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January 1, 2004

Are Some Short Sellers in Trouble?

By Gregory Bresiger

Naked short selling, an option for which a buyer or seller has no underlying security position, is a form of "economic terrorism," says a company executive who is lobbying Congress to reform the practice.

Richard Altomare, chief executive of Universe Express, says the practice is tantamount to counterfeiting stock. Altomare, who says the securities reforms of the 1930s have not been vigorously enforced in short selling, is part of a group lobbying Capitol Hill for reforms.

Mixed Feelings

Some of the reforms, which the Securities and Exchange Commission had released for public comment, contain the following proposals: 1) A short sale should be executed only after "an affirmative determination" about the ability to borrow shares sold short for delivery within three days. 2) Use of whip calls, kiting, electronic counterfeiting and other such manipulations should be subject to racketeering laws. 3) All trades should settle and clear within three days from the trade date.

The wholesale adoption of these reforms would have a dramatic effect on the OTC market, says one executive, who notes that he has mixed feelings about them. Cromwell Coulson, chief executive of the Pink Sheets, warns that requiring an affirmative determination could hurt market makers. He explains that marker makers often don't know if they're going to obtain a certain stock in order to make a sale.

"I'm against taking away the rights of market makers to carry out legitimate activities," Coulson said. Nevertheless, he agrees some naked short selling changes are needed. That's because there are traders who pretend to be market makers in order to short sell, Coulson says.

"I think there should be a test to establish if you are a legitimate maker maker," he added. Coulson suggests that market makers should have an exemption from many of these reforms. He also had his own proposed short selling change: Have the NASD collect information on short selling and distribute it to investors.