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Naked shorting: The curious incident of the shares that didn't exist (2005)

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Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#11

Post by fractionalhare »

eloff wrote: post #9
fractionalhare wrote: post #8

Earlier quoted context omitted.

It was noticed. The SEC even had data supporting Global Links' claims. This incident is almost 16 years old and was later investigated by the SEC.

So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?

I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm. It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis.

As far as outcomes go, there is this testimony from the SEC chair circa 2010: http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010...

> In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of 2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#12

Post by setr »

anaphor wrote: post #4
tristanj wrote: post #2

Non-archive.org version: https://www.euromoney.com/article/b1320xkhl0443w/naked-short... The "self-replenishing pool" missing image is available here: https://web.archive.org/web/20201104113520im_/https://cdn.eu...

Thanks, maybe a mod can edit the url in the original post?

Especially needed here because the way back link is broken into 6 pages, and page 2 wasn’t captured (didn’t check 3-6, since it doesn’t matter)

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#13

Post by beefield »

jkhdigital wrote: post #10

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).

1. Fractional reserve banking is by definition decentralized.

2. Cough, Tether audits, cough.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#14

Post by d0mdo0ss »

crb002 wrote: post #5
harikb wrote: post #3

Very interesting indeed.. > The stock borrow programme at the DTCC, they allege, enables the naked shorting of shares to the extent that the number of shares in circulation of some companies is now several times in excess of that issued. Even companies listed on the NYSE, could have been affected. As Wes Christian, partner in law firm Christian, Smith & Jewell in Houston, and lead lawyer on several of the cases, expl…

When I was in PFG Marketer Services I saw million dollar double payout fuckups all the time and a shady SQL Server database for "manual over-rides" on commissions to brokers that seemed like an un-audited slush fund.

off topic, but I'm curious what would've been a typical workday there.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#15

Post by ryebit »

beefield wrote: post #13
jkhdigital wrote: post #10

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).

1. Fractional reserve banking is by definition decentralized. 2. Cough, Tether audits, cough.

Not OP, but USDT / Tether is an example of something which exists as a proxy for something off-chain; so auditing the chain is obviously not going to work to see how much USD they actually have. Though it is possible to provably audit exactly how many USDT are in circulation at any point.

I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly there (rather than as a proxy for real shares tracked somewhere else).

In that frame, a better example is something like the DAI stablecoin, which is backed by assets that are on-chain. So at any block, you can audit exactly how many DAI there are, exactly which assets exist to back it, and exactly what the last reported oracle prices are for those assets.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#16

Post by rwmj »

slashdev wrote: post #7

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into…

I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#17

Post by pantalaimon »

rwmj wrote: post #16
slashdev wrote: post #7

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into…

I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.

is that really how it works?

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#18

Post by sn_master »

rwmj wrote: post #16
slashdev wrote: post #7

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into…

I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.

Not sure about this case, but owning all trading shares doesn't mean owning the company. A company may have only 2% of its value as public shares and the rest owned by the company itself.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#19

Post by ryebit »

ryebit wrote: post #15
beefield wrote: post #13

Earlier quoted context omitted.

1. Fractional reserve banking is by definition decentralized. 2. Cough, Tether audits, cough.

Not OP, but USDT / Tether is an example of something which exists as a proxy for something off-chain; so auditing the chain is obviously not going to work to see how much USD they actually have. Though it is possible to provably audit exactly how many USDT are in circulation at any point. I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly t…

Just to expound on that point here.

While Tether's bank accounts being private is a problem for auditing, even if that were removed, you'd still have to somehow "snapshot" all the bank accounts an transactions, freezing things in time so you could ensure there wasn't a shell game going on while you audited.

This just isn't feasible with a federated system where each bank has their own ledger, and asynchronously tries to align it with a bunch of other ledgers.

Blockchains overall reduce throughput compared to this model, because they enforce a single ledger. But they do this while still preserving decentralized control, resulting in a tradeoff where you lose some scalability, but also remove need for a trusted mediator(s), and now anyone can audit a snapshot of the state at their leisure.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#20

Post by anonymouse008 »

crb002 wrote: post #5
harikb wrote: post #3

Very interesting indeed.. > The stock borrow programme at the DTCC, they allege, enables the naked shorting of shares to the extent that the number of shares in circulation of some companies is now several times in excess of that issued. Even companies listed on the NYSE, could have been affected. As Wes Christian, partner in law firm Christian, Smith & Jewell in Houston, and lead lawyer on several of the cases, expl…

When I was in PFG Marketer Services I saw million dollar double payout fuckups all the time and a shady SQL Server database for "manual over-rides" on commissions to brokers that seemed like an un-audited slush fund.

Now dark about dark pools and see how far up we really are
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