Short selling concepts and its regulation

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My thesis is to study the impact on NSE and BSE but its ban on both the trading market of the India. In short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. Shorting and going short also refer to entering into any derivative or other contract under which the investor profits from a fall in the value of an asset. Going on the short can be contrasted with the more conventional practice of "going long", whereby an investor profits from any increase in the price of the asset.


In the concepts the profit from a decrease in the price of a security, a short seller can borrow the security and sell it, expecting that it will be cheaper to repurchase in the future. When the seller decides that the time is right (or when the lender recalls the securities), the seller buys equivalent securities and returns them to the lender. The process relies on the fact that the securities (or the other assets being sold short) are fungible; the term "borrowing" is used in the sense of borrowing $10, where a different $10 note can be returned to the lender, rather than in the sense of borrowing a car, where the same car needs to be returned.

A short seller typically borrows through a broker, who is usually holding the securities for another investor who owns the securities; the broker itself seldom purchases the securities to lend to the short seller. The lender does not lose the right to sell the securities while they have been lent, as the broker will usually hold a large pool of such securities for a number of investors which, as such securities are fungible, can instead be transferred to any buyer. In most market conditions there is a ready supply of securities to be borrowed, held by pension funds, mutual funds and other investors.

The act of buying back the securities that were sold short is called "covering the short" or "covering the position". A short position can be covered at any time before the securities are due to be returned. Once the position is covered, the short seller will not be affected by any subsequent rises or falls in the price of the securities, as he already holds the securities required to repay the lender.

The terms shorting and going short are also used as blanket terms for tactics that allow an investor to gain from the decline in price of a security. Such tactics are generally based on a derivative contract, such as an option, a future or a similar synthetic position. As we give the example :- A put option consists of the right to sell an asset at a given strike price; the owner of the option therefore benefits when the market price of the asset falls below that price, as he can buy the asset at the lower price and sell it under the option at the strike price. Similarly, a short position in a futures contract means the holder of the position has an obligation to sell the underlying asset later at a given price; if the price falls below the given price, the person with the short position can buy the asset at the lower price and sell it under the future at the higher price.

Benefits of Short Selling

  • Profit from falling share prices
  • Receive interest on total value of the position at 4.75%
  • Protect the value of your physical shares

Short selling restrictions in 2008

In September 2008 short selling was seen as a contributing factor to undesirable market volatility and subsequently was prohibited by the U.S. Securities and Exchange Commission (SEC) for 799 financial companies for three weeks in an effort to stabilize those companies. In India also NSE AND BSE both are also ban on the short selling investment in the market by Financial Services Authority (FSA) prohibited short selling for 32 financial companies. On September 22, Australia enacted even more extensive measures with a total ban of short selling. Also on September 22, the Spanish market regulator, CNMV, required investors to notify it of any short positions in financial institutions, if they exceed 0.25% of a company's share capital. Naked shorting was also restricted.

In an interview with the Washington Post in late December 2008, NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE and U.S. Securities and Exchange Commission Chairman Christopher Cox said the decision to impose a three-week ban on short selling of financial company stocks was taken reluctantly, but that the view at the time, including from Treasury Secretary Henry M. Paulson and Federal Reserve chairman Ben S. Bernanke, was that "if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save." Later he changed his mind and thought the ban unproductive. In a December 2008 interview with Reuters, he explained that the SEC's Office of Economic Analysis was still evaluating data from the temporary ban, and that preliminary findings point to several unintended market consequences and side effects. "While the actual effects of this temporary action will not be fully understood for many more months, if not years," he said, "knowing what we know now, I believe on balance the Commission would not do it again.


Short selling stock consists of the following:

The investor instructs the broker to sell the shares and the proceeds are credited to his broker's account at the firm upon which the firm can earn interest. Generally, the short seller does not earn interest on the short proceeds.

