Sublimierte Marktmanipulation - Programtrading

Today, the big and powerful have programmed computers protecting and furthering their interests. Computers protect their owner/operators interests in times of panic buying and panic selling—especially panic selling—and further their programmed-trading manipulation interests at all other times. It's a "little one-sided," this advantage, but then a whole lot of the inner-workings of our markets are definitely one-sided against the average small investor.

Think about that for a moment.

Then use your imagination! Pretend it's 1929, but 1929 with computers!  The bottom has dropped out of plunging stocks just seconds ago. What to do? Face it, by the time you can decide and type anything, the drop is already far worse that you could have imagined. So you sit catatonic thinking you missed the drop and would now be selling at the bottom. Your common sense—such of it as remains in such a moment—is telling you that selling at bottoms is generally thought to be quite stupid, you see. But then, we never know exactly where is that bottom, do we? Especially in a panic situation. So what to do? But you get the picture.

Meanwhile back at the computer ranch on wallstreet, the pre-programmed computers had instructions to sell everything (and exacerbate the crash) the second a given stock has dropped 5% in less than 30 seconds (or whatever % and number of seconds or minutes makes sense). And it did! Sure the computers missed the first part of the decline, but if a trade can be made on the floor at any time during the computer-fed plunge, those sellers are going to get super rich off their new naked short positions!

You can't sell short by any method in this situation--so there's no need even to try! It takes time to borrow and time to type and the sands of time just ran out for you. Only naked short sellers can sell short in real time!

NOW! Re-insert the Up-tick Rule into this scenario and you have denied wallstreet insiders their biggest profits in a lifetime! And it all would have been generated for them by their machines. Yes, there are cumbersome ways to perhaps force an uptick during a panic decline so as to enable your masters to get short higher! But that is problematic and would not work near as well as the ability to simply grab the next lower trade-point after the trigger has been pulled and the drop has begun.

Do you see what this means? Any crash is pre-programmed to be a disastrous crash, and the SEC sits on a market with no uptick feature at all! None! Nada! Zip! Zilch! Worse, the silly basta#ds seem not even to be aware of the precarious position in which they have put our markets--all of them!

Think about that for five minutes!

Motley Fool, published an article on March 24, 2008, titled "The Naked Truth on Illegal Shorting," in which 100% of a company's shares were purchased by one individual, and were not available for shorting. Nevertheless, 60 million phantom shares were traded, according to owner. Subsequently, he filed a SEC 13-D compliant form.

Dick Fuld, CEO of Lehman Brothers (LEH), told market regulators that he has information that short-selling hedge funds colluded to bring down Bear Sterns (BSC). If Fulds's "information" is of evidentiary value, these hedge fund managers, and their cast of cohorts, could find themselves behind bars.

If the SEC diligently investigates the facts, we could see RICO indictments against illegal short sellers as early as Labor Day. Anyone charged under the RICO statue, even if they are found "not guilty," will become permanently damaged.

After observing the demise of Fannie Mae (FNM), and Freddie Mac (FRE) last week, it is expedient that the SEC move quickly to abolish the practice of naked short selling for all stocks. Short selling should only be allowed after the short seller has successfully borrowed the shares. The practice of selling shares that cannot be borrowed is a crime!

RICO, Racketeering Influenced Corruption Organizations Act, the law Rudy Guiliani used to bring down Michael Milken, and other Wall Street crooks, could be revisited in the SEC's struggle to clean up Wall Street's growing threat to the financial markets.

The SEC's crackdown against illegal naked short selling and rumor-mongering resulted in more than 50 hedge funds being slapped with subpoenas last week, according to the Wall Street Journal. Conspiracy theorist and CEO of Overstock.com (OSTK), Patrick Byrne, has embarked on a crusade to expose the nefarious hedge funds that practice illegal short selling. Byrne's web site, Deep Capture.com, has compiled a plethora of facts documenting, names, dates, times and videos of the players and their schemes.

Mark Mitchell, of DeepCapture.com, believes there exist a "hedge fund-orchestrated campaign to cover-up the crime of naked short selling." Depending on how deep the SEC probes, and what insidious facts they discover, we could see hedge fund managers, traders, and other employees facing scandalous, unprecedented charges under the infamous racketeering law, RICO. There is growing pressure for whistle-blowers to sound off or risk becoming the next scapegoat.

