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Comment by gizmo | Hacker News Reader

1. Naked short selling basically doesn't happen anymore. To the extent that it does happen it's a mere technicality and the borrow is found after a couple of days.

2. There is very little money in shorting. Pumping and dumping by making up positive news is much more lucrative. "to the moon" has been a trope for years, and there is no equivalent on the short side. Even the world's most successful short seller Jim Chanos was successful because the short portfolio functioned as a hedge that enabled a leveraged long position on broad indices. It's pretty hard make money net short when the market goes up for two straight decades.

3. The authorities don't have the resources nor the dogged inclination to hunt down fraudsters. The authorities can't and shouldn't base an exhaustive investigation on vaguely shifty CEO behavior. Short sellers can and do start their investigation based on gut feeling.

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> The authorities can't and shouldn't base an exhaustive investigation on vaguely shifty CEO behavior.

Moral hazard. We are in this thread, where many people complain about the irrationality of the market, of bad choices having no ill effects, and at the same time it is argued that authorities should prioritize and only investigate and prosecute large cases where the ROI is good.

I think the ethical landscape created by this "selective investigation and prosecution based on ROI" is part of the problem. We officially abandon the concept that wrong-doing will get caught and punished as a rule and then we marvel that the markets are irrational and that bad actors profit and keep profiting over large time horizons. Who could have expected such?

I think over a longer time period these effects will compound and there will be larger and larger problems. You can't just abandon the rules because enforcing them is not cost-efficient and hope everything will be alright. But it does take time to see the effects so who knows when the larger problems will show up.

I broadly agree, except I think the greater moral hazard is in failing to prosecute the plain-as-day cases of fraud (regardless of size). I'm not arguing in favor of abandoning rules but given limited resources you have to prioritize somehow, and every prosecution strategy has significant externalities like those you touched on.

1. FTDs are at an all time high. Naked short selling is an epidemic. This is provably false.

2. Operational shorting as a part of market making and derivatives strategies is an enormous part of the market. This is also demonstrably false.

3. The DOJ has the resources, not the jurisdiction. Self regulation will always be underfunded. Trying to argue that short selling is an effective form of privatized self regulation is laughable.

An increase in failures to deliver does not imply an increase in naked shorting.

They are highly correlated. Most other causes are static processes which would not increase or decrease.

The few firms (market makers) that are allowed to short naked pretty much always deliver.

By “cheque kiting”. Trading back and forth perpetually with colluding firms to perpetually “deliver”, eventually landing these phantom shares in offshore swap agreements where reporting has conveniently been perpetually delayed.

As for 3. Looking at the HR targets they don't look like hunch targets to me.

They seem to be going after egregious high flyers with a pattern of grift who are vulnerable to a short.

Of course I could be wrong

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