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US equity market – Short selling: The naked truth

Fails to deliver in the US equity market have exacerbated the sharp declines in share prices of financials. Although the SEC is clearing up the mess caused by naked short-selling, more drastic measures might be needed to restore confidence. Helen Avery reports.

The treasury market reaches breaking point
In this article:
Unheard voices
Fails to deliver in the US stock markets
are not a new phenomenon. The SEC
has pussyfooted around enforcing
delivery in the US equity market over
the past 10 years or so.

Small steps
Actions taken against naked shorting
are steps in the right direction, but more
must be done.

IT IS NO surprise that the stock of Bear Stearns was heavily shorted in the run-up to its government-supported rescue in March, given its high leverage, poor risk management and the fact that its sub-prime bets had gone awry. Short-selling of any financial company would have been understandable by March this year. But just why on March 12, two days before the rescue announcement, almost 1.25 million Bear Stearns shares were shorted is a question that is a little harder to answer.

Up to that point in 2008, cumulative fails to deliver of Bear Stearns’ stock were only between 10,000 and 200,000 on any given day. On March 14, more than 2 million Bear Stearns shares went undelivered, and from then until the end of March, failures increased, peaking one day at more than 13.78