Clusterstock.com, reported, "the SEC is demanding both trading records and email correspondences" from subpoenaed firms. The inclusion of cell phone and text messaging records will undoubtedly be scrutinized. Concurrently, the NYSE Regulation Inc. is also investigating how some of its largest firms comply with false and misleading rumors that could undermine a stock's price. This is going to intensify.

Motley Fool, published an article on March 24, 2008, titled "The Naked Truth on Illegal Shorting," in which 100% of a company's shares were purchased by one individual, and were not available for shorting. Nevertheless, 60 million phantom shares were traded, according to owner. Subsequently, he filed a SEC 13-D compliant form.

Dick Fuld, CEO of Lehman Brothers (LEH), told market regulators that he has information that short-selling hedge funds colluded to bring down Bear Sterns (BSC). If Fulds's "information" is of evidentiary value, these hedge fund managers, and their cast of cohorts, could find themselves behind bars.

If the SEC diligently investigates the facts, we could see RICO indictments against illegal short sellers as early as Labor Day. Anyone charged under the RICO statue, even if they are found "not guilty," will become permanently damaged.

After observing the demise of Fannie Mae (FNM), and Freddie Mac (FRE) last week, it is expedient that the SEC move quickly to abolish the practice of naked short selling for all stocks. Short selling should only be allowed after the short seller has successfully borrowed the shares. The practice of selling shares that cannot be borrowed is a crime!

seekingalpha.com/article/...-sellers-may-face-rico-indictments

These traders, not economists or securities analysts, can turn the world upside down, make governments tremble, give central bankers colitis and ruin the lives of ordinary men and women saving for their children’s college education or their own retirement. In America today, it is the traders, not the politicians or the generals or the corporate bosses, who have the power.
......
And one thing’s for sure: With the traders running things, it won’t be a good time for amateurs until the traders cry “Switch!” and the market starts to rise.
www.nytimes.com/2008/01/27/business/...ted=2&_r=2&ref=business

Hinzuzufügen wäre vielleicht noch, daß der Schrei "switch!" sicher erst ertönen wird, wenn die aussichtsreichen Werte "genügend" runtergeprügelt worden sind und "die Großen" genügend long-positionen aufgebaut haben.

Also, Ohren spitzen!

Other ideas, however, could be adopted earlier – at the time proposals are issued – including a requirement to disclose substantial short positions or to use a price test or some kind of “circuit breaker” to limit short-selling when, for instance, shares fall by a certain percentage.

“Given the great differences between all of the companies across the market, a one-size-fits-all approach is unlikely,” one SEC official said.

Nevertheless, market participants say traders might not engage in “naked” short-selling in the intervening weeks.

“A message has been sent and I don’t think we’ll see a return to that,” said one, while another said the emergency measure gave the market a necessary breather. Others say traders can short-sell legitimately through numerous other methods, including using derivatives.

However, some market participants are uneasy. “We remain concerned that during this interim time period our members will continue to be exposed to these “distort and short” campaigns,” said Sarah Miller, senior vice-president of the American Bankers Association.

Ms Miller wants the SEC either to extend the emergency order and include all banks or to issue a proposal as soon as possible.

She said the growing volume of “failures-to-deliver” are indicative of abusive short-selling, and that a spike in FTDs is invariably accompanied by significant stock drops, not all of which can be attributable to market or bank-specific conditions. “We suspect that the volume of FTDs has only continued to grow, perhaps dramatically,” she said.

SEC officials, who are also working on amending some existing rules governing short-selling, are still studying the impact of the emergency rule.

Copyright The Financial Times Limited 2008

What's more, South Dakota voters will decide in November whether to approve an initiative that the state's securities director says would ban all short selling. The group sponsoring that action promises to get similar initiatives on ballots in 18 other states if the SEC doesn't put more restrictions on short sales.

The hedge fund industry is fighting restrictions on naked short selling, in which securities are sold short without borrowing the stock first. Abusive naked short selling is being blamed for depressing stock prices in financial services stocks as well as stock prices for other companies.

The practice could have played a role in the demise of The Bear Stearns Cos. Inc. of New York, which was taken over by JPMorgan Chase & Co. of New York in May.

The pressure to take protective action in the wake of these incidents is mounting. SEC emergency orders enacted July 15 require short sellers of stock in 19 major financial services firms to arrange to borrow the securities before the transaction so that buyers will receive the stock they purchase on time. Those orders expire tomorrow and will not be renewed. However, the new SEC rule will address the issue.

Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke and Robert Greifeld, chief executive of The Nasdaq Stock Market Inc. of New York, as well as the Financial Services Roundtable and the U.S. Chamber of Commerce, both of Washington, have all indicated support for the SEC's efforts to impose more restrictions on the practice.

Many financial firms have joined in calling on the SEC to take more-aggressive action to rein in abuses. The emergency order ought to be made permanent, and it should be extended to all publicly traded companies, said registered representative Keith Stucker, who was one of the commenters.

"Naked short selling has been abusing the markets for a decade," said Mr. Stucker, senior vice president and financial consultant in the Indianapolis office of RBC Wealth Management of Minneapolis. He manages about $100 million.

The proliferation of hedge funds during that time has contributed to the problem, Mr. Stucker said.

"When you couple naked short selling with the repeal of the uptick rule a year ago, it was like giving the keys to the henhouse to all of these hedge funds or sovereign wealth funds that wanted to take advantage of manipulation," he said.

The uptick rule, repealed by the SEC in 2007, required traders to wait for a stock's price to go up before it could be sold short.

In a July 21 letter filed with the SEC by the Managed Funds Association and the Coalition of Private Investment Companies, both in Washington, the two hedge fund groups urged the SEC not to extend the emergency order, which they said "will have the effect of discouraging legitimate short sales."

Current rules say short sellers only have to locate stock before they short, according to Peter Chepucavage, general counsel of Plexus Consulting Group LLC in Washington, which operates The International Association of Small Broker Dealers and Advisors. He is a commenter.

"That means you only have to look at a list" to locate a stock, Mr. Chepucavage said. "If the locate fails, you're better off. That leads to opportunistic short selling. If I can make a ton of money without the borrowing costs, that's the American way."

So far, the Securities Industry and Finan cial Markets Association has been silent on the SEC's emergency order, which ends this week. SIFMA, which has offices in New York and Washington, is "first and foremost focused on ... implementation issues," said spokesman Travis Larson.

"We're now in the process of gathering data about how that [July 15 emergency] order went forward ... When we have those facts in hand, we will ... work on ... a consensus position," Mr Larson said.

In 2006, SIFMA sued Utah over a law passed by the state's legislature that would have imposed severe penalties on brokerage firms that failed to deliver stock in a short sale. The Utah Legislature repealed the law after SIFMA won a preliminary injunction against it in a federal court in that state.

But SIFMA may face an even more difficult situation this year in South Dakota, where a measure is on the ballot in November that would effectively ban all short selling, according to that state's securities director, Gail Sheppick, whose office is in Pierre.

The initiative would ban selling securities not owned by the seller, or securities that a seller did not have a contract to purchase, said Mr. Sheppick, who opposes it. "It sounds like a simple resolutions, but it's not when you're trying to keep the markets liquid," he said. If the initiative is passed, it may be overturned in court for violating the commerce clause of the Constitution, Mr. Sheppick said. "But meanwhile, it will create a lot of turmoil in the market here."

Los Angeles-based American Entrepreneurs for Securities Re-form, which sponsored the South Dakota initiative, last week promised to organize similar campaigns in 18 other states if the SEC does not move to restrict naked short selling permanently for all companies.

The organization is backed by Overstock.com Inc., a Salt Lake City online retailer that has waged a campaign against naked short selling for several years, saying the practice has been used by hedge funds to depress its own stock. "Our goal is to stop abusive naked short selling," said Overstock.com president Jonathan Johnson, a commenter. "Before someone short-sells, they should have to borrow the stock."

Other companies also believe they have been harmed by naked short selling. One is Monroe Bank and Trust, a unit of MBT Financial Corp. of Monroe, Mich. The community bank's trust department manages $750 million. "A short sale as an investment strategy is appropriate," said Herb Lock, senior vice president and chief investment officer, and a commenter. "The concern is the naked short sale and whether there is an effort to manipulate price."

The SEC needs to act as quickly as possible to make its emergency order permanent for all stocks, said Wayne Jett, managing principal and chief economist with Classical Capital LLC of San Marino, Calif., which manages about $3 million. He is one of the commenters.

Naked short selling has allowed short-sellers "to create stocks that are unregistered and sell them as electronic entries and get the money for it," Mr. Jett said.

