Sublimierte Marktmanipulation - Programtrading

Play Here 0:02:25 ... sure that the SEC has control over the DT CC. Almost all stock is now kept at the company's central depository and never leaves there. Instead the stock -- brokerage account is electronically credited with the securities entitlement. These in this electronic credit can in turn be sold to someone else. Replacing paper with electrons is allowed stock trading volume to rise to billions of shares daily. The cost of buying or selling stock has fallen to less than three and a half cents a share. A tenth of the previous -- the paper here cost. But to keep trading moving at this pace. The system can provide cover for naked shorting. Critics art argue if the stock in a given transaction isn't delivered in the three day period the buyer who paid his money. Is routinely given electronic credit for the stock . While the SEC calls for delivery in three days the agency has no mechanism to enforce that guidelines. And this mr. president is where. The practice of naked short selling comes in. I didn't really understand it and tell I had some investment bankers not the kind you find on Wall Street. But the more modest kind you find in Salt Lake City. Sit me down in front of a screen and show me what happens with stock trading and put it in the simplest possible terms. Someone who wants to sell short that is sell stocks he does not home. ...
Play Here 0:04:22 ... to prison. You said you've got to understand that if you sell stock chart. That time is going to come when you're gonna have to -- back to cover that sailed by delivering shares . In the days at the Wall Street Journal talked about that men buying a prickly piece of paper. The stock certificate and delivering it so that you have covered your shirt sales. Today that's not the case because all of the stock certificates are gone. In the critically pieces of paper have been replaced by electronic impulses in the computers. So this is what happens. -- short seller enters the market. And says I want to short I want to sell. A thousand shares of XYZ stock . That means at some point he has to produce a thousand shares to cover his sale. How do you do that you borrow the shares . And then you buy them back at some future time. All right slum home -- borrow them. ...
Play Here 0:05:25 ... The DT CC. They have all of the shares on deposit is so you go to the DT CC. And you say I want to borrow a thousand shares of XYZ stock and they say fine we have them on deposit we will lend them to you. So that you can use them for your short set. All right everything's fine. Except that in this electronic age it is possible for you to keep shuffling around. The electronic impulses that represent the stock and never ever have to buy it back. Stop and think about that mr. president that's a pretty good business plan. You can sell as much as you want and never ever have to pay for. You could go in the stock is trading at five dollars a share you go in and sell a thousand shares . You get paid 5000 dollars for selling a thousand shares you never have to by the because you're constantly moving around the electronic impulses the represent those shares you never have to cover. Now when you talk to the DT CC people. They say no we always make sure. That ...
Play Here 0:07:48 ... Charts -- thousand shares . ...
Play Here 0:07:53 ... 13 days which is the period he has to produce the shares . He's been unable to find any probably hasn't even looked. But he has this -- requirement under the SEC rule to produce a thousand shares so he goes to broker beat. And says quietly sell me a thousand -- broker -- I don't have any brokerage has doesn't matter. This sell me a thousand shares so I can cover. Broker B says all right I'll sell you a thousand shared so you can cover an old they're being -- and there'll be no. Passage of money this is just a deal between the two of us -- rollover the end of 13 days broker being asked to deliver a thousand -- So broker -- sells the same. Thousands phantom shares back to broker me and they didn't pong knees back and forth for as long as they want. So you can have a situation where people are selling shares that don't exist taking commissions on the sales. And the profits of the sale and never ever having to produce the shares . ...
