Een artikel van Ellen Brown. Altijd de moeite waard:
How Short Sellers Fleece Investors - Ellen Brown
http://www.globalresearch.ca/index.php?context=va&aid=26857
Financial Warfare: "Sheared by the Shorts". How Short Sellers Fleece
Investors
by Ellen Brown
Global Research, September 29, 2011
“Unrestrained financial exploitations have been one of the great
causes of our present tragic condition.” -- President Franklin D.
Roosevelt, 1933
Why did gold and silver stocks just get hammered, at a time when
commodities are considered a safe haven against widespread global
uncertainty? The answer, according to Bill Murphy’s newsletter
LeMetropoleCafe.com, is that the sector has been the target of massive
short selling. For some popular precious metal stocks, close to half the
trades have been “phantom” sales by short sellers who did not actually
own the stock.
A bear raid is the practice of targeting a stock or other asset for
take-down, either for quick profits or for corporate takeover. Today the
target is commodities, but tomorrow it could be something else. When
Lehman Brothers went bankrupt in September 2008, some analysts thought
the investment firm’s condition was no worse than its competitors’. What
brought it down was not undercapitalization but a massive bear raid on
9-11 of that year, when its stock price dropped by 41% in a single day.
The stock market has been plagued by these speculative attacks ever
since the four-year industry-wide bear raid called the Great Depression,
when the Dow Jones Industrial Average was reduced to 10 percent of its
former value. Whenever the market decline slowed, speculators would step
in to sell millions of dollars worth of stock they did not own but had
ostensibly borrowed just for purposes of sale, using the device known as
the short sale. When done on a large enough scale, short selling can
force prices down, allowing assets to be picked up very cheaply.
Another Great Depression is the short seller’s dream, as a trader
recently admitted on a BBC interview. His candor was unusual, but his
attitude is characteristic of a business that is all about making money,
regardless of the damage done to real companies contributing real goods
and services to the economy.
How the Game Is Played
Here is how the short selling scheme works: stock prices are set by
traders called “market markers,” whose job is to match buyers with
sellers. Short sellers willing to sell at the market price are matched
with the highest buy orders first, but if sales volume is large, they
wind up matched with the bargain-basement bidders, bringing the overall
price down. Price is set by supply and demand, and when the supply of
stocks available for sale is artificially high, the price drops. When
the bear raiders are successful, they are able to buy back the stock to
cover their short sales at a price that is artificially low.
Today they only have to trigger the “stop loss” orders of investors to
initiate a cascade of selling. Many investors protect themselves from
sudden drops in price by placing a standing “stop loss” order, which is
activated if the market price falls below a certain price. These orders
act like a pre-programmed panic button, which can trigger further
selling and more downward pressure on the stock price.
Another destabilizing factor is “margin selling”: many speculative
investors borrow against their holdings to leverage their investment,
and when the value of their holdings goes down, the brokerage may force
them to come up with additional cash on short notice or else sell into
the bear market. Again the result is something that looks like a panic,
causing the stock price to overreact and drop precipitously.
Where do the short sellers get the shares to sell into the market? As
Jim Puplava explained on FinancialSense.com on September 24, 2011, they
“borrow” shares from the unwitting true shareholders. When a brokerage
firm opens an account for a new customer, it is usually a “margin”
account—one that allows the investor to buy stock on margin, or by
borrowing against the investor’s stock. This is done although most
investors never use the margin feature and are unaware that they have
that sort of account. The brokers do it because they can “rent” the
stock in a margin account for a substantial fee—sometimes as much as 30%
interest for a stock in short supply. Needless to say, the real
shareholders get none of this tidy profit. Worse, they can be seriously
harmed by the practice. They bought the stock because they believed in
the company and wanted to see its business thrive, not dive. Their
shares are being used to bet against their own interests.
There is another problem with short selling: the short seller is allowed
to vote the shares at shareholder meetings. To avoid having to reveal
what is going on, stock brokers send proxies to the “real” owners as
well; but that means there are duplicate proxies floating around.
Brokers know that many shareholders won’t go to the trouble of voting
their shares; and when too many proxies do come in for a particular
vote, the totals are just reduced proportionately to “fit.” But that
means the real votes of real stock owners may be thrown out. Hedge funds
may engage in short selling just to vote on particular issues in which
they are interested, such as hostile corporate takeovers. Since many
shareholders don’t send in their proxies, interested short sellers can
swing the vote in a direction that hurts the interests of those with a
real stake in the corporation.
