The Problem of “fails to deliver”

From FreeRepublic via financialwire.net, StockGate: Is All Heck About To Break Loose? The NY Fed has called a special meeting for 14 companies who dominate the credit-derivatives market. The 14 companies include JPMorgan Chase & Co. (NYSE: JPM), Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc., Morgan Stanley (NYSE: WMD) and Merrill Lynch & Co. (NYSE: MER). There have been allegations of illegal naked short selling, and regulators are smarting over allegations that they gave super hedge funds a free pass because regarding “fails to deliver” (FTD). Regulation SHO included a “grandfather clause” to fix the FTD problem, but the FTDs are so massive a problem that even with a six months notice it has not been cleaned up.

The hedge funds, (TheStreet.com’s Kevin)Kelleher said, say that “most of the positions created by failed deliveries are related to options trading and not a concerted effort to drive stocks down.”That may be the case. But without better data on stocks that failed to deliver, the rest of us will never know for sure.

FTDs are a growing problem anmounting to about 1.5% of daily trading or $6 Billion daily.

(CrossCurrents editor Alan) Newman explains naked short-selling in eye-opening clarity, he notes: “Selling unborrowed shares means the buyer doesn’t get delivery of the shares he bought. “There are now two actual owners of the same shares. The exact same shares now show up long in both accounts,” Newman says. “Every 100 shares of a naked short is a duplication of real shares, just as if the shares had been photocopied and distributed.”

The buyer of the naked short expects to receive his shares and the clearing corporation registers a FTD, when that doesn’t happen.

“After Regulation SHO was passed, the delivery failures rose, averaging 205 million shares a day in December and rising as high as 259 million on Dec. 22 alone. Since the law went into effect on Jan. 3, the delivery failures have declined, but are still only about 20% below their levels of last summer.”The SEC, wanting to avoid short-squeezes in dozens of stocks caused by the closing out of naked short positions, opted to ‘grandfather in’ any failed deliveries before Jan. 3.

…snip…

“Among other things, by not having to deliver securities, naked short-sellers can take on larger short positions than would otherwise be permissible, which can facilitate manipulative activity.

We have suspected for a long time that the price of Gold was manipulated and even the shares of gold mining companies. How easy would it be to sell shares you don’t own to keep manipulate the price of shares? How many times does it have to happen; Gold goes up $6 then the next day it goes up again, but the mining shares go down? The third day the price of gold goes down. It is a giant scheme to keep gold at low levels so that you don’t have an alarm that says inflation is picking up.

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