Upon completion of the sale, the investor has 3 days (in the US) to borrow the shares. If required by law, the investor first ensures that cash or equity is on deposit with his brokerage firm as collateral for the initial short margin requirement. Some short sellers, mainly firms and hedge funds, participate in the illegal practice of naked short selling, where the shorted shares are not borrowed or delivered.

The investor may close the position by buying back the shares (called covering). If the price has dropped, he makes a profit. If the stock advanced, he takes a loss.

Finally, the investor may return the shares to the lender or stay short indefinitely. At any time, the lender may call for the return of his shares i.e. because he wants to sell them. The borrower must buy shares on the market and return them to the lender (or he must borrow the shares from elsewhere). When the broker completes this transaction automatically, it is called a 'buy-in'.

In The vast majority of stocks borrowed by U.S. brokers come from loans made by the leading custody banks and fund management companies (see list below). Depending on specific account agreements, brokers are able to borrow stocks from their customers who own "long" positions, particularly those in "margin" accounts. In these cases, and again, depending on account agreement, and only if the customer has fully paid for the long position, the broker may or may not be able to borrow the security without the express permission of the customer; the broker must provide the customer with collateral and may or may not pay a fee to the customer. In cases where the customer has not fully paid for the long position (meaning the customer borrowed money from the broker in order to finance the purchase of the security), the broker will not need to inform the customer that the long position is being used to effect delivery of another client's short sale.

Most of the brokers will allow retail customers to borrow shares to short a stock only if one of their own customers has purchased the stock on margin. Brokers will go through the "locate" process outside their own firm to obtain borrowed shares from other brokers only for their large institutional customers.

Stock exchanges such as the NASDAQ typically report the "short interest" of a stock, which gives the number of shares that have been legally sold short as a percent of the total float. Alternatively, these can also be expressed as the short interest ratio, which is the number of shares legally sold short as a multiple of the average daily volume. These can be useful tools to spot trends in stock price movements but in order to be reliable, investors must also ascertain the number of shares brought into existence by naked shorter. Investors are cautioned to remember that for every share that has been shorted (owned by a new owner); a 'shadow owner' exists. He has not relinquished his interest and some rights in that stock.


In India now a Days to Cover (DTC) is a numerical term that describes the relationship between the amount of shares in a given equity that have been legally short sold and the number of days of typical trading that it would require to 'covering' all legal short positions outstanding. As given the example, if there are ten million shares of XYZ Inc. that are currently legally short sold and the average daily volume of XYZ shares traded each day is one million, it would require ten days of trading for all legal short positions to be covered (10 million / 1 million).

Short Interest is a numerical term that relates the number of shares in a given equity that have been legally shorted divided by the total shares outstanding for the company, usually expressed as a percent. As a example, if there are ten million shares of XYZ Inc. that are currently legally short sold and the total, number of shares issued by the company is one hundred million; the Short Interest is 10% (10 million / 100 million). If however, shares are being created through naked short selling, "fails" data must be accessed to assess accurately the true level of short interest.

What does it mean to sell short?

If you sell a stock you don't own, you are selling short. (Yes, it's legal.) You are now short the stock. A short seller sells a stock that he believes will fall in value. A short seller does not own the stock before he sells it. Instead, he borrows it from someone who already owns it. Later, the short seller buys back the stock he shorted and returns the stock to close out the loan. If the stock has fallen in price since he sold short, he can buy the stock back for less than he received for selling it. The difference is his profit.

Short selling allows investors to profit from falling stock prices. "Buy low, sell high" is the goal of both short selling and purchasing shares ("going long"). A short sale reverses the order of a typical stock purchase: the stock is sold first and bought later.

In March 2002, Andy thinks HLL is overvalued. He sells short 100 shares of HLL at Rs. 250 per share. The stock market crashes in April and HLL's share price falls to Rs. 210 per share. Andy buys back 100 shares of HLL and closes out the short sale. Andy gains the difference between the sales proceeds and the purchase costs and pockets Rs. 4,000 from the short sale, excluding transaction costs.

Where Does The Broker Get The Stock?

