So does commsec refer to naked short selling as day short selling as opposed to term short selling with i assume is covered by stock lending in the latter case, please correct me if i'm wrong,
cutz.
I am not familiar with Comsec's policy as regards to short selling but the term of the trade is not the difference between a naked short and a covered short...
Simply put, a covered short is one where a seller borrows the stock from a broker, prior to the sell, in anticipation that the price will fall. He then purchases the stock and returns it to the broker.... The broker has actually borrowed the stock from an investor who is "long".....The broker, ie Comsec, is the middle man.....of course the real securities never physically change hands but they do exist......So if you are long 10000 shares on CBA you have purchased through Comsec, the broker can lend these out for covered short purposes....
I am not sure of the rules here but in the states the broker has to request the permission of the holder before they can lend out the stock....If on the other hand the customer has borrowed money to purchase the shares the broker does not require permission....
There's nothing wrong with this process. In fact covered short selling actually enables other investors or traders to go long......
Naked shorts, on the other hand are very different. These are sells without first arranging the borrow. This means that ficticious shares can be sold in a deliberate attempt to drive down the price....
This is an abusive practice because the trader or syndicate involved has no intention of ever delivering the shares.....that's the crucial difference....the failure to deliver ultimately creates the phantom shares.... By placing a sell order, large enough to move the share price ,it is likely to succeed. Once they cover the short they then short it back into the market, further driving down the price....The price keeps dropping but none of the shares sold actually ever existed....
The penalities for fails to deliver are far outwighed by the profits to be had and despite claims by some that "failure to delivers" are minimal the problem is important enough for the US Securities Exchange to create the "Threshold Security List" under Regulation SHO. This list reports any stock where more than .05% of a company's total outstanding shares failed delivery for five consecutive days....