Lax Regulation
Some of the damage caused by short selling was blunted by the Securities
Act of 1933, which imposed an “uptick” rule and forbade “naked” short
selling. But both of these regulations have been circumvented today.
The uptick rule required a stock’s price to be higher than its previous
sale price before a short sale could be made, preventing a cascade of
short sales when stocks were going down. But in July 2007, the uptick
rule was repealed.
The regulation against “naked” short selling forbids selling stocks
short without either owning or borrowing them. But an exception turned
the rule into a sham, when a July 2005 SEC ruling allowed the practice
by “market makers,” those brokers agreeing to stand ready to buy and
sell a particular stock on a continuous basis at a publicly quoted
price. The catch is that market makers are the brokers who actually do
most of the buying and selling of stock today. Ninety-five percent of
short sales are done by broker-dealers and market makers. Market making
is one of those lucrative pursuits of the giant Wall Street banks that
now hold a major portion of the country’s total banking assets.
One of the more egregious examples of naked short selling was relayed in
a story run on FinancialWire in 2005. A man named Robert Simpson
purchased all of the outstanding stock of a small company called Global
Links Corporation, totaling a little over one million shares. He put all
of this stock in his sock drawer, then watched as 60 million of the
company’s shares traded hands over the next two days. Every outstanding
share changed hands nearly 60 times in those two days, although they
were safely tucked away in his sock drawer. The incident substantiated
allegations that a staggering number of “phantom” shares are being
traded around by brokers in naked short sales. Short sellers are
expected to cover by buying back the stock and returning it to the pool,
but Simpson’s 60 million shares were obviously never bought back to
cover the phantom sales, since they were never on the market in the
first place. Other cases are less easy to track, but the same thing is
believed to be going on throughout the market.
Why Is It Allowed?
The role of market makers is supposedly to provide liquidity in the
markets, match buyers with sellers, and ensure that there will always be
someone to supply stock to buyers or to take stock off sellers’ hands.
The exception allowing them to engage in naked short selling is
justified as being necessary to allow buyers and sellers to execute
their orders without having to wait for real counterparties to show up.
But if you want potatoes or shoes and your local store runs out, you
have to wait for delivery. Why is stock investment different?
It has been argued that a highly liquid stock market is essential to
ensure corporate funding and growth. That might be a good argument if
the money actually went to the company, but that is not where it goes.
The issuing company gets the money only when the stock is sold at an
initial public offering (IPO). The stock exchange is a secondary market
– investors buying from other stockholders, hoping they can sell the
stock for more than they paid for it. In short, it is gambling.
Corporations have an easier time raising money through new IPOs if the
buyers know they can turn around and sell their stock quickly; but in
today’s computerized global markets, real buyers should show up quickly
enough without letting brokers sell stock they don’t actually have to sell.
Short selling is sometimes justified as being necessary to keep a brake
on the “irrational exuberance” that might otherwise drive popular stocks
into dangerous “bubbles.” But if that were a necessary feature of
functioning markets, short selling would also be rampant in the markets
for cars, television sets and computers, which it obviously isn’t. The
reason it isn’t is that these goods can’t be “hypothecated” or
duplicated on a computer screen the way stock shares can. Short selling
is made possible because the brokers are not dealing with physical
things but are simply moving numbers around on a computer monitor.
Any alleged advantages to a company or asset class from the liquidity
afforded by short selling are offset by the serious harm this sleight of
hand can do to companies or assets targeted for take-down in bear raids.
With the power to engage in naked short sales, market makers have the
market wired for demolition at their whim.
The Need for Collective Action
What can be done to halt this very destructive practice? Ideally,
federal regulators would step in with some rules; but as Jim Puplava
observes, the regulators seem to be in the pockets of the brokers and
are inclined to look the other way. Lawsuits can have an effect, but
they take money and time.
