This is a letter attached to the note from HW posted on the lower part of the main page. It is from Tony Elgindy. The general reader should be made aware that this letter probably represents the views of certain of retail investors, shorters, who specialize in betting against stocks that they feel are scams (pump and dump), scams they suspect are run by criminals only wanting to dupe innocent investors. Staying away from a stock is not a way to make money and usually there are no (call or put) options available to enable one to bet without shorting. My clarifications are in square brackets [eg] and some comments in double brackets thus [[eg RI]] His early mention of naked shorting refers to the technical requirement that shares sold short are considered "naked" if they are not first borrowed. Mr. Elgindy writes:
I suppose what I propose isn't really about being just PRO-"naked short selling" (which I define as any shortselling that is NOT tied to a specific share or shareholder) its really all about being against the current system's reliance on "permission" [to borrow shares]. Which totally based on your getting permission from those who have a vested interest to see you NOT make your trade.
The notion that in order to make a bet against a stock that you feel is overvalued, a scam or whatever, you must first go to the owner of that stock ( which is publicly traded and listed on a public exchange) and "Borrow" that stock from that person, is simply absurd. That's like requiring a cop to secure a bank robber's permission before he can be arrested while he is in mid heist. Scumbags running scams know they are running a scam and will never give you that "permission" or so-called "borrow" as they like to call it. In fact, we all know that these guys they will do everything in their power to get other shareholders to also withhold that permission. Only in a real deal [legitimate company] do you see insiders and officers shrug their shoulders towards those who think their stock should be lower. What is the point of borrowing anyway?? If a share is in the float and CAN be borrowed in the current system, than what would the difference be if that availability was simply a given? In other words, if a share trades and is shortable with permission what is the difference if that share is shortable regardless if the guy who owns it WANTS to loan it or not ?? I mean what shareholder in their right mind would EVER want anyone else to use their stock to make a bet against themselves? If a share trades, it should simply be shortable PERIOD.
By giving those who own the stock that kind of control over anyone who wants to take a contrary position you have eliminated one entire side of an argument. The size of a short should be limited to the actual size of the float which is easily calculated, because short positions are reported now regularly. Once the float has been sold short, than that would be it. No more shorting. This is a situation that would hardly ever happen.
When was the last time you ever saw the short interest in a company near 100% of the float?? NOT OFTEN - that's my guess. [[I'll challenge this below]] Even in the most outrageous frauds I haven't seen it, not even in the days where naked short-selling was allowed in Canada can I remember that ever being the case...In any event, I'd be perfectly happy with such a limit. Isn't that what the current system allows anyway (assuming you get permission from the shareholders to borrow their stock)??If a company has 5 million shares in the float and you can borrow all 5 million shares and you sell them short... Now there are 10 million shares in the hands of shareholders and 5 million short held by shorts that must be bought back some day. Right? That's assuming nobody refuses to loan their shares. Well what's the difference if you simply take away their ability to say NO?? Because that's what you need to create the incentive for traders to get in and investigate the claims of each of these companies...
If companies knew that at any time someone could come in and investigate and research and profit by being right...many of the shenanigans taking place now would stop. The SEC would have thousands of eyeballs that could focus on what is and what isn't true. What's even more notable is that even if this were to ever happen and a stock's short interest were ever to hit 100%, the shorts would still be outnumbered 2 to 1. And in such a system, where nobody could offer and or rescind permission what is the difference between a scenario in which every shareholder DID give permission to loan their stock? There is NO difference between the two. So my point is that this is the only way it can work and the only way it should work. So I'm really not arguing for "naked short selling" per se. What I'm arguing for is something I call "equal access" When a company goes public, raises money , has access to added capital and an instantly liquid marketplace for it's shares which attracts investors, it has a certain duty and responsibility to not only it's existing shareholders but all investors as a whole. It has a duty to be part of a system (the market) that enables the rapid and accurate injection of information into the market about its security. These people who argue that it's MY stock and it's my RIGHT to decide who borrows it and who doesn't is a bull shit argument. They don't own anything other than a fractional piece of a public entity in which they have no control. And to top it off their ownership is only as meaningful as the price of the stock determined by the public market that this company relied on to attract you [the investor] in the first place.
Aren't you entitled to know ALL the information about a stock before you put your money in?? Or just the stuff that the company wants you to know? Don't the public exchanges themselves, that list these stocks, have a duty to give equal access to BOTH sides of the arguments for each of their listed stocks? Wouldn't a more legitimate market entice more money to flow into the companies that hold up to scrutiny? If I'm an investor and I'm going to put my money into a company, do I want to put it into a stock in which the insiders have succeeded in making my stock so difficult to short that there are no shorts, resulting in a dearth of reality? Is that what I want or do I want to put my money into a company that is fully accessible by all traders who are constantly injecting the good and the bad? Who else is going to spend the necessary time and energy and money to get the truth except a guy who has a financial incentive??