E-mail Sara Hansard at shansard@investmentnews.com.

www.investmentnews.com/apps/pbcs.dll/...20080811/REG/827522981

OZ Minerals and Challenger International have notably been unhappy about the state of unreported short selling, and BHP made an unexpected appearance last week at the top of a UBS list, circulated internationally, of the week's "best shorts".

Mr Potts said that "the Government has encouraged the public to invest and provide for their own retirement so it also has a responsibility to ensure the integrity of the market." He said the ITS trading system used by the ASX could easily police the 10 per cent rule, as long as short sales were properly reported.

"Should the open position get to 10 per cent, the trading system will not accept any further open short positions until the open position is reduced."

He said one of the worst effects of widespread unreported short selling was the damage to companies' ability to raise money in the equity markets via share issues.

"Companies are afraid to attempt to raise capital as they are immediately attacked by shorters, and given that the credit markets are incredibly tight if not already closed, then they are denied the ability to raise capital to expand."

ASX spokesman Matthew Gibbs said his organisation was in favour of as much transparency as possible and that "if anyone has information about brokers not reporting short sales then we'd certainly like to hear about it". But, he said, the ASX had no powers over the brokers' clients, who many believe are at fault in the under-reporting.

Mike Tilley, chief executive of Challenger, said that if the ASX's powers were lacking it should contact regulator ASIC and send a copy of their letter to the Senator Sherry.

"It's easy enough to write a letter," he said. "The client obligation has to be to report to the broker and the broker's must be to report to ASX."

He said that because short selling had the lowest level of investment required for any major market activity, it had the most scope for market manipulation. "That means we need to have really good surveillance to cover short selling."

He declined to comment on the current level of surveillance.

www.theaustralian.news.com.au/story/...,24164709-20142,00.html

But forget all that, let's talk about reality, let's talk about what could happen now, now that it is clear that not only is the SEC not extending these rules to other financials, as I had hoped, but is letting them expire.

Let's talk Downey Financial DSL. Everyone knows this savings and loan is on life support. The headlines are just awful, the losses staggering, the deposits are running the wrong way, and it looks like another IndyMac is in the works.

Now, consider that more than 60% of the float of this bank is short, so it is virtually inconceivable you can get a borrow, so you shouldn't be able to short it, but naked shorting's allowed now, so you don't have to worry about a buy-in. Second, no upticks, so what's the point of waiting here?

You can only guess what the hedge funds will do now, right? The stock was down 25% yesterday. Why not just mash the stock to zero, the way IndyMac's was? I think that will happen today and tomorrow and Friday. By that point, the depositors will freak out -- I don't think they hedge funds will hire actors to stand in line, but there sure are enough of them unemployed in L.A. that it wouldn't be too hard to get 'em to hang out at 5 a.m. Just provide them coffee. (I wonder if the union would get angry?)

Anyway, with naked shorting and no upticking, the prospect of pinning Downey at 20 cents or 30 cents seems pretty likely to me.

Then the bank has to be seized. When it does, the FDIC's pressure hoard of insurance capital disappears quickly: Remember, it doesn't have any IndyMac takers yet because there is no mortgage resolution trust to dump bad loans to.

And voila, three days after the rules go away we have a bank panic all over again.

That's what I think will happen now. It just seems so obvious to me -- how can it not seem obvious to the SEC or the FDIC? Is it because, like the Ben Bernanke Fed, there are only academics and laissez-faire theoreticians running the joint with a handful of pols mixed in? Do you think they even know how the operation against Downey is going to work? Do they even know about this stuff?

I don't even think so or they would have extended the rule and broadened it.

I have seen the power of the rules in their ability to save even the worst of institutions that could be saved.

When the rubber hit the road in 1990 and I was shorting all of those failing bank stocks, the one thing that kept nagging at me was whether I could get a "borrow" on some of the worst ones, because everyone else was shorting them, too. In Confessions of a Street Addict, I documented how I got crushed on a Rutherford Savings Bank short I had when my broker could not find any more stock to lend me so I could stay short. I got bought in at a ludicrous price -- the broker just came in and bought the stock back well above the market -- and my quarter was almost lost.

That would never happen now, ever. Because the SEC doesn't care. Why? I don't know. My friend Mario Gabelli told me yesterday that he thought it was just because the academics sold them a book of goods that this stuff didn't matter. He could be very right. I think they are just over their heads.