The short answer is from other customers or the Stock Holding Corp. of India. Short selling is a marginable transaction. In plain English, that means you must open a margin account to sell short. This is the same account you would use if you want to use your stocks as collateral margin to trade in the markets.

When you open a margin account, you must sign an agreement with your broker. This agreement says you will maintain a cash margin or pledge your stocks as margin.

How Do I Sell Short?

Unlike a stock purchase transaction, which involves two parties (the buyer and the seller), short selling involves three parties: the original owner, the short seller, and the new buyer. The short seller borrows shares from the original owner, and immediately sells them on the open market to any willing buyer. To finalize ("close out") the short sale transaction, the short seller must then go out into the stock market and buy the same amount of shares as he sold so that the broker can return them to the original owner.

To sell short you first must set up a margin account with your broker. A margin account allows you borrow from your brokerage company using the value of your portfolio as collateral. The general rule is that the value of your portfolio must equal at least 50% of the size of the short sale transaction. In other words, If you have Rs. 100,000 worth of stock/cash in your margin account, you can borrow Rs. 200,000 of stock to sell short.

To sell a stock short, you must borrow stock. To initiate a short sale, you simply call up your broker and ask to sell short a specific number of shares of your selected stock. Your broker then checks with the Margin Department to see whether the shares are available or can be borrowed. If they are available, the brokerage borrows the shares, sells them in the open market, and puts the proceeds into your margin account. To close out your short sale, you tell your broker that you want to buy the same number of shares that you shorted. The broker will purchase the shares for you using the money in your margin account, return the shares and close out the short sale transaction.

While your short sale is outstanding, your account will be charged interest against the value of the short position. If the stock you shorted goes up in price, or the value of the stock you are using as collateral goes down in price, so that your collateral is less than the "maintenance" requirement you will be required to add money to your margin account or buy back the stock that you sold short. You must also pay any dividends issued by the company whose stock you sold short.

Why Sell Short?

The two primary reasons for selling short are opportunism and portfolio protection. Occasionally investors see a stock that they believe has been hyped to a ridiculously high level. They believe that the stock price will fall when reality replaces the hype. A short sale provides the opportunity to profit from the overpriced stock. Short sales are also used to protect an investor's portfolio against a market downturn. By shorting stocks that the investor believes will fall sharply when the market as a whole falls, investors can help insulate the value of their portfolios against sudden market drops.

Short selling is also used to protect portfolios against erosion due to a broad market decline. Short sellers make money when stock prices fall. An investor can diversify a long portfolio by adding some short positions. The portfolio will then have positions that make money both when prices rise and when they fall. This reduces the volatility in the portfolio's returns and helps protect the value of the portfolio when prices are falling.

By shorting carefully selected stocks that are priced near their peak but that will fall sharply if the market falls, an investor can use the profits from the short sales to help offset losses in his long position to protect the value of his portfolio.

Short selling just like long buying is essential for proper functioning of the stock market. It provides essential liquidity which in turn leads to proper price discovery.


Short sales are orders to sell securities that the seller does not own. It order to do this, a seller must follow the short-sale procedure below:

  1. The seller must borrow the securities from a broker before their sale.
  2. The seller must inform their broker that the order is a short sale before the transaction is placed. The broker must also be a broker that engages in short sales of shares.
  3. The seller must return the securities at the request of the lender or when the short sale is closed out. The short seller does not get the proceeds of the short sale.
Rules of short selling

the following three rules apply to short selling:

  1. The uptick rule states stocks can only be shorted in an up market. Therefore, a short sale can only trade at a price higher than the previous trade. 'Zero ticks' occur where there is no price change and are defined as keeping the sign of the previous order. This rule is in effect to prevent traders known as "pool operators" from driving down a stock price through significant short selling, and then buying the shares for a large profit.
  2. The short seller of stock must pay all dividends due to the lender of the security. This is because you effectively have a negative number of the shares.
  3. The short seller of stock must also deposit margin money to guarantee the eventual repurchase of the security.
When to short sell stock

Having outlined the risks of short selling, the following types of companies were identified by Investor Guide as targets for the short sale of their stock:

  • Small capitalisation companies that have been driven up by speculative investors, especially companies that are difficult to value or those with minimal revenue (see P/E below).
  • Companies whose P/E ratios are much higher than can be justified by their growth rates.
  • Companies with bad or useless products and services.
  • Companies riding the latest trend that are unlikely to last.
  • Companies that have new competition entering the market.
  • Companies with weak or worsening financials (bad balance sheet, negative cash flows, etc.).


