Are counterfeit shares and the "short ladder attacks" purporting to use them, real?

Hi, long-time SE user here. As I would like to attract users with actual industry experience or expertise, I'll be awarding +150 bounty to the best answer, and possibly +50 bounty for other informative answers.


I'm aware of Closing Shorted Positions via Short Ladder Attacks. There, the OP asked, "Why wouldn't hedgefunds keep using a short ladder attack?" to which someone answered that short ladder attacks are a fiction because NBBOs make them impossible. As someone with experience in the tech side of the industry though, I don't know if this argument is watertight—I explain why later. I don't feel extending discussion in comments there will work out, as the topic has numerous considerations, so I'm asking a question directly, with sources and quotes to focus argument.

The idea of "Short Ladder Attacks" appear to have originated from the 2014 source Counterfeiting Stock. I could not trace the author from the homepage or a WHOIS. Many have found this source through a Seeking Alpha article that referred to it, authored by Gerald Klein. (On this person I could only find several class actions they were a plaintiff in.1 2)

Are "counterfeit shares" real?

Whoever the author is, these are the claims they make. The numbering is influenced by paragraphs but also sometimes split by me; I'm trying to keep to one idea per number so people can refer to each clearly.

  1. There are a variety of names that the securities industry has dreamed up that are euphemisms for counterfeit shares. Don't be fooled: Unless the short seller has actually borrowed a real share from the account of a long investor, the short sale is counterfeit. It doesn't matter what you call it and it may become non–counterfeit if a share is later borrowed, but until then, there are more shares in the system than the company has sold. [...] The creation of counterfeit shares falls into three general categories. Each category has a plethora of devices that are used to create counterfeit shares.

  2. [a] Fails–to–Deliver — If a short seller cannot borrow a share and deliver that share to the person who purchased the (short) share within the three days allowed for settlement of the trade, it becomes a fail–to–deliver and hence a counterfeit share; however the share is transacted by the exchanges and the DTC as if it were real. Regulation SHO, implemented in January 2005 by the SEC, was supposed to end wholesale fails–to–deliver, but all it really did was cause the industry to exploit other loopholes, of which there are plenty (see [b] and [c] below). [...]

  3. [b] Ex–clearing counterfeiting — The second tier of counterfeiting occurs at the broker dealer level. This is called ex–clearing. These are trades that occur dealer to dealer and don't clear through the DTC. Multiple tricks are utilized for the purpose of disguising naked shorts that are fails–to–deliver as disclosed shorts, which means that a share has been borrowed. They also make naked shorts “invisible” to the system so they don't become fails–to–deliver, which is the only thing the SEC tracks. The SEC does not examine ex–clearing transactions as they don't believe that Reg SHO applies to short shares held in ex–clearing. [The author goes on to list 7 examples.]

  4. [c] [This one's so long I won't even bother to include it.]

It goes without saying that, admitting possibility of "counterfeit shares" does not mean short ladder attacks are real. (Trying to preempt misuse of this question for misinformation.)

Are "short ladder attacks" real?

And here are their claims regarding what they actually called a "short down ladder."

  1. The Anatomy of a Short Attack — Abusive shorting are not random acts of a renegade hedge funds, but rather a coordinated business plan that is carried out by a collusive consortium of hedge funds and prime brokers, with help from their friends at the DTC and major clearinghouses. Potential target companies are identified, analyzed and prioritized. The attack is planned to its most minute detail. The plan consists of taking a large short position, then crushing the stock price, and, if possible, putting the company into bankruptcy. Bankrupting the company is a short homerun because they never have to buy real shares to cover and they don't pay taxes on the ill–gotten gain. [...] Typical tactics include the following:

  2. [a] Flooding the offer side of the board — [...] The shorts manipulate the laws of supply and demand by flooding the offer side with counterfeit shares. They will do what has been called a short down ladder. It works as follows: Short A will sell a counterfeit share at $10. Short B will purchase that counterfeit share covering a previously open position. Short B will then offer a short (counterfeit) share at $9. Short A will hit that offer, or short B will come down and hit Short A's $9 bid. Short A buys the share for $9, covering his open $10 short and booking a $1 profit.

