrell on 4/25/2006 5:30 PM
Settle the trades in T+13? Section 17A says T+3. "Pick your thief" is a great line from a great mind. Think it is easier to manage one or 100? And everyone wants to shitcan the Specialist system.

This is a lot of things, but comedy is one word I wouldn't use to describe any of them. Tragedy, Abomination, Treason, etc. are more appropriate words, ad nausea.

There will be a reckoning. You have bet your children's lives on it.
Re: New NASD Bulletin on Naked Short Selling By rtway1 on 4/25/2006 6:15 PM
Bud or Bob, can you break this down in words that the novice mihjt understand.
SEC Q&A 5.8 By other_opinions on 4/25/2006 8:10 PM
The SEC doc that the NASD notice refers to is at

http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm

The NASD doc does seem to make an interesting change to what has been normal operating procedure. It says that if a broker dealer reduces their FTD before the T+13 day, then the reductions apply to the most recent fails, not the oldest.

Thus, if they start with no fails, then naked shorts 10K shares of security on day 1.

That is supposed to clear by T+3. Let's say they they naked short 10K on day 2 and day 3.

So, on day 4 (T+3 for the first naked short) they are short a total of 30K and have and FTD of 10K.

Now, let's say they naked short 10K a day until day 11 and deliver none of them. They are now short 110K but have only a T+3 FTD of 80K.

None of those shares are now at the T+13 forced buy-in. Let's say that on day 11, they somehow reduce their FTD by 30K. (We can put on our rose-colored glasses and assume that they located and purchased shares.)

They have fails for days 1 through 8.

The NASD is saying that the 30 day reduction has to apply to the most recent fails, not the earliest. (LIFO not FIFO for the programming types.) Thus, the 30K reduction in FTD applies to days 6 to 8 not 1 to 3.

That process accelerates the point that they hit T+13 failure.

It's not clear from the NASD guidance what happens if they already have T+13 failures when they reduce their FTD. You could assume that any T+13 fails get cleaned up first and then the most recent fails get cleaned up second. If all the noise and lawsuits indicates that SEC may make some enforcement examples, then, that process provides a disincentive to carry fails, which may be the intent.

If, however, it means that if there are any FTD's you must apply any reduction to the most recent ones, then woe unto those holding grandfathered short sales.
Re: New NASD Bulletin on Naked Short Selling By Bovine on 4/25/2006 8:33 PM
Bob O';

Our friendly SEC publishes their "Responses to Frequently Asked Questions Concerning Regulation SHO", and they add updates periodically. One of these updates definitely shows their true color and their intent to not address the problem. To wit: Question 5.7 added 05/24/2005.

Basically, the question is with regard to closing out FTD positions and is: "will the participant be deemed to have satisfied the close-out obligation on the day the purchase is executed, or on the day the purchase settles?" This seems pretty simple, and the answer should have been 'on the day the purchase settles'. But, instead, they answer it in their typical 1500 words or less.

And, what is their answer? Pretty much it's 'you don't have to wait for settlement unless you know or suspect that delivery will not be forthcoming.' It really should have been the other way around inasmuch as there's already a FTD issue with the stock. It should have been the same requirement as there is on shorting reg SHO stocks; ergo, something more akin to 'you don't have to wait for settlement if you have reasonable grounds to believe that the security can be delivered on the date delivery is due.' The rule, as quoted below, only obligates the buyer if he knows the shares will not be delivered. Try to prove that in a court of law!

Just a comment; just thought you might find this useful in some future work on the FTD issue.

bov

"Rule 203(b)(3)(v) provides that where a participant enters into an arrangement with another person to purchase securities to close out an open fail to deliver position in a threshold security, and the participant knows or has reason to know that the other person will not deliver securities in settlement of the purchase, the participant will not be deemed to have fulfilled the close-out requirements of Rule 203(b)(3)."
Re: New NASD Bulletin on Naked Short Selling By Sean on 4/26/2006 3:59 AM
Bobo, Charlie Gasparino just did a very interesting piece on Naked Shorting and the SEC's responsibilities to addressing it. I doubt CNBC will put the piece on their Website.. but if they do I will send it to you. Your voice and that of of others are being heard finally!!
Re: New NASD Bulletin on Naked Short Selling By bobo on 4/26/2006 6:35 AM
Bov: Agreed. The approach makes a mockery of the requirement for the seller to borrow the shares before selling the stock (affirmative locate is SUPPOSED to accomplish this, but clearly doesn't) in order to deliver it, and instead introduces a ton of weasel words.

It really is like they are trying to design in loopholes and ambiguity.
Re: New NASD Bulletin on Naked Short Selling By jcline on 4/26/2006 6:37 PM
"It really is like they are trying to design in loopholes and ambiguity."

Isn't there a class called Loopholes and Ambiguity 101? They take that course before graduation I think. Mandatory that you pass... or you fail the whole course.

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