I thought they may have figured all of this out after the July 15 bottom, but it turns out they really didn't understand that a return to the rules the way they were for 70 years was a good idea, as opposed to the laissez-faire garbage they believe in now.

Downey could have been Rutherford. It could have had a chance.

But not with this market. Not with this SEC.

Look out for this. It's Saturday's headline.

Be ready for it.

Oh, and I forgot something else: There are four or five Downeys out there right now that we all know about.

They will probably all meet the same fate in the same time frame now that the geniuses at the SEC have said all is well and good and the problems have gone away.

At the time of publication, Cramer was long Goldman Sachs.

www.thestreet.com/print/story/10433130.html

``Even if I were the most bearish man on Earth, I can't imagine buying puts 50 percent below the price with just over a week to expiration,'' said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. ``It's not even on the page of rational behavior, unless you know something.''

`Lottery Ticket'

The 57,000 puts that traded March 11 at the $30 strike price and the 1,649 that traded at $25 were collectively worth about $1.7 million, Bloomberg data show. Each put is equal to 100 shares of stock.

``That trade amounted to buying a lottery ticket,'' said Michael McCarty, chief options and equity strategist at New York-based brokerage Meridian Equity Partners Inc. ``Would you buy $1.7 million worth of lottery tickets just because you could? No. Neither would a hedge fund manager.''

During the next four days, New York-based Bear Stearns unraveled in the swiftest investment-banking failure in Wall Street history. Speculation about a cash shortage proved self- fulfilling, causing customers and lenders to demand their money back. Bear Stearns's stock sank 47 percent to $30 on Friday, March 14. That's when the Fed moved to stave off a panic by helping the U.S. Treasury arrange JPMorgan Chase & Co.'s purchase of the company for $2 a share, a price unimaginable to the firm's 14,000 employees.

Wall Street Seizure

In the aftermath, Bear Stearns Chief Executive Officer Alan Schwartz told Congress that the firm was toppled by rumor- mongering and abusive trading. Regulators have begun peeling back trading records, hunting for suspects.

Schwartz and officials at the SEC declined to comment for this story.

The fire sale of Bear Stearns was the climax of a nine- month credit seizure that started with the failure of two Bear Stearns hedge funds, caused more than $490 billion of losses and writedowns in the banking and securities industry and ousted the CEOs of Citigroup Inc., Merrill Lynch & Co., and UBS AG. Never in its 95-year history had the Fed done so much to rescue Wall Street during its worst financial crisis in at least two decades.

The DNA

Evidence of any scheme to bring down Bear Stearns is most likely buried in options data, according to former government investigators. Options, contracts to buy or sell shares by a certain date at a specific price, can offer forensic evidence of market manipulation and insider trading, said Brent Baker, a former U.S. Securities and Exchange Commission Enforcement Division lawyer who helped prosecute Anthony Elgindy, the stock- picker convicted in 2005 on 11 counts of securities fraud, wire fraud, extortion and racketeering.

``On CSI Wall Street, the options are the DNA,'' he said, referring to the television series, ``Crime Scene Investigation.''

While Bear Stearns executives tried to quash rumors about the firm's insolvency with press releases and television appearances by its CEO Schwartz, the number of $30 Bear Stearns put options held by speculators soared 10,768 percent from Monday March 10 to Tuesday March 11, Bloomberg data show.

On March 11, when the Fed said it planned to make up to $200 billion available through weekly auctions and for the first time lend cash in exchange for debt that included the devalued mortgage-backed securities that contributed to the credit seizure, one or more unidentified traders requested the Chicago Board Options Exchange list the even deeper out-of-the-money strike at $25.

Stock in Freefall

Bear Stearns also was rocked that week by failed trades, a problem associated with naked short selling. Failed trades in Bear Stearns soared more than 10,800 percent during the week of March 10, according to data released by the SEC.

Bear Stearns fell 11 percent to $62.30 in the first trading day of the week on speculation that the firm had insufficient liquidity, or enough funds to cover any sudden withdrawals. The 58-year-old Schwartz, who was in Palm Beach, Florida, at an industry conference, was puzzled by the rumors, according to people who talked to him. He was told by associates that the firm had no shortage of cash. Clients weren't pulling their money, trading counterparties weren't refusing to do business with Bear Stearns, and short-term credit lines weren't being cut.

To quell the speculation, the company issued a two- paragraph statement at the end of the day, saying its financial position was ``strong.''