  3. [cont'd] By repeating this process the shorts can put the stock price in a downward spiral. If there happens to be significant long buying, then the shorts draw from their reserve of “strategic fails–to–deliver” and flood the market with an avalanche of counterfeit shares that overwhelm the buy side demand. Attack days routinely see eighty percent or more of the shares offered for sale as counterfeit. Company news days are frequently attack days since the news will “mask” the extraordinary high volume. It doesn't matter whether it is good news or bad news. [...]

  4. [cont'd] Global Links Corporation is an example of how wholesale counterfeiting of shares will decimate a company's stock price. Global Links is a company that provides computer services to the real estate industry. By early 2005, their stock price had dropped to a fraction of a cent. At that point, an investor, Robert Simpson, purchased 100%+ of Global Links' 1,158,064 issued and outstanding shares. He immediately took delivery of his shares and filed the appropriate forms with the SEC, disclosing he owned all of the company's stock. His total investment was $5205. The share price was $.00434. The day after he acquired all of the company's shares, the volume on the over–the–counter market was 37 million shares. The following day saw 22 million shares change hands — all without Simpson trading a single share. It is possible that the SEC has been conducting a secret investigation, but that would be difficult without the company's involvement. It is more likely the SEC has not done anything about this fraud. [More details at the source but also here.]

So, there you have it. There's a lot more at the source, but I think these excerpts give plenty of launching points for debunking or validating the idea of counterfeit shares and short ladder attacks.

Why I don't find the NBBO argument convincing enough...

Referring back to Closing Shorted Positions via Short Ladder Attacks, here's why I felt the answers and comments fell short of my trust. No disrespect to anyone there.

Any trader who bids less than NBBO to buy a security goes on the order book at a lower price as a limit order. The same holds true for a seller whose price is above NBBO. The only way that traders can move price is more buying (or selling) volume that is available at current price.

I just don't think that's necessarily true. (It might end up being true, but it's not a closed case for me.)

I know what an NBBO is—I've spent quite some time developing trading platforms—and in that time I've seen a staggering variety of exchange mechanics: dark pools, smart order routing techniques incorporating icebergs and stop triggers, funky exchange features like "mid-point dark crosses," groups of pegs that just sit outside like P+1, P+2, P+3, P+4, P+5. (And I thought I had seen that brokers can prefer executing against other specific brokers as long as they respect price priority.) Anyway, these examples aren't to argue that the NBBO can be violated (it can't), but I think the NBBO line of argument assumes that order books are comprised of static, vanilla limit orders that don't react to their environment. Correct me if I'm wrong, but I don't think retail traders (or "traders") make up most of the order book. It's institutions, and the order book is full of dynamic orders that do respond to sell pressure.

Given the technology I've coded for institutions, I can imagine a coordinated attack that drives prices down. I think. (Consider this a hypothetical, just to show it's not that simple.) Algorithms and technical indicators do respond to sell walls and high-frequency sell-offs. (You think there aren't hedge funds on the other side of this game?) Orders are pegged to the inside or they're "feelers"—they disappear or shift around as the inside moves. So not only can a coordinated attack bring on pressure, but, especially when there's significant profit to be made, why couldn't part of the strategy be to intentionally execute the inside at a controlled loss? As long as part or most of those executions are against your friends who are in on the scheme (i.e. have planted bids on every price level, especially empty ones—fractional prices come to mind), you would be able to feign high volume while forcing prices down, triggering institutional reactions and retail panic, so that you can ease off the gas and let momentum do the work—then gas on, gas off—maybe a couple million dollars sacrificed each time—but to make a billion later.

Again, that's completely made up. I just want to highlight that markets are sophisticated, and I would rather see a sophisticated answer ruling out why scenarios such as mine aren't possible or effective. But more importantly, why counterfeit shares and short ladder attacks as described in the source, Counterfeiting Stock, do or don't make sense.


I'm not trying to make short ladder attacks a thing. For full disclosure, I am surfacing from the echo chamber of WSB, but I also recognize all kinds of questionable analyses that have cropped up there—grasping at straws about SEC legalese, imaginative takes on basic things like T+2 Settlement, etc. I'm a long-time evangelist of the SE network and was surprised to see someone on WSB (r/wallstreetbets) link directly to this site, which is what motivated me to award bounties for a quality answer on the topic.

