rookinvestor, in re Naked Shorts...believe it or not I actually believe they serve a purpose in the markets as well. Let me explain before you go ballistic on me.
Naked Short is typically a term associated with a position held my a market maker. When a stock first begins trading, often times, the market for that stock is very thin. By that I mean, there are not very many shares in the public float to create a liquid market with.
So, what happens is, let's say NITE has decided they want to play in the market of your stock but they don't have any stock. Well they want to be a participant so how do they do that? They fill your order to buy, by selling you stock they don't own, going "naked". Ohhh, terrible thing right? WRONG !!!
If NITE sells you shares they don't own, at some point they have to cover, right? How do they cover...they buy the stock. How do they buy the stock? They sit on the bid and wait for somebody to sell them shares to cover their short position. So, in essence what this does is create BID SUPPORT for the stock.
I know longs like to bash the shorts but they do serve a necessary function to the overall market. Can this be abused? Certainly.
Is there a remedy for this abuse? Absolutely. As I posted in my original post. The Company has the option of contacting FINRA and requesting a "short audit". This "short audit" will determine whether a clearing firm is over 51% short. If it is determined that the clearing firm is over 51% short, they will be forced to either put up $1.00 per share or cover their short position and they have three days to do it.
*DISCLAIMER : I have not dealt with FINRA and the short specialist if over 5 years so the criteria etc may be different today. But that's what it used to be. Either way, there are safeguards in place to protect the integrity of the market.
Now, let's talk about Clearing firms...an example of a clearing firm would be Penson. Penson clears for many, many brokerage firms. So, when conducting the audit, FINRA does not look at individual brokerage firms to determine the short status..they look to Penson. So, let's say Penson has 100,000 shares on deposit, in various brokerage firms they clear for. With some exceptions, Penson can short against those positions. If the audit determines that PENSON is over 51% short against their positions, FINRA can force the $1.00 collateral or the cover.