Play Here 0:10:31 ... be. Borrowing that that the brokers cannot borrow for short sales. More stock than is on deposit with the DT CC. I think that's just obvious if there. Three million shares of XYZ company on deposit at the DT CC. People should not be able to short sell four million shares . I've seen the situation where people with these small companies in all of this happens primarily a little companies. He was small companies in an effort to defend their stock against the short sales that are rolling allred are buying stock . And is electronically credited to them and end up. On paper or at least on computer owning more shared that exist. How can that be. Is somebody buys the stock for his company. And ends up owning a 110% of the issued stock and people are still selling that stock . You know you're dealing with phantom shares so my first recommendation would be that the BT CC cannot make available as loans for short sellers. More stock than they have on the plaza. Once they have reached the point that a 100% of the shares they have on deposit have been loaned out. They can't blown out anymore I think that's just an obvious commonsense recommendation but it doesn't apply now. Secondly I think there ought to be rule that says that a broker cannot be paid a commission on a charge sale. Until the shares are delivered. Back to the business model a broker. Sells 5000 dollars worth of stock he can do it every day you get 5000 dollars every day. Without ever having to cover the stock and he gets a commission on making the sale. So if you say no there'll be no commissions paid and tell the stock is delivered. You will have a significant impact on stopping this activity. Now people who hear the comment the complaints about -- church selling say. It only represents a tiny percentage of the trillions of dollars worth of trading activity that goes on an American markets every day they're right. It is only a tiny percentage. But that's small comfort to those who have gotten a few dollars together formed a business. Gone to the market to try to raise some capital to support the business. On the marketplace say 25% of their shares holding the other 75% for themselves. And then getting some support in the market so that the shares and job. From 25 cents to 50 cents to a dollar to a dollar recorder and then suddenly see. The short sellers come in and say okay we will drive that stock back down from a dollar and a quarter to two and a half sense. And we will do it by selling stock that doesn't exist. And in the process we will ruin the company the one thing that convinced me that this was real. ...
Play Here 0:13:52 ... sat me down in front of the screen and showed me this stock trading of -- company. That has been out of business for three years. And the stock trades regularly every 13 days. You know exactly what they're doing. The brokers are rolling the stock back and forth every 13 days so they're meeting the SEC requirements that they're delivering. But the shares they are delivering to each other back and forth do not exist. The company. Was driven out of business. By the short ...
Play Here 0:15:08 ... from the DT CC to let us hear from Mosul in the marketplace who have actual experience with this. And see if the present SEC rules are sufficient. Or if we need to do additional ...
Play Here 0:00:01 Thank you mr. president after all of the fireworks then. Contention of some previous issues this week I rise to -- you speak about something that has very little interest to most Americans. But tremendous interest I believe to a certain portion of our economy. And I want to use this opportunity to Carleton detention the Senate. I'm talking about me practice that occurs in the stock market. That has the very interesting name I was naked short selling. That conjures up all kinds of interesting images in many people's minds. But this is what ideas. It's a practice where somebody sells short a particular stock . And it never ever has to cover the sale now could it. Even that may be too much stock market type jargon. For people who understand what I'm talking about so let me quote from an article that appeared in the Wall Street Journal with a few weeks ago and I would ask unanimous consent that'd be included and the end of my remark action so ordered. Quoting from the article. It's as the naked short selling debate is a product of the revolution that has occurred in stock trading over the past 40 years -- the 1960s trading involved hundreds of messengers crisscrossing lower Manhattan with bags of stock certificates and checks. As trading volume hit 15 million shares daily. The New York stock exchange had to close for part of each week declared the paperwork backlog. I may say is an insert in the quotation I remember those days. I was trading in the -- stock market at the time. And having the market shut down to clear the back office paperwork was not an unusual experience going back to the article. And -- that led to the creation of DT ECC. As our initials for the depository trust and clearing corporation. Which is regulated by the SEC. My mind as an aside I don't think that last statement is true I'm not sure that the SEC has control over the DT CC. Almost all stock is now kept at the company's central depository and never leaves there. Instead the stock -- brokerage account is electronically credited with the securities entitlement. These in this electronic credit can in turn be sold to someone else. Replacing paper with electrons is allowed stock trading volume to rise to billions of shares daily. The cost of buying or selling stock has fallen to less than three and a half cents a share. A tenth of the previous -- the paper here cost. But to keep