In the meantime, Puplava advises investors to call their brokers and ask
if their accounts are margin accounts. If so, get the accounts changed,
with confirmation in writing. Like the “Move Your Money” campaign for
disciplining the Wall Street giants, this maneuver could be a
non-violent form of collective action with significant effects if enough
investors joined in. We need some grassroots action to rein in our
runaway financial system and the government it controls, and this could
be a good place to start.
http://www.globalresearch.ca/index.php?context=va&aid=26857
Financial Warfare: "Sheared by the Shorts". How Short Sellers Fleece
Investors
by Ellen Brown
Global Research, September 29, 2011
“Unrestrained financial exploitations have been one of the great
causes of our present tragic condition.” -- President Franklin D.
Roosevelt, 1933
Why did gold and silver stocks just get hammered, at a time when
commodities are considered a safe haven against widespread global
uncertainty? The answer, according to Bill Murphy’s newsletter
LeMetropoleCafe.com, is that the sector has been the target of massive
short selling. For some popular precious metal stocks, close to half the
trades have been “phantom” sales by short sellers who did not actually
own the stock.
A bear raid is the practice of targeting a stock or other asset for
take-down, either for quick profits or for corporate takeover. Today the
target is commodities, but tomorrow it could be something else. When
Lehman Brothers went bankrupt in September 2008, some analysts thought
the investment firm’s condition was no worse than its competitors’. What
brought it down was not undercapitalization but a massive bear raid on
9-11 of that year, when its stock price dropped by 41% in a single day.
The stock market has been plagued by these speculative attacks ever
since the four-year industry-wide bear raid called the Great Depression,
when the Dow Jones Industrial Average was reduced to 10 percent of its
former value. Whenever the market decline slowed, speculators would step
in to sell millions of dollars worth of stock they did not own but had
ostensibly borrowed just for purposes of sale, using the device known as
the short sale. When done on a large enough scale, short selling can
force prices down, allowing assets to be picked up very cheaply.
Another Great Depression is the short seller’s dream, as a trader
recently admitted on a BBC interview. His candor was unusual, but his
attitude is characteristic of a business that is all about making money,
regardless of the damage done to real companies contributing real goods
and services to the economy.
How the Game Is Played
Here is how the short selling scheme works: stock prices are set by
traders called “market markers,” whose job is to match buyers with
sellers. Short sellers willing to sell at the market price are matched
with the highest buy orders first, but if sales volume is large, they
wind up matched with the bargain-basement bidders, bringing the overall
price down. Price is set by supply and demand, and when the supply of
stocks available for sale is artificially high, the price drops. When
the bear raiders are successful, they are able to buy back the stock to
cover their short sales at a price that is artificially low.
Today they only have to trigger the “stop loss” orders of investors to
initiate a cascade of selling. Many investors protect themselves from
sudden drops in price by placing a standing “stop loss” order, which is
activated if the market price falls below a certain price. These orders
act like a pre-programmed panic button, which can trigger further
selling and more downward pressure on the stock price.
Another destabilizing factor is “margin selling”: many speculative
investors borrow against their holdings to leverage their investment,
and when the value of their holdings goes down, the brokerage may force
them to come up with additional cash on short notice or else sell into
the bear market. Again the result is something that looks like a panic,
causing the stock price to overreact and drop precipitously.
Where do the short sellers get the shares to sell into the market? As
Jim Puplava explained on FinancialSense.com on September 24, 2011, they
“borrow” shares from the unwitting true shareholders. When a brokerage
firm opens an account for a new customer, it is usually a “margin”
account—one that allows the investor to buy stock on margin, or by
borrowing against the investor’s stock. This is done although most
investors never use the margin feature and are unaware that they have
that sort of account. The brokers do it because they can “rent” the
stock in a margin account for a substantial fee—sometimes as much as 30%
interest for a stock in short supply. Needless to say, the real
shareholders get none of this tidy profit. Worse, they can be seriously
harmed by the practice. They bought the stock because they believed in
the company and wanted to see its business thrive, not dive. Their
shares are being used to bet against their own interests.
There is another problem with short selling: the short seller is allowed
to vote the shares at shareholder meetings. To avoid having to reveal
what is going on, stock brokers send proxies to the “real” owners as
well; but that means there are duplicate proxies floating around.
Brokers know that many shareholders won’t go to the trouble of voting
their shares; and when too many proxies do come in for a particular
vote, the totals are just reduced proportionately to “fit.” But that
means the real votes of real stock owners may be thrown out. Hedge funds
may engage in short selling just to vote on particular issues in which
they are interested, such as hostile corporate takeovers. Since many
shareholders don’t send in their proxies, interested short sellers can
swing the vote in a direction that hurts the interests of those with a
real stake in the corporation.
