Balancing Act

The term Naked Short Selling conjures up some pretty lurid mental images. Bloomberg News has an interesting report that replaces those images with that of fraud and scandal.

For those not in the know, Short Selling is a perfectly accepted practice. Short selling involves selling borrowed shares of a stock that you do not own at one price and then buying the stock at a (hopefully) lower price to cover the stock you sold. The spread between the sales price and the later purchase price is profit.

Where it becomes Naked Short Selling is when one sells shares in a stock that they do not own and does not borrow the shares to cover the sale. In fact this technique has been used to sell shares that do not in fact exist. These are known as Phantom shares.

The net effect is that the company’s stock becomes less valuable because there are these phantom shares floating around. In effect more shares can be traded then exist for a particular company.

Some say it is the result of greed and is an attempt manipulate the market. Others claim that it is clearing house errors that result in these unresolved trades. If however you are the CEO of an impacted company such as Patrick Byrne, PhD. CEO of Overstock.com it is clear that you think something evil is afoot.

Follow the link to Bloomberg New to see Mike Schnieder’s report:
Bloomberg News Report