We’re still trying to figure out what the hell was going on in Matt Taibbi’s “Caught on Tape: A Naked Swindle” video. What we know for sure is that there’s nothing in there that comes remotely close to evidence of a naked swindle.
For another perspective, here’s Kid Dynamite’s take, which blasts the idea that there was even a “stock locate” going on in the video, which is what Taibbi claims is all he said.
…if you try to short Citibank (a few months ago), any good execution system will check its easy to borrow list, see that Citi is not on the list, and ask you where your “locate” is from – in other words, which broker agreed to lend you the stock. There are also many electronic systems where you can request a stock locate electronically – but this is not what’s in Taibbi’s video! What the video clearly shows is that the stock in question (let’s call it C) is on the hard to borrow list. The trader gets a warning message saying that the stock needs to be borrowed, and asking for the trader to either submit the borrow information or elect not to submit the trade.
The trader in the video is NOT submitting a request for the stock to be borrowed – he’s entering information into an audit trail point asking WHO the stock was borrowed from, HOW MUCH was borrowed, and WHEN it was borrowed – exactly to prevent problems related to naked short selling! This way, if the seller fails to deliver shares, the broker can easily pull the exact reference that was used for the short sale. Of course, just because I say that I was able to obtain a locate for a gajillion shares of C doesn’t mean that I actually was able to – and that’s why especially hard to borrow stocks should have another level of compliance checking embedded in them. If this trading system in the video allowed a trader to claim a locate that was clearly impossible, then that’s a condemnation of the inadequacy of this trading system – not of the borrow market and the legitimacy of short selling. Fortunately, there was no naked short sale of tens of billions of shares of C on this trade, and Taibbi’s post is a gigantic misunderstanding of what was actually going on. Of course, it’s especially scary when people jump to his defence (in the comments of both his posts and of Carney’s posts) and thank him for highlighting such injustices – never failing to mention how Goldman Sachs is stealing money from poor old grandmothers at the same time.
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