A plethora of academic articles have examined various aspects of short selling. In this section we will examine some of these articles and their contribution to the literature.

In examined the net effects of large short positions using data between 1946 and 1965. The article finds that short sales act as a predictor of stock prices. Baron and McDonald (1973) explored the risk-return patterns of reported short positions. Using data from the NYSE over the period 1961-66, they found that stocks with more idiosyncratic risk have higher short interest. Brent, Morse, and Stice (1990) examined increases in short interest over the period 1974-86. They found that stocks with convertible securities, options, and high betas tend to have more shares held short. Further, Webb and Figlewski (1993) examined the effects of options on short sales. Using data obtained from CRSP and IDC over the period 1969-85, they found that options facilitate short selling. More recently Geczy, Musto, and Reed (2002) have examined short-selling costs and constraints. Using data from an unnamed custodian bank over the period 1998-1999, they found that short-selling frictions appear strongest in merger arbitrage. Bris, Goetzmann, and Zhu (2007) looked at short sales and market efficiency in world markets. Using data from various investment banks6 over the period 1990-2001, they found that markets where short selling is prohibited display significantly less negative skewness. Boehmer, Jones, and Zhang (2008) explored whether short sellers are informed. Using data from CRSP and NYSE over the period 2000-04, they found that short sellers are well informed and contribute to efficient stock prices. Diether, Lee, and Werner (2008) studied trading strategies used by short sellers. Using data from various exchanges for 2005, they found that short sellers in both NYSE and NASDAQ stocks increased their short-selling activity after periods of positive returns. Finally Evans, Geczy, Musto, and Reed (2008) looked at whether options market competition tends to oligopoly as stocks become difficult to short. Using data from a large options market-maker over the period 1998-99, they found that market-makers profit when they fail to deliver stock.

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Literature review on short selling: - Economic theory suggests that short selling can contribute to the accurate valuation of stocks. If investors are constrained from short selling, their unrevealed negative information will manifest itself only once the market is about to drop. A related point is that short selling can contribute to liquidity. Liquidity is essentially the ease of completing a trade. In the absence of short selling restrictions, not only will short sellers themselves find it easier to trade (i.e. to sell stocks despite not yet owning them), but so will their trading partners. This is evidence that an announcement about increases in short positions contains negative information about a stock which is then reflected in prices. The authors also divide their sample into optioned and non-optioned stocks. They are able to demonstrate a strong negative relation between short positions and returns, both during the time the stocks are heavily shorted and over the following two years. They find that heavily shorted firms exhibit significant negative abnormal returns even after controlling for other factors. The negativity of returns is positively related to the level of short positions.

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SEBI unhappy over FII short selling:-

In that the SEBI were unhappy with the FII short selling its disclosed by Market regulator Securities and Exchange Board of India (SEBI), Financial Services Group, a Hong Kong-based club of FII representatives, had gone to meet top SEBI officials after the regulator recently warned FIIs on participatory note based lending and borrowing operations and the related short selling.

In the Recently released data showed that in just six sessions - between October 10 and October 17 - over Rs 1,000 crore worth of stocks were short sold using the data for short selling. SEBI had also written to all FIIs that they were submitted the data on their outstanding positions on securities lent abroad. "In order to take stock of the existing position, you are also requested to submit the existing/outstanding positions of the securities lent abroad as on October 09, 2008," from SEBI's division of foreign institutional investors and custodians to foreign funds.

