Goldman's "Naked Short Selling" Strawman

Tyler Durden's picture

Matt Taibbi has put together a very informative piece on Goldman's lobbying attempts, specifically in the context on the upcoming discussion over naked short selling. The contention here by the majority is that naked short selling, or NSS, promotes bear raids on crippled companies which tend to feed upon each other, with CDS traders also joining in the fray. The argument is a dramatic oversimplification and has little substantiation by facts. "Bear raids" occur only and exclusively in financial stocks: why can't you have a bear raid on a firm like Coke or Johnson and Johnson, or even some leveraged behemoth like Hertz.

As an side, full disclosure before Hertz sues us like it did Audit Integrity for daring to mention that it is a prime bankruptcy candidate: we fully recognize the company's tremendous cash flow potential, its amazing assortment of non-rapidly amortizing fleet vehicles, it manageable capital structure, its absolute lack of reliance on pristine credit markets, and the fact that GM is now entering the rental arena courtesy of GM's 60 day money back guarantee is only a synergistic positive: after all the definition of fleet sales is completely irrelevant for a post-bankruptcy Detroit 3 monster. Hertz is a titan of a company and its prospects foreshadow a future so bright we've gotta wear shades.  Zero Hedge however feels for third party research companies like Credit Sights, GimmeCredit, or KDP which may feel otherwise. We hope Hertz' legal team smites them like the irresponsible cockroaches they are if they ever dare to issue a negative report on such a stalwart of American Kapitalism.

Anyway, back to the original point - if you do a bear raid on a company that has tangible assets all you end up creating is an attractive entry point for others who see the depressed stock price as an indication of cheap valuation and nothing else. Of course, why this could be a threat for financial firms, is that the vast majority of financial companies are woefully undercapitalized through the equity level. Bear raids can in fact work when there is a total loss in confidence in any one company. Ironically what worked with Lehman, if indeed it was a bear raid, could easily, and almost did, work with virtually all other financial companies whose only tangible assets were a cesspool of toxic loans whose value is nickels on the dollar. This of course, before Hank Paulson decided to replenish their balance sheets directly via TARP hot-capital injections. That their core balance sheet exposure hasn't moved a smidge is irrelevant, yet could explain why a financial company like Goldman, which for all intents and purposes is in much better shape than all of its peers, could nonetheless be concerned about what happens the proverbial next time around.

Yet what is most relevant here is the presentation that accompanies Goldman's lobbying efforts, which underlines the straw man nature of NSS. In isolation NSS is mostly a bogeyman to the next generation of Dick Fuld's. However, when viewed in the context of all other salient points on the "market structure debate" (a term coined by Goldman) it does become a much more relevant issue. After all, NSS is a critical cog in a properly functioning, computer traded landscape, which as we have been discussing for a long time, is now dominated by such concepts as High Frequency Trading, and where a majority of trading occurs under the radar in dark liquidity pools, potentially using trading proxies such as sponsored access.

From the Goldman presentation obtained by Taibbi:



Notable here is that even as Goldman is presumably extolling the virtues of NSS (a topic which we will discuss much more in depth at a later date), the key considerations presented relate to:

  • "Dark Pools" & Reg. ATS
  • High-Frequency Trading & Exchange Collocation
  • Sponsored Access/DMA
  • Flash Trading & IOIs.

What is curious is the melange of various represented conflicts within this structure debate, that Goldman is either pro or against. On one hand the firm is against lowering of Reg ATS Fair Access thresholds, which would enforce quote obligations, thus dramatically lower the volume of traded stocks on dark pools before the transactions need to be disclosed, yet on the other hand Goldman is for declawing actionable IOIs, a critical component of dark pools, and the equivalent of Flash orders in traditional exchanges. As an aside, and to highlight the growing divergence of opinions on these matters, even as Goldman is against threshold reduction, the head of Credit Suisse's Advanced Execution Services group has a diametrically opposite opinion: "Lowering the threshold appears to be on the table," he said. "We're
thrilled the SEC is reviewing this issue. We're hopeful they're going
to make a change.
" In essence, this would be a categorical first step to pushing dark pools into the gray, and subsequently open, arena:

"This would be a radical change," [Jamie Selway of White Cap Trading] said. "If you're a dark pool
of reasonable size and you're exchanging order information through what
are essentially limited private networks, you'd incur quote
obligations. That would probably kill the practice of routing out
order-ish messages." He added that dark pools would have a harder time
going "semi-light" to pursue more executions.

