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The Mother of all Short-Squeezes

July 27th, 2008 · 1 Comment

We reported on it before already, but the new temporary rules from the SEC governing 19 financials have, well, had quite an impact. And that is probably the understatement of the year.. 

We’re very happy but also a little bit disappointed. We have argued before that InterOil, with it’s enormous short count, would provide the necessary fuel to fire the ‘Mother of all Short-Sqeezes’. But an even bigger one has already happened.

Just a week ago, the SEC introduced a new temporary rule forcing short-sellers in 19 financials to first borrow the shares they want to short from somewhere. The effects have been nothing sort of dramatic.

Here from a recent Reuters article:

  • Short sales, or bets a stock will fall, are now down 98 percent in shares of mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) and have fallen 85 percent for all 19 financial companies, S3 Matching Technologies said, citing data from its clients.S3’s clients are primarily individual investors.
  • “There has been no additional shorting from the flow that we have access to at all. It’s dried up significantly, even from Monday,” said John Standerfer, S3’s vice president of financial services.
  • “Retail traders were shorting Fannie and Freddie a lot and now it has become virtually impossible as there are no shares available to borrow against the shorts,” Standerfer said.
  • “Retail brokers are very concerned about complying with the SEC rule. As an intraday retail trader you used to be able to short during the day and cover near the end of the day with abandonment.”
  • While the SEC said last week that its rule was not intended to stop legitimate short selling, which can prevent stocks from becoming overvalued, S3’s data showed that its clients are dramatically changing their strategies.

However, before we cry victory just a little bit too soon, realize also this:

  • Data on short sales by hedge funds, which have been active in this type of trading, is closely guarded by the firms.
  • Short sellers at hedge funds said this week that while the rule was making it slightly more expensive to short, as there was more demand to borrow shares, this did not provide a significant disincentive.

But while we don’t have hard data how the hedgefunds have been affected, even they cannot short nakedly under the new rule (at least for those 19 financials). We have said many times before, we have nothing against shorting as such, but naked shorting, that’s just pure market manipulation.

Now, there are a few interesting things to ponder on in relation with our featured company, InterOil:

  • By the latest count, InterOil had almost 10.5M shares short
  • IOC was on the naked short list for 479 consequtive days, which is proof of substantial naked shorting
  • The SEC is considering extending the rule
  • At a minimum, those who have nakedly shorted (that is, sold shares short and not having borrowed them first) will be just a little bit more nervous

We will talk to a few people to find out what the situation with InterOil is and will report back to here.

Tags: IOC

1 response so far ↓

  • 1 Some InterOil rumors // Jul 27, 2008 at 9:31 pm

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