Friday, March 20, 2009

Naked Shorts

More evidence that naked shorting contributed to the Fall of Lehman.

Legally, you cannot sell a share short unless you can find someone from whom to borrow that stock from in the first place. Bloomberg says there might have been 57 TIMES AS MANY stocks in Lehman Brothers sold short without a corresponding share that could be borrowed to sell ("naked shorts") as compared to short sales that were actually borrowed before being sold short ("covered short").

Uncovered short sales artificially drive share prices down because they are one way bets without someone taking the opposite side of the bet. All transactions in securities, by definition, have a winner and a loser. The win and the loss cancel each other to zero. Not so here.

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