Goldman is reticent on the topic of Sponsored Access, even though it is a core provider of such services to its clients. As readers may recall, Zero Hedge highlighted some quotes from Greg Tusar previously which indicated the firm's hesitancy on DMA. Yet is this merely an altruistic attempt to curry favor with regulators? One could argue, that Goldman, under the administration's protective wing, is simply trying to redirect the bulk of DMA order flow to its own product offering. If so, this would become evident once new formal DMA rules are set in place, which, magically put Goldman in absolutely no violation of new statutes, while other DMA providers have to scramble to not lose their existing customer base. And what happens if you attain DMA monopoly, or if for some reason, there is a fatal error in order flow especially if post-trade monitoring is enacted as the defacto standard? We quote Lime brokerage:

With a two minute delay to cancel these
erroneous orders, 120,000 orders could have gone into the market and
been executed, even though an order validation problem was detected
previously. At 1,000 shares per order and an average price of $20 per
share, $2.4 billion of improper trades could be executed in this short
timeframe. The sheer volume of activity in a concentrated period of
time is extremely disruptive to the process of maintaining a “fair and
orderly” market. This shortcoming needs to be addressed if the practice
of Naked Access is going to be permitted to continue; otherwise, the
next “Long Term Capital” meltdown will happen in a five-minute time

Lastly, on the topic of HFT and collocation, Goldman is again donning the sheep's clothing and pretending to be all for fair use: "Additional trading obligations should be attached to the privilege of co-location and special rebates offered by exchanges." Funny this should come from Goldman, which has attained a virtual monopoly in both of thsee verticals. And pray tell, dear Goldman, just what obligations will these be? Would they happen to be permissive to Goldman, which, as it just so happens, has a balance sheet perpetually guaranteed by taxpayers, and thus can assume any risk tolerance thresholds, yet virtually unattainable by the incipient competition?

In this cluster of various market landscape artifacts, one can see why NSS is a key issue: any change in its existing form would disrupt an infrastructure that is geared toward instantaneous trade flow, not only on the upside, but definitely to the downside as well (and if you think the market can only go up, you are in for a surprise). Obtaining pre-clearance, or complying with other forms of NSS curbs would be a major stick in Goldman's well-greased PT/SLP/HFT machine, which desires nothing else but to simply solidify its monopolistic position in equity markets. We hope the SEC, other regulators, and politicians can see beyond this thinly veiled attempt by Goldman to promote its own ever-more-dominant interests in the "market structure debate" and not to be caught up on the NSS strawman which is nothing more than a critical part of modern markets used and abused by those who already have an unprecedented, monopolistic presence in virtually every realm of equity trading.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
chumbawamba's picture

The Uprising

Find your conscience. Find your strength. Find your enemy.

And strike.

I am Chumbawamba.


Anonymous's picture

that is a suh-weet video.

Anonymous's picture

good video... passing it along now.

Tripps's picture

does anyone know the band/song in this? love it

Anonymous's picture

from The Resistance

handsfree's picture

Congress has long ago given up all moral authority on this issue. But, go figure. When you lay down with whores, expect to wake up with STD's.

Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.

good articles; good articles 4 slow news day ..http://www.. hat tip: finance news & opinion updated daily

arnoldsimage's picture

good video... sharing it now with others.

gmrpeabody's picture

Maybe it's just me (OK..I'm sure it's me), but.....

I get the feeling that video could have been paid for and edited by the same people that surround and advise the current governing group. Sure seems to have their stamp on it, and yet..

Anonymous's picture

we understand your skepticism. we share it too (question everything before acceptance, especially when it comes to emotionally charged media).

the guy speaking at the end was adam kokesh: one of your new congressmen...

Anonymous's picture

Just donated. Support RJ Harris, Rand Paul, and Peter Schiff as well. We need to vote these criminals out before it comes to blood.

