The naked short selling saga continues. If the SEC was attempting to initiate a short squeeze in financials during options expirations week, it managed to do just. See Short Squeeze In Financials Continues.

Fannie Mae is up another 25% today to $13.66 in the wake of Selective Enforcement of Regulation SHO and Bernanke’s statement: “It’s important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market.”

Selective Enforcement

As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the broker dealers and investment banks, it became time to selectively enforce the existing regulation.

Today the SEC has gone one step further. (sorry no link for the following)

Emergency Order amended

WASHINGTON (Dow Jones)–An emergency order issued by the Securities and Exchange Commission to impose new restrictions on short sales in 19 stocks will not apply to bona fide market makers, the SEC announced Friday.

The SEC amended the order at the recommendation of its staff to shield market makers from the new restrictions, which will take effect on Monday and could last for up to 30 days. It said the change was made to allow market makers “to facilitate customer orders in a fast-moving market without possible delays” that might come from complying with the emergency order “and to prevent substantial disruption to securities markets.”

The SEC said the exemption covers registered market makers, block positioners and other market makers that sell short as part of their bona fide market making and hedging activities in the affected shares, as well as standardized options on the shares and exchange-traded funds that include the affected shares.

Bonafide Market makers

BNP Paribas Securities Corp
Bank of America Corp
Barclays PLC
Citigroup Inc
Credit Suisse Group
Daiwa Securities Group Inc
Deutsche Bank Group AG
Allianz SE
Goldman Sachs Group Inc
Royal Bank ADS
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc
Merrill Lynch & Co Inc
Mizuho Financial Group Inc
Morgan Stanley
UBS AG

Here’s The Deal

Anyone in the above list can continue to naked short with full approval from the SEC. No one else can.

The implications are that the market makers will be accumulating massive quantities of financial shorts as everyone else is squeezed out.

Looking one step ahead, think what happens to the bid after everyone else is squeezed out and the market makers hold all the financial shorts.

If the intent of the SEC was to force prices up, it is going to fail big time, in due time. If the SEC’s intent was to temporarily increase the trading profits of the broker dealers, it will succeed.

Mike “Mish” Shedlock
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