In recent days we have had a lot of questions and comments regarding both naked shorts and synthetic activity surrounding a stock, in particular AMC. Our community have made some valid points and in this article, we highlight how ORTEX data accounts for these factors.
Naked shorting is an illegal practice involving the short-selling of shares that have not been borrowed. Hedge funds and prime brokers are both heavily regulated institutions, so when this activity – or any other form of false reporting – occurs, it is criminal behavior and should be identified by regulators. Perpetrators risk sanctions or even prison for the saving of a stock borrow cost. You can get a rough idea of the scale of potential naked shorts from the level of trades that fail to deliver from seller to buyer within the mandatory settlement period.
ORTEX has today added failure to deliver data to the short interest page to ensure our users have access to all the relevant data. Please note that not all fails-to-deliver are due to naked shorts but it is certainly the best indication available to identify such activity.
There have also been suggestions that stock lending data is less useful or less relevant due to synthetic activity surrounding a stock. You can create similar economic effects using derivatives or “synthetic” structures without ever owning the underlying security – options and futures being obvious examples. However, remember that almost all meaningful synthetic positions will be hedged by the underlying issuer. For example, if a significantly large put option is created, the issuer will likely hedge that position by borrowing and shorting the stock. ORTEX stock lending and short interest data therefore also include data related to synthetic positions.
False reporting carries very significant fines. Whether by accident or malfeasance, even when self-confessed to the regulator, fines will show some pretty eye-watering numbers. As our users know, we are committed to providing the most timely and accurate stock lending data in the market. We source our data from the world’s largest pool of agent lenders, prime brokers and broker-dealers.
Our mission is to provide non-institutional investors with affordable access to the highest quality information available. We go to great lengths to ensure the validity and robustness of our data so that our users can make informed trading decisions on a level playing field. We’ll continue to work hard to bring accessibility, transparency and trust to global markets.
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