Is it Hard to Borrow Shares on the Firms on the "No Naked Shorts" List?

There may be a disconnect between what the brokerage industry is reporting on a temporary rule to ban naked shorts in 19 financial firms, whose common characteristic seems to be that they are deemed “too big to fail,” and what some customers are experiencing. The industry reports that everything is hunky dory now that the new procedures are in place, as it probably should be (it’s very few names out of the universe of stocks, all large cap and liquid, so there are probably in most cases shares that can be borrowed).

We have one report from a reader, that his broker said it was hard to obtain shares in the 19 stocks, and I’d be curious to learn if any other readers have had the same experience.

First, on the vendor perception, via the Wall Street Journal:

After a five-day scramble, Wall Street firms handled the arrival of new short-selling limits relatively smoothly, though some firms had to cobble together manual record-keeping systems and rely on telephones, not computers.

The curbs mandated by the Securities and Exchange Commission took effect Monday with little noticeable effect on trading of the 19 stocks on the agency’s list. Some of the stocks were in shorter supply, and some customers had to pay more to arrange borrowing of shares.

Mortgage giants Fannie Mae and Freddie Mac “got a little tougher to borrow,” said Stephen Sachs, director of trading at mutual-fund group Rydex Investments in Rockville, Md. Overall, “the market got a little tighter, but not to any significant degree.”

Partners at proprietary-trading firm Bright Trading LLC, based in Chicago, spent extra time on the phone with their clearing broker, Goldman Sachs Group Inc., trying to obtain a total of 30,000 shares to borrow in four of the stocks for which the SEC is trying to crack down on improper short selling: Bank of America Corp., Citigroup Inc., Fannie Mae and Freddie Mac.

Contrast this with the report from reader Vijay:

I spoke with my broker today after trying to short FXB (obviously unrelated to financials). The trade was rejected because they were unable to locate any shares. After explaining why FXB was a hard one to borrow shares on he mentioned that it’s become much harder to locate shares on firms on the SEC’s list because the demand for normal shorting has increased dramatically (since naked shorting on those stocks is no longer allowed).

Now there could be plenty of explanations: perhaps retail customers are getting the short shrift for the moment, particularly since the rule was just implemented; the firm in question may be having systems issues with the new rules and is making an excuse so as to discourage shorting until it gets its act in gear.

I recognize that this is not a terribly consequential move (although the symbolism is pretty bad). I am curious from a truth in reporting standpoint, whether indeed this change is pretty much a non-event or not.


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  1. Anonymous

    Jim Chanos gave an interview to Bloomberg TV after the close last Thursday (available on the Bloomberg system)and said shares in all 19 were easy to borrow over the last several weeks, including that day. If naked shorting was occurring, it was not necessary as one could borrow all shares they want, even in Fannie and Freddie.

    Bill Ackman was on CNBC last Monday (July 14) with a plan to bail out Fannie and Freddie. He said he shorted both shares the previous Thursday (July 10) and apparently had no problem borrowing them. Considering his fund is $6 billion, it is reasonable to assume he did this in significant size, especially if he was going to invest the time to create a bail-out plan.

    So, where was this naked shorting that drove these stocks into the ground? I think its a myth, it never really happened to any great degree in the first place.

  2. Anonymous

    From market ticker ( with which i totally agree….but not mentioned by MSM…because they do not understand it):

    “The truth appears to be that there is now an action, taken in concert, by most brokerages to simply refuse to allow short sales on any of these stocks irrespective of whether you can get a borrow on them or not.

    Now this clearly was not what The SEC intended. At least I hope it wasn’t what they intended, and that’s not because I want to go naked shorting financials. There are far better stocks out there to short right now, for instance, Apple, which whiffed on forward guidance last night and was immediately punished to the tune of $16/share.

    No, I want Christopher Cox to realize that whether he intends to or not he is setting up a potential market CRASH.

    Take a look at China’s stock market. It is illegal to short there. The market has utterly collapsed over the last few months, and it is precisely because of the inability to short that it has happened.

    Watch their market some night if you want grins and giggles. It tends to move in what look suspiciously like a sine wave, up and down.


    Because there are no shorts.


    See, when there are shorts in the market then declines are stabilized, because every share (legitimately) short must be covered at some point, and when it is covered, it must be bought. This places upward pressure on the price.

    But when there are no shorts, then what tends to happen is that when the supply/demand imbalance gets out of hand the bid just “disappears” – that is, there is nobody will to buy at any price, as the buyers are exhausted.

    I’m sure you know what the price of something is when nobody wants to buy it, right?

    “What is zero, Alex.”

  3. jest


    my theory on that is as follows:

    the guilty parties are not the “unscrupulous” hedge funds who are shorting; the guilty parties are the prime brokers.

    what is supposed to happen is that the hedge fund asks for shares to short, and the broker says “we have none,” but the unscrupulous hedge fund manager “forces” the “honest” broker to counterfeit the shares.

    but what if the “honest” broker lies and says “sure, here you go,” gives the “unscrupulous” hedge fund phantom shares, and collects the commissions and fees associated with the trade?

    the hedge funds may not necessarily know that they are naked shorting if their broker covers it up to get their fee. and seeing how desperate brokers are for cash lately, it does make some sense.

    and as to the myth argument, believe me it is NOT a myth. you obviously haven’t seen the FTDs in bear and lehman’s stock right before bernanke opened the window to ibanks. i personally have seen some of my stocks (non-financial) collape 70% in a few months, for no reason at all; they’ve been on the reg SHO list for months. cox knows it’s not a myth, because he still hasn’t prohibited it entirely.

    if it weren’t a big deal, then he would just enforce the law, b/c he’d be enforcing a law that no one breaks!

  4. Richard Kline

    To Anon of 10:44, I am very much in sympathy with your observation. Stiff, narrow interventions are likely to _decrease_ stability, not increase it, in this instance much as you project. If no one wants to buy, Freddie, and no one _has_ to buy Freddie (to cover), then Freddie can go begging for a bid while the digit counters fall through the naught-hole. Unless the government intervenes in the stock market and buys Freddie on the open market, as happened in Japan’s crash _completely ineffectively to the tune of scores of billions of dollars in losses_.

    The obsession of the upper echelon at the Treasury, and as bruited here at the Fed as well, with equity prices is delusional. These prices cannot be defended, and any money, time, and effort thrown at them is wasted by definition. Equities need to come well down from where they are on fundamentls, and efforts to prop them up mean we’ll get a nasty snap-down when give-and-take turns to give-in-and-run-for-it. We need a real plan regarding how we are going to recapitalize, or better replace, busted financial concerns, not a fool’s play at defending their indefensible share prices.

  5. mxq

    BBG reported on Sunday:

    “More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007…Short selling on the New York Stock Exchange rose to 4.6 percent of total shares last month, the highest since at least 1931”

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