Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation

73 Pages Posted: 24 Mar 2005  

John D. Finnerty

Finnerty Economic Consulting LLC; Fordham University - Finance Area

Date Written: March 2005

Abstract

The SEC recently adopted Regulation SHO to tighten restrictions on short selling and curb abusive short sales, including naked shorting masquerading as routine fails to deliver. This paper models market equilibrium when short selling is permitted and contrasts the equilibrium with and without manipulators among the short sellers. I explain how naked short selling can routinely occur within the securities clearing system in the United States and characterize its potentially severe market impact. I show how a recent securities innovation called floating-price convertible securities can resolve the unraveling problem and enable manipulative short selling to intensify.

Suggested Citation

Finnerty, John D., Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation (March 2005). Available at SSRN: https://ssrn.com/abstract=687282 or http://dx.doi.org/10.2139/ssrn.687282

John D. Finnerty (Contact Author)

Finnerty Economic Consulting LLC ( email )

60 East 42nd Street
Suite 2910
New York, NY 10165
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2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Fordham University - Finance Area ( email )

113 West 60th Street
New York, NY 10023
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

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