Monday July 27, 2009
Navivest
The Securities and Exchange Commission or SEC, had made permanent, rule Rule 204T, which was temporarily put in place last fall and was set to expire on July 31, in a bid to reduce the potential for abusive “naked” short selling in the securities market.
Rule 204 requires broker-dealers to promptly purchase or borrow securities that they would hold in a vault, whenever a customer makes a short sale.
In a short sale, a trader who believes that a stock will fall, borrows the stock and sells it, with the hopes that when the stock does fall, it will be bought back at a cheaper price to replace it. The difference between the price the trader sold it for and the price paid to buy back, is the profit.
In a naked short sale, the broker, whose responsibility it is to secure the shares that are being borrowed, does not actually do so on behalf of the client, resulting in a naked short.
The SEC put rule 204T in place on concerns that naked short selling was partly responsible for the demise of firms like Lehman Brothers, during the height of the credit crisis.