If you eliminate the ability to get short or to stay short or give that power to those who want the stock ONLY to go up? How is that fair and how does that help anyone except the nefarious minded?
It might work in the short term, but haven't I just given these insiders carte blanche to lie to my face? Unhindered? What do I do when it turns out they were lying all along and I could have known earlier if the stock was shortable? What do I do when the stock is halted or a story by Bloomberg or Stockwatch hits and there was no warning whatsoever??
Don't we want MORE information flowing in and NOT less?? Well, when you eliminate one whole side of the picture and make it all but impossible to get short and STAY short you distort that picture. If I can short Company A, ONLY if the guy who owns it lets me borrow it....That is "permission" I should be able to short Company A when that guy who owns Company A -- can't tell me NO. That stock, as long as it's listed and trades freely should be available to ANY trader and it should not be left up to the one guy who wants you to now stay far away. (Just like the Arbitration agreement you sign when you open an [trading] account.
You agree that if you buy a public share of stock you understand and acknowledge that those "shares of stock" can be shorted by others,.it would simply be a part of the "market" you have asked to trade in).
[[TOOK ME YEARS TO FIND OUT, how many investors know this? RI]]
It is an almost certainty that the instant before he bought those shares he would have loved to hear what you had to say and know about that company, but it is also just as certain that the instant after he plunks his $5,000 down and buys that 1000 shares @ $5, he doesn't want to hear anything negative anymore. That's because he's in, he's already committed to one side of the story, in other words he's married to the stock and no guy wants to hear about how ugly his bride is after the "I Dos". Tell him before not after...And to give that guy the power to tell you or me that we can or can't investigate and make a bet against that stock is the MOST un-American system of all.
Why do some special Hedge Funds and Market-Makers have some privileges that no one else has? Why do some of these guys always seem to be the ones who can "borrow" the worst stocks and either keep them for themselves or charge outrageous fees to those who uncovered the truth while the vast majority of private traders watch from the sidelines, unable to take a position and/ or KEEP a position based on their own hard work and due -diligence? ['keep' refers to the fact that shorters are subject to a forced 'buyin' in which share lenders demand their shares back, often at an inopportune time]
By restricting the short interest in any stock to the size of it's public float you have done nothing to change what is possible in today's system, but by disconnecting each short sale from a specific share, certificate number & shareholder you would instantly eliminate the abusive and predatory stock loan practices of today and take away the unfair advantage dirt-bag insiders and CEO's currently have (who grant and rescind permission at will as they manipulate, share prices, buy-ins and stock loan recalls) and give equal access to each share of publicly traded stock to all investors, long and short. And for the first time ever, you would have a more legitimate market in which the accurate exchange of positive and negative information has a real chance to flow. "Equal access" I firmly believe is the solution and all it involves is simply taking away the "permission" part of the equation that exists in today's system, everything else would stay the same. And since every single short is in essence a "covered" short since each share has a like share in the float, you could still proudly claim that you don't allow "naked short selling". No idiot with 100 shares of Putri-facts Corp. bundled around his crack pipe under the spare should ever be able to tell you or me that we can't investigate this company and make a dollar if we are right. Put simply, if a share exists it can be shorted......PERIOD.It doesn't matter if the CEO Is Bill Gates or Patrick Byrnes or Ding Dong Hung Hi.....No permission needed. ...
Do that and you fix the market.
I can sort of see his point though - given that he is focusing his talents on outing criminals, (plus trying to rein in big market makers, which I would agree with) why should he not be allowed to profit from his efforts? I would certainly approve if there was a way that did not involve the manufacture of counterfeits and the deleterious effects of those counterfeits as described on the main page. Options or a separate market for pari-mutual betting (like horse races) might well work?? I wonder if he feels the same about the counterfeiting US Dollar? Why should he not be allowed to buy a printer and print like no tomorrow. It is highly unlikely anyone could keep up with Ben Bernake anyway.
I can appreciate that in the sector he is specializing in, shorting may be somewhat beneficial in smoking out criminals. I've heard some of the stories - companies supposedly worth millions (based on bilking innocent investors) which have no offices, no equipment, no real product, only promises and hype, an answering machine and a pretentious looking mail address. But I question whether there are so many companies like that. If the vast majority of companies have no office, no product, no equipment, surely we have a bigger problem with our regulators and systems. But to suggest this is the whole story is a chimera. Criminals are a small part of the market unless the market itself becomes criminal, on which point, we probably have common ground.