Bankruptcy Put

Hedge funds, concerned about losing their money, weren't convinced. Eagle Asset Management Inc. moved to other prime brokers, according to Managing Director Todd McCallister. Investors who had credit default swap contracts with Bear Stearns turned to Goldman Sachs Group Inc. and other Wall Street firms, asking them to buy the contracts.

On Wednesday, March 12, Schwartz appeared on CNBC, live from Florida, saying the company had ample resources to weather the credit crunch. While for the moment, at least, that assuaged concerns in the market, the capital flight began again the next day. Many of Bear Stearns's traditional creditors reduced or halted their lending to the 85-year-old company founded by Joseph Bear and Robert Stearns.

By the end of the day, Bear Stearns's cash was almost depleted and its stock closed at $57. As Schwartz realized the company couldn't function on Friday without access to overnight borrowing, he called government officials, regulators and JPMorgan CEO Jamie Dimon.

Fed Steps In

After discussions late into Thursday night, the Fed agreed to provide cash through JPMorgan, the second-biggest U.S. bank by market value, because Bear Stearns didn't have direct access to the Fed as a lender of last resort.

Then, on March 14, the CBOE listed a series of put options with less than five days to expiration. The lowest strike price, $5, was more than 90 percent out-of-the-money in what options traders refer to as a ``bankruptcy put.'' Bear Stearns slumped 47 percent that day to $30 in NYSE trading.

The out-of-the-money Bear Stearns puts point to a raid, said Baker, who's now a securities lawyer whose clients include companies that have filed complaints over naked short selling.

The $25 Bear Stearns puts, and others obtained March 14 involving the right to sell 630,000 shares at a strike price of $5 by March 22, were ``bizarre,'' according to Haugh, the PTI partner who spent 18 years as a CBOE options-market maker.

`One Tick'

``An incredible amount of bearish activity could have been generated by just 10 to 15 people,'' Haugh said. ``Other people then pile in, because they think somebody knows something.''

John Olagues, who started trading options 30 years ago, said he has never experienced anything like it. Olagues, who runs a New Orleans consulting company called Truth in Options, also manages more than $1 million for a client who had a stake in Bear Stearns, which plummeted 94 percent in value on March 17. The drop prompted Olagues to start poring over options trading records and call officials at the CBOE.

``In just one tick, the company's share price lost nearly all its value, a steeper drop than Enron's right before its de- listing in 2001,'' said 63-year-old Olagues, referring to the bankruptcy of Houston-based energy trading company Enron Corp. ``I've never seen a stock perform like that in my life.''

Olagues, who was an options market maker at the Pacific Exchange and then the CBOE from 1976 to 1984, said he knows all about so-called time decay, implied volatility, arbitrage and the complexities of options trading. The former all-conference pitcher at Tulane University, who started Truth in Options in 2003, said he has found options transactions that convince him Bear Stearns was the victim of insider trading.

Vertical Put

``I would stake my reputation on that,'' he said.

Olagues said he was able to avoid losses for his client on Friday, March 14. His hedged position -- a so-called vertical put spread designed to absorb losses as great as 50 percent -- made money by the closing bell that day. The hedging failed the next trading day, March 17, when the stock opened at $3.17.

``Nobody prepares for the stock going from $57 to $3 in just two days,'' he said.

Schwartz told the U.S. Senate Banking Committee on April 3 that there are ``lots of reasons why people could have a financial motivation to induce panic'' and ``a lot of trading would point to that.''

SEC Review

Bear Stearns has forwarded options data to the Senate Banking Committee and the SEC, said a person close to the firm, who declined to be identified.

SEC Chairman Christopher Cox told Congress last month that the agency is probing whether illegal trading spurred the collapse of Bear Stearns and the 72 percent drop this year in Lehman Brothers Holdings Inc.'s market value. The inquiry focuses on investors suspected of seeking to profit by intentionally spreading false information about the companies.

The SEC subpoenaed Wall Street's largest firms and hedge funds for trading records and communications, including e-mails. The agency also enacted an emergency limit on so-called naked short sales in Freddie Mac, Fannie Mae and 17 brokerages as it prepares broader rules to thwart stock manipulation. That limit expires at midnight tomorrow.

Naked shorting, which can be illegal, occurs when short sellers who intend to profit from a decline in securities prices fail to borrow stock by the settlement date. Traders can use that method to drive down prices by flooding the market with sell orders.