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    As someone with experience in the tech side of the industry though, I don't think this argument is valid. Why? You don't even need a national order book, all you need is some other buyer to start throwing wrenches in this whole "attack." Which, by the way, assuming multiple disjointed order books without a NBBO, your attack would only hit one order book and could be readily arbitraged by a third party with access to a other orderbook. I think you are too quick in dismissing this fundamental impedament.
    – quid
    Commented Feb 3, 2021 at 7:44
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    While I appreciate the effort made creating this question, there's a lot of conflated spaghetti thrown at the wall in the Seeking Alpha article and way too much to unpack here (too many statements of fact and too many questions) which may lead to closure. In brief, a syndicate conspiring to drive share price down with shorting is collusion and is illegal. That abusive tactic isn't a short ladder. Commented Feb 3, 2021 at 14:03
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    @Andrew Cheong - If C shorts 100k shares at some price and A and B buy them, it's an offset and that does not move price. No matter how many traders play games swapping shares at that a given price, price goes nowhere. In order for C to drive price down, he has to take out all shares bid at the current price. If he keeps doing this, share price continues to drop until buying volume exceeds selling volume. Note that C has to devote more and more capital to achieve this repeatedly. Where this falls apart is if shorters floodi the market with naked shorts, swallowing bid volume illegally. Commented Feb 5, 2021 at 20:23
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    @supercat - If there is an unlimited supply of naked shorts, it takes out every buyer at the bid. When that happens, the next highest bid (at a lower price) becomes the NBBO quote. Legitimate sellers see this and lower their ask price. Share price drops. Lower and lower share price induces more people to sell. It all cascades, perhaps creating panic selling (profit taking and traders cutting their losses), perhaps sped up if there is significant naked shorting. Commented Feb 10, 2021 at 0:12
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    @BobBaerker: Is there any mechanism, other than the inducement of panic selling, by which naked selling would yield a net profit after the shares are bought back? If some of the shares are scooped up by value buyers at a price which is 75% less than even the lowest plausible estimate of a company's per-share net asset value, and those buyers would demand four times what they paid to sell them back onto the market (why should they sell them for less?), I don't see any way for the short sellers to unwind their positions without a major loss unless panic selling outweighs value buying.
    – supercat
    Commented Feb 10, 2021 at 0:27

2 Answers 2


One starting point is to note that, on "lit" electronic exchanges as in most or all dark pools, market participants do not get to know who exactly they are trading with. Thus, the scheme is already technically impossible as described because A has no way of selling directly to B, nor B back to A, and so on.

That leaves our schemers with something weaker to try: they can all agree that they will do a bunch of selling (the same is true for buying of course). They cannot know exactly who they will sell to, but they agree they will do a lot of it. The net effect of all these sales will be no different from the effect of a single firm just trading a lot of shares, so it is not really necessary to assume some kind of collusion.

Now, making a lot of sales is not illegal unless it is done with the purpose of manipulation. That is as true for a single firm as for a cartel. It is slightly more illegal for a cartel to do it, but either way it is not allowed.

As commenters have noted, there is no way for our seller(s) to keep the stock price down without committing ever-increasing amount of capital. So artificially depressed prices like these will rebound unless either (A) panic is induced (@supercat comment) or (B) the new price is seen to be an epiphany revealing corrected firm value by the broader market.

That is to say, prices will rebound unless our cartel gets significant non-cartel participants to agree that the "fair" price truly is closer to this low new price, which is not part of the "attack" premise. Hence prices will rebound. The rebound will put the seller in a huge negative PL situation. Thus, it is not really a smart strategy.

The one place you do see firms actually trying these sales floods is when they can make the new price "stick" for a while; namely, at the end of the trading day. If a firm can push the price down a few bucks just as markets close then their overnight capital requirements may be reduced. Firms get caught (and fined) for that a dozen times a year or so in the US markets.

I also want to comment that the word "ladder" in the phrasing "ladder attack" lends zero clarity to the idea, and just serves to make it sound more menacing through its obscurity.

Conclusion: "ladder attacks" are impossible as described, are a great way to lose money if you analyze something close to what's described, and are illegal anyway, with attempts at this sort of thing being constantly monitored by regulators.

Edit: Here is a technical paper describing a famous model of price rebounds

My qualifications: I hold a Series 57 qualification, worked on trade execution algorithms (theory and C++ code) for a decade at a former employer, and teach some of this stuff at a top-10 US university.