Anonymous's picture

very obscure MLK quote...but very relevant.

we were walking down the street today and saw a t-shirt that had both MLK's and the Wiz of O's pictures on it, exclaiming "Now Is The Time".

nice to see that someone is starting to make the rightful separation once again.

one of the many many differences between the two was that MLK was a registered Republican.

mrhonkytonk1948's picture

I have never understood why any short sale without a verifiably delivered share (not a time-share, either!) was not reversed T+3 or similar.   Well, actually I do understand, and it is fraud, pure and simple.  Bah.  Humbug.

Billy Bob's picture

I may be too old, or I may be uninformed, or maybe some combination of the proceeding, but I recall some rules issued in 1934 that forced "short sellers" to enter a trade on an "uptick".  Of course, the seller had to have arranged to deliver those shares on settlement date.  The "up-tick" rule was designed to eliminate the operations of the great short sellers of the '20, like old Joe Kennedy, from "driving down" the price of the shares of a targeted company.


I understand the current debate on "naked short selling" to focus on the non-delivery of shares.  But I don't hear any talk re: the "up-tick" rule.

Any thoughts?

deadhead's picture

the uptick rule went out under Chris Cox at the SEC under the Bush admin. is this what you were looking for?

Billy Bob's picture

I knew there had to be a reason.. I should have guessed the great free market advocates of the last 8 years changed the rules.  What the devil did those nasty regulators of the '30's know about how to operate a free market!

Oh, well, I guess I will never have to pass the series 7 exam again.

trader1's picture

is it coincidence that the uptick rule was rescinded during the summer of 2007?



lizzy36's picture

hertz, thou doth protest too much methinks.....

deadhead's picture

I will burn those shorts...

ummm, never mind.

lizzy36's picture

where there is smoke, generally there is fire......

Rari Nantes In Gurgite Vasto's picture

every transaction is made of 2 sides when someone does a NSS or for this matter any sale it does it because there is a willing buyer on the other side, which most likely is not interested to know if the seller is "naked or not". If the were no willing buyers the sellers would not be able to find a bid and the market would be 0-offer levels.
The other side of the coin is that if you don't allow short selling you should not allow leveraged buying either...

_Biggs_'s picture

On the contrary, with a naked short transaction, the shares are created out of thin air and are therefore counterfeit.  At least with leverage, one could make an argument there is accountability if the trade goes bad.  Plus market participants cannot see whether the shares are phantom or not.  It certainly seems relavent to me whether the shares I am buying are naked or not and frequently observe the Reg. SHO list at the SEC to see whether there were failure to delivers in stocks I trade.  On any given day, for example ETFC can have millions.  To me, regardless of the MBS risks, this tells me there is significantly more risk there, as the trading is not above board.  There is a law that states that shares need to be delivered within a certain amount of time, and this law is broken constantly.  Again, this places trades unfairly in the favor of institutions and hedge funds...because they can and they own the government. 


The fact that Goldman is able to show up at a hearing like they did and blatently lie to the government saddens me.  I know a statement at this point in the game is certainly more than a little trite, but I will never get used to this blatent criminal activity.  It really does sicken' me.  


NSS is bullshit and it illegal.  End of story.


I don't generally post here that often, but I would highly recommend you educate yourself on what the implications of NSS have had on multiple companies traded on stock exchanges in the U.S before you consider opening up your keyboard to post about it.



vreporter's picture

Many of these themes will come under addressing "liquidity risk," a theme on which London regulators have jumped ahead of us.

Comrade de Chaos's picture

aren't bear raids representation of capitalism, where markets are efficient and participants are free to invest at their will and according to their views? Since bear raids represent capitalism and GS is against those therefore GS is anti-capitalist entity.

It's founders must be turning in their graves... SHAME!!!!

Comrade de Chaos's picture

GS should rename thyself into GSSRP, GS & Social Republic of Pussycats. 

ratava's picture

My dad does politics, not economics, but when I asked him what happened in the US, he got it right immediately: "Bankers robbed them."

Anonymous's picture

Hello Bank of America,

I already closed the personal accounts I had with you.

This week I finally convinced my business partners to move our commercial accounts (aprox. 220K) to a credit union.