`Turbocharge' Effect

The strategy can ``turbocharge'' the effect of false rumors on a stock price, Cox said on a July 16 conference call with reporters. The SEC will consider new rules to prevent improper short selling, Cox told Congress on July 24. It also may force investors to disclose ``substantial'' bets on falling stocks, he said.

On Tuesday, March 11, when Federal Reserve Bank Chairman Ben Bernanke attended a luncheon with Wall Street executives at the New York Fed and the CBOE listed its $25 Bear Stearns put option, McCarty of Meridian red-flagged Bear Stearns in his ``MEP Noteworthy Option Activity'' memo.

What got McCarty's attention that day was the volume of put trading in strike prices of $35 and below. Investors traded 84,109 puts at strike prices that would require a calamitous drop to make money, he said.

Big Bets

``Somebody placed some big bets that day that paid off,'' McCarty said. ``The question is, did they make it pay off?''

On March 14, when Schwartz sought emergency funding, Bear Stearns opened at $54.24 in NYSE trading. That day, the CBOE listed eight new put options that expired in five days with strike prices that ranged from $22.50 to $5. The lowest was 90.7 percent below the opening stock price.

Gail Osten, a spokeswoman for the CBOE, declined to say who placed the order for the options.

``Nobody in their right mind would buy that put unless you knew what was going down,'' said Ray Wollney, Olagues's partner at Truth in Options. On Friday, March 14, a total of 6,303 of the March $5 Bear Stearns puts traded.

That night, Schwartz got a call from Treasury Secretary Henry Paulson making it clear that Bear Stearns had until Sunday evening to find a buyer because the Fed planned to withdraw its financial backing. Paulson, who didn't want the government to appear to be bailing out a Wall Street firm, then brokered the sale to JPMorgan.

Convincing the Board

Schwartz and Bear Stearns Chairman James ``Jimmy'' Cayne convinced fellow board members by explaining that their only alternative was to accept the deal or face bankruptcy. The agreement was announced Sunday night.

Options bets that looked irrational on Friday proved brilliant on Monday, when the shares traded between $3 and $5. By Wollney's calculations, the traders who spent $35.8 million on the deep out-of-the-money puts reaped an estimated $274 million windfall from the plunge in Bear Stearns.

Peter Chepucavage, a former general counsel for compliance at Nomura Securities and onetime SEC lawyer, said the Bear Stearns bets were neither smart nor lucky.

``When you buy $5 strikes when the stock is trading over $50, you either have to be manipulating, or you have to have insider information,'' said Chepucavage, who's now with Washington-based Plexus Consulting.

`Riddled With Bullets'

John Welborn, a London School of Economics-educated economist who works at Haverford Group investment firm in Salt Lake City, has been analyzing data released by the SEC on Bear Stearns shares sold but not delivered to buyers within the required three-day limit.

From March 10 to March 14, SEC data show that the failed Bear Stearns trades jumped to 2.1 million from 19,424, Welborn said. The failed trades correlate with increases in the firm's put volume. The volume of Bear Stearns puts soared to 237,770 on March 11 from 32,081 on March 7. Put contracts doubled again to 445,635 on March 14.

``It looks to me like Bear Stearns got riddled with bullets,'' Welborn said.

The question is whether the trading was premeditated and designed to ruin Bear Stearns, Chepucavage said. If there is a link between these separate activities, only subpoena power will be able to establish it, he said.

``Track the rumors,'' Chepucavage said. ``Follow the puts.''

To contact the reporters on this story: Gary Matsumoto in New York at gmatsumoto@bloomberg.net.

www.bloomberg.com/apps/...20601109&sid=aLsfDbE1JU_E&refer=home

mit vorsichtigen Vorschlägen..., denn: "We intend to have no impact whatsoever on the direction of prices, that's not the purpose of the regulation," said Cox.


UPDATE:Cox: SEC Seeks 'Marketwide' Cure To Short-Sale Abuses
Dow Jones
August 19, 2008: 05:09 PM EST

(Updated in the second paragraph to note disclosure of significant short positions to SEC is under consideration.)

By Judith Burns

money.cnn.com/news/newsfeeds/articles/...NE000436_FORTUNE5.htm

Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Look for U.S. securities regulators to propose a marketwide cure for short-selling abuses within the next few weeks, Securities and Exchange Commission Chairman Christopher Cox said Tuesday.