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In the Bombay stock exchange view on the short selling that Four scrips -- Aptech, Bajaj Holdings & Investment, Corporation Bank and IndusInd Bank -- would not be available for trading in the SLB segment with effect from July 31, the BSE said in a notice.These scrips have ceased to fulfill eligibility criteria and hence these scrips would not be available for trading in the Securities Lending and Borrowing segment, it added. Short selling is an activity wherein a investor sells shares without owning it.


Short Selling CFDs involves selling shares you do not own then buying them back to make a profit from a falling price. This ability allows you to profit from negative price movements and hedge the value of your physical shares and/ or Self Managed Super Fund.

Short selling a CFD is a flexible way to benefit from a falling share price. The lower transaction costs and lower margin requirements make CFDs an ideal way to take advantage of falling markets.

Short Selling Case Study

While reviewing the chart Steve notices that ANZ has broken a key support level of $24.40 on 8th February and he decides to open a short CFD position of 2,000 ANZ shares at $24.40.

Short Selling to protect your physical Shares

Short selling can also be used to protect the value of your physical shares. This is referred to as hedging. Hedging allows you to retain your holdings while protecting the value from falling prices. Refer to our Hedging case study for more information.

Case study: - Stockbroker under ASX scrutiny for role in short-selling case

In that study short selling that I found that According to an ASX draft disciplinary report into the matter, between October 8 and 24, 2007, Findlay's sold 1.176 million QRS shares and 150,000 QRS options on behalf of Mr. Spagnolo in nine transactions - shares that both the stock exchange and ASIC claim the Northcote trader did not own. In a more serious claim, ASX investigators allege that Mr. Spagnolo informed Findlay's on October 10 that his allotment of QRS shares had been delayed and that the entire deal might need to be halted.

This included the sale of 120,000 QRS shares on October 11; a further 115,120 shares on October 12; 150,000 options and 9000 shares on October 15; and a further 217,000 shares on October 17, 18 and 19. As a result of those transactions, ASX Markets Supervision concluded that Findlay Securities had contravened ASX market rule 5.7.3 on nine occasions, by failing to settle the trades within three days. The report also stated that Findlay Securities contravened market rule 19.1.2 on nine occasions, by effecting short-sales that were not allowed. (Link}.

CASE STUDY Goldman pays $2 million to settle 'naked' short-selling case {link: -}

Goldman Sachs Group Inc.'s clearing unit has agreed to pay $2 million in civil penalties to settle allegations that it allowed customers to illegally profit by selling securities short just before public offerings of stock. It marks the first settlement of a Securities and Exchange Commission and NYSE Regulation Inc. case alleging that a prime brokerage firm played a role in a type of abusive short-selling practice. In that case are significant trading disparities indicating that a customer may be lying to the broker, the broker must investigate the customer's trading and review its trading records to determine whether it can reasonably continue to rely on the customer's representations.


An institutional procedure for short selling affects portfolio selection in terms of transaction costs. According to the normative view, short selling can potentially enhance the risk-return trade-off of a portfolio. The market equilibrium view, meanwhile, shows a pricing relationship under institutional procedures for short selling and those market-clearing prices.

Banks tread carefully on short-selling measures:-

As a measure to increase depth in the debt markets the Reserve Bank of India (RBI) finally announced the guidelines on the intra-day short selling of government securities. This was announced in the mid-term review of annual policy statement in October. By introduction of short selling, banks and primary dealers (PDs) may undertake outright sale of government security that they do not own, subject to the same being covered by outright purchase from the secondary market within the same trading day. The RBI in its circular has stated that intra-day short sale transaction and also the covering of short position should be executed only on the Negotiated Dealing System Order Matching (NDS-OM) platform. The guidelines also say that the short positions are not to be left uncovered at the end of the day. Moreover, inability to cover a short position during the trading day itself shall be treated as an instance of 'SGL bouncing' and would lead to further regulatory action by RBI. In order to control excess exposure in a particular security RBI has set a limit, where in any bank or PD cannot accumulate a short position in excess of 0.25% of the outstanding stock of a security in the market. Gilt Accounts Holders under CSGL facility are not permitted to undertake intra-day short selling says RBI. Bond players are also required to report to IDMD, RBI on a monthly basis, the daily security-wise maximum intra-day short sale position on the first working day of the succeeding month. The debt markets failed to show any remarkable response after guideline issuance, as before entering short selling the banks need to get internal approvals and procedure completed. By introducing short selling in the market, volumes are expected to increase and lead to better price discovery. According to market observers this would increase volumes as many players are cautious in taking an overnight position as it leads to interest rate.