Bank of America: F**K YOU

Pizza Delivery Man's picture

Market down. Victory for the bulls.

Anonymous's picture

Hello Bank of America,

I already closed the personal accounts I had with you.

This week I finally convinced my business partners to move our commercial accounts (aprox. 220K) to a credit union.

Bank of America: F**K YOU

Mazarin's picture

A.P Giannini would be rolling in his grave at what the crazed banksters have turned his baby into. Giannini founded Bank of Italy in San Francisco. It was renamed Bank of America as it grew. But only recently was it acquired by the east-coast bankster establishment and turned into the plebe (little people)-robbing tentacle of the fed-morgan-rockefeller squid...

Gilgamesh's picture

Oh, no.  I strongly disagree with your assumption.  He was a key figure in this from the very beginning...

Giannini, Amadeo Peter.  Born in 1870. Giannini, who in 1904 founded Bank of America in San Francisco, originally called Bank of Italy (until 1930), virtually invented branch banking.  Giannini's bank was "for the little fellows" at a time when banks generally lent only to the wealthy.  Giannini's first foray east was to reach across the continent to form the East River National Bank in New York City in 1919.  He then bought the Bowery National Bank in 1925 and New York's small Bank of America in 1928.  In 1928, banker Giannini formed Transamerica Corporation as a holding company for all his Californian interests.  Transamerica Corp. held 99% of the stock of Bank of America and it continued buying up banks in Oregon, Nevada, Washington and Arizona.  Right after Transamerica was created, Giannini retired to Italy.  He put New York banker Elisha Walker, who headed Blair & Co. until it was taken over by Transamerica in March 1929, in charge as CEO.  Elisha Walker was a director of American International Corp., once set up by the Morgans and Rockefellers, together with Percy Rockefeller, Pierre du Pont, Otto Kahn, William Woodward (director NY Fed), and George Herbert Walker (father of Prescott).  Elisha became a senior partner in Kuhn Loeb & Co. in 1933, which was managed by Felix Warburg and Otto Kahn, successors to Jacob Schiff.  Elisha held 13% of the bank's stock in 1933, the same amount as John Schiff, son of Jacob Schiff.  In the 1960s, after Giannini's death, Bank of America even became larger than First National City Bank and Chase Manhattan of Wall Street.  Giannini was a great admirer of FDR's New Deal.  Lawrence Mario Giannini, son of founder Amadeo Peter Giannini, was elected president of Bank of America in 1936.  In 1945, Bank of America became America's largest bank, with assets of $5 billion.  A.P. Giannini died in 1947.  In 1953, regulators succeeded in forcing the separation of Transamerica and Bank of America.


Any need to mention his involvement in the Globalist Societies?

McGriffen's picture

interesting, thanks for that bit o' history.  quite the panopoly (sp?) of power elites

pigpen's picture

Even poor little naive Pigpen took his money out of Capital One Bank.  It is the only way for the hoi polloi the only way to hit the monied elite oligarchs is to take your money out of the system.

Be like pigpen and take your ball and go home.



gmrpeabody's picture


Local credit union only and zero balance on any credit card.

I shop the merchants and restaurants that accept Am Ex.

Careless Whisper's picture

Isn't Hertz controlled by the Carlyle Group? Maybe afraid of a domino effect?


unemployed's picture

Eventually got down to how the naked short selling/failure to deliver is done.  My probably inaccurate understanding is that there is an SEC? rule that allows market makers to fail to deliver if they have a hedge, such as a put (far out of money, exchange or private).   They go on to show how a hedge fund would borrow the electronically created non delivered  shares from a co conspirator market maker so that either hedge fund or market maker could sell at will.  Bottom line,  as with stock proxies, they say the clearance corporations allow an infinite number of shares to "exist". 

But why limit this to stocks,  what about the amount of Treasuries and bonds that fail to deliver.  Not to say anyone is taking advantage of this. But if two different entities could lay claim to the same asset on their balance sheet at the same time that would enable quite a Ponzi scheme. 

Gilgamesh's picture

I would assume Deepcapture is involved in what it to come here.  Or hope, at least.

