Rampant Mis-Information – and the Responsibility of Financial Bloggers

It’s not that I don’t like Matt Taibbi. I have a subscription to Men’s Journal, and Taibbi’s sports-related pieces are always worth reading and usually laugh out loud funny. For example, from his piece several months ago on all-time ugly athletes:

Then there’s Kevin Youkilis. Youk has only three body parts, all hideously oversized: an enormous set of gnomish, bushy forearms; a massive, casaba melon–size white head; and a cauldronlike belly. He has a truly awesome bristle of thick red chin hair that makes his face look like a cross between a vagina and something out of The Hobbit. At the plate he disgustingly gushes sweat by some means previously unknown to science in which the moisture travels upward along his body, racing in a cascade from his balls and armpits up his neck, over his head, and back down over the bill of his helmet to shower the plate. Whereas a guy like Teixeira was born with a swing so gorgeous you want to paint it, Youkilis fighting a middle reliever to a nine-pitch walk looks like a rhinoceros trying to fuck a washing machine.”


See – that’s accurate, well written, and funny. If I want to read a lucid comparison of Youk’s face to a Hobbit-esque vagina, I’ll look for Matt Taibbi’s name in the byline. However, if I want to read factual financial articles that demonstrate a solid understanding of what is actually happening, I am knowledgeable enough to know that Taibbi has very little idea what he’s talking about. This is the reason I’m bothering to write a post about a little tete-a-tete between Taibbi and Clusterstock’s John Carney on the subject of naked short selling. There are few things less rewarding than internet blog post battles – one of them being interfering in other people’s internet blog post battles, but I take my self appointed role as “Protector of the Accuracy of Financial Information on the Internet” very seriously, so I’m stepping into the fray. We’ll just stick to this week’s happenings, and ignore the stuff from last week where Taibbi posted a presentation from GS about market structure and reached the conclusion that GS was using the presentation to lobby congress to allow naked short selling.

First, Taibbi posted a video that purported to show a trader nearly instantly obtaining a locate (which you need to do in order to short stock) on “tens of billions of shares” of a stock that only had 4.5B shares outstanding. Clusterstock’s Carney misread Taibbi’s post, and responded that Taibbi was a sucker for believing that someone actually shorted tens of billions of shares of said stock, and that some common sense would allow anyone who understands the process to reach the conclusion that there is no way that trade happened.

Matt Taibbi retorted that Carney was an idiot, and that he (Taibbi) never said that the trade happened (although, Taibbi DID say that: “:17 At seventeen seconds, at the bottom, you see that the firm Penson has now approved the trade and” located” the multibillion amount of shares. The trade goes through.“) - insisting that he claimed only that the trader was able to quickly obtain a locate which 1) should have been impossible to obtain and 2) should CERTAINLY have been impossible to obtain so quickly, and that the actual trade was for only 100 shares. Taibbi is absolutely right on these two points – the locate should have been impossible to obtain, especially with such speed. But here’s the kicker: Taibbi’s video shows nothing of the sort. I’m not going to link the video here, because I’m not going to take part in spreading the mis-information – but what is shown in the video is a simple audit trail requirement. Let me explain.

Daily, traders and brokers will obtain a list of easy to borrow stocks, which get loaded into their trading system. If you go to short GE, it’s on the “easy to borrow list,” and as long as you don’t try to short 10,000,000,000 shares, you won’t have to call your stock loan department to “borrow” shares to short – everyone knows the stock is readily available. Other stocks, however, like Citi (which is almost certainly the stock in Taibbi’s video) can at times be difficult to borrow – like during the summer when they were doing an exchange of preferred stock for common stock, and everyone wanted to be short the common (and long the preferred) to arbitrage the spread between the two share classes.

So, if you try to short Citibank (a few months ago), any good execution system will check its easy to borrow list, see that Citi is not on the list, and ask you where your “locate” is from – in other words, which broker agreed to lend you the stock. There are also many electronic systems where you can request a stock locate electronically – but this is not what’s in Taibbi’s video! What the video clearly shows is that the stock in question (let’s call it C) is on the hard to borrow list. The trader gets a warning message saying that the stock needs to be borrowed, and asking for the trader to either submit the borrow information or elect not to submit the trade.

The trader in the video is NOT submitting a request for the stock to be borrowed – he’s entering information into an audit trail point asking WHO the stock was borrowed from, HOW MUCH was borrowed, and WHEN it was borrowed – exactly to prevent problems related to naked short selling! This way, if the seller fails to deliver shares, the broker can easily pull the exact reference that was used for the short sale. Of course, just because I say that I was able to obtain a locate for a gajillion shares of C doesn’t mean that I actually was able to – and that’s why especially hard to borrow stocks should have another level of compliance checking embedded in them. If this trading system in the video allowed a trader to claim a locate that was clearly impossible, then that’s a condemnation of the inadequacy of this trading system – not of the borrow market and the legitimacy of short selling. Fortunately, there was no naked short sale of tens of billions of shares of C on this trade, and Taibbi’s post is a gigantic misunderstanding of what was actually going on. Of course, it’s especially scary when people jump to his defence (in the comments of both his posts and of Carney’s posts) and thank him for highlighting such injustices – never failing to mention how Goldman Sachs is stealing money from poor old grandmothers at the same time.

Journalists with the clout of Matt Taibbi need to take special care to ensure that their reporting is accurate, especially when dealing with topics that the general public clearly doesn’t understand. It is essential that we provide MORE clarity to the uninformed, rather than misinterpreting the facts and stirring up a hornets nest of anger when none is warranted.

-KD

disclosures: I am not currently, and have never previously received any type of compensation from C, GS, Men’s Journal, Matt Taibbi, John Carney, or Clusterstock.

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