Expert: Steven Taylor - 7/28/2009

Question
Hello Steve,

I read your recent article / reply to someone else (regarding the subject of shorting) in which you said:  "I generally know who those firms are, and if I see one of them involved with a particular stock in a certain way I advise people to stay away".  Would it be possible for you to name (and shame?) these firms....(or at least name them?  

I am a small investor, and I am not at all interested in shorting.   I just don't want to end up being cheated in one way or another by unscrupulous people engaged in unscrupulous practices.

Shorting is (I believe) one of those practices.   Another one which has been in the news recently -and hopefully will end up being banned soon, is so called  "flash trading"....and a third one are some of the practices of "quants".  

I see no legitimate reason why legitimate investors should become victims and easy prey for unscrupulous firms and traders.

I am an American but I have basically stopped trading altogether on U.S. exchanges because of these (and other unethical) practices which I consider completely unacceptable (if people want to gamble against the house they can go to Las Vegas and don't need to trade in the stock markets) and so now I trade only on the TSX.

Not because the TSX is necessarily 100% clean but because I think (perhaps naively) that Canada remains a marginally more honest country and this is likely to be reflected on its stock exchanges  too.  Not to mention that the trading volumes are comparatively less and there is therefore less money to be made by assorted cheaters and rip-off artists who prey on normal people.

Until a complete regulatory overhaul is designed and fully implemented in the U.S. I won't be trading there any longer, in any case.

But I was wondering which kinds of Canadian stocks (and I am particularly interested in so called penny stocks and those trading for under 10 dollars per share) are "immune" from "shorting disease" and from assorted cleverer-than-thou firms and traders.

Thanks for any light you can shed on this specific topic and best regards,


Max Jones  

Answer
Max, I agree with you to some extent regarding the problem issues in the US. However, if you are trading the TSX, you should familiarize yourself with the similar issues in Canada which can also seriously disadvantage the small investor (that includes rules for Short Sales in Canada). The Canadian traders may be more "cleaver-than-thou" than US traders, in fact.

In regards to Canada being a more "honest" country, there is a reason why a huge percentage of the OTC stock frauds in the US are being run out of Canada. One of them is that Canada has very lax white-collar crime laws and penalties, and courts that take forever to hear a case and resulting appeals. There is a reason why the SEC and US Justice Department are the most effective stock regulators in Canada and why the high profile Canadian stock scammers are in prison in the US, not Canada.

As far as shorting goes, the problem of "Naked Shorting" is pretty much a non-issue. Yes, it happens, but it is uncommon. The vast majority of OTC companies that claim they are being naked shorted are instead cases of stock fraud - usually by the very management that is claiming naked shorting. I actually welcome the SEC's rule change which requires firm borrowing before going short. Hopefully it will prevent what little naked shorting there is, but more importantly stop crooked companies from shouting "naked shorting" while management and insiders fraudulently dump stock on the market.

I agree there should be further change to the US securities regulation. First change I would make is to require EVERY publicly traded company to be registered and fully-reporting. In addition, companies should be required to disclose capital changes promptly. Right now, so many of these small companies gag the transfer agent and keep shareholders in the dark while they dump enormous amounts of stock on the market. If companies were required to quickly disclose share issuances (again, the fully reporting issue) above a certain percentage, many of the current problems in the US OTC market will be eliminate.

However, having said all that, money is a strong motivator. The crooks will certainly find another way to get around the system and separate people from their money. Its like whack-a-mole - send them back into their hole in one place, and it will pop up elsewhere.