"We're focused on marketwide solutions," Cox told reporters after a press conference at the agency's Washington, D.C., headquarters. He declined to specify what the SEC will propose but said disclosure of significant short-sale positions is one of the ideas under consideration.

Regulators aim to crack down on delivery failures of stocks used in short- sales transactions, not to prop up stock prices, Cox stressed.

"We intend to have no impact whatsoever on the direction of prices, that's not the purpose of the regulation," said Cox.

The SEC has previously announced it planned to propose new rules to attack short-sale abuses. The agency issued a temporary emergency order in July to tighten restrictions on short sales in federal housing-finance giants Fannie Mae (FNM) and Freddie Mac (FRE), and 17 companies that act as primary dealers in U.S. Treasury debt, a group that includes Wall Street firms such as Lehman Brothers Holding Inc. (LEH) and Merrill Lynch & Co. (MER).

Cox said the short-lived experiment showed delivery failures in the 19 targeted stocks were reduced "substantially."

"It was a very effective order from that standpoint," said Cox. "The reduction in 'fails to deliver' was large."

Rumor-mongering about financial companies also halted during the experiment, Cox added. The SEC had issued warnings on that subject in July and, Cox said, " the rumors stopped."

Short sellers aim to profit from declining stock prices by borrowing shares to sell in hopes of buying them back later at a lower price. "Naked" short sellers don't borrow shares in advance of short sales and may never do so, a practice that can have a punishing effect on a stock's price. The SEC has previously sought to curb abusive naked short selling and delivery failures; its emergency order went further, requiring short sellers to borrow shares in advance of short-sale transactions in the 19 targeted stocks.

Separately, Cox said he expects the SEC will vote later this year to seek public comment on a "road map" that lays out a timetable for U.S. companies to move toward international financial reporting standards, or IFRS. He said the move will be "one step on what will undoubtedly be a long journey."

-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com

mit vorsichtigen Vorschlägen..., denn: "We intend to have no impact whatsoever on the direction of prices, that's not the purpose of the regulation," said Cox.


UPDATE:Cox: SEC Seeks 'Marketwide' Cure To Short-Sale Abuses
Dow Jones
August 19, 2008: 05:09 PM EST

(Updated in the second paragraph to note disclosure of significant short positions to SEC is under consideration.)

By Judith Burns

money.cnn.com/news/newsfeeds/articles/...NE000436_FORTUNE5.htm

Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Look for U.S. securities regulators to propose a marketwide cure for short-selling abuses within the next few weeks, Securities and Exchange Commission Chairman Christopher Cox said Tuesday.

"We're focused on marketwide solutions," Cox told reporters after a press conference at the agency's Washington, D.C., headquarters. He declined to specify what the SEC will propose but said disclosure of significant short-sale positions is one of the ideas under consideration.

Regulators aim to crack down on delivery failures of stocks used in short- sales transactions, not to prop up stock prices, Cox stressed.

"We intend to have no impact whatsoever on the direction of prices, that's not the purpose of the regulation," said Cox.

The SEC has previously announced it planned to propose new rules to attack short-sale abuses. The agency issued a temporary emergency order in July to tighten restrictions on short sales in federal housing-finance giants Fannie Mae (FNM) and Freddie Mac (FRE), and 17 companies that act as primary dealers in U.S. Treasury debt, a group that includes Wall Street firms such as Lehman Brothers Holding Inc. (LEH) and Merrill Lynch & Co. (MER).

Cox said the short-lived experiment showed delivery failures in the 19 targeted stocks were reduced "substantially."

"It was a very effective order from that standpoint," said Cox. "The reduction in 'fails to deliver' was large."

Rumor-mongering about financial companies also halted during the experiment, Cox added. The SEC had issued warnings on that subject in July and, Cox said, " the rumors stopped."

Short sellers aim to profit from declining stock prices by borrowing shares to sell in hopes of buying them back later at a lower price. "Naked" short sellers don't borrow shares in advance of short sales and may never do so, a practice that can have a punishing effect on a stock's price. The SEC has previously sought to curb abusive naked short selling and delivery failures; its emergency order went further, requiring short sellers to borrow shares in advance of short-sale transactions in the 19 targeted stocks.

Separately, Cox said he expects the SEC will vote later this year to seek public comment on a "road map" that lays out a timetable for U.S. companies to move toward international financial reporting standards, or IFRS. He said the move will be "one step on what will undoubtedly be a long journey."

-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com