Thursday, October 02, 2008

Naked Shorts

No, it isn't a porn film.  Short selling is selling something (typically stocks) you don't have in the hope you can buy it later for less than you already sold it for and pocket the difference.  In a regular securities short sale, the seller borrows the stock from somebody who already owns it, closes the sale with the borrowed stock, then buys stock and gives it to the guy he borrowed from.  In a naked short, the seller doesn't bother borrowing; he closes the sale when he buys the stock down the road.

A lot of people think naked shorts have caused much of the recent market downturns.  As I've noted previously in this blog, Patrick Byrne, CEO of is one of them.  He's convinced naked shorts are what have driven down Overstock's stock (conveniently ignoring Overstock's chronic inability to turn a profit greater than the neighborhood lemonade stand).  And the SEC announced on 17 September that it is piling more regulations on "abusive naked short sales."

Byrne is feeling his oats about this now and is lecturing on the evils of naked shorts today at the U and tomorrow at the Miller Business Center.  I read about these lectures in yesterday's Tribune in an article by Steve Oberbeck.  Oberbeck says in the article that naked shorts are "an illegal trading tactic."  I emailed him to correct him; they aren't illegal, just restricted.  He hasn't bothered to respond or correct.

A word of caution to those of you who count on PR: If you turn an item over to the media (print or broadcast, it doesn't matter) and it contains a legal issue, it will get screwed up.  And chances are they won't correct it.

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