
Naked shorts can't stay naked forever - tomrod
https://theintercept.com/2016/09/24/naked-shorts-cant-stay-naked-forever/
======
numlocked
Matt Levine said it well about this non-story: "[DiIorio] then decided to put
$100,000 of his own money into a penny-stock company that supposedly made
computer chips. ("I bought this company on hype," he says.) The company then
announced a reverse merger with a travel company, because that is how things
go in the penny stock world; corporate identities are pretty fluid. The stock
soared, and then lost almost all of its value. "DiIorio took a loss from the
peak stock value of well over $1 million," though I am not sure why you'd
measure his losses that way."

~~~
oneloop
I don't think it's a non-story the fact that some market participants can
short sell non-existent amounts of stocks. Is this common knowledge? Did
everyone already know this but me?

~~~
wcummings
The CEO of Overstock has been loudly complaining about naked shorts for a
while

[https://www.overstock.com/naked-short-
selling.html](https://www.overstock.com/naked-short-selling.html)

------
markonen
The consensus here seems to be that DiIorio got what he had coming for trading
in the pink sheets. Fine.

But if we accept the premise–that a market maker in penny stocks can sell an
essentially unlimited number of shares without ever having to close out the
short position–doesn't that mean that there is absolutely nothing a private
investor, using a regular brokerage account, can do to protect themselves?

So the point doesn't seem to be about DiIorio's due diligence (or lack
thereof), but that this can happen with any penny stock absolutely regardless
of the level of care an investor puts into the trade. If true, it seems to
call into question the regulatory policy of letting non-qualified investors
trade in these things in the first place.

~~~
x1798DE
> If true, it seems to call into question the regulatory policy of letting
> non-qualified investors trade in these things in the first place.

That's a disturbingly paternalistic thought to my reckoning, and it's the
"Baptists" part of the bootleggers and Baptists story that leads to barriers
to entry that end up benefiting large, concentrated interests (who can afford
all the crazy paperwork and legal fees) over smaller players. Maybe there's a
problem, but, "impose a licensing scheme to prevent people from taking risks
with their own money" should probably be the _last_ thing you try, not the
first.

~~~
markonen
People are rightly warned not to trade in OTC stocks if they don't know what
they are doing, but I bet most people understand that warning to be about the
companies likely being dodgy rather than about the market itself being rigged.

If the market mechanics mean it's essentially house-always-wins, you bet I'm
paternalistic enough to advocate regulation against offering these casino
chips to retail investors.

~~~
x1798DE
Why make a distinction between retail and individual investors? Either it's
rigged, in which case it's almost certainly fraud, or it's not rigged and that
means it's not exactly "house-always-wins". Like I said, making it so only
certain people can participate in the market seems like the _last_ step, not
the first.

------
ScottBurson
Odd how this series keeps repeating that Chris DiIorio lost $1M on a penny
stock, when the Part 1 makes it clear that his entire investment was around
$100k. He had a big paper gain that evaporated.

TL;DR: don't trade the pink sheets.

------
ryporter
NITE may have abused the rules to maintain their short position, but this was
definitely not some evil plot to drive down stock prices. The reason that
these tickers end up on the "chill list" is because they are massively
inflated shares that are literally not worth the paper that they are printed
on. Shorting and holding is almost guaranteed to be very profitable strategy.

The difficult part is maintaining your short position, and this is where the
real story is. Here, an alternate theory for NITE's behavior is that they were
protecting their short position. Stock manipulation schemes are often a cat-
and-mouse game where the manipulators are trying to trap shorts in large
positions and then squeeze them out of it, forces them to buy back the stock
at even more inflated prices. In this case, NITE would have been allegedly
abusing the rules to win the game against a cheater.

In my opinion, the manipulators are likely far more at fault for Dilorio's
loss than NITE is.

------
OscarCunningham
As others have said, this might be a non-story. It's also weird how it's
writing about Knight Capital in the years 2008-2011, without noting that in
2012 Knight Capital collapsed spectacularly by losing $440 million in one day
due to an error in its trading algorithm.

[https://en.wikipedia.org/wiki/Knight_Capital_Group](https://en.wikipedia.org/wiki/Knight_Capital_Group)

~~~
bboreham
They're still going, after merging with Getco and renaming as KGC.

------
qwrusz
Some context: These events date back to 2006. Prior to the financial crisis.
There've been major changes to the industry and SEC regulations since. Wall
Street still has bad actors and has a lot to fix but short selling looks very
different today.

The SEC added multiple rule amendments to Regulation SHO over the past 10
years to address fails to deliver and restrict abusive short selling. The SEC
claims high double digit declines in FTD rates. Naked shorting feels like it
has dropped off the radar compared to something like Reg NMS. Knight Capital
had many problems and no longer exists.

The link story involves a penny-cap mobile chipmaker company suddenly merging
with an online travel agency...This company then does a 1-1000 reverse stock
split...Around the same time, a clearing agency freezes the company's stock,
hinting at potential violations of federal/state law.

For those not familiar with equities, these events are bad. The stock is
likely going down. Shareholders will lose money whether or not naked short
selling took place.

Knight Cap may have engaged in fraud here, I don’t know, but this guy for sure
bought a bad stock.

Wiki on Regulation SHO:
[https://en.wikipedia.org/wiki/Naked_short_selling#Regulation...](https://en.wikipedia.org/wiki/Naked_short_selling#Regulation_SHO)

SEC Short Sales website has rules, info and data (warning gov site and
painfully dry reading):
[https://www.sec.gov/spotlight/shortsales.shtml](https://www.sec.gov/spotlight/shortsales.shtml)

------
coldcode
Whatever the merits of the actual story, it's pretty obvious to everyone that
without real oversight, most banks, trading firms and the like will eventually
break the law, or at least bend it out of recognition. The question is who
will suffer the loss; I assume eventually it's all of us.

------
SFJulie
The same old con from the XVIIIth century (UK) called arnaque à la bouilloire.
It used to be forbidden on the stock exchange (like a lot of other practices
such as cavallerie). But through some obscure technical points of laws left
intentionally opened it tends to come back, written by a MP that tends to then
go to work in a bank. That is the reason why public clerk were forbidden to
work in the private.

History repeats itself, nothing new under the sun.

------
oli5679
I find it frustrating when journalists level these claims of market
manipulation without clearly specifying the trading strategy. I am struggling
to write down a sequence of trades that corresponds to the allegations of the
article, generate a profit and abide by basic order book mechanics/sensible
counterparty behaviour