trading moving at this pace. The system can provide cover for naked shorting. Critics art argue if the stock in a given transaction isn't delivered in the three day period the buyer who paid his money. Is routinely given electronic credit for the stock . While the SEC calls for delivery in three days the agency has no mechanism to enforce that guidelines. And this mr. president is where. The practice of naked short selling comes in. I didn't really understand it and tell I had some investment bankers not the kind you find on Wall Street. But the more modest kind you find in Salt Lake City. Sit me down in front of a screen and show me what happens with stock trading and put it in the simplest possible terms. Someone who wants to sell short that is sell stocks he does not home. We'll place -- sale order. Now when I first sold short. As the participant in the market. My broker gave me this crude level palm to remember he said he who sells what isn't isn't. Must buyback or go to prison. You said you've got to understand that if you sell stock chart. That time is going to come when you're gonna have to -- back to cover that sailed by delivering shares . In the days at the Wall Street Journal talked about that men buying a prickly piece of paper. The stock certificate and delivering it so that you have covered your shirt sales. Today that's not the case because all of the stock certificates are gone. In the critically pieces of paper have been replaced by electronic impulses in the computers. So this is what happens. -- short seller enters the market. And says I want to short I want to sell. A thousand shares of XYZ stock . That means at some point he has to produce a thousand shares to cover his sale. How do you do that you borrow the shares . And then you buy them back at some future time. All right slum home -- borrow them.
Play Here 0:05:25 The DT CC. They have all of the shares on deposit is so you go to the DT CC. And you say I want to borrow a thousand shares of XYZ stock and they say fine we have them on deposit we will lend them to you. So that you can use them for your short set. All right everything's fine. Except that in this electronic age it is possible for you to keep shuffling around. The electronic impulses that represent the stock and never ever have to buy it back. Stop and think about that mr. president that's a pretty good business plan. You can sell as much as you want and never ever have to pay for. You could go in the stock is trading at five dollars a share you go in and sell a thousand shares . You get paid 5000 dollars for selling a thousand shares you never have to by the because you're constantly moving around the electronic impulses the represent those shares you never have to cover. Now when you talk to the DT CC people. They say no we always make sure. That there is a deliberate and if there is not it's not our fault. It's not our responsibility to police this it's up to the brokerage houses to do this. The SEC has spent enough time looking at business. And enough time talking to me that they. Issued to me a three page letter outlining the steps that they have taken to stop the practice of naked short selling. And I ask unanimous consent that their letter be included in the record at the conclude that objection so ordered. I think the SEC letter goes along way the SEC actions go along way without getting too technical about it. They have taken a number of steps to prevent what are called fails to deliver. And therefore to try to stop the naked short selling situation. But I have discovered something that appears to be a way around BF the SEC rules. Here's the transaction broker pay.
Play Here 0:07:48 Charts -- thousand shares .
Play Here 0:07:52 At the end -- 13 days which is the period he has to produce the shares . He's been unable to find any probably hasn't even looked. But he has this -- requirement under the SEC rule to produce a thousand shares so he goes to broker beat. And says quietly sell me a thousand -- broker -- I don't have any brokerage has doesn't matter. This sell me a thousand shares so I can cover. Broker B says all right I'll sell you a thousand shared so you can cover an old they're being -- and there'll be no. Passage of money this is just a deal between the two of us -- rollover the end of 13 days broker being asked to deliver a thousand -- So broker -- sells the same. Thousands phantom shares back to broker me and they didn't pong knees back and forth for as long as they want. So you can have a situation where people are selling shares that don't exist taking commissions on the sales. And the profits of the sale and never ever having to produce the shares .
