Australian (ASX) Stock Market Forum

How are naked shorts settled?

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Sunder

Sunder

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I have a few questions.

1. If an entity selling naked can't settle, what happens to the buyer of the shorted stocks? They paid for some shares, and the seller can't deliver. Surely the buyer has a case for some serious litigation? Do the naked short sellers just buy shares at that point and transfer them over at the settlement date?

2. Can funds naked short in Australia? Or only covered shorts?

I'm not interested in doing naked shorts, if anyone has that idea. I'm just trying to figure out how naked shorts haven't ended up in endless lawsuits.
 
Well, these are the rules:
A broker must inform its clearer that the sale is a short sale, and must ensure that the clearer has secured a minimum 20% initial margin over the short position.
In the current volatility a responsible broker should in fact increase that margin or temporarily stop offering this until volatility reduces.

A broker must advise ASX as soon as practicable that it is executing a short sale. A broker must report to ASX their unsettled net short sale position as at 7.00pm by no later than 9.00am on the next trading day.
The penalty for not doing this is laughably small though so most institutions ignore this and are quite happy to pay the peanuts penalty.

Further, ASX limits the class of listed securities in which 'naked' short selling can occur, determined on the basis of liquidity of the relevant securities and capitalisation of the relevant issuer.

ASX has:
a) Clearly stated that it must be informed of all short sales, whether naked or not. Previously, some market participants have taken the view that their disclosure obligations differed depending on the type of short sale.
b) Announced that legislative amendments are needed to remove the scope for different interpretations of key obligations under the law, and to support the obligations that ASX imposes directly on brokers and indirectly via brokers on other market users.
c) Confirmed that if it identifies a person failing to comply with their short selling obligations under the Corporations Act 2001 (in particular section 1020B(5)), it will refer the matter to ASIC for investigation and prosecution.

You can look up the Opes thread to see what happens if a broker ignores these rules :eek:
 
As I understand it the asx guarantees settlement for any trades done through the asx. For a seller of shares where the purchaser fails to settle thats pretty straightforward on the asx's behalf - they go to their pool of funds that are set aside for this exact purpose, and pay the seller out of that money, and then I assume they go and pursue the purchaser for the funds.

For a buyer where the seller fails to settle I'm not sure how they go about guaranteeing settlement as this involves delivering scrip that doesn't exist. Do they go into the market and purchase the stock and deliver it?

Its a good question. Actually how do they deliver scrip with naked shorts anyway even under normal trading - the scrip never existed so I'm not sure how it gets delivered at settlement.

The vast majority of shorting that occurs is via stock lending though and not via naked shorts as I understand it.
 
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