_Biggs_'s picture

unemployed-indeed...Ponzi scheme.  I think the argument has been made here that our entire financial system is a check-kiting scam right now.  Let's see which Peter I can rob to pay Paul. 

 On NSS, the rules were actually changed during "community service" hours performed by none other than Bernie Madoff in the bowels of the SEC.  My guess is he was just a pawn, in the end, that was one of many.  His lucky number came up as scapegoat 31276 within whatever organization he was working for.  Now this story has got to be one of the SEC's biggest black eyes, in my opinion, going right now.  A guy never hears a word about it, either.  And, as I think was reported here, Madoff articulated that he was next in line to takeover the Chairman spot at the SEC.  Unreal.


(Side note) My links to deepcapture on comment boards such as the New York Times have been deleted.  One day I posted links six times only to have the messages vaporized.  Pretty weird.

I haven't seen the Rolling Stone article, or whether it is oversimplified (TD-please consider the audience), but here is the video of the deepcapture version of Bear and Lehman.  They provide many instances of NSS hurting or destroying companies that are not financial institutions.


I'm happy to see this addressed here.






Anonymous's picture

DNDN bear raid a few months ago, brought the stock from 20 down to about 8. NASDAQ refused to reverse the trades.

bonddude's picture

I read a compelling and seemingly credible story 2 or 3 years ago about the massive fees these illegal transactions create for all of the exchanges and DSCC. If true they will NEVER care. Talkin' about billions in the trough.

Frankfurt and other lesser exchanges were reported to allow registering companies shares to trade there and then voila. I really don't know much about it. Does anyone else?

Anonymous's picture

obviously the Golden Sacks boys still think they're smarter than everyone else.

in the end, that might be an error that may prove to be fatal.

Gordon_Gekko's picture

Hubris will be their undoing.

Anonymous's picture

Direct Execution Sales Trader - Electronic Equity Trading
The UBS Investment Bank based in Stamford, CT is seeking an experienced professional for the role of DES Direct Execution Services - Sales Trader withn our Electronic Trading group. The ideal candidate would have a solid track record developing client relationships in financial services and will be responsible for working with our institutional clients utilizing UBS Electronic Trading products & services.

This individual is a professional, self-motivated and a team player. The candidate must be results-oriented and committed to supporting the existing client base and generating new business opportunities in a competitive market. The individual will be expected to develop and maintain strong relationships with UBS institutional clients.

The job involves ensuring that there is a quality execution service to support the various electronic execution tools and products that the bank provides to its institutional clients. The role responsibilities includes but is not limited to:

Leading the first line of business support for electronic trading in Algorithmic trading, Direct Market access and execution consulting

Intelligent service provision to customers to ensure and improve quality of service around algorithm-selection, execution quality, market structure, technical advice etc.

Care and ownership of Algorithmic orders sent to the desk

Driving the growth of electronic business through client relationship management

Basic Qualifications
A bachelor degree or equivalent

A minimum of 5 yrs sales trading experience

Series 7 & 63 registration

Fluent in industry regulatory issues and electronic execution concepts

Knowledge of ECN's, Darkpools and market structure

Preferred Qualifications
5 yrs sales trading experience preferred (electronic desk preferred)

Established client base and familiarity with execution technologies/strategies.

To Apply to this role: Please go to the UBS career portal at and use the requisition number in the Keyword field: 50790BR

handsfree's picture

Intelligent service provision to customers to ensure and improve quality of service around algorithm-selection, execution quality, market structure, technical advice etc.

Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.

good articles; good articles 4 slow news day ..http://www.. hat tip: finance news & opinion updated daily

ToNYC's picture

what up? no Series 55 for Equity Trader?

Gordon_Gekko's picture

"The US equities market is increasingly efficient and is broadly regarded as the best in the world."

Goldman's cocaine consumption must be at all time high these days. What a load of utter HORSESHIT. People I know - both family and friends - will prefer DEATH to "investing" in the US equities "market".

handsfree's picture

Good point here

Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.

good articles; good articles 4 slow news day ..http://www.. hat tip: finance news & opinion updated daily

ToNYC's picture

didn't bother with the articles, but not putting jpmChase with their huge SPY prints as numero uno or photo-finish with GS is off the mark.