Play Here 0:09:04 I think it is serious enough that we ought to have a hearing about this in the banking committee and I've spoken to the chairman of the banking committee senator god. And asked him if it wouldn't be possible for us to have such a hearing at some point in the future and he's expressed their willingness to do that. I can understand we can't set a time for that right now they're too many other things going on in the banking committee. But I'm delighted to know that he's willing to cooperate -- in examining this. I would like to suggest several things. That I would like to discuss at that hearing. First by the way I want the officials of the DT CC to have the opportunity to comment explain how it really works. I have seen -- letter to the editor in the Wall Street Journal where they say this article is an accurate. And I don't want to be relying on this article if it is an accurate and I think gay congressional hearing. Is a good place for those who are running the DT CC to explain to us how it really works. I would like the SEC to come in and give us their background and information as to how their rules are working to try to stop and make it short selling. But I have these two additional recommendations that I would hope we could get done by regulation and if not I'm prepared to introduce legislation to deal with -- first.
Play Here 0:10:27 I think there should be role this as. I cannot be. Borrowing that that the brokers cannot borrow for short sales. More stock than is on deposit with the DT CC. I think that's just obvious if there. Three million shares of XYZ company on deposit at the DT CC. People should not be able to short sell four million shares . I've seen the situation where people with these small companies in all of this happens primarily a little companies. He was small companies in an effort to defend their stock against the short sales that are rolling allred are buying stock . And is electronically credited to them and end up. On paper or at least on computer owning more shared that exist. How can that be. Is somebody buys the stock for his company. And ends up owning a 110% of the issued stock and people are still selling that stock . You know you're dealing with phantom shares so my first recommendation would be that the BT CC cannot make available as loans for short sellers. More stock than they have on the plaza. Once they have reached the point that a 100% of the shares they have on deposit have been loaned out. They can't blown out anymore I think that's just an obvious commonsense recommendation but it doesn't apply now. Secondly I think there ought to be rule that says that a broker cannot be paid a commission on a charge sale. Until the shares are delivered. Back to the business model a broker. Sells 5000 dollars worth of stock he can do it every day you get 5000 dollars every day. Without ever having to cover the stock and he gets a commission on making the sale. So if you say no there'll be no commissions paid and tell the stock is delivered. You will have a significant impact on stopping this activity. Now people who hear the comment the complaints about -- church selling say. It only represents a tiny percentage of the trillions of dollars worth of trading activity that goes on an American markets every day they're right. It is only a tiny percentage. But that's small comfort to those who have gotten a few dollars together formed a business. Gone to the market to try to raise some capital to support the business. On the marketplace say 25% of their shares holding the other 75% for themselves. And then getting some support in the market so that the shares and job. From 25 cents to 50 cents to a dollar to a dollar recorder and then suddenly see. The short sellers come in and say okay we will drive that stock back down from a dollar and a quarter to two and a half sense. And we will do it by selling stock that doesn't exist. And in the process we will ruin the company the one thing that convinced me that this was real.
Play Here 0:13:51 Was when the investment banker sat me down in front of the screen and showed me this stock trading of -- company. That has been out of business for three years. And the stock trades regularly every 13 days. You know exactly what they're doing. The brokers are rolling the stock back and forth every 13 days so they're meeting the SEC requirements that they're delivering. But the shares they are delivering to each other back and forth do not exist. The company. Was driven out of business. By the short sellers who made it impossible for them to go to the capital markets as I said in my opening mister president this is a tiny matter. Does not end evolve very many people but for the people. To the people who are involved it frankly can be a matter of life and death. And there are enough of them starting businesses and creating entrepreneurial activity in the United States. That we owe it to them. To find out exactly what is going on with respect to this -- who have asked chairman thought to consider hearing on this matter. To let us hear from the SEC to let us hear from the DT CC to let us hear from Mosul in the marketplace who have actual experience with this. And see if the present SEC rules are sufficient. Or if we need to do additional things along the lines of the two items that I have suggested.

