Naked shorts can't stay naked forever

Matt Levine said it well about this non-story: "[DiIorio] then decided to put $100,000 of his own money into a penny-stock company that supposedly made computer chips. ("I bought this company on hype," he says.) The company then announced a reverse merger with a travel company, because that is how things go in the penny stock world; corporate identities are pretty fluid. The stock soared, and then lost almost all of its value. "DiIorio took a loss from the peak stock value of well over $1 million," though I am not sure why you'd measure his losses that way."

The consensus here seems to be that DiIorio got what he had coming for trading in the pink sheets. Fine.

But if we accept the premise–that a market maker in penny stocks can sell an essentially unlimited number of shares without ever having to close out the short position–doesn't that mean that there is absolutely nothing a private investor, using a regular brokerage account, can do to protect themselves?

So the point doesn't seem to be about DiIorio's due diligence (or lack thereof), but that this can happen with any penny stock absolutely regardless of the level of care an investor puts into the trade. If true, it seems to call into question the regulatory policy of letting non-qualified investors trade in these things in the first place.

Odd how this series keeps repeating that Chris DiIorio lost $1M on a penny stock, when the Part 1 makes it clear that his entire investment was around $100k. He had a big paper gain that evaporated.

TL;DR: don't trade the pink sheets.

NITE may have abused the rules to maintain their short position, but this was definitely not some evil plot to drive down stock prices. The reason that these tickers end up on the "chill list" is because they are massively inflated shares that are literally not worth the paper that they are printed on. Shorting and holding is almost guaranteed to be very profitable strategy.

The difficult part is maintaining your short position, and this is where the real story is. Here, an alternate theory for NITE's behavior is that they were protecting their short position. Stock manipulation schemes are often a cat-and-mouse game where the manipulators are trying to trap shorts in large positions and then squeeze them out of it, forces them to buy back the stock at even more inflated prices. In this case, NITE would have been allegedly abusing the rules to win the game against a cheater.

In my opinion, the manipulators are likely far more at fault for Dilorio's loss than NITE is.

As others have said, this might be a non-story. It's also weird how it's writing about Knight Capital in the years 2008-2011, without noting that in 2012 Knight Capital collapsed spectacularly by losing $440 million in one day due to an error in its trading algorithm.

https://en.wikipedia.org/wiki/Knight_Capital_Group

Some context: These events date back to 2006. Prior to the financial crisis. There've been major changes to the industry and SEC regulations since. Wall Street still has bad actors and has a lot to fix but short selling looks very different today.

The SEC added multiple rule amendments to Regulation SHO over the past 10 years to address fails to deliver and restrict abusive short selling. The SEC claims high double digit declines in FTD rates. Naked shorting feels like it has dropped off the radar compared to something like Reg NMS. Knight Capital had many problems and no longer exists.

The link story involves a penny-cap mobile chipmaker company suddenly merging with an online travel agency...This company then does a 1-1000 reverse stock split...Around the same time, a clearing agency freezes the company's stock, hinting at potential violations of federal/state law.

For those not familiar with equities, these events are bad. The stock is likely going down. Shareholders will lose money whether or not naked short selling took place.

Knight Cap may have engaged in fraud here, I don’t know, but this guy for sure bought a bad stock.

Wiki on Regulation SHO: https://en.wikipedia.org/wiki/Naked_short_selling#Regulation...

SEC Short Sales website has rules, info and data (warning gov site and painfully dry reading): https://www.sec.gov/spotlight/shortsales.shtml

Whatever the merits of the actual story, it's pretty obvious to everyone that without real oversight, most banks, trading firms and the like will eventually break the law, or at least bend it out of recognition. The question is who will suffer the loss; I assume eventually it's all of us.

The same old con from the XVIIIth century (UK) called arnaque à la bouilloire. It used to be forbidden on the stock exchange (like a lot of other practices such as cavallerie). But through some obscure technical points of laws left intentionally opened it tends to come back, written by a MP that tends to then go to work in a bank. That is the reason why public clerk were forbidden to work in the private.

History repeats itself, nothing new under the sun.

I find it frustrating when journalists level these claims of market manipulation without clearly specifying the trading strategy. I am struggling to write down a sequence of trades that corresponds to the allegations of the article, generate a profit and abide by basic order book mechanics/sensible counterparty behaviour