Lax Regulation
Some of the damage caused by short selling was blunted by the Securities
Act of 1933, which imposed an “uptick” rule and forbade “naked” short
selling. But both of these regulations have been circumvented today.
The uptick rule required a stock’s price to be higher than its previous
sale price before a short sale could be made, preventing a cascade of
short sales when stocks were going down. But in July 2007, the uptick
rule was repealed.
The regulation against “naked” short selling forbids selling stocks
short without either owning or borrowing them. But an exception turned
the rule into a sham, when a July 2005 SEC ruling allowed the practice
by “market makers,” those brokers agreeing to stand ready to buy and
sell a particular stock on a continuous basis at a publicly quoted
price. The catch is that market makers are the brokers who actually do
most of the buying and selling of stock today. Ninety-five percent of
short sales are done by broker-dealers and market makers. Market making
is one of those lucrative pursuits of the giant Wall Street banks that
now hold a major portion of the country’s total banking assets.
One of the more egregious examples of naked short selling was relayed in
a story run on FinancialWire in 2005. A man named Robert Simpson
purchased all of the outstanding stock of a small company called Global
Links Corporation, totaling a little over one million shares. He put all
of this stock in his sock drawer, then watched as 60 million of the
company’s shares traded hands over the next two days. Every outstanding
share changed hands nearly 60 times in those two days, although they
were safely tucked away in his sock drawer. The incident substantiated
allegations that a staggering number of “phantom” shares are being
traded around by brokers in naked short sales. Short sellers are
expected to cover by buying back the stock and returning it to the pool,
but Simpson’s 60 million shares were obviously never bought back to
cover the phantom sales, since they were never on the market in the
first place. Other cases are less easy to track, but the same thing is
believed to be going on throughout the market.
Why Is It Allowed?
The role of market makers is supposedly to provide liquidity in the
markets, match buyers with sellers, and ensure that there will always be
someone to supply stock to buyers or to take stock off sellers’ hands.
The exception allowing them to engage in naked short selling is
justified as being necessary to allow buyers and sellers to execute
their orders without having to wait for real counterparties to show up.
But if you want potatoes or shoes and your local store runs out, you
have to wait for delivery. Why is stock investment different?
It has been argued that a highly liquid stock market is essential to
ensure corporate funding and growth. That might be a good argument if
the money actually went to the company, but that is not where it goes.
The issuing company gets the money only when the stock is sold at an
initial public offering (IPO). The stock exchange is a secondary market
– investors buying from other stockholders, hoping they can sell the
stock for more than they paid for it. In short, it is gambling.
Corporations have an easier time raising money through new IPOs if the
buyers know they can turn around and sell their stock quickly; but in
today’s computerized global markets, real buyers should show up quickly
enough without letting brokers sell stock they don’t actually have to sell.
Short selling is sometimes justified as being necessary to keep a brake
on the “irrational exuberance” that might otherwise drive popular stocks
into dangerous “bubbles.” But if that were a necessary feature of
functioning markets, short selling would also be rampant in the markets
for cars, television sets and computers, which it obviously isn’t. The
reason it isn’t is that these goods can’t be “hypothecated” or
duplicated on a computer screen the way stock shares can. Short selling
is made possible because the brokers are not dealing with physical
things but are simply moving numbers around on a computer monitor.
Any alleged advantages to a company or asset class from the liquidity
afforded by short selling are offset by the serious harm this sleight of
hand can do to companies or assets targeted for take-down in bear raids.
With the power to engage in naked short sales, market makers have the
market wired for demolition at their whim.
The Need for Collective Action
What can be done to halt this very destructive practice? Ideally,
federal regulators would step in with some rules; but as Jim Puplava
observes, the regulators seem to be in the pockets of the brokers and
are inclined to look the other way. Lawsuits can have an effect, but
they take money and time.
In the meantime, Puplava advises investors to call their brokers and ask
if their accounts are margin accounts. If so, get the accounts changed,
with confirmation in writing. Like the “Move Your Money” campaign for
disciplining the Wall Street giants, this maneuver could be a
non-violent form of collective action with significant effects if enough
investors joined in. We need some grassroots action to rein in our
runaway financial system and the government it controls, and this could
be a good place to start.
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