QUOTE(Floydsvoid @ Mon 5th April 2010, 7:25pm)
Dammit Jim, I'm a programmer not an accountant.
I don't get the dispute about NSS. Now I might understand short selling. If I borrow `x' amount of stock from a lender payable at a later date then I could reasonably assume he has x amount of stock in hand. If the stock goes down like I predicted then I give back to the lender x amount of shares and pocket the difference.
But in NSS if I borrow x amount of stock, the lender might not have x amount of stock on hand and in fact the total shares of stock, lent and otherwise, may exceed the total number shares? This smells of `virtual stock' and can't be a good thing, right?, much less legal?
That a market maker (a subset of stock broker/dealers whose job it is to always be available to buy or sell shares of certain companies -- ie "make a market" in those securities) is able to sell shares not immediately available in its inventory is a good thing. But it should happen rarely and only in the interest of keeping markets fluid.
What we've discovered is that the "hack" (meaning, the flaw in the system) is in
options market-making, and the flawed people willing to assist would-be naked short sellers in exploiting that hack are operating in options brokerages in Chicago (precisely where Jimbo Wales made a living, pre-Wikipedia...only a coincidence, but an interesting one).
Here's how it works: the manipulator buys an equal number of at-the-money puts and calls (in huge blocks) with identical expiration dates and strike prices. This is called a perfect hedge and is a riskless investment (also most likely to be worthless, by the way). The short seller then exercises the call options, though in such quantities, the options market maker is almost certainly only able to fill the order through liberal use of "share equivalents" (virtual share IOUs). In this way, the short seller is technically selling shares long, while it's the options market maker who is (naked) short the stock.
At that point, with a huge arsenal of virtual shares, the short seller peppers the market with small quantities of these IOUs, in a manner referred to as "attacking the bid." This simulates high selling demand and price always drops in response.
In and of itself, this practice is antithetical to efficient markets, but the real problem is the false signal this price movement sends real investors, who see downward movement not related to any new information and assume it's insiders unloading shares in response to something the rest of us don't yet know. The result is more and more selling and, if the manipulator goes about it correctly, a "demoralized market" in the security.
It makes no difference what the report says, Lehman Brothers could NOT have been killed in September of 2008 by information unavailable to the market until February of 2010. Instead, Lehman was killed by a plummeting stock price, which was sparked by illegal, manipulative trading and brought to completion by millions of uninformed investors running for the exits in response to what they assumed was informed selling on the part of all the other people whom they suspected knew something everybody else did not.
All this is in my book, by the way...which better fricking be finished this year.
Gary Weiss on the verge of a nervous breakdown
Wikipedia Review > Wikimedia Discussion > Editors > Notable editors > Gary Weiss and his cavalcade of socks
WordBomb Gary Weiss on the verge of a nervous breakdown Fri 26th February 2010, 4:06am
Fri 26th February 2010, 4:06am
