Carney Vs. Taibbi

There’s a nice little blog war going on between Matt Taibbi and John Carney over naked short selling, and Carney is mopping the floor with him.
Taibbi posted a video which he claimed show a trader placing a naked short sale. Well, not a short sale exactly but a locate. And this proves that naked shorting is fraudulent because, well, I don’t get that part.
The only point that I see is that the software the trader uses isn’t worth a damn. It claims to have instantly found a bazillion shares of Citi. Taibbi claims it’s Penson though that’s not the case.
Carney writes:

Importantly, this trade would have to be put through some broker who would have the responsibility to check whether the shares could reasonably be located in the amount requested. The speed with which this transaction takes place implies that it is a fully automated system that processes trades that would then have to be passed on to an actual back-office at a brokerage where much a much slower review would take place. And at the brokerage, putting aside an egregious human error (which is always possible), the trade would have been rejected.

As I see it, this is like posting a video of guys wearing ski masks standing outside a bank and claiming it’s a video of a hold-up. No, I mean it could be a video of a hold-up. Impressed? Me neither.
More from Kid Dynamite:

Daily, traders and brokers will obtain a list of easy to borrow stocks, which get loaded into their trading system. If you go to short GE, it’s on the “easy to borrow list,” and as long as you don’t try to short 10,000,000,000 shares, you won’t have to call your stock loan department to “borrow” shares to short – everyone knows the stock is readily available. Other stocks, however, like Citi (which is almost certainly the stock in Taibbi’s video) can at times be difficult to borrow – like during the summer when they were doing an exchange of preferred stock for common stock, and everyone wanted to be short the common (and long the preferred) to arbitrage the spread between the two share classes.
So, if you try to short Citibank (a few months ago), any good execution system will check its easy to borrow list, see that Citi is not on the list, and ask you where your “locate” is from – in other words, which broker agreed to lend you the stock. There are also many electronic systems where you can request a stock locate electronically – but this is not what’s in Taibbi’s video! What the video clearly shows is that the stock in question (let’s call it C) is on the hard to borrow list. The trader gets a warning message saying that the stock needs to be borrowed, and asking for the trader to either submit the borrow information or elect not to submit the trade.
The trader in the video is NOT submitting a request for the stock to be borrowed – he’s entering information into an audit trail point asking WHO the stock was borrowed from, HOW MUCH was borrowed, and WHEN it was borrowed – exactly to prevent problems related to naked short selling! This way, if the seller fails to deliver shares, the broker can easily pull the exact reference that was used for the short sale. Of course, just because I say that I was able to obtain a locate for a gajillion shares of C doesn’t mean that I actually was able to – and that’s why especially hard to borrow stocks should have another level of compliance checking embedded in them. If this trading system in the video allowed a trader to claim a locate that was clearly impossible, then that’s a condemnation of the inadequacy of this trading system – not of the borrow market and the legitimacy of short selling. Fortunately, there was no naked short sale of tens of billions of shares of C on this trade, and Taibbi’s post is a gigantic misunderstanding of what was actually going on.

Posted by on October 6th, 2009 at 10:43 am


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