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James Stafford

James Stafford

James Stafford is the Editor of Oilprice.com

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Is This The Beginning Of The End Of Naked Short Selling In Canada?


Finally, after years of watching dubious short-sellers manipulate stocks and destroy companies, Canadian regulators are ready to do something about it, and unscrupulous short-sellers who have been living lives of obnoxious luxury paid for by ordinary shareholders have every reason to worry.

The only question now is whether the Canadian regulators have the teeth to follow through.

The first move came in January 2021, when the Ontario Capital Markets Modernization Task Force recommended a new prohibition against “misleading or untrue statements” about public companies. Why? Because Canadian markets are being threatened severely by “short and distort” and “pump and dump” campaigns. The same legislation was already enacted in British Columbia.

The prohibition would do one very important thing: It would mean that Ontario regulators would only have to prove “intent” and not “causation”, making them far more powerful if they choose to use that power.

That starts the regulatory ball rolling … but it isn’t enough.

Now, the Ontario task force wants to take things further, requiring short sellers to actually confirm they can borrow the securities they’re attempting to short.

The task force also wants to make them subject to a mandatory buy-in if a sale fails to settle only two days after the settlement day or four days after the trading date.

That would be the death of one of the free market’s biggest threats: Naked shorting, when shorters sell shares they don’t own and have made no arrangements to buy. 

As we noted in our recent expose on naked short selling, this harmful setup gives traders the ability to endlessly sell phantom shares and manipulate the share prices to their benefit in a direct challenge to the free market.

If the task force makes good on its plans, it would essentially make it impossible to do any naked short selling. 

So far, naked shorters have gotten away with their destructive market tactics due to a loophole that requires them to have a “reasonable expectation” of settling a trade without actually borrowing the stock. That loophole may have turned the Toronto Stock Exchange (TSX) into a free-for-all.

The disruption doesn’t end there, either. Stocks are sent into a tailspin when shorters fail to settle a trade and cannot find any stock to buy back, meaning that there are more shares which seem to be outstanding than there really are on the market. It’s an existential crisis for companies targeted by naked shorters. While technically, traders only have two days to settle those shorts, they are often given 10 days under “exceptional circumstances”, according to CME.

And as far as some Canadian regulators are concerned, all circumstances appear to be “exceptional”.

The most insidious aspect is this, though: The funds behind these big naked shorts are highly sophisticated machines that can easily take full advantage of any loopholes, not to mention the Canadian regulators. We have talked to dozens of lawyers and traders who attest that these naked shorters have had no trouble staying naked for months when the actual limit is technically two days. That kind of time frame is destroying companies.

While all of these sophisticated naked shorting machines are already getting the 10-day grace period that they shouldn’t be getting in the first place, they also have a strategy for the 11th day: They simply shift their bets to another related company so that the clock starts all over again. That practice is called “kiting”. 

In other words, they simply move their position from one broker or dealer to another--endlessly.

Indeed, it’s not even clear to many whether naked short selling is legal or not, given all the loopholes that make it so prevalent.

Mining.com called it “either quasi-legal or poorly policed”, noting that the IIROC says short selling is illegal in Canada, but a 2019 study by business law firm McMillan LLP concludes that “despite IIROC’s insistence to the contrary, naked short-selling is legal in Canada”.

If the law is that unclear, it’s no wonder why naked short-sellers seem to be calling the shots on the Canadian capital markets.

It took an uprising among Canadian mining companies, of which there are many on the TSX, for regulators to do anything.


These companies have been key targets of harmful “short and distort” campaigns in which naked shorters spread negative rumors to drive a company’s stock down by artificial means. And the smaller the miner, the easier the target.

Will Canada continue to allow naked short sellers to control capital markets?

The mining industry is up in arms and they’ve banded together to force change, but many are still concerned that the IIROC will only pay lip service to the Ontario task force’s new proposals and implementation will be light-handed.

This is the first time there has been any sense of pending optimism as opposed to pending doom for Canadian capital markets. And now, it’s all down to the regulators to challenge the predators, protect the prey--which includes the savings of regular shareholders--and reinstituting a free market where companies rise and fall on their merits and not on naked shorting tactics, distortion, and manipulation.

By James Stafford

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