The Securities Exchange Act of 1934 stipulates a settlement period up to three business days before a stock needs to be delivered, generally referred to as "T+3 deliveries."


The Regulation in January 2005 to target abusive naked short selling by reducing failure to deliver securities, and by limiting the time in which a broker can permit failures to deliver. In addressing the first, it stated that a broker or dealer may not accept a short sale order without having first borrowed or identified the stock being sold. The rule had the following exemptions:

  • Broker-dealer effecting a sale on behalf of a customer that is deemed to own the security pursuant to Rule 200 through no fault of the customer or the broker-dealer.
  • To reduce the duration for which fails to deliver are permitted to sit open, the regulation requires broker-dealers to close-out open fail-to-deliver positions in threshold securities that have persisted for 13 consecutive settlement days. The SEC, in describing Regulation Short term share holders, stated that failures to deliver shares that persist for an extended period of time "may result in large delivery obligations where stock settlement occurs."
  • The Regulation of short selling investment also created the "Threshold Security List," which reported any stock where more than 0.5% of a company's total outstanding shares failed delivery for five consecutive days.
  • The SEC proposed to amend Regulation further reduces failures to deliver securities. SEC Chairman Christopher Cox referred to "the serious problem of abusive naked short sales, which can be used as a tool to drive down a company's stock price." and that the SEC is "concerned about the persistent failures to deliver in the market for some securities that may be due to loopholes in Regulation.

In present the Securities and Exchange Board of India (SEBI), which disallowed short sales altogether in 2001 as a result of the Ketan Parekh affair, reintroduced short selling under regulations similar to those developed in the United States. In conjunction with this rule change, SEBI outlawed all naked short selling.

The SEC voted to remove the grandfather provision that allowed fails-to-deliver that existed before short selling "a fraud that the commission is bound to prevent and to punish." The SEC also said it was considering removing an exemption from the rule for options market makers. Removals of the grandfather provision and naked shorting restrictions generally have been endorsed by the U.S. Chamber of Commerce.

'Naked' Short Selling Anti-Fraud Rule," in which he announced new SEC efforts to combat naked short selling. Under the proposal, the SEC would create an antifraud rule targeting those who knowingly deceive brokers about having located securities before engaging in short sales, and who fail to deliver the securities by the delivery date. Cox said the proposal would address concerns about short-selling abuses, particularly in the market for small-cap stocks. Even with the regulation in place, the SEC received hundreds of complaints in 2007 about alleged abuses involving short sales. The SEC estimated that about 1% of shares that changed hands daily, about $1 billion, were subject to delivery failures. SEC Commissioners Paul Atkins and Kathleen Casey expressed support for the crackdown.

The SEC announced emergency actions to limit the naked short selling of government sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, in an effort to limit market volatility of financial stocks. But even with respect to those stocks the SEC soon thereafter announced there would be an exception with regard to market makers. SEC Chairman Cox noted that the emergency order was "not a response to unbridled naked short selling in financial issues", saying that "that has not occurred".

The SEC issued new, more extensive rules against naked shorting, making "it crystal clear that the SEC has zero tolerance for abusive naked short selling". Among the new rules is that market makers are no longer given an exception. As a result, options market makers will be treated in the same way as all other market participants, and effectively will be banned from naked short selling.

"The Small Investor Protection Act", to end naked short selling in that state. The Securities Industry and Financial Markets Association of Washington and New York said they would take legal action if the measure passed.

