Instead, it showed a video of a trader requesting a giant locate for a hard to borrow stock and having a trade rejected because he had insufficient funds to cover the trade.
Taibbi says we read his post all wrong.
“What I published was a tape of a trader asking for a locate of tens of billions of shares,” he writes. “It is the size of the locate, and the speed with which it is approved that is the issue, not the trade. The actual trade, if Carney had bothered to read the text, was only for 100 shares.”
This is good news. Taibbi agrees that he hasn’t uncovered any evidence of naked short selling. Instead, he seems to have just found a piece of trading software that may have initially claimed it could locate the entire float of a stock very swiftly, although the same software would later reject the trade. We should all be grateful that the kind of naked short selling that conspiracy theorists like Taibbi think is controlling markets doesn’t seem to exist.
It’s actually very difficult to see whether Taibbi has actually uncovered anything the slightest bit off here. We don’t know what the stock in the video was–more on this in a moment–and we don’t know the number for the locate that was blocked out in the video Taibbi posted. It may well be that the trader was using a primitive piece of software that simply claims to have located the entire float of a stock. Notice that the tiny numbers at the bottom of the screen don’t match the number requested, implying there is some kind of limit to the number it will allow the trader to locate.
Taibbi claimed in his piece that the trade was done through Penson, the big clearing firm. Penson has denied the trade was done on its system.
Importantly, this trade would have to be put through some broker who would have the responsibility to check whether the shares could reasonably be located in the amount requested. The speed with which this transaction takes place implies that it is a fully automated system that processes trades that would then have to be passed on to an actual back-office at a brokerage where much a much slower review would take place. And at the brokerage, putting aside an egregious human error (which is always possible), the trade would have been rejected.
Incidentally, we think the trader was trying to short shares of Citigroup. The trade takes place on August 15th, 2009 and involves a stock that was on the hard to borrow list that day. Ordinarily, stocks can be shorted in almost any amount that a short seller has the purchasing power to short because there is no real locate requirement for highly liquid, widely held stocks. For stocks on the hard to borrow list, however, a broker must have a reasonable belief that the stock can be located for borrowing in the quantity requested.
Citi was on the hard-to-borrow list that day. Taibbi describes the company as “a major NYSE-traded stock” that is “one of America’s largest financial companies and the recipient of an enormous amount of public bailout money.” So our money is on Citi.
If we misread any of Taibbi’s meaning in his “Caught On Tape: A Naked Swindle” piece, we apologise. But we think an error on our part would have been understandable given what Taibbi actually wrote in his post. Take a look and see if you wouldn’t have also thought that Taibbi was claiming an actual trade was taking place.
- The video is titled “Penson Approves Billion Share Naked Short.” That sure sounds like a trade. In any case, the video doesn’t show Penson approving anything. Penson denies this is their system. It looks like some third party software.
- The post is titled “Caught on Tape: A Naked Swindle.” But no actually swindling or short-selling takes place.
- “The trade goes through.” Those are the words that Taibbi uses to close out his description of the transaction on the tape. But no trade actually went through anything. In fact, the trade was rejected.
Taibbi thinks our reading of his post as Penson approving a billion share naked short could only be the result of glue-sniffing and says we badly “fuck the reporting process up.” Really? (Here’s another link to his original post if you want to read it again.)
For our part, we find ourselves agreeing with the conclusion of forensic accountant and professional fraud detector Tracy Coenen, who wrote on The Fraud Finder blog:
Was Taibbi really saying that a 100 share trade went through? Because that point wasn’t clear in the original article, and would essentially be a non-story. The real story, according to Taibbi, was the multi-billion shares that could be naked shorted. And the story was headlined with the words “naked swindle”… but now he’s saying there was no swindle?
So either way you interpret the original story, we still end up with no evidence of massive naked short selling.
One thing that seems clear is that Taibbi’s video is not an example of how naked short-selling can happen. At best it shows that margin requirements are a truly effective brake on speculative naked short-selling even if the locate system breaks down. Taibbi certainly hasn’t shown that a clearing firm will give you a locate no matter how big your request is, because the short locate request in the video probably never reached the clearing firm.
Why does this matter? There’s an attempt out there to claim that the failures of Bear Stearns and Lehman Brothers were brought about by day traders who piled on to naked short positions against the stock of the investment banks. So far, there’s zero evidence for this claim and little evidence that it would even be possible. Taibbi’s post doesn’t show any naked short sellling, which means it doesn’t provide any supporting evidence for the claim that naked shorts crushed Bear and Lehman.