Prime Brokers Scrambling to “Locate a Borrow”

Back office operations are not my strong suit, but it is a trendy topic as Wall Street gets up to speed on the mechanics of "locating a borrow" and the new focus on naked short selling:

The naked short regulations promise to have more teeth than last weekend's announcement that the SEC would police rumors on Wall Street. That was widely interpreted as a weak attempt to herd cats.

Traders now won't be able to skirt borrowing rules to short shares of a rival firm. Up until now, traders were merely required to "locate" shares they'd be borrowing to short. As in: "Yeah, my cousin Vinny in Hoboken has them." The location requirement is a weaker standard that leaves plenty of room for "interpretation" if not outright abuse.

Pre-borrowing is a much firmer commitment and eliminates the probability that a stock lender will lend out the same shares to several different traders. Forbes

Patrick Byrne and a number of small-cap CEO's have long fumed over the practice, clearly having more shares sold short than exist in a stock's float is a clue that abuses are taking place. But it was not until the pile-on reached the financials, and threatened the viability of many high-profile former Blue Chips, and perhaps the system as a whole, that the SEC took action.

Critics say the SEC has been dragging its feet on tighter rules on short-selling. Last year it controversially removed the rule that short sales could only be made on an uptick in a stock. Also, the agency recently extended a comment period on rules that would eliminate option market makers’ exemption from the locate requirement.

Critics say the option market makers’ exemption, together with the SEC’s elimination of the uptick rule last year, has exacerbated the downward pressure on heavily shorted stocks.

John Tabacco of Locatestock.com has been getting some air time to discuss the issue, and reviews the popular borrows daily on his website. He was on FBN last week:

July 7th

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CNBC had a spirited discussion on the topic at the end of trading yesterday, and Tabacco explained, in a nutshell, what has been going on at clearing firms and prime brokers, where multiple borrows have been allowed on the same inventory of shares.

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Curbing Short-Selling Abuse
Forbes

Locatestock.com
Homepage

Full Discussion on Naked Shorting
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