          §search.everyzing.com/...&dedupe=1&y=0&channel=41&x=0&e=7909995

Naked Short Selling Senate Floor Speech / Senator Bennet   -   20.Juli 2007

Bush swore to do "everything in [his] power" to undo the damage wrought by Clinton's two terms in office, including selling off the national parks to developers, going into massive debt to develop expensive and impractical weapons technologies, and passing sweeping budget cuts that drive the mentally ill out of hospitals and onto the street.

During the 40-minute speech, Bush also promised to bring an end to the severe war drought that plagued the nation under Clinton, assuring citizens that the U.S. will engage in at least one Gulf War-level armed conflict in the next four years.

"You better believe we're going to mix it up with somebody at some point during my administration," said Bush, who plans a 250 percent boost in military spending. "Unlike my predecessor, I am fully committed to putting soldiers in battle situations. Otherwise, what is the point of even having a military?"

On the economic side, Bush vowed to bring back economic stagnation by implementing substantial tax cuts, which would lead to a recession, which would necessitate a tax hike, which would lead to a drop in consumer spending, which would lead to layoffs, which would deepen the recession even further.

Wall Street responded strongly to the Bush speech, with the Dow Jones industrial fluctuating wildly before closing at an 18-month low. The NASDAQ composite index, rattled by a gloomy outlook for tech stocks in 2001, also fell sharply, losing 4.4 percent of its total value between 3 p.m. and the closing bell.

Asked for comment about the cooling technology sector, Bush said: "That's hardly my area of expertise."

Turning to the subject of the environment, Bush said he will do whatever it takes to undo the tremendous damage not done by the Clinton Administration to the Arctic National Wildlife Refuge. He assured citizens that he will follow through on his campaign promise to open the 1.5 million acre refuge's coastal plain to oil drilling. As a sign of his commitment to bringing about a change in the environment, he pointed to his choice of Gale Norton for Secretary of the Interior. Norton, Bush noted, has "extensive experience" fighting environmental causes, working as a lobbyist for lead-paint manufacturers and as an attorney for loggers and miners, in addition to suing the EPA to overturn clean-air standards.

Bush had equally high praise for Attorney General nominee John Ashcroft, whom he praised as "a tireless champion in the battle to protect a woman's right to give birth."

"Soon, with John Ashcroft's help, we will move out of the Dark Ages and into a more enlightened time when a woman will be free to think long and hard before trying to fight her way past throngs of protesters blocking her entrance to an abortion clinic," Bush said. "We as a nation can look forward to lots and lots of babies."

nation nightmare jump

Soldiers at Ft. Bragg march lockstep in preparation for America's return to aggression.

Continued Bush: "John Ashcroft will be invaluable in healing the terrible wedge President Clinton drove between church and state."

The speech was met with overwhelming approval from Republican leaders.

"Finally, the horrific misrule of the Democrats has been brought to a close," House Majority Leader Dennis Hastert (R-IL) told reporters. "Under Bush, we can all look forward to military aggression, deregulation of dangerous, greedy industries, and the defunding of vital domestic social-service programs upon which millions depend. Mercifully, we can now say goodbye to the awful nightmare that was Clinton's America."

"For years, I tirelessly preached the message that Clinton must be stopped," conservative talk-radio host Rush Limbaugh said. "And yet, in 1996, the American public failed to heed my urgent warnings, re-electing Clinton despite the fact that the nation was prosperous and at peace under his regime. But now, thank God, that's all done with. Once again, we will enjoy mounting debt, jingoism, nuclear paranoia, mass deficit, and a massive military build-up."

An overwhelming 49.9 percent of Americans responded enthusiastically to the Bush speech.

"After eight years of relatively sane fiscal policy under the Democrats, we have reached a point where, just a few weeks ago, President Clinton said that the national debt could be paid off by as early as 2012," Rahway, NJ, machinist and father of three Bud Crandall said. "That's not the kind of world I want my children to grow up in."

"You have no idea what it's like to be black and enfranchised," said Marlon Hastings, one of thousands of Miami-Dade County residents whose votes were not counted in the 2000 presidential election. "George W. Bush understands the pain of enfranchisement, and ever since Election Day, he has fought tirelessly to make sure it never happens to my people again."

Bush concluded his speech on a note of healing and redemption.

"We as a people must stand united, banding together to tear this nation in two," Bush said. "Much work lies ahead of us: The gap between the rich and the poor may be wide, be there's much more widening left to do. We must squander our nation's hard-won budget surplus on tax breaks for the wealthiest 15 percent. And, on the foreign front, we must find an enemy and defeat it."

