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Univ. of Toledo College of Law

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Sunday, May 24, 2009

Fotak et alia on Naked Short Selling

Naked Short Selling: The Emperor’s New Clothes?, by Veljko Fotak, University of Oklahoma - Division of Finance, Vikas Raman, University of Oklahoma - Division of Finance, and Pradeep K. Yadav, University of Oklahoma - Division of Finance, was recently posted on SSRN.  Here is the abstract:

Regulatory and media concern has focused heavily on the potentially manipulative distortion of market prices associated with naked short selling. However, naked shorting can also have beneficial effects for liquidity and pricing efficiency. We empirically investigate the impact of naked short-selling on market quality, and find that naked shorting leads to significant reduction in positive pricing errors, the volatility of stock price returns, bid-ask spreads, and pricing error volatility. We study naked shorting surrounding the demise of financial institutions hardest hit by the financial crisis in 2008 and find no evidence that stock price declines were caused by naked shorting. We also find that naked short-selling intensifies after rather than before credit downgrade announcements during the 2008 financial crisis. In general, we find that naked short sellers respond to public news and intensify their activity after price declines rather than triggering these price declines. We study the impact of the SEC ban on naked short selling of financial securities during July and August 2008, and find that the ban did not slow the price decline of those securities and had a negative impact on liquidity and pricing efficiency. Finally, after examining the speeds of mean reversion of pricing errors and order imbalances, we infer that Regulation SHO was successful in curbing the impact of manipulative naked short selling, and this reduction in the impact of manipulative naked shorting has continued through the 2008 financial crisis. Overall, our empirical results are in sharp contrast with the extremely negative pre-conceptions that appear to exist among media commentators and market regulators in relation to naked short-selling.

http://lawprofessors.typepad.com/securities/2009/05/fotak-et-alia-on-naked-short-selling.html

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Comments

Who pays you/your department to write any crap that seems to encourage yet more illegal, manipulative, destructive, dishonest activity such as naked shorting or even covered shorting for that matter. Shoot all the shorters, let God sort them out.

For more info, visit
www.stopshortingstocks.com

Posted by: Canbyte | May 25, 2009 6:26:43 PM

OK lets say you are right. You will need to make that $0 margin, mark to market trade available to the retail trader.

Currently a group of "accredited Investors" control an individual stocks price while locking in riskless gains via the Naked Short. A result of unethical, illegal and unauthorized expansion of a companies outstanding shares.

Give the other parties involved access to such a tool or go directly to JAIL.

Grown Ups playing prove it is as stupid as it sounds.

Posted by: Ugo | Jun 25, 2009 9:31:27 AM

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