Naked Short Selling..
Day traders will sell short, even market makers will sell short, Naked.
SEC gives market makers, special rules.
Short squeezes
Traders do short stocks, and market makers qualify for an exemption that allows them to short stocks naked in order to provide liquidity. The latter must always trade against market sentiment: if retail wants to buy, they must sell; if retail wants to sell, they must buy. If the MM miscalculates, and finds himself with a serious imbalance he can’t cover going forward, he’ll be in serious trouble. Traders too will have difficulty covering if the stock rises precipitously. Both will be susceptible to buy-in notices from their clearing firms, and could lose very significant amounts of money as the stock rockets higher and higher. That is a short squeeze, and for longs, a squeeze is a delightful experience.
Most short squeezes occur in exchange-listed issues. Though rare in penny stocks, they aren’t unknown. Two years ago, Lithium Exploration Group (LEXG) enjoyed a spectacular run that left some small broker-dealers in ruins. More recently, Lot78 Inc (LOTE) experienced an even more impressive squeeze, which has been discussed at length in an article at this site. The fun and games with LOTE began nearly a month ago, and still aren’t over.
A short squeeze will result if one or more MMs sell naked into buying pressure and become trapped. But these people are professionals, and can nearly always avoid that outcome. Contrary to what’s said at countless penny stock conspiracy websites, they don’t short willy-nilly, in an effort to “destroy” companies. They make their livelihood trading the stock of those companies. Why kill the golden goose?
Resist the siren song of those who’ll tell you every poorly-performing penny stock is a tragic victim of NSS. It just isn’t true.
