At some point in the early 2000’s, it was fashionable to manipulate stocks down by shorting them without borrowing them first.  The practice of Naked Short Selling wasn’t against the law per se, but stock manipulation was and still is.  Unfortunately, as is the case with precedent-based securities law, governing policies are reactive and therefore ripe for loophole exploitation.  It took some investigative work by Bloomberg and some very public, brazen manipulation of stock before governing bodies tightened up the rules.

Those rules to ban manipulative Naked Short Selling were introduced in 2008.   5 years later we are again hearing about manipulation in the form of High Frequency Trading (HFT).  High Frequency Traders using latency arbitrage techniques are now in the public spotlight and much of the debate is reminiscent of the Naked Short Selling complaints 10 years ago.   In fact, this Bloomberg special on Naked Short Selling could easily be re-purposed for an expose on HFT.

As Mike Schneider reports:  “While naked short selling is legal, manipulation of markets is not, and regardless of intent the effect of naked short selling can be the same – driving prices lower”.  Sounds a lot like HFT…

Bloomberg Special: ‘Phantom Shares’