The SEC, under what the Wall Street Journal described as "intense political pressure," made permanent an interim rule that obliges brokerages to promptly buy or borrow securities when executing a short sale. The SEC said that since the fall of 2008, fails to deliver in all equity securities declined by about 57 percent, and the average daily number of threshold list securities declined from a high of about 582 securities in July 2008 to 63 in March 2009.


Several international exchanges have either partially or fully restricted the practice of naked short selling of shares, and they was originally scheduled to run until, but was extended through October of that year

The Singapore Exchange started to penalize naked short sales with an interim measure in September, 2008. These initial penalties started at $100 per day. In November, they announced plans to increase the fines for failing to complete trades. The new penalties would penalize traders who fail to cover their positions, starting at $1,000 per day. There would also be fines for brokerages who fail to use the exchange's buying-in market to cover their positions, starting at $5,000 per day. The Singapore exchange had stated that the failure to deliver shares inherent in naked short sales threatened market orderliness.


In 2005, the enforcement action against the securities of short selling of stock unit of securities trading violations concerning the shorting stock. The SEC sought information related to two former Refco brokers who handled the account of a client, Amro International, which shorted Sedona's stock.

In December 2006, the SEC sued Gryphon Partners, a hedge fund, for insider trading and naked short-selling involving PIPEs in the unregistered stock of 35 companies. PIPEs are "private investments in public equities," used by companies to raise cash. The naked shorting took place in Canada, where it was legal at the time. Gryphon denied the charges.

In that study the Goldman Sachs was fined $2 million by the SEC for allowing customers to illegally sell shares short prior to secondary public offerings. Naked short-selling was allegedly used by the Goldman clients. The SEC charged Goldman with failing to ensure those clients had ownership of the shares. SEC Chairman Cox said "That is an important case and it reflects our interest in this area."

They had claimed naked shorting of its stock, were sanctioned by a federal court judge as "repeated and remorseless violators" of the securities laws. The SEC asserted that the company "appears to exist primarily as a vehicle for fraud. They referring to a court ruling from serving as an officer of a public company, the issues that bothered the judge are irrelevant. 'Long and short of it,' he said in a statement, 'this is a naked short hallmark case in the making.' Or it is proof that it can take a long time for the SEC to stop a fraud. Universal Express claimed that 6,000 small companies had been put out of business by naked shorting, which the company said "the SEC has ignored and condoned. They receiver was subsequently appointed to administer the company.

In July 2007, Piper Jaffray was fined $150,000 by the New York Stock Exchange (NYSE). Piper violated securities trading rules from January through May 2005, selling shares without borrowing them, and also failing to "cover short sales in a timely manner", according to the NYSE, At the time of this fine, the NYSE had levied over $1.9 million in fines for naked short sales over seven regulatory actions.

Also in July 2007, the American Stock Exchange fined two options market makers for violations of Regulation SHO. SBA Trading was sanctioned for $5 million, and ALA Trading was fined $3 million, which included disgorgement of profits. Both firms and their principals were suspended from association with the exchange for five years. The exchange said the firms used an exemption to Reg. SHO for options market makers to "impermissibly engage in naked short selling."

In October 2007, the SEC settled charges against New York hedge fund adviser Sandell Asset Management Corp. and three executives of the firm for, among other things, shorting stock without locating shares to borrow. Fines totalling $8 million were imposed, and the firm neither admitted nor denied the charges.

In October 2008 Lehman Brothers Inc. was fined $250,000 by the Financial Industry Regulatory Authority (FINRA) for failing to properly document the ownership of short sales as they occurred, and for failing to annotate an affirmative declaration that shares would be available by the settlement date.

Short term regulator identified that
  1. In Short selling should be subject to appropriate controls to reduce or minimize the potential risks that could affect the orderly and efficient functioning and stability of financial markets.
  2. In that Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities.
  3. We study that Short selling should be subject to an effective compliance and enforcement system.
  4. In the Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.


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