The Mother of All Short-Squeezes, part 2

Well, we skipped reading the Wall Street Journal, and we’re immediately punished for that. As a poster (thanks Ken!) on the Yahoo IOC message board found out, the gathering storm against naked shorting we were sensing is indeed that, gathering… 

Here is the story:

  • Last update: 2:53 p.m. EDT July 24, 2008 WASHINGTON (MarketWatch) – The staff of the Securities and Exchange Commission is mulling whether to put forward a new rule that would require public disclosure of large short positions, SEC Chairman Christopher Cox said Thursday.
  • Cox made the disclosure in an op-ed in the Wall Street Journal Thursday. He explained it in more detail to reporters following his testimony on financial market regulatory reform before the House Financial Services panel.
  • Cox said the new rule would be “analogous” to the reports that the agency now requires for shareholders that buy more than a 5% stake in a public company’s common stock.
  • He said the measure was being considered to aid the enforcement efforts of the agency. He said it was premature to discuss the “specific contours” of the proposal, which is under study by the staff.
  • Last week, the SEC moved to limit so-called naked short sales of Fannie Mae and Freddie Mac and primary dealers of government debt. The emergency rule can be extended for 30 days.
  • Cox said the agency would most likely begin considering rule-making on the issue around this deadline, which puts action in mid-August.
  • In a typical short sale, traders sell borrowed shares, hoping to buy them back at a lower price and return them to the lender. The difference is kept as profit. In naked shorting, a trader shorts a stock without first making necessary arrangements to borrow shares.
  • Imposing a “pre-borrow” requirement on short sales of some shares will force traders to make sure they have located securities before putting on negative bets. That may limit the pressure on the stocks included in the emergency order.

We are wondering which hedgefunds will be coming forward if the rule is enacted. With the successful DST’s already behind us, they will be in an awkward place, either being named and shamed, or having to cover. They’re under pressure from authorities and the market alike. Something will have to give..

We, for obvious reasons, prefer the extension of the pre-borrowing requirement to all stocks (not just those 19 ‘chosen ones’ in the financials), but everything helps.