Instead, I contend that (and this site is dedicated to) the vast majority of companies as being honest attempts to do something. Often something quite risky. Further, I think it goes without saying that most or all companies wobble seriously at one time or another. Getting something going is a fearsome task which not many can succeed at. Telling the difference between a legitimate but wobbly company and an outright criminal is not that easy. Criminals make it their business to look good. But the shorter could care less. Elgindy suggested that legitimate company insiders could care less about shorters. I think not. Not enough capital? short it. Key person just left? short it. Product losing sales, bid lost to others, competitor came out with a better product? Short it. The problem though is that it becomes a self fulfilling prophecy. A wobble becomes a bankruptcy, perhaps because the bank manager, watching the share price crumble under the shorters, decides his money is now at risk and calls the loan. What shorters do is to increase risk, stress and steal time away from companies as they try to overcome a wobble. To increase profits, shorters can always make the situation look so bad that everyone loses hope, banks, customers, suppliers extending credit, even employees may jump ship. Hope is ephemeral. The guy was just trying to save his creation until the shorters showed up. Then everyone loses under bankruptcy. All debts are erased, not paid. Employees are let go, maybe not paid yet. Maybe some suppliers will also succumb if they had extended too much credit to the wobbler. But the shorter loves the kill, squashing the hapless soul or criminal soul with equal abandon. Crooks do exist, but isn't this something like the death penalty - better for 100 criminals go free than one innocent man dies by mistake. When companies die, maybe the heart dies too. Do we think its a good idea to kill off wobbly companies just so a shorter can make a buck? Can a shorter use that capital to start a company? Can he create employment in like numbers, or just destroy? Wouldn't it be better for all that activity and jobs and supply line to carry on for awhile. It may die eventually anyway, but folks can live (and let live) in the meantime.
There are many aspects discussed on the main page that Mr Elgindy does not address. I don't share his understanding of how longs ignore bad news (highlighted). The fact is that many, even most longs are institutions holding our savings and pensions. Most ordinary people don't have a clue about the company (even its name) or about shorting, but they do want the company to succeed, something Mr Elgindy does not seem to appreciate. His depiction above really just applies to message board conversations. Shorting to levels 100% of float may not happen often but as I pointed out on the main page, it did happen at the worst time - just before the 2008 meltdown and for the 'worst' companies -- the TOP 10 DOW stocks! Hedge funds, short/distort scams. Mr. Elgindy has no idea how destructive his plaything is. Indeed, like all shorters, he wants to make shorting easier, notwithstanding the enormous increase of short interest and shorting tools such as negative ETFs that have been invented.
Let me put this another way. If Mr Elgindy really wants to help, to make a difference, to make the world a better place, would it not be better to go to the company in question and show them the error of their ways? HW mentioned a company where the operators had been previously convicted of fraud. Well, even ex-criminals have to make a living. Why not go to them and work with them (for pay) to get their operation actually being successful in doing whatever? That would be a turnaround. Not only for the company, employees and suppliers but for the operator with a checkered past. A life truly brought back to the right side. Which is better, destruction or construction? Creativity or tearing apart? Encouragement or criticism?
>I thought of a little exercise.
100 m Americans own 10 share at $10 = 10Bn company. About the size of Ford?? Quite plausible.
Lets say it gets 100% shorted
100m new owners and 100m shorters
Is this not a $20Bn company according to the bets by the longs? I contend this new 'market cap' should be shown on free market pages. If it were, my argument would be weakened, no? (# real shares + #counterfeits) x price = real market cap so folks could see the inflated price
Now I think you can see that 200m owners will have a tough time selling in America. Would the children buy? The folks in old age homes? In food banks? 100 m shorters have lots of incentive to MAKE the company fail
so they make bad news (easy in today's MSM) and 100m owners want to sell, who to?
only shorters left, a self made market.
It's a trick. The only way to stay safe is to stay out of the market altogether. Then where will the shorters be? Where will the employers be? Where will the economy be? Having a goodly supply of capital is what helped capitalism grow so well but if you want to screw everybody who tries to create something plus the common folk who expose their pensions to the sharks of the market, then we should keep our money under the mattress and not let the sharks use it against us. The shorters argument is really a machine gun aimed at the creative people and their pensioner partners. Why is it, when anyone tries to create something, snakes slither out of the grass to cut it down by any means possible. Microsoft, Apple, RIMM and a few others are the exceptions. Most of us don't even try. Now we wonder why everything is falling apart. There is too few big trees, not enough forest of small to middling companies to grow our productivity when we need it most. But I will agree wih HW and Elgindy, the banksters (& hedge funds) are the biggest thieves of all. Shorting is their best game. Why let them get away with it? To stop them though, you have to stop it all.