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.