Matt Taibbi’s journey down the rabbit hole of naked short selling is getting weirder and weirder.
Today he posted a video allegedly showing a “day trader” shorting tens of billions of shares of a stock with a float of only 5.5 billion shares. The trader allegedly executes his trades through the clearinghouse Penson.
“If you don’t need to actually find the stock before you sell it, there’s no real brake on speculative naked short-selling,” Taibbi writes. “If a clearing firm will give you a locate no matter how big your request is, there is no real barrier out there to stop this kind of activity.”
Here’s the video.
Sorry. But there’s no way this trade is real.
Update I: We heard from Penson. They say it isn’t their trading system.
Update II: This is ridiculous. The video doesn’t even show what Taibbi says it does.
There are plenty of things wrong with this video, and with the conclusion Taibbi draws. Clearing firms will not execute orders without regard to the size of the order, there are real brakes on speculative naked short selling, and real barriers exist to stop “this kind of activity.”
Too Speedy. The first thing that rings false the speed with which the trade is executed. The trader apparently manages to short billions of shares in mere seconds. Penson may be a popular and efficient clearinghouse but there is no way they are that fast. There’s just no way to have instant execution of a trade of this size.
“It takes minutes to a half-hour for a request to come back from Penson,” a trader who clears through the firm tells us.
Too Big Of A Trade. You cannot sell tens of billions shares without someone wanting and able to buy those billions of shares. This trade involves placing a sell order for more than the total volume of all US equity markets combined for any single trading day.
Too Much Leverage. More importantly, almost no trader using Penson as his clearing house would have the buying power to put in an order this large. This should sale would require billions of dollars of buying power. The buying power of any trader is a multiple of the money deposited with Penson. That is, it is determined by the maximum margin account available to the trader.
For ordinary, retail traders—the kind of people likely to be called “day trader”—the maximum intra-day leverage is 4 to 1. This is set by FINRA regulation. In order to short tens of billions of shares on any stock worth more than $1, the trader would have to have billions in his brokerage account.
Small hedge funds often use a more sophisticated kind of margin account that allows for more leverage. It’s calculated by the clearing firm exclusively for each of their clients who get it based on their style of trading and track record. A risk averse day-trading hedge fund could get leverage as high as 7 to 1 intraday. These typically require a minimum of at least $1 million in the account with the clearinghouse.
Any trader with the billions of dollars necessary to get execution on the trade Taibbi describes would be unlikely to be clearing through Penson. He would be trading through Goldman Sachs or JP Morgan.
It’s too risky. There is a good reason for Penson and other clearing houses to limit leverage in this way, even beyond the regulations. They face counter-party risk when allowing traders to short stocks. If the stock increases in value and the trader cannot pay for the stocks he is short, the clearinghouse will have an obligation to make good with the Depository Trust Company.
This trade would be a disaster. If tens of billions of shares of a stock were sold like this, it would make headlines and single handedly wipe out the stock. Likewise, when the trader bought up the shares to close the trade and deliver the shares to the buyers, he’d face a self-imposed massive short squeeze. Buying shares pushes the price up. He’d get crushed.
Taibbi is reading too much into the video. Although Taibbi concludes his description of the video by writing “The trade goes through,” this isn’t what happens. This screen shot is nothing more than the purported “ok” from some trading system that an attempt is made to locate shares. The quantity is requested and there is no indication that the entire amount was approved.
Many trading systems will accept any amount for the request but only return the approval for the quantity that the firm was actually able to locate. There is no evidence that this trading screen is somehow linked in real time to Penson. Had this order actually been attempted to be entered into the Penson system, multiple risk checks and parameters would rejected the order.
In short, there’s just no way the trade represented in this video is real. It certainly doesn’t reflect the reality of short selling.