You are right on with your observations. The only thing I would add is that in my opinion the short's trading over the last few weeks is being reviewed and today's activity is the icing on the cake. I am very interested to see the real short number upon completion of the reconciliation of the shares from the TSX to Nasdaq. Todays trading was organized and the 10k sell order at 16:00:00 at $5.25 and the ensuing 3 buy orders at $5.45 at 16:29:35 and 16:29:50 did not go unnoticed and we should hear more about this soon. Here is the explanation of short selling from the SEC website. Interesting read.
Last 10 trades
Time X Price Chg Vol
16:29:50 Q 5.45 -0.55 500
16:29:50 Q 5.45 -0.55 500
16:29:35 Q 5.45 -0.55 400
16:00:00 Q 5.25 -0.75 10,000
15:59:42 Q 5.44 -0.56 200
15:59:42 Q 5.34 -0.66 100
15:59:42 Q 5.34 -0.66 217
15:59:41 Q 5.44 -0.56 100
15:59:36 Q 5.43 -0.569 744
15:59:26 Q 5.50 -0.50 300
D. Are short sales legal?
Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.
II. "Naked" Short Sales
In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. 3 As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").
Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period. A fail may also result from naked short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.
Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security4 generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks such as securities quoted on the OTC Bulletin Board,5 as there may be few shares available to purchase or borrow at a given time.
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