"The insanity is over," Bush said. "After a long, dark night of peace and stability, the sun is finally rising again over America. We look forward to a bright new dawn not seen since the glory days of my dad."

www.theonion.com/content/node/28784?utm_source=onion_rss_daily

           Cox said the 19 stocks were targeted because they are now eligible to
           borrow from the Federal Reserve, something that had previously been
           limited to commercial banks. But he said the SEC aims to extend
           "operational protections" marketwide.
           The SEC also is revisiting price tests for short sales other than the
           so-called "tick test" which it abolished last year, Cox added.
           Ackerman has introduced legislation to reinstate the uptick rule, which
           allowed short sales only when stock prices are ticking higher, saying it
           seemed to work very well when it was in place.
           Cox said a thorough study of stocks in the Russell 3000 index found the
           tick test was ineffective in markets that use decimal pricing, reducing
           price changes to pennies. He said the SEC is looking at alternative
           price tests, based on five or 10-cent price moves.
           Short sellers sell borrowed shares which they hope to replace later at
           lower prices, profiting from stock price declines. The practice is
           legal, but has long been controversial. The SEC has put restrictions in
           place in recent years to curb abusive "naked" short sales, in which
           stocks are not borrowed before short sales. That effort was extended
           with the emergency order, which calls for borrowing or arranging to
           borrow shares in advance of short sales in the 19 targeted stocks.

Like a plague of locusts, short-selling hedge funds can even prey on healthy expanses of companies and countries and add to their woes virtually overnight because of their massive evil size, because (thanks to Internet Technology) of their ability to strike instantaneously, and of their capacity for parachuting in and out of negative investments with lightening speed.

Informed, savvy (and in some cases scared) Asians have been onto the vile Western hedge-fund, short-selling game for more than a decade. The smart brains -- in Indonesia, Thailand and Hong Kong, especially -- even today attribute the near-death experience of the Asian Financial Crisis (1997-99) in some measure to Western hedge funds that made bad economic and financial situations in Asia worse by betting that they would in fact get worse... which they then did, in part because of all the negative bets by the West.

They think that hedge funds can create a self-fulfilling prophecy by encouraging panic and pessimism, and then rake in the fruits of their misery.

Donald Tsang, now the cerebral leader of Hong Kong, explained the reality to me a decade ago that short-betting hedge funds were not only a danger to a troubled economy but even to those that were otherwise sound and healthy. Acting mostly alone but also, at times, together, many Asian countries have since have worked to fertilize their economies, develop early-warning signs, and selectively stick poison-pills in their economic soil to make life much riskier for the hedge ("trouble is my game") fund.

Now, increasingly, the biggest and most grandiose economy in the world is starting to look and sound more Asian than American on the hedge-fund, short-selling issue.  For none other than the magisterial U.S. Security and Exchange Commission has put into place, just this week, new rules to make the short-selling of certain bank and financial stocks more difficult.

These moves are to be applauded. Their central aim is to slow down the fiendish rapidity of rapacious short-selling that puts money into the pockets of amoral speculation while adding to the general economic turmoil of the American economy. But the SEC actions, while historic, are limited to targeting only the illegal side of short-selling.
This dark side of the moon is a bit complicated to simplify, but is perhaps best explained as playing around with shares in stocks that you actually don't possess. The great academic John Coffee, security-laws professor at Columbia Law School, has famously dubbed such shady transactions as "naked" short-selling. The practice, which is strictly speaking illegal, can amount to stock and currency manipulation on a titanic scale. But until the action of the SEC this past week,  "naked shorting" was nothing less than the most ongoing, least-regulated financial orgy taking place in the darkest recesses of the financial world.
The new controversy in America pits the U.S. banking industry -- now feeling a bit of what it is like to be an Asian economy about 10 years ago -- against serious sluggers in the U.S. investment community. The theoretical economic argument against the new SEC rules amounts to the now-familiar religious reaffirmation of "the magic of the marketplace." But the marketplace loses a lot of magic when greed operates in the dark for private gain at public expense.

Stable economies are a necessary condition towards peace and prosperity. Hedge-fund short-selling, operating at a level as esoteric to be, at times, undetectable until it is too late, is the great economic Satan of our time. It may have taken Americans ten years to figure out what Asians already knew, but the consensus is growing: hedge-funds can bring misery. They can be big trouble.

The views expressed above are those of the author and are not necessarily those of AsiaMedia or the UCLA Asia Institute.