Edit 2: I realize I should also address the following bit of silliness:

 The plan consists of taking a large short position, then crushing the 
 stock price, and, if possible, putting the company into bankruptcy

The traded firm has already received the money for its shares in the IPO, and in secondary offerings, etc. It never gets any more. Unless the firm has imminent prospects of issuing more shares, a crash in share price has zero effect on the finances of the firm and could not possibly affect the likelihood of bankruptcy.

  • "a crash in share price has zero effect on the finances of the firm and could not possibly affect the likelihood of bankruptcy." I disagree. A companies stock movement downward will affect line of credits and cash flow.
    – paulj
    Commented Feb 10, 2021 at 21:22
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    @paulj On the contrary, where lines of credit and other loans exist, their T&C/covenants are at best infrequently attached to stock price. In no small part, this is in service of operational uniformity -- i.e. because bank loan desks deal with many client companies that are not publicly traded, and hence have no externally-available stock price at all.
    – Brian B
    Commented Feb 10, 2021 at 23:53
  • Folks may be interested to read about another common type of illegal market manipulation, pretty much the opposite of what is being discussed here. Namely, if someone wants to sell for a nice high price, they put in a bunch of buy orders at a price at or below the national best bid (NBB). This way other market participants erroneously perceive a lot of buying interest, and adjust their quotes upwards. It is called spoofing, and every year various jail terms and fines arise from miscreants using it.
    – Brian B
    Commented Feb 11, 2021 at 0:10
  • This is a great answer. Describes both the way it is technically possible [though not in coordination of buying and selling to directed parties, but rather through flooding the market and trading with any and all] but also generally financially prohibitive. Commented Feb 11, 2021 at 16:06
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    (continued) Some dark pools separate their clients into sub-pools depending on what type of trading firm they are, but it is still not directable to particular counterparties. Dark pool trades in the US of course still must attend to NBBO price priority. Some foreign markets allow, say price-broker-time priority but that's a whole different set of securities. It is possible for two counterparties to trade directly with each other over the telephone, but those trades would not make it onto the tape in the same way.
    – Brian B
    Commented Feb 11, 2021 at 22:29

That counterfeiting stock article is the best. The answer is already there, you just need to read it again.

You are assuming short manipulators need to sell outside the NBBO to mount a short attack. They don't. All they need to do is keep selling at the NBBO. Due to the collusion, the shorts will always overwhelm the longs. And in many cases, it doesn't immediately lead to a crash. There can be a lot of long interest too when a stock becomes value, but the longs get frustrated because the stock price doesn't go up. Many times, the longs don't even realize the extent of longs and assume there is little long interest. It's confirmation bias from looking at the flaccid share price.

The truth is, a lot of longs bought counterfeit shares from manipulating shorts who never get to borrow as the shares count is limited. When these buy and sell orders match within a broker dealer, they cancel each other. As per the article, only shares that have no matching and hence don't cancel out within a broker dealer have to be reported to the DTCC where the broker dealer will be given 3 days to sort it out otherwise they become Failed to Deliver. To circumvent this, broker dealers collude among themselves to "match ex clearing". Given the right balancing act, manipulating shorts can keep selling without borrowing ad infinitum without triggering Reg SHO. Whether it triggers Reg SHO or not is immaterial. Triggering Reg SHO means manipulating shorts were caught. Most manipulating shorts aren't caught. In that article, the author mentioned a perfect case study, where one person had bought off the entire shares outstanding, but after that still seeing multi-millions amounts of shares "changing hands" after he supposedly bought the entire company! This is the biggest fraud in the history of finance, and must be stopped immediately.

  • I wasn't the first downvote but I also have to downvote; please know this is not a personal attack (I see you're new here). I was seeking an answer that adds credence to the pieces I quoted, using additional or more accessible and verifiable facts. You are mostly resurfacing pieces of the article in question. And: "You are assuming short manipulators need to sell outside the NBBO to mount a short attack." No, I don't. (But I agree that a great many people do.) If your answer gets further downvoted or removed, please know it's because it's not an answer, not because of "manipulating shorts." Commented Feb 5, 2021 at 17:10
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    I think your answer can be salvaged though, if you try again and reply to me (rather than who you might think I am, or people you want to argue against). If you have knowledge, I'm looking for a teacher. But I'm not going to listen to someone pointing to a sacred text that already tells it all. Commented Feb 5, 2021 at 17:17

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