Sorry for the two page post, but I think KXLers might find it interesting reading.

There has been a fair of talk about whether KXL has been hit by naked short selling when the price drops a lot. I didn't take it too seriously - the counterargument is that price movements can also be explained by occasional disappointment in results and market conditions, and both of those have hit us at one time or another.

However, I educated myself on naked short selling, and it opened my eyes. It definitely does exist, people get away with it, and there is plenty of it.

My take on KXL naked shorting / manipulation is that the answer is yes and no, both - there is probably naked short selling and other manipulation of KXL, but we shouldn't invoke it as an explanation every time we're disappointed by a stock drop. More likely it's used by some brokers and traders as a way to squeeze trading profits out, and perhaps it does us longs limited long term harm, other than to our nerves.

I was pretty doubtful about naked shorting until I read a paper from Fordham University, viewed a video about it on Bloomberg, and checked out an overview of it on Motley Fool. I would say all three are reasonably credible sources:

1) JOHN D. FINNERTY
Finnerty Economic Consulting LLC; Fordham University

Abstract link

Direct download of paper

Quote: "I conclude that the current
capital market environment and regulatory regime, Regulation SHO notwithstanding, are
conducive to manipulative short selling."

2) Bloomberg video

Location of video

Suggestion - open the page in another tab, let the whole thing download, and then pick and choose what you want to listen to.

3) Motley Fool aritcle

Location of article

My favourite quote from the Motley article, with overwhelming evidence of naked shorting in Global Crossing:

"... a man named Robert Simpson filed a Schedule 13-D with the SEC describing his purchase of 1,158,209 shares of Global Links Corp. (OTCBB: GLKCE), "constituting 100 percent of the issued and outstanding common stock of the Issuer." As described in a story that ran on FinancialWire on March 4, Simpson stuck every single share of the company in his sock drawer -- and then watched as 60 million shares traded hands over the next two days."

- so basically, for $5000, as an exercise, Simpson bought the entire float of a nearly-failed internet company, locked down the shares with a high asking price, and saw 60 million phantom shares trade in two days. What fun!

Naturally, the SEC was alerted, and ... (you guessed it) nothing happened. The watchdog committee at the SEC (and perhaps the OSC too) is, I read and saw, populated by the trading firms that make some of their money enabling the naked shorts.

Beyond that, for trades that a not nicely hidden away, the SEC maintains a Threshold Security List for nakeds not covered. Problem is "many companies linger on the Threshold Security List, experiencing impossible trading volumes." - i.e. nothing happens.

What the various sources make clear is that technically naked shorting without covering in 3 days, and then 17 days ("we really mean it this time, er, not") is illegal, but by moving the uncovered trades from one account or brokerage to another, the trader/brokerage short-covering-clock is started over. So for a large brokerage, the recipe is as easy and legal as making mud pies.

Personally, I have had conversations with the principal and traders at one large brokerage I have traded through over the last two decades, and "on the advice of my lawyers" all I can say is that with the experiences I had and the impressions I got, if I was asked to testify that they do not naked short, I would have to take a very long pause. We really are pawns. But remember, pawns that make it to the other end in a chess game can win the game.

Summary? I would put my money on KXL getting hit by naked shorts on a regular basis, like many other stocks, but that activity very likely won't obscure the real story - good land and people, and drill results. So let's take occasionaly swings down (and up) with a good sprinkling of salt.

Thanks for reading this far / enjoy / cedar