Date Posted: 7/24/2008
www.asiamedia.ucla.edu/columns.asp?parentid=95124

online.wsj.com/article/...865187779279.html?mod=googlenews_wsj

What the SEC Really Did on Short Selling
By CHRISTOPHER COX
July 24, 2008; Page A15

The Federal Reserve's decisions to offer credit to its 18 primary dealers -- and to extend these credit facilities to Fannie Mae and Freddie Mac, complementing the recent Treasury proposal for authority to back their debt and buy their equity -- are highly unusual. Because they break with the norm that markets should decide which firms fail and which succeed, both the Fed and Treasury proposals are intentionally limited in duration. But if policy makers want to return these firms to the discipline of the market, the lessons of the recent turmoil will have to be quickly taken to heart.

Already, heeding one important lesson, both the Securities and Exchange Commission and the Fed have strengthened liquidity and capital tests for the firms we regulate. Another central lesson is that financial institutions, which depend on confidence, are uniquely vulnerable to panic fueled by suspect information and market manipulation.

A run on a bank can take hold quickly, and can be fatal. In the wake of IndyMac's demise and Bear Stearns's desperate sale to JPMorgan Chase, even far-better capitalized financial firms may be threatened. What's needed now, therefore, is reliable information for investors, and confidence that trading can be conducted without the illegal influence of manipulation that can fuel stampedes.

When an irrational panic is fueled by false rumors that investors believe must be acted on immediately -- lest everyone else get out first -- market integrity is threatened. In such circumstances, it is the job of market cops to provide a measure of confidence that information about public companies is accurate -- and when it is not, to punish those responsible.

Who profits from intentionally false information in the marketplace? Those who are in on the scam and positioned to benefit from the predictable response of people who believe the fraudulent information to be true.

The classic "pump and dump" scheme, in which a stock is inflated through false information and then dumped on unsuspecting investors when the perpetrators flee, is one example of how this works. "Distort and short" is the same thing in reverse.

"Naked" short selling can turbocharge these "distort and short" schemes. In an ordinary short sale, one borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.

Last week, in close consultation with the Treasury and the Fed, the SEC issued an order to further the objective of existing commission rules that restrict naked short selling. It applies to precisely those financial firms that the Fed has designated as eligible for access to its liquidity facilities -- and for which the taxpayer could be on the hook.

The order carefully protects legitimate short selling in these securities. Our agency's rules have long been supportive of short selling, which can help quickly transmit price signals in response to negative information or prospects for a company. Short selling helps prevent "irrational exuberance" and bubbles. Continued legitimate short selling in the securities of these financial firms will act, as it is supposed to, as a way for market participants to invest in the downside and to hedge other positions.

Illegitimate naked short selling is different. In the context of a potential "distort and short" campaign aimed at an otherwise sound financial institution, this kind of manipulative activity can have drastic consequences.

Eliminating the prospect of naked short selling will help assure investors that it is safe for them to participate, and that when the market declines it is not because of unseen manipulators and "distort and short" artists.

The emergency order is not a response to unbridled naked short selling -- which so far has not occurred. Rather it is intended as a preventative step to help restore market confidence at a time when that is sorely needed.

When the SEC announced this order, I also made clear my intention to ask the full commission to apply operational protections against abusive naked shorting to the broader market. The scope of last week's action is based on the Fed's designation of those financial institutions to which our government and the taxpayers will now temporarily provide liquidity, but its rationale extends to all public companies.

Although the Commission's order was issued under emergency authority in unusual market conditions, it is based on several years of experience and analysis. In 2004, the SEC adopted Regulation SHO to attack the problem of naked shorting. It requires broker-dealers, before they accept short sale orders or effectuate short sales in their own accounts, to first borrow the security to be shorted, or enter into a contract to borrow it.

But Regulation SHO also offers an alternative to these requirements if the broker has "reasonable grounds" to believe that the security can be borrowed. This could create opportunities for evasion of the rule's purpose.

That has led the commission to consider simply eliminating the "reasonable grounds" alternative altogether. This is essentially what the SEC did for the financial firms for which the American taxpayer is now on the line. It is also what the commission is even now considering for the broader market.

We are also exploring other remedies to "distort and short" and naked short-selling abuses, such as the reporting of substantial short positions (akin to the long-standing requirement to disclose significant long positions). All of this comes on the heels of the agency's recent elimination of other exceptions to Regulation SHO, and our March proposal of a new antifraud rule targeting naked short selling.

The SEC is committed to maintaining orderly securities markets. It neither can nor should direct the market's fluctuations, up or down. Instead, the commission's most basic role is to ensure a continued flow of liquidity to the markets from participants who are confident the game isn't rigged against them.

Abusive naked short selling is far different from ordinary short selling, which is a healthy and necessary part of a free market. Manipulative naked short selling is one worry investors shouldn't have.

Mr. Cox is chairman of the Securities and Exchange Commission.

online.wsj.com/public/article/...ial_page_campaign2008_leftbox

SEC Intensifies Efforts
To Rein In Short Selling
Wall Street Readies
For Longer Limits;
Are Curbs Working?
By JENNY STRASBURG, KARA SCANNELL and RANDALL SMITH
July 28, 2008

Wall Street executives expect the Securities and Exchange Commission to extend the temporary limits it has placed on short-selling and expand them to cover additional stocks beyond the 19 financial companies it targeted two weeks ago.
[Christopher Cox]

The limits are set to expire Tuesday, and executives, lobbyists and hedge-fund representatives of the Managed Funds Association, the biggest hedge-fund industry group, have been talking throughout the weekend, trying to come up with possible approaches to asking the SEC to reconsider expanding the rules, according to people familiar with the talks.

A call with regulators on Friday gave the funds group "a fair degree of certainty" that the SEC intends to seek an extension of the emergency period, these people said. Regulators said an extension could be for as short as 60 days and could involve insurance, housing-industry and a broader range of financial stocks, according to these people. SEC Chairman Christopher Cox indicated last week the rules might be extended to all stocks.

In a short sale, a trader sells borrowed stock in a bet the price will decline and the stock can be profitably repurchased at a lower price. The new rules require specific arrangements to borrow shares in short sales rather than the existing rules, which allow a looser assurance the shares can be located.

The rules appear to have had their intended effect of halting the slide in shares of financial companies such as Fannie Mae, Freddie Mac and Lehman Brothers Holdings Inc. Combined with falling oil prices and encouraging earnings reports from some banks, shares in some of these names have doubled.

Some hedge-fund officials until Friday said privately they considered an extension of the short-selling curbs unlikely. However, calls with regulators on Friday afternoon left a different impression, giving the matter added urgency going into the weekend, they added.

By 11:59 p.m. EDT Tuesday, the SEC will need to decide whether to extend its emergency order or let it expire. The SEC said it could extend the order for 30 days. But the law allowing the order limits such action to 10 business days.

It's not clear the SEC commissioners will agree that an extension is warranted. Paul Atkins, a Republican commissioner, has asked the agency's economists to determine whether the order had an effect on the targeted stocks, a person familiar with the matter says. If it hasn't, Mr. Atkins might argue against an extension, this person said.

Two groups of investors appear to be most vulnerable to an extension and broadening of the rules, smaller firms where the added costs and capital requirements would be onerous and fast-trading funds that use computer programs to make thousands of trades a day.

So far, major Wall Street firms have been complying with the order manually, making phone calls to line up so-called pre-borrow arrangements for the 19 stocks. Expanding the rule to all stocks "would require an extensive delay" so the process could be automated, one brokerage executive said.

Executives at the big Wall Street firms that handle trading for hedge funds and others have also been involved in discussions about how to adapt their computer systems to handle the rules.

The expansion could require increased capital to finance the borrowed shares during the three days before trades settle, as well as make short selling more cumbersome and labor-intensive. It is expected that the industry will push back forcefully on any attempt to expand rules.

The SEC is also working to make short-selling rules permanent. The SEC staff is expected to narrow down the options and recommend them to the four SEC commissioners, which could happen as soon as Monday. The rules wouldn't be finalized until later this year.