Correct title is “Counterfeiting Stock 2.0”. The document doesn’t allege illegal activity; it describes things the author believes should be illegal.
Also:
> In compiling the information contained in this website, the author relied on sources — both public and private — and, for the most part, accepted the information from the source as reliable.
This only works when the piece is written or published by someone willing to stake their reputation on its veracity.
> Despite being made illegal after the 2008–09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems.
Doesn't sound like it was properly made illegal. Should probably fix those rules.
> Does your broker automatically loan out your shares?
The “loopholes” are intentional carve outs for market makers [1]. Something you want unless you like market makers disconnecting every time the market hiccups.
“Market makers” shouldn’t get to mess around with shares they don’t have. This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto.
> This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto
We have fast settlement for Treasuries. They’re T + 1 and heading towards real-time settlement.
For equities, however, there really aren’t many downsides to T + 2. At the same time, there are many advantages. On the balance, most people who have an idea about clearing are fine with T + 2, though it’s heading towards #
T + 1.
As for market makers, we have similar evidence for market made markets being more stable in crisis than order book markets. Cryptos don’t need this. They have never marketed themselves as being stable, and don’t do anything that requires price stability.
What is the distinction here between what you call "order book" markets and "market made markets".
Surely anything traded on a central limit order book requires outstanding limit orders to provide liquidity and therefore all order book markets are "market made"?
Or are you working with some specific technical definitions here?
> Surely anything traded on a central limit order book requires outstanding limit orders to provide liquidity and therefore all order book markets are "market made"?
No. Some markets, e.g. the NYSE, have specialists [1]. They support the market even when there is nobody else on one side of the order book. When companies list on the NYSE, they are explicitly asking for a group of market makers to be able to naked short their shares as a stabiliser. Many longer-term investors, similarly, explicitly express preference for these protections.
Other markets, like dark pools, are completely counterparty to counterparty. Still others operate around dealers (who are similar to but distinct from specialists).
There is a lot of variation in and competition around market structure.
Ah okay thanks. I always just considered professional market makers (as described there) as just another kind of participant or counter-party who just has a particular strategy and maybe takes advantage of volume rebates or similar (but basically transparent) incentives to act as a liquidity provider.
But I see that you're making a comparison about bitcoin markets where that kind of structure is mostly not there.
That reminds me. For anyone interested, there's an interview with a HFT market-making guy here who set up the LXDX exchange for crypto derivatives and who talks a bit about the differences in market microstructure: https://www.youtube.com/watch?v=xkhLZXLb8mU
The same concept exists in crypto. It’s called flash loans. Ethereum smart contracts can absolutely sell tokens that they don’t own, as long as they buy them back before the end of the transaction. Like traditional market making, this is used to arb price differences in the Defi ecosystem and improve liquidity.
I believe it's more complicated. Per Wikipedia [0],
> Failing to deliver shares is legal under certain circumstances, and naked short selling is not per se illegal.
There are arguments for why phantom (i.e., counterfeit) shares benefit the market. E.g., providing liquidity. Others contend that this practice is used in the aggressive short selling of companies, which is illegal, and there is insufficient transparency and accountability of this practice.
There's a great story of supposed illegal naked short selling in the Global Links fiasco. [1] In this case, one investor was able to purchase 100% of outstanding shares while trading continued unaffected. This post's website also cover's that story and I don't recall how this mess was ever resolved. Briefly searching through sec.gov that didn't turn up anything relevant.
The creation date of the CounterfeitingStock20Full.pdf file is Aug. 28, 2008. Going to the SEC site, it seems like there has been further regulation since then. How much of the document's discussion is still current is not clear. Would also like to know who the author is to understand their interest in the issue.
Also:
> In compiling the information contained in this website, the author relied on sources — both public and private — and, for the most part, accepted the information from the source as reliable.
This only works when the piece is written or published by